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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-K**
| (Mark One) |                                                                                            |
|------------|-------------------------------------------------------------------------------------------------|
| ý     | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)  OF THE SECURITIES EXCHANGE ACT OF 1934     |
|       | **For the fiscal year ended June  30, 2001**                                                    |
| OR         |
|       | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o          | **For the transition period  from __________ to __________**                                    |

**Commission File Number:001-16159**

**WATSON WYATT & COMPANY HOLDINGS**(Exact name of registrant as specified in its charter)

| **Delaware**(State or  other jurisdiction of  incorporation or organization) |   | **52-2211537**  (I.R.S. Employer Identification No.) |
|------------------------------------------------------------------------------|--------|------------------------------------------------------|

**1717 HSTREET NWWashington, D.C.  20006-3900**(Address of principal executive offices, including zip code)**(202)715-7000**(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  on which registered** |
| ****                                                              |   | **** |
| **Class A Common Stock**                                          |   | **New York Stock Exchange** |
|                                                              |   |   |
| **Securities registered  pursuant to Section 12 (g) of the Act:** |
|                                                              |   |   |
| **Common Stock, $.01 par value  (Title of Class)**                |   | **Outstanding at August 17,  2001  33,032,995 shares** |
|                                                              |   |   |
| **Class**                                                         |   | **Number of Shares** |
| **Class A Common Stock**                                          |   | **9,390,000** |
| **Class B Common Stock**                                          |   | **23,642,995** |

Indicate bycheck mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
| Yes | ý |   | No | o |
|-----|--------|--------|----|---|

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.
| Yes | o |   | No | ý |
|-----|---|--------|----|--------|

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates of the Registrant is $839,201,870 as of August 16, 2001.

**DocumentsIncorporated by Reference**

Portions ofthe Definitive Proxy Statement for the Annual Meeting of Stockholders to beheld on or about November 5, 2001 are incorporated by reference into Part IIIof this Form 10-K.

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**PART I**

**Item 1. Business.**

**Overview**

Watson Wyatt& Company Holdings, including its subsidiaries, (collectively referred toas "we", "Watson Wyatt" or the "Company") is aglobal human capital consulting firm. We help our clients enhance business performanceby improving their ability to attract, retain and motivate qualified employees.As leading economies worldwide become more services oriented, human capital hasbecome increasingly important to companies and organizations. The heightenedcompetition for skilled employees, unprecedented changes in workforcedemographics and rising employee-related costs have increased the importance ofeffective human capital management. We help our clients address these issues bycombining our expertise in human capital management with technologies in orderto improve the design and implementation of various human resources, or HR,programs, including compensation, retirement and healthcare plans.

We design,develop and implement HR strategies and programs through the following threeclosely interrelated practice areas:

| **Benefits Group** |                                                                      | **HR Technologies Group** |   | **Human Capital Group**                                                                        |
|--------------------|---------------------------------------------------------------------------|---------------------------|--------|------------------------------------------------------------------------------------------------|
| •             | Retirement plans, including pension, 401(k)  and executive benefits plans |                      | • | EHRTM, our web-based delivery of HR  information and programs                                  |   | • | Compensation plans, including executive  compensation and stock option programs |
| •             | Investment consulting services to pension  plans                          |                      | • | Employee self-service applications and call  centers                                           |   | • | Strategies to align workforces with business  objectives |
| •             | Healthcare, disability and other group benefit  plans                     |                      | • | Benefit administration systems and retirement  planning tools                                  |   | • | Organization effectiveness services |
| •             | Actuarial services                                                        |                      | • | EHRTM strategy consulting, using  best-of-breed research on HR vendors, products, and services |   | • | Strategies for attracting, retaining and  motivating employees |

Our clientsinclude many of the world's largest corporations as well as emerging growthcompanies, public institutions and non-profit organizations.  Many of our client relationships haveexisted over several decades.

We believethat our extensive history, global presence, dedication to long-term clientrelationships and recognized reputation for quality provide us with significantcompetitive advantages. We focus on delivering value-added consulting servicesthat help our clients anticipate, identify and capitalize on emergingopportunities in human capital management. We implement this strategy through over 4,200 associates in 62 officeslocated in 18 countries.

***Corporate Information***

Watson Wyatt& Company Holdings was incorporated in Delaware on January 7, 2000. Itsprincipal operating subsidiary, Watson Wyatt & Company, was incorporated inDelaware on February 17, 1958. Including predecessors, we have been in businesssince 1946. We conducted our business as The Wyatt Company until changing ourcorporate name to Watson Wyatt & Company in connection with theestablishment of the Watson Wyatt Worldwide alliance.

***Watson Wyatt Worldwide Alliance***

Recognizingour clients' need for a global organization to service their needs, weestablished operations throughout Europe in the late 1970's by acquiring localfirms and opening new offices. Responding to the rapidly increasingglobalization of the world economy, we made a strategic decision in 1995 tostrengthen our European capabilities significantly and extend our global reachby entering into an alliance with R. Watson & Sons (now Watson WyattPartners), a leading United Kingdom-based actuarial, benefits and humanresources consulting partnership that was founded in 1878. Since 1995, we havemarketed our services globally under the Watson Wyatt Worldwide brand, sharingresources, technologies, processes and business referrals.

The WatsonWyatt Worldwide global alliance maintains 87 offices in 29 countries andemploys over 6,100 employees. Watson Wyatt & Company Holdings operates 62offices in 18 countries in North America, Latin America and Asia-Pacific.Watson Wyatt Partners operates 10 offices in the United Kingdom and Ireland. Thealliance operates 15 offices in 9 continental European countries principallythrough a jointly owned holding company, Watson Wyatt Holdings (Europe)Limited, which is 25% owned by us and 75% owned by Watson Wyatt Partners.

**Human Resources ConsultingIndustry**

***Overview***

The growingdemand for employee benefits and human capital consulting services is directlyrelated to the size, complexity and rapid change associated with humanresources programs. In the U.S. alone, employers spend over $5 trillionannually on the direct costs of human capital such as compensation andbenefits, according to the U.S. Department of Commerce, Bureau of EconomicAnalysis. In 1999, U.S. employers contributed over $170 billion to pension andprofit sharing plans, and the assets of U.S. retirement plans exceeded $8trillion.

Employers,regardless of geography or industry, are facing unprecedented challengesinvolving the management of their people. Changing technology, critical skillshortages and an aging population in many developed countries have increasedcompetition for talented employees. At the same time, employees' expectationsrelating to compensation, benefits and other HR services are growing. Employersmust address these challenges effectively in order to remain competitive.

Watson Wyattis one of the leading HR-focused consulting firms, based on revenues, thatcompete in serving the large employer market worldwide. Other major consultingfirms include: William M. Mercer, Towers Perrin and Hewitt Associates. Inaddition to these firms, the industry includes smaller benefits andcompensation firms and the HR consulting divisions of diversified professionalservice firms, such as the big five accounting firms, Accenture, EDS and Booz,Allen & Hamilton. The global HR consulting industry is highly fragmented.There are approximately 950 firms providing HR-related consulting services,with the four major HR-focused consulting firms accounting for approximately40% of total industry revenue.

**Consulting Services**

Our NorthAmerican operations include three principal practice groups: Benefits, HRTechnologies and Human Capital. Outside North America, our operations areorganized and managed on a geographic basis. The percentage of revenues generated in the various groups is asfollows:

|                                               | 2001 |   | 2000 |   | 1999 |   |
|----------------------------------------------------|------|--------|------|--------|------|--------|
|                                               |      |   |      |   |      |   |
| Benefits Group                                     | 56   | %      | 56   | %      | 58   | %      |
| HR Technologies Group                              | 14   |   | 13   |   | 12   |   |
| Human Capital Group                                | 8    |   | 8    |   | 8    |   |
| International                                      | 11   |   | 12   |   | 11   |   |
| Other (including Data Services and Communications) | 11   |   | 11   |   | 11   |   |
|                                               |      |   |      |   |      |   |
| Total                                              | 100  | %      | 100  | %      | 100  | %      |
|                                               |      |   |      |   |      |   |

Prior yearpercentages have been recalculated to conform to current classification.  For more information about industrysegments, see Note 13 of Notes to the Consolidated Financial Statements,included in Item 14 of this report.

***Benefits Group***

Our BenefitsGroup is our largest and most established practice, with a franchise dating to1946. This group consists of approximately 1,540 associates and works withclients to create cost-effective benefits programs that help attract, retain andmotivate a talented workforce.  Westrive to provide tailored benefits programs for our clients, and we base ourrecommendations on extensive research. Our Benefits Group, which consists ofRetirement Consulting, Investment Consulting, and Group & Health CareConsulting, accounted for approximately 56% of our total revenues for thefiscal year ended June 30, 2001.

*Retirement Consulting*

We are oneof the world's largest advisers on retirement plans, and we provide actuarialand consulting services for large defined benefit and defined contributionretirement plans. Our consultants work with clients to provide realisticassessments of the impact that the change in workforce demographics will haveon their retirement plans, corporate cash flow requirements and retireebenefits adequacy and security.

In NorthAmerica, and increasingly throughout much of the developed world, retirementsecurity is provided through funded pension plans, most of which are eitherdefined benefit or defined contribution plans. A typical defined benefit planis characterized by employer contributions and a specified future benefit tothe employee. These plans typically involve large asset pools, complexcalculations to determine employer costs and funding requirements andsophisticated analysis to match liabilities and assets over long periods oftime. These plans are commonly referred to as pension plans. A typical definedcontribution retirement plan is characterized by employee contributions,possible employer matching contributions and an unspecified future benefit paidto the employee which will ultimately be based on investment returns. In theUnited States, the most common example of a defined contribution plan is a401(k) plan.

Our targetmarket for defined benefit plans consists of large plans such as the Fortune1000, Pensions & Investments 1000, and other similarly sized plans and plansponsors. Our consultants provide actuarial services to many of the world'slargest retirement plans, including the three largest corporate-sponsoreddefined benefit plans in the United States. Our defined benefit servicesinclude:

•            Strategic plan design

•            Actuarial services

•            Funding recommendations

•            Multinational asset pooling consulting

•            Financial reporting

•            Valuation and diagnostic software and systems

•            Assistance with merging, divesting and acquiring plans

We also helpcompanies design and implement defined contribution plans, especially 401(k)plans in the United States. We assist clients with the selection of assetmanagers and administrators and in communicating with their employeesconcerning enrollment, plan provisions and investment alternatives.

In both thedefined benefit and defined contribution areas, we emphasize research-basedconsulting to design retirement programs that align our clients' workforceswith their business strategies. Examples of our products and services include:

| § | Pension Equity Plan - an alternative  retirement plan that combines the lump sum portability of defined  contribution and cash balance plans desired by younger workers with a  benefits formula based on the final few years of earnings, providing benefits  security typical to a traditional defined benefit plan that older and  long-service employees seek; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                               |
| § | Flex Pension PlusTM - a  tax-effective Canadian supplemental retirement plan for attracting and  retaining key employees;                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                               |
| § | PREpare!® - a web-based tool that  enables employees to model different savings and retirement income scenarios;                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                               |
| § | Watson Wyatt 401(k) Value IndexTM -  a tool that looks beyond cost to identify the total value that employers and  their employees derive from their 401(k) plans;                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                               |
| § | Phased Retirement Programs - a combination of  programs that help clients attract and retain older workers by enabling them  to balance work/life needs through a gradual transition to retirement; and                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                               |
| § | Electronic Actuary/ElectraTM - a  tool that performs immediate ''what if'' scenarios so that different plan  designs can be modeled and priced interactively with clients.                                                                                                                                                                                         |

To supportour retirement consulting services, we invest heavily in state-of-the-arttechnology, software and systems to ensure seamless consistency and efficiencyof service delivery in all our offices worldwide. We also maintain extensiveproprietary databases, Watson Wyatt COMPARISONTM and BenTRACKTM,that enable our clients to track and benchmark benefits plan provisions in theUnited States and throughout the world, respectively.

*Group and HealthcareConsulting*

Healthcarecosts incurred by U.S. employers are rising by more than 10% per year. In thisenvironment, we help our clients with the design, financing, administration andcommunication of medical, disability and other group benefits plans. Clientsseek our services to assist them in an environment that is characterized by escalatingcosts, employee dissatisfaction with healthcare programs and the burden ofmanaging multiple vendor relationships. Our approach is to establish a linkbetween each element of an employers' benefits programs and the employers'desired cost, employee satisfaction and productivity goals. Our servicesinclude:

•            Plan design;

•            Actuarial services;

•            Vendor management services;

•            U.S. and off-shore funding analysis;

•            Benefits pricing;

•            Assistance with plan changes relating to mergers,acquisitions and divestitures; and

•            Integrated disability management.

Our approachto group benefits consulting is research-based and makes use of sophisticatedconsulting tools such as:

| § | eHR/BenefitsTM - tools, including a  customizable web portal to facilitate the administration and management of  health and welfare benefits.                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                             |
| § | PreViewTM - a medical benefits cost  modeling system which accurately and quickly models medical claims under  alternative plan designs, covered populations and managed care delivery  systems; |
|   |                                                                                                                                                                                             |
| § | Health Plan Value LibraryTM -  software tools and a database of information on the cost, quality and  accessibility of health plans that are used to screen and evaluate health  plans; and      |
|   |                                                                                                                                                                                             |
| § | Auto-RFPTM - a powerful software  application that organizes and eases the administrative process of gathering  and evaluating the responses from healthcare vendors to requests for  proposals. |

*Investment Consulting*

Through ourregistered investment advisor subsidiary, we offer investment consultingservices that help private and public sector clients throughout the worldmaximize the return on their retirement plan assets, develop governancepolicies and strategies and design investment structures to successfully managefinancial liabilities within the context of their overall business objectives.Our services include:

•            Asset/liability modeling and asset allocation studies;

•            Governance and investment policy development;

•            Investment policy implementation;

•            Investment structure analysis;

•            Investment manager selection and evaluation; and

•            Performance evaluation and monitoring.

***HR Technologies Group***

Our HRTechnologies Group helps clients select and implement technologies that enhancethe delivery of benefits and related information to employees. Our HRTechnologies Group consists of approximately 410 associates and representedapproximately 14% of our total revenues for the fiscal year ended June 30,2001.

As humanresources programs become more complex and important for recruiting andretaining employees, organizations are seeking flexible, adaptable andcost-effective ways to provide benefits information to their employees. We arewell-positioned to help clients address these challenges because of our eHRTMapproach, which integrates human resources related data, computer systems andtransactions in a single employee accessible network. We help organizationsthat have adopted internet applications for external business strategies toemploy similar advanced technologies for internal applications such as humanresources. Our services include assisting clients in implementing employeeself-service applications, retirement plan administration systems, benefitsenrollment, training programs, time and attendance systems and applicanttracking systems. Using our proprietary consulting methodology of ''Discover,Invent and Deliver,'' our consultants work with clients to evaluate existinghuman resources infrastructure and business strategy, identify the best sourcesof people, process and technology and design and implement tailored approaches.Our consulting work frequently involves the development of web-based employeeself-service applications, the implementation of interactive call centers andthe integration of existing legacy systems. We also offer hosting services forcompanies who prefer to access applications from our servers rather than hoston their own intranets. In addition, we deliver state-of-the-art applicationsin health and welfare enrollment, pension administration, compensation planningand retirement planning.

In June2001, we entered into an agreement with Workscape, Inc., a provider of internetbased human capital management software and services, regarding a strategicalliance to market, distribute and implement a complete human resources portalsolution.

***Human Capital Group***

Our HumanCapital Group, which consists of approximately 260 associates, helps clientsachieve competitive advantage by aligning their workforce with their businessstrategy. This includes helping clients develop and implement strategies forattracting, retaining and motivating their employees to maximize the return ontheir investment in human capital. Our Human Capital Group representedapproximately 8% of our total revenues for the fiscal year ended June 30, 2001.Our Human Capital Group focuses in three principal areas:

*Executive Compensation*

We counselexecutives and boards of directors on executive pay programs, including cashcompensation, stock options and stock purchase plans, and on ways to alignpay-for-performance plans throughout the organization in order to increaseshareholder value.

*Strategic Rewards®*

We helpalign an organization's rewards—including compensation, stock programs,incentives, recognition programs and flexible work arrangements—with itsbusiness strategies, cultural values, work design and human resources strategy.We work together with our Benefits Group to develop optimal total compensationprograms for our clients.

*Organization Effectiveness*

We helpclients build high-performance organizations by working with them to clarifyand implement business strategy, recognizing the impact of employee attitudesand commitment and effective team and leadership development on businesssuccess. We provide a wide array of services centered around organizationassessment, including organization measurement and surveys. In the area oftalent management, we provide tools and methodologies for talent selection anddevelopment, succession planning and performance management. We also provideconsulting regarding the organization and development of the HR function,including shared services and organizational design.

We havedeveloped the *Watson Wyatt Human Capital Index*â, a proprietary tool fordemonstrating the relationship between the effectiveness of an organization'shuman capital practices and the creation of superior shareholder returns. Insupport of our human capital consulting we also maintain databases of employeeattitudes for client organization comparison.

Our WorkUSA®/WorkCanadaTMdatabase is regarded as the most up-to-date survey in existence on theattitudes of North American workers. It includes the opinions of 10,000employees surveyed independently, reflecting a large cross-section of jobs andindustry types. Our clients compare their own employee survey results againstthese norms to identify workplace perceptions and satisfaction and commitmentlevels.

**International Operations**

Ouroperations outside North America are managed and organized on a geographicbasis. These operations include 24 offices in Asia-Pacific and Latin America,employing approximately 920 associates, which generally provide our full arrayof services. This segment represented approximately 11% of our total revenuesfor the fiscal year ended June 30, 2001.

Weestablished our presence in Asia-Pacific in 1979 with offices in Hong Kong andMalaysia, and grew substantially throughout the 1980's and 1990's byestablishing new offices and acquiring existing firms. We have been successfulin growing high-end human capital consulting services, which has becomeincreasingly important since the 1997/1998 economic crisis, helping our clientswith the people and cultural issues that are necessary to grow theirbusinesses. We are also widely recognized as the leader in providingcompensation and benefits surveys in the region, with over 50 different surveyproducts. Our retirement consulting services continue to grow in the region,and we provide investment consulting services to some of the largest pensionplans in Japan and Hong Kong. We were named HR Consultancy of the Year in HongKong for 1998, 1999 and 2000 by China Staff magazine. In addition to our humancapital and benefits consulting services, we have also recently begun marketingHR Technologies services to clients in the region.

Our presencein Latin America began in the early 1980's in Mexico and grew to include suchmajor markets as Brazil in the 1990's. With deregulation, privatization and theinflux of multinationals, we believe there are significant opportunities forgrowth in the region, both in the benefits area, where most of our services areconcentrated currently, and in the human capital consulting area.

**Other Services**

***Communication Consulting***

Ourcommunication consulting group has won numerous awards for innovative andeffective communications. Our consultants combine strong creative skills withtechnical excellence on human resources issues and solid research on employeeattitudes and communication effectiveness. We conduct communications audits,research, and focus groups, and provide communications planning andimplementation. In addition, our consultants assist employers in complying withdisclosure requirements.

***Watson Wyatt Data Services***

Watson WyattData Services provides a comprehensive array of global compensation, benefitsand employment practices information that is often studied and cited by many ofour clients and competitors. In the United States, we publish and market anextensive library of reports on human resources issues, and more than 7,500organizations participate in one or more of our annual surveys. Our databasescontain compensation information for more than two million employees invirtually every industry sector and major metropolitan area. Outside of theUnited States, our worldwide alliance offers more than 70 remuneration,benefits and employment practice reference guides, covering more than 50countries and 6 continents. In addition to our annual survey references, wealso offer many reference works intended to assist practitioners in creating ormaintaining programs in a variety of subject areas such as variable pay,performance management and personnel policies.

***Integrated Service Approach***

While wefocus our consulting services in the principal areas described above, we drawupon consultants from our different practices to deliver integrated services tomeet the needs of our clients. An example is in the area of Merger andAcquisitions. Recognizing that many business combinations fail because of''people problems,'' we help clients achieve better transactional success byassisting with faster integration, cost containment, increased customer focusand greater productivity. We assemble multi-disciplinary teams to provide keyservices that include due diligence of pension and benefits plans, companycultures and human resources strategies, integration of human resourcesprocesses and practices and enterprise-wide project management.

Anotherexample is our Total Rewards approach which encompasses compensation, benefits,career growth and company culture. We help clients determine the correct mix ofreward programs to attract and retain the right employees and to motivate themto produce desired results.

***Sales and Marketing***

Our growthstrategy starts with ensuring the satisfaction of current clients through ourAccount Management program. We have approximately 135 account managers whofocus on the effective delivery of services to clients and on expanding ourrelationships across service lines, geographic boundaries and divisions withinclient companies. A key element of this program is an approach we callClientFirstTM. Using proprietary processes and tools, we work withclients to define their needs and expectations before an engagement begins andthen continually measure our performance according to agreed upon standards.

We alsopursue new clients using cross-disciplinary teams of consultants as well asdedicated business developers to initiate relationships with carefully selectedcompanies. Our client expansion and new client acquisition efforts aresupported by market research, comprehensive sales training programs, andextensive marketing databases. Our sales efforts are also supported by a fullarray of marketing programs designed to raise awareness of the Watson WyattWorldwide brand and our reputation within our target markets. These programspromote our thought leadership on key human resources issues and establish usas a preferred human capital consulting firm to many of the world's largestcompanies.

**Clients**

We work withmajor corporations, emerging growth companies, government agencies andnot-for-profit institutions in North America, Latin America and Asia-Pacificacross a wide variety of industries. Our client base is broad andgeographically diverse. For the fiscal year ended June 30, 2001, our tenlargest clients accounted for approximately 13% of our consolidated revenuesand no individual client represented more than 4% of our consolidated revenues.

**Competition**

The humancapital consulting business is highly competitive. We believe that there areseveral barriers to entry, such as the need to assemble specializedintellectual capital to provide expertise on a global scale, and that we havedeveloped competitive advantages in providing human resources consultingservices. However, we face intense competition from several different sources.

Our currentand anticipated competitors include:

|   | • | Major human resources focused consulting firms  that compete in serving the large employer market worldwide, such as William  M. Mercer, Towers Perrin and the administration/consulting firm Hewitt  Associates; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                              |
|   | • | Smaller benefits and compensation consulting  firms, such as Buck Consultants, The Segal Company and Hay Group;                                                                                                   |
|   |   |                                                                                                                                                                                                              |
|   | • | The human resources consulting practices of  public accounting, consulting and insurance firms, such as  PricewaterhouseCoopers, Deloitte & Touche, Booz, Allen & Hamilton and  Aon;                      |
|   |   |                                                                                                                                                                                                              |
|   | • | Information technology consulting firms, such  as Accenture, and KPMG Consulting, as well as internet/intranet development  firms; and                                                                            |
|   |   |                                                                                                                                                                                                              |
|   | • | Boutique consulting firms comprised primarily  of professionals formerly associated with the firms mentioned above.                                                                                               |

The marketfor our services is subject to change as a result of regulatory, legislative,competitive and technological developments and to increased competition fromestablished and new competitors. We believe that the primary determinants ofselecting a human resources consulting firm include reputation, ability toprovide measurable increases to shareholder value, global scale, servicequality, and the ability to tailor services to a clients' unique needs. Webelieve we compete favorably with respect to these factors.

**Employees**

We employapproximately 4,200 associates as follows:

| Benefits Group                                     | 1,540 |
|----------------------------------------------------|-------|
| HR Technologies Group                              | 410   |
| Human Capital Group                                | 260   |
| International                                      | 920   |
| Other (including Data Services and Communications) | 1,070 |
|                                               |       |
|                                               | 4,200 |
|                                               |       |

None of ourassociates are subject to collective bargaining agreements.  We believe relations with associates aregood.  Approximately 66% of our stock isheld by our current associates.

**Item 2. Properties.**

We operatein 62 offices in principal markets throughout the world.  Operations are carried out in leased officesunder operating leases that normally do not exceed 10 years in length. We donot anticipate difficulty in meeting our space needs at lease expiration or ifadditional space is required earlier. We also evaluate office relocation on an ongoing basis to meet changingneeds in our markets while minimizing our occupancy expense.

The fixedassets owned by Watson Wyatt represented approximately 14% of total assets atJune 30, 2001 and consisted primarily of computer equipment, office furnitureand leasehold improvements.

**Item 3. Legal Proceedings.**

From time to time, we are a party to variouslawsuits, arbitrations or mediations that arise in the ordinary course ofbusiness. These disputes typically involve claims relating to employmentmatters or the rendering of professional services. The matters summarized belowinvolve the most significant pending or potential claims against us. Webelieve, based on currently available information, that the results of all suchproceedings, in the aggregate, will not have a material adverse effect on ourfinancial condition, but claims which are possible in our business could bematerial to our financial results for a particular period.

We carry substantial professional liabilityinsurance with a self-insured retention of $1 million per occurrence whichprovides coverage for professional liability claims including the cost ofdefending such claims. We also carry employment practices liability insurance. The Company has provided for the $1million self-insured retention where estimated losses in excess of such amountare considered probable.  The actualoutcome of any lawsuit is not likely to result in any additional loss to theCompany.

*ConnecticutCarpenters Pension Fund.* The Connecticut Carpenters Pension Fundfiled an action against us in 1999, in the U.S. District Court for District ofConnecticut, claiming errors in valuations from 1991 through 1998 thatallegedly resulted in understated liabilities. A jury trial was held inFebruary 2001. On February 23, 2001, the jury returned a verdict in favor ofthe Fund and awarded $32 million in damages to the Fund, plus pre-judgmentinterest of approximately $7 million. We filed post-trial motions with thetrial court disputing the damages amount, which were denied on June 19, 2001,and the judgment was satisfied on July 3, 2001.

*PacificGroup Medical Association (PGMA)*. In connection with the insolvency andliquidation of the Pacific Group Medical Association, a health insuranceprovider and former client, the Hawaii Insurance Commissioner, acting asliquidator of PGMA, brought claims in the 1st Circuit for theCircuit Court of Hawaii against the former officers, directors, accountants,attorneys and other service providers of PGMA. Late in 2000, a lawsuit by theInsurance Commissioner against Watson Wyatt & Company and others wasconsolidated with an earlier lawsuit brought by the Insurance Commissioneragainst the PGMA officers and directors. The Insurance Commissioner allegedthat PGMA's liabilities exceeded its assets by approximately $15 million whenit was shut down in 1997 and sought to recover damages from all of thedefendants. During a mediation conducted in Honolulu during the week of March19, 2001, we and the Insurance Commissioner reached a tentative settlement ofthe liquidator's claims against us. Settlement negotiations among the parties to the litigation havecontinued, and we anticipate that a stipulation dismissing claims against thesettling defendants will be submitted to the court for approval in the nearfuture.

*Regina,Saskatchewan Police*. The Administrative Board of the ReginaPolice Superannuation and Benefit Plan filed an action against us and threeindividual employees in 1994 in the Queen's Bench Judicial Center of Regina,alleging errors in valuation methods, assumptions and calculations for the planduring the course of work provided for the Plan since the 1970’s.  The claim has been settled and the lawsuitwas dismissed on June 19, 2001.

*SocieteInternationale de Telecommunications Aeronautique S.C. (SITA)*. In 1999, alaw firm representing SITA, a Belgium cooperative based in France, notifiedWatson Wyatt Partners, our European alliance partner, of a claim involvingalleged errors in the design of a global employee stock plan which includeswork performed by a former subsidiary that is now owned by Watson Wyatt &Company Holdings (Europe) Limited. Suit was filed on November 15, 2000, in theHigh Court of Justice Chancery Division against Watson Wyatt Partners and TheWyatt Company (UK) Limited, one of our subsidiaries. SITA's specific damageclaim is indeterminate, but could be in the $90 million range. With our respectiveinsurers, we and Watson Wyatt Partners have entered into a joint defenseagreement. We filed our statement of defense on February 7, 2001 and theparties have commenced discovery.

**Item 4. Submission of Mattersto a Vote of Security Holders.**

None.

**PART II**

**Item 5. Market Price of andDividends on the Registrant's Common Equity and Related Stockholder Matters.**

*Initial Public Offering*

On October10, 2000, our Registration Statement on Form S-3 (File No. 333-94973),registering for sale up to 6,440,000 shares of class A common stock at $12.50per share to be issued in connection with our initial public offering, wasdeclared effective. On October 16, 2000, we completed changes in our corporatestructure in conjunction with the initial public offering. The changes incorporate structure involved the merger of Watson Wyatt & Company with WWMerger Subsidiary, Inc., a wholly-owned subsidiary of Watson Wyatt &Company Holdings. Watson Wyatt & Company is now a wholly-owned subsidiaryof Watson Wyatt & Company Holdings.

At the timeof the reorganization, each share of Watson Wyatt & Company's redeemablecommon stock was converted into one share of class B-1 common stock and oneshare of class B-2 common stock of Watson Wyatt & Company Holdings. Theclass B common stock is divided into two classes to accommodate differenttransfer restriction periods. The class B-1 shares are subject to a transferrestriction period of 12 months following the public offering date, while theclass B-2 shares are subject to a transfer restriction period of 24 monthsfollowing the public offering date, unless waived by the Board of Directors.The Company waived the transfer restrictions on a total of 1,559,250 class B-1and 1,559,250 class B-2 shares to allow for conversion into the class A sharessold by selling stockholders in the initial public offering describedbelow.  Following the expiration orwaiver of the respective transfer restriction periods, the remaining class B-1and class B-2 shares will automatically convert into class A common stock.  Class A, B-1 and B-2 shares all retain equalvoting rights.

Inconjunction with our initial public offering, we entered into agreementsproviding for additional transfer restrictions with major stockholders,executive officers and employee directors affecting approximately 36% of ourremaining class B common stock. The agreements restrict transfers of all sharesheld by such persons immediately following the offering, and the restrictionsterminate as to 25% of such shares on each of the first, second, third andfourth anniversaries of the consummation of the public offering.

A total of5,600,000 shares of class A common stock were offered and sold in our initialpublic offering at an offering price of $12.50 per share, for an aggregate offeringprice of $70.0 million. Of the shares included in this transaction, WatsonWyatt & Company Holdings offered 2,800,000 newly-issued shares, and theselling stockholders offered the remaining 2,800,000 shares. On November 8,2000, our underwriters exercised their over-allotment option. As a result, theunderwriters purchased an additional 840,000 shares of class A common stockfrom us and from the selling stockholders at the initial public offering priceof $12.50 per share less the underwriting discount, for an aggregate offeringprice of $10.5 million. Of the shares included in this transaction, WatsonWyatt & Company Holdings sold 521,500 newly-issued shares, and the sellingstockholders sold 318,500 shares. The managing underwriters of the offering wereDeutsche Banc Alex. Brown, Banc of America Securities LLC, and Robert W. Baird& Co.

As a resultof these transactions and upon completion of the offering, we received grossproceeds of $41.5 million, and the selling stockholders received gross proceedsof $39.0 million. Net proceeds to the Company were $35.0 million, which is netof $6.5 million in underwriting discounts, commissions and other offeringcosts. Also, we paid $2.7 million to selling stockholders as reimbursement forcommission payments resulting from the sale of their shares.

From thetime of receipt through June 30, 2001, proceeds from the offering of $17.7million were applied to the repayment of short-term debt, $16.5 million wereused for capital expenditures and a $0.8 million installment payment was madefor our acquisition of Talisman, Inc., a boutique firm specializing inrecruiting and staffing consulting.

*Secondary Public Offering*

In June2001, we completed a secondary public offering ("the Secondary") ofour class A common stock.  In thisoffering, a total of 2,950,000 shares of class A common stock was offered andsold at a price of $22.00 per share, for an aggregate offering price of $64.9million.  Of the shares included in thistransaction, Watson Wyatt & Company Holdings offered 104,285 newly-issuedshares, and selling stockholders offered the remaining 2,845,715 shares.  On July 6, 2001, our underwriters exercisedtheir over-allotment option. As a result, the underwriters purchased an additional442,500 shares of class A common stock from selling stockholders at theoffering price of $22.00 per share less the underwriting discount, for anaggregate offering price of $9.7 million. The managing underwriters of theoffering were Deutsche Banc Alex. Brown, Robert W. Baird & Co. and UBS Warburg.

Inconjunction with this offering, the Board of Directors waived the transferrestrictions on a total of 3,288,215 class B-1 shares to allow for conversioninto the class A shares sold by selling stockholders.

Net proceedsto the Company from the Secondary were $1.8 million, net of underwritingdiscounts, commissions and other offering costs.  These proceeds were used for capital expenditures.  We did not receive any proceeds from thesale of shares by the selling stockholders.

*Market Information*

Watson Wyatt& Company Holdings class A common stock is currently traded on the New YorkStock Exchange under the symbol WW.  Thefollowing table sets forth the range of high and low closing share prices foreach period since our initial public offering in October 2000, determined bythe daily closing stock prices. 

|                                                       | Fiscal year 2001 |   |
|------------------------------------------------------------|------------------|--------|
|                                                       |                  |   |
|                                                       | High             |   | Low |   |
|                                                       |                  |   |  |   |
|                                                       |             |   |   |   |
| Second quarter (October 1, 2000 through December 31, 2000) | $                | 23.50  |   | $ | 16.00 |   |
| Third quarter (January 1, 2001 through March 31, 2001)     | 24.00            |   | 15.60 |   |
| Fourth quarter (April 1, 2001 through June 30, 2001)       | 25.01            |   | 14.81 |   |
|                                                            |                  |        |  |  |  |  |

Prior to ourinitial public offering in October 2000, there was no established publictrading market for our redeemable common stock since the price of the Company'sredeemable common stock was determined by our formula book value and thetransferability of such shares was restricted.

*Holders*

As of August17, 2001, there were 1,516 registered holders of our common stock.

*Dividends*

Under ourcredit facility (see Note 10 of Notes to the Consolidated Financial Statements,included in Item 14 of this report), we are required to observe certaincovenants (including requirements as to minimum net worth) that affect theamounts available for the declaration or payment of dividends.  Under the most restrictive of thesecovenants, approximately $36.5 million was available for the declaration orpayment of dividends as of June 30, 2001. The declaration and payment of dividends by the Company is at thediscretion of our Board of Directors and depends on numerous factors,including, without limitation, our net earnings, financial condition,availability of capital, debt covenant limitations, and our other businessneeds, including those of our subsidiaries and affiliates.  Historically, while our performance wouldhave permitted the payment of dividends, we have chosen not to declaredividends every year since fiscal year 1991. We currently intend to retain our future earnings to finance the operationand expansion of our business and we do not anticipate paying cash dividends onour common stock in the foreseeable future.

**Item 6. Selected ConsolidatedFinancial Data.**

The table on the following page sets forthselected consolidated financial data of Watson Wyatt as of and for each of theyears in the five year period ended June 30, 2001.  The selected consolidated financial data as of June 30, 2001 and2000 and for each of the three years in the period ended June 30, 2001 arederived from the audited consolidated financial statements of Watson Wyattincluded in this Form 10-K.  Theselected consolidated financial data as of June 30, 1999, 1998, 1997, and foreach of the years ended June 30, 1998 and 1997 have been derived from auditedconsolidated financial statements of Watson Wyatt not included in this Form10-K and have been restated to reflect our discontinued operations.  Earnings per share data for each period havealso been restated to reflect our corporate reorganization and two-for-one shareconversion as if our corporate reorganization and two-for-one share conversionwere effective at the beginning of each period.  See Note 2 of the Consolidated Financial Statements for furtherinformation regarding the corporate reorganization and share conversion.

The consolidated financial data should be readin conjunction with our Consolidated Financial Statements and notes thereto and"Management's Discussion and Analysis of Financial Condition and Resultsof Operations" included in Item 7 of this Form 10-K.  Amounts are in thousands of U.S. Dollarsexcept per share data.

 

|                                                                          | Year Ended  June 30,                    |    |
|-------------------------------------------------------------------------------|-----------------------------------------|---------|
|                                                                          |                                         |    |
|                                                                          | 2001                                    |    | 2000 |   | 1999 |   | 1998 |   | 1997 |   |
|                                                                          |                                         |    |  |   |  |   |  |   |  |   |
| **Statement of Operations Data:**                                             |                                    |    |   |   |   |   |   |   |   |   |
| (amounts are in thousands, except per share  data)                            |                                    |    |   |   |   |   |   |   |   |
|                                                                          |                                    |    |   |   |   |   |   |   |   |   |
| Revenue                                                                       | $                                       | 700,189 |   | $ | 624,583 |   | $ | 556,860 |   | $ | 512,660 |   | $ | 486,502 |   |
|                                                                          |                                         |    |  |   |  |   |  |   |  |   |
| Costs of providing services:                                                  |                                    |    |   |   |   |   |   |   |   |   |
|                                                                          | Salaries and employee benefits          | 370,045 |   | 332,339 |   | 298,915 |   | 268,611 |   | 252,302 |   |
|                                                                          | Stock incentive bonus plan (a)          | -       |   | 30,283 |   | 22,610 |   | - |   | - |   |
|                                                                          | Non-recurring compensation charge (b)   | -       |   | - |   | - |   | 69,906 |   | - |   |
|                                                                          | Professional and subcontracted services | 53,865  |   | 49,608 |   | 47,863 |   | 49,907 |   | 48,827 |   |
|                                                                          | Occupancy, communications and other     | 112,314 |   | 100,099 |   | 92,668 |   | 88,840 |   | 96,026 |   |
|                                                                          | General and administrative expenses     | 69,402  |   | 63,596 |   | 56,578 |   | 51,759 |   | 45,696 |   |
|                                                                          | Depreciation and amortization           | 21,995  |   | 17,878 |   | 15,248 |   | 24,994 |   | 22,094 |   |
|                                                                          |                                         |    |  |   |  |   |  |   |  |   |
|                                                                          | 627,621                                 |    | 593,803 |   | 533,882 |   | 554,017 |   | 464,945 |   |
|                                                                          |                                         |    |  |   |  |   |  |   |  |   |
| Income (loss) from operations                                                 | 72,568                                  |    | 30,780 |   | 22,978 |   | (41,357 | ) | 21,557 |   |
| Other:                                                                        |                                    |    |   |   |   |   |   |   |   |   |
|                                                                          | Interest income                         | 2,855   |   | 1,823 |   | 944 |   | 901 |   | 1,462 |   |
|                                                                          | Interest expense                        | (1,144  | ) | (1,876 | ) | (2,646 | ) | (2,768 | ) | (1,506 | ) |
| Income from affiliates                                                        | 4,098                                   |    | 3,116 |   | 2,524 |   | 258 |   | 105 |   |
|                                                                          |                                         |    |  |   |  |   |  |   |  |   |
| Income (loss) before income taxes and      minority interest   | 78,377                                  |    | 33,843 |   | 23,800 |   | (42,966 | ) | 21,618 |   |
| Income taxes                                                                  | 33,623                                  |    | 15,195 |   | 11,448 |   | 13,134 |   | 9,070 |   |
| Minority interest                                                             | (318                                    | )       | (115 | ) | (217 | ) | (112 | ) | (167 | ) |
|                                                                          |                                         |    |  |   |  |   |  |   |  |   |
| Income (loss) from continuing operations                                      | 44,436                                  |    | 18,533 |   | 12,135 |   | (56,212 | ) | 12,381 |   |
| Discontinued operations (c)                                                   | -                                       |    | - |   | 8,678 |   | (69,906 | ) | (11,483 | ) |
|                                                                          |                                         |    |  |   |  |   |  |   |  |   |
| Net income (loss)                                                             | $                                       | 44,436  |   | $ | 18,533 |   | $ | 20,813 |   | $ | (126,118 | ) | $ | 898 |   |
|                                                                          |                                         |    |  |   |  |   |  |   |  |   |
| Earnings (loss) per share, continuing      operations, basic   | $                                       | 1.39    |   | $ | 0.62 |   | $ | 0.40 |   | $ | (1.63 | ) | $ | 0.35 |   |
| Earnings (loss) per share, continuing      operations, diluted | $                                       | 1.37    |   | $ | 0.62 |   | $ | 0.40 |   | $ | (1.63 | ) | $ | 0.35 |   |
| Earnings (loss) per share, net income  (loss),      basic      | $                                       | 1.39    |   | $ | 0.62 |   | $ | 0.68 |   | $ | (3.67 | ) | $ | 0.02 |   |
| Earnings (loss) per share, net income  (loss),      diluted    | $                                       | 1.37    |   | $ | 0.62 |   | $ | 0.68 |   | $ | (3.67 | ) | $ | 0.02 |   |
| Weighted average shares of common stock,      basic            | 32,068                                  |    | 30,000 |   | 30,430 |   | 34,340 |   | 34,876 |   |
| Weighted average shares of common stock,      diluted          | 32,363                                  |    | 30,000 |   | 30,430 |   | 34,340 |   | 34,876 |   |
|                                                                          |                                    |    |   |   |   |   |   |   |   |   |
|                                                                          | As of June  30,                         |    |
|                                                                          |                                         |    |
|                                                                          | 2001                                    |    | 2000 |   | 1999 |   | 1998 |   | 1997 |   |
|                                                                          |                                         |    |  |   |  |   |  |   |  |   |
| **Balance Sheet Data:**                                                       |                                    |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                     | $                                       | 81,735  |   | $ | 41,410 |   | $ | 35,985 |   | $ | 13,405 |   | $ | 26,257 |   |
| Working capital                                                               | 96,171                                  |    | 16,177 |   | 11,692 |   | 23,748 |   | 21,307 |   |
| Total assets                                                                  | 387,456                                 |    | 329,960 |   | 313,960 |   | 268,310 |   | 331,778 |   |
| Note payable                                                                  | -                                       |    | - |   | - |   | 9,000 |   | - |   |
| Common stock                                                                  | 330                                     |    | - |   | - |   | - |   | - |   |
| Additional paid-in capital                                                    | 146,649                                 |    | - |   | - |   | - |   | - |   |
| Redeemable common stock                                                       | -                                       |    | 115,480 |   | 107,631 |   | 96,296 |   | 96,091 |   |
| Total