FISCAL YEAR ENDED JUNE 30, 2002
COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001

Revenue. Revenue from continuing operations was $710.5 million in fiscal year 2002, compared to $700.2 million in the prior year, an increase of $10.3 million, or 1.5%. After adjusting for the sale of our U.S. based public sector retirement business to Gabriel, Roeder, Smith & Company (“GRS”), revenue growth was $15.3 million or 2.2%. The unadjusted revenue growth was comprised of a $21.0 million or 6% increase in our Benefits Group and an $8.8 million or 9% increase in our eHR Group, partially offset by a $7.0 million or 13% decrease in our Human Capital Group, a $5.1 million or 7% decrease in International and a $7.5 million or 12% decrease in other practice areas in North America.

Salaries and Employee Benefits. Salaries and employee benefit expenses for fiscal year 2002 were $404.8 million, compared to $379.6 million for the previous fiscal year, an increase of $25.2 million or 7%. Salaries and employee benefit expenses for fiscal year 2001 includes the $3.5 million compensation charge that the Company incurred resulting from agreements with our employee stockholders related to our initial public offering in the second quarter of fiscal year 2001. The increase, inclusive of this charge, was principally due to a $15.9 million increase in salaries, a $14.9 million increase in pension expenses and a $5.4 million increase in benefits and wage taxes, partially offset by a $12.2 million decrease in the accrual for discretionary compensation. As a percentage of revenue, salaries and employee benefit expenses increased to 56.9% from 54.3%.

Professional and Subcontracted Services. Professional and subcontracted services used in consulting operations for fiscal year 2002 were $48.7 million, compared to $54.1 million for fiscal year 2001, a decrease of $5.4 million, or 10%. The decrease was mainly due to lower reimbursable services incurred on behalf of clients of $3.1 million and lower recruiting fees of $1.7 million. As a percentage of revenue, professional and subcontracted services decreased to 6.9% from 7.7%.

Occupancy, Communications and Other. Occupancy, communications and other expenses for fiscal year 2002 were $109.2 million, compared to $114.4 million for fiscal year 2001, a decrease of $5.2 million or 5%. The decrease was mainly due to lower travel costs of $6.8 million, lower general office expenses of $2.9 million, lower dues and entertainment expense of $0.9 million and decreased publication expenses of $0.6 million, partially offset by higher rent expense of $3.6 million, which is attributable to an increase in leased space required to support our operations and higher real estate and operating expenses and higher telephone expenses of $2.3 million. As a percentage of revenue, occupancy, communications and other decreased to 15.4% from 16.3%.

General and Administrative Expenses. General and administrative expenses for fiscal year 2002 were $55.5 million, compared to $57.5 million for fiscal year 2001, a decrease of $2.0 million or 3%. The decrease was mainly attributable to lower travel costs of $2.3 million, lower professional services of $2.0 million and a lower accrual for discretionary compensation of $1.4 million, partially offset by a $2.6 million increase in pension and insurance expenses, a $0.8 million increase in promotional expenses and a $0.4 million increase in base salaries. As a percentage of revenue, general and administrative expenses decreased to 7.8% from 8.2%.

Depreciation and Amortization. Depreciation and amortization expenses for fiscal year 2002 were $20.0 million, compared to $22.0 million for fiscal year 2001, a decrease of $2.0 million or 9%. The decrease is primarily attributable to the Company no longer amortizing goodwill, pursuant to Statement of Financial Accounting Standards No. 142.
As a percentage of revenue, depreciation and amortization expenses decreased to 2.8% from 3.1%.

Interest Income (Expense), net. Interest income (expense), net for fiscal year 2002 was $1.2 million, compared to $1.7 million for fiscal year 2001, a decrease of $0.5 million or 29%. The decrease reflects lower interest rates earned on our cash and cash equivalents.

Other Non-Operating Income. Other non-operating income for fiscal year 2002 was $2.2 million, which is due to the gain on the sale of our U.S.-based public sector retirement business of $1.0 million and a $1.2 million gain on the sale of common stock that the Company received as a result of the demutualization of a health and general insurance provider.

Income from Affiliates. Income from affiliates for fiscal year 2002 was $2.9 million, compared to $3.8 million for fiscal year 2001, a decrease of $0.9 million or 24%. The decrease is attributable to reduced operating income of our Continental European affiliate, Watson Wyatt Holdings (Europe) Limited.

Provision for Income Taxes. Income taxes for fiscal year 2002 were $31.4 million, compared to $33.6 million for fiscal year 2001. Our effective tax rate was 40.0% for fiscal year 2002, compared to 42.9% for fiscal year 2001. The change in the effective rate was due to a decrease in state taxes and a decrease in non-deductible expenses. Our effective tax rate was also affected by differing foreign tax rates in various jurisdictions. We record a tax benefit on foreign net operating loss carryovers and foreign deferred expenses only if it is more likely than not that a benefit will be realized.

Net Income. Net income for fiscal year 2002 was $47.1 million, compared to $44.4 million in fiscal year 2001, an increase of $2.7 million or 6%. As a percentage of revenue, net income increased to 6.6% from 6.3%.

Earnings per Share. Diluted earnings per share for fiscal year 2002 was $1.41, compared to $1.37 for fiscal year 2001. Results for fiscal year 2002 include the effect of the other non-operating income discussed above equaling $0.04 per diluted share. Fiscal year 2001 results include the $2.3 million after tax or $0.07 per diluted share compensation charge that the Company incurred related to our initial public offering and the effect of amortization of goodwill equal to $0.05 per diluted share. Exclusive of these items, diluted earnings per share would have been $1.37 in fiscal year 2002 compared to $1.49 in fiscal year 2001.