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Salaries and Employee Benefits. Salaries and employee benefit expenses for the first three months of fiscal year 2002 were $91.7 million, compared to $89.8 million for the first three months of fiscal year 2001, an increase of $1.9 million, or 2%. The increase is mainly due to a $7.3 million increase in salaries, which is primarily the result of a 10% increase in headcount, a $3.8 million increase in pension expenses and a $1.7 million increase in benefits and wage taxes, partially offset by an $11.0 million decrease in the accrual for variable compensation. As a percentage of revenue, salaries and employee benefits increased from 52.6% to 53.2%.

Professional and Subcontracted Services. Professional and subcontracted services used in consulting operations were $10.2 million for the first three months of fiscal year 2002, compared to $11.2 million for the first three months of fiscal year 2001, a decrease of $1.0 million, or 9%. The decrease was mainly due to a $0.6 million decrease in reimbursable expenses incurred on behalf of clients. As a percentage of revenue, professional and subcontracted services decreased from 6.5% to 5.9%.

Occupancy, Communications and Other. Occupancy, communications and other expenses were $28.2 million for the first three months of fiscal year 2002, compared to $26.6 million for the first three months of fiscal year 2001, an increase of $1.6 million, or 6%. The increase was mainly due to higher rent expense of $1.2 million, which is attributable to an increase in leased space required to support our operations and higher real estate taxes and operating expenses. The remainder of the increase was primarily due to the additional capacity required to expand our electronic communications infrastructure. As a percentage of revenue, occupancy, communication and other increased from 15.6% to 16.4%.

General and Administrative Expenses. General and administrative expenses for the first three months of fiscal year 2002 were $16.6 million, compared to $15.1 million for the first three months of fiscal year 2001, an increase of $1.5 million, or 10%. The increase was mainly due to a $1.3 million increase in salaries and a $0.8 million increase in pension and insurance expenses on an 8% increase in headcount, partially offset by a lower fiscal year end bonus accrual of $1.0 million. As a percentage of revenue, general and administrative expenses increased from 8.9% to 9.6%.

Depreciation and Amortization. Depreciation and amortization expense for the first three months of fiscal year 2002 was $5.4 million, compared to $5.9 million for the first three months of fiscal year 2001, a decrease of $0.5 million, or 8%. The decrease is primarily attributable to the Company ceasing amortization of goodwill, pursuant to FAS 142. For more information about the adoption of FAS 142, see Note 2 of the Notes to the Consolidated Financial Statements. Depreciation expense was unchanged from the prior year. As a percentage of revenue, depreciation and amortization decreased from 3.5% to 3.1%.

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Interest Income. Interest income for the first three months of fiscal year 2002 was $0.8 million, compared to $0.6 million for the first three months of fiscal year 2001, an increase of $0.2 million, or 33%. The increase was attributable to interest earned on a higher average investment balance during the first three months of fiscal year 2002.

Interest Expense. Interest expense for the first three months of fiscal year 2002 was $0.3 million, unchanged from the prior year. Interest expense for the current period is comprised mainly of fees associated with maintaining our credit facility. We had no borrowings under our credit facility during the quarters ended September 30, 2001 and 2000.

Other non-operating income. Other non-operating income for the first three months of fiscal year 2002 was $1.0 million, which is due to the gain on the sale of our U.S. based public plan retirement business. See Note 9 of the Notes to the Consolidated Financial Statements for more information about this transaction.

Income from Affiliates. Income from affiliates for the first three months of fiscal year 2002 was $0.7 million, compared to $1.0 million for the first three months of fiscal year 2001, a decrease of $0.3 million, or 30%. The decrease reflects a slower business climate in Europe in the first quarter of fiscal year 2002.

Provision for Income Taxes. Income taxes for the first three months of fiscal year 2002 were $9.0 million, compared to $10.0 million for the first three months of fiscal year 2001. Our effective tax rate was 40.0% for the first quarter of fiscal year 2002, compared to 42.9% for the first quarter of fiscal year 2001. The change in rate was due to an increase in foreign tax credits utilized and a decrease in non-deductible expenses. 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 the first three months of fiscal year 2002 was $13.5 million, compared to $13.3 million for the first three months of fiscal year 2001, an increase of $0.2 million, or 1%. As a percentage of revenue, net income remained unchanged at 7.8%.

Our cash and cash equivalents at September 30, 2001 totaled $19.9 million, compared to $81.7 million at June 30, 2001. The $61.8 million decrease in cash from June 30, 2001 to September 30, 2001 follows a typical pattern of cash flows for the Company that is attributable to the payment of bonuses in the first quarter of each subsequent fiscal year. Our cash and cash equivalents at September 30, 2001, while comparable to the balance of $17.2 million at September 30, 2000, reflect the net proceeds from our issuance of common stock during fiscal year 2001, mainly offset by accelerated bonus payments.

Cash Used for Operating Activities. Cash used for operating activities for the first three months of fiscal year 2002 was $61.5 million, compared to cash used for operating activities of $37.1 million for the first three months of fiscal year 2001. The variance is mainly due to a larger reduction in the bonus accrual due to greater bonus payments for fiscal year 2001 paid in September of 2002.

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The allowance for doubtful accounts increased $2.1 million and the allowance for work in process increased $1.0 million from June 30, 2001 to September 30, 2001. The number of days of accounts receivable and work in process outstanding was 94 at September 30, 2001 and 2000. Typically, our receivables and work in process balances and related allowances are substantially reduced at our June 30 year-end as a result of an increased emphasis on billings and collections.

Cash Used in Investing Activities. Cash used in investing activities for the first three months of fiscal year 2002 was $6.5 million, compared to $8.1 million for the first three months of fiscal year 2001. The decrease in cash usage can be attributed to lower acquisition related payments of $2.9 million, the $1.0 million proceeds from the sale of our U.S. based public plan retirement business, partially offset by higher fixed asset purchases of $1.7 million and lower distributions from affiliates of $0.6 million.

Cash From Financing Activities. Cash from financing activities for the first three months of fiscal year 2002 was $5.7 million, compared to $21.8 million for the first quarter of fiscal year 2001. The variance is due to the accelerated payment of the annual fiscal year end bonus, which resulted in a year over year decrease in cash from operations. Bonus payments were accelerated by two weeks compared to previous years in order to accommodate effective tax strategies.

Expenditures of capital funds were $7.8 million for the first quarter of fiscal year 2002. Anticipated commitments of capital funds are estimated at $34.6 million for the remainder of fiscal year 2002, mainly for computer hardware purchases, office relocations and renovations, development and upgrade of financial and knowledge management systems, and acquisition-related payments. Additionally, our consultants require access to hardware and software that will support servicing our clients. In a rapidly changing technological environment, management anticipates we will need to make continued investments in our knowledge sharing and financial systems infrastructure. We expect cash from operations and our existing credit facility to adequately provide for these cash needs.

Our foreign operations do not materially impact liquidity or capital resources. At September 30, 2001, $14.0 million of the total cash balance of $19.9 million was held outside of North America, which we have the ability to readily utilize, if necessary. There are no significant repatriation restrictions other than local or U.S. taxes associated with repatriation. Our foreign operations in total are substantially self-sufficient for their working capital needs.

The Company continues to guarantee certain leases for office premises and equipment for Wellspring. Minimum remaining payments guaranteed under these leases at September 30, 2001, which expire at various dates through 2007, total $36.9 million, not including sublease income. These leases are also jointly and severally guaranteed by the Company's former partner in Wellspring, State Street Bank and Trust Company. The estimated loss from the potential exercise of these guarantees was included in the fiscal year 1998 loss on disposal of the benefits administration outsourcing business.

We have a $95,000,000 revolving credit facility with a group of banks at an interest rate that varies with LIBOR and/or the Prime Rate. We are charged a quarterly commitment fee, currently 3/10 of 1% of the facility, that varies with our financial leverage and is paid on the unused portion of the credit facility. No amounts were outstanding under the revolving credit facility as of September 30, 2001 or June 30, 2001. Credit under the facility is available upon demand, although the credit facility requires us to observe certain covenants (including requirements as to minimum net worth and other financial and restrictive covenants) and is collateralized by a blanket lien on all assets. At September 30, 2001 we were in compliance with all covenants under the credit facility. The revolving portion of the credit facility is scheduled to mature on June 30, 2003. A portion of the revolving facility is used to support required letters of credit issued under the credit line. As a result, $4,310,000 of the facility is currently unavailable for operating needs.

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Additionally, the Company has a facility which is available to collateralize loans to associates for purchased redeemable common stock under our former Stock Purchase Program. The maximum available borrowings under this facility were $14,323,000 at September 30, 2001 and June 30, 2001. We guarantee these loans to our stockholders, the aggregate outstanding balances of which totaled $6,485,000 and $8,537,000 at September 30, 2001 and June 30, 2001, respectively. Shares totaling 4,045,000 and 4,598,000 of Watson Wyatt & Company Holdings Class B shares were pledged by stockholders to collateralize these loans at September 30, 2001 and June 30, 2001, respectively.

This filing 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: Note 3 on page 7; Note 6 and 7 on page 10; the sixth paragraph under Liquidity and Capital Resources on page 17; and Part II, Item 1 "Legal Proceedings" on page 18 and 19. 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 25, 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.

We are exposed to market risks in the ordinary course of business. These risks include interest rate risk and foreign currency exchange risk. We have examined our exposure to these risks and concluded that none of our exposures in these areas are material to fair values, cash flows or earnings.

From time to time, we are a party to various lawsuits, arbitrations or mediations that arise in the ordinary course of business. These disputes typically involve claims relating to the rendering of professional services or employment matters. The matters reported on below involve the most significant pending or potential claims against us. We are incorporating, by reference, the descriptions of the legal proceedings that appear under the caption "Legal Proceedings" beginning on page 10 of the Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2001. Management believes, based on currently available information, that the results of all such proceedings, in the aggregate, will not have a material adverse effect on our financial condition.

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Pacific Group Medical Association. The settlement agreement disposing of the claim, which has been signed by the parties in October 2001, is awaiting court approval.

We carry substantial professional liability insurance with a self-insured retention of $1 million per occurrence, which provides coverage for professional liability claims including the cost of defending such claims. We also carry employment practices liability insurance. The Company has provided for the self-insured retention where estimated losses equal to or in excess of such amount are considered probable. The actual outcome of any pending lawsuit is not likely to result in any additional loss to us beyond the $1 million retention.

In October 2000, we completed an initial public offering ("IPO") of our class A common stock. In conjunction with that offering, we reorganized our corporate structure by merging Watson Wyatt & Company with a wholly-owned subsidiary of the Company. As a result, Watson Wyatt & Company became a wholly-owned subsidiary of the Company.

At the time of the reorganization, each share of Watson Wyatt & Company's redeemable common stock was converted into one share of class B-1 common stock and one share of class B-2 common stock of the Company. The class B common stock was divided into two classes to accommodate two different transfer restriction periods, which may be waived by the Board of Directors. The class B shares will automatically convert into class A common stock following the expiration or waiver of the respective transfer restriction periods. The class B-1 shares were subject to a transfer restriction period of 12 months following the IPO date, which expired on October 16, 2001, while the class B-2 shares are subject to a transfer restriction period of 24 months following the IPO date. The Company waived the transfer restriction on a total of 1,559,250 class B-1 and 1,559,250 class B-2 shares to allow for conversion into the class A shares for sale in the IPO.

In June 2001, we completed a secondary public offering of 2,950,000 shares of our class A common stock. In July 2001, our underwriters exercised their over-allotment option and purchased an additional 442,500 shares of class A common stock from selling stockholders. In conjunction with this offering, the Board of Directors waived the transfer restrictions on a total of 3,288,215 class B-1 shares to allow for conversion into the class A shares sold by selling stockholders.

Other Conversions

On October 16, 2001, the 12-month transfer restriction on our class B-1 shares expired. As a result, 9,956,140 class B-1 shares were automatically converted to class A shares of common stock.

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In August 2001, the Board of Directors of the Company approved a proposal to amend the alliance agreement with Watson Wyatt Partners to reduce Watson Wyatt Partners' minimum required holdings of the Company's common stock to 100,000 shares. The Board also authorized the conversion, on or after October 16, 2001, of up to 313,000 of the Company's class B-2 shares held by Watson Wyatt Partners for distribution by Watson Wyatt Partners to its partners, subject to the prior execution by each partner of a lock-up agreement imposing the same transfer restrictions on such class A shares as are applicable to the Company's class B-2 shares. Following the conversion of the class B-1 shares pursuant to the Company's Amended and Restated Certificate of Incorporation and the class B-2 shares pursuant to the Board's authorization, Watson Wyatt Partners distributed 626,000 shares to its individual partners.

None.


Item 4.  Submission of Matters to a Vote of Security Holders

At the second annual meeting of the stockholders of the Company, held on November 5, 2001, the following matters were submitted to a vote of stockholders: (1) the election of five Class I members of the Board of Directors; (2) the approval of the adoption of the 2001 Employee Stock Purchase Plan ("ESPP"); (3) the approval of the adoption of the 2001 Deferred Stock Unit Plan for Selected Employees ("Stock Unit Plan"); and (4) the ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal year ending June 30, 2002.

Proxies representing 23,908,966 shares were received (total shares outstanding as of the Record Date were 33,032,995), and the results of the meeting were as follows with respect to each matter submitted to a vote of stockholders.

Pursuant to the Company's Amended and Restated Certificate of Incorporation, the directorships are divided into three classes, Class I, Class II and Class III. The directorships in Class I will expire as of the annual stockholders' meeting in 2004 and every three years thereafter, the directorships in the Class II will expire as of the annual stockholders' meeting in 2002 and every three years thereafter, and the directorships in Class III will expire as of the annual stockholders' meeting in 2003 and every three years thereafter. As the terms of each of the classes of directors expires, directors of the Company will be elected to serve for a three-year period and until their respective successors have been duly elected and qualified.  Of the proxies received, the votes were as follows:

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The ESPP is intended to provide employees of the Company with additional incentives by permitting them to acquire a proprietary interest in the Company through the purchase of shares of the Company's common stock. Of the proxies received, the votes were as follows:

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The Stock Unit Plan is intended to provide senior employees of the Company with additional incentives by permitting the Company to grant them a proprietary interest in the Company in the form of deferred stock units, in lieu of a portion of their discretionary bonus. Each stock unit represents the Company's obligation to issue one share of common stock. Of the proxies received, the votes were as follows:

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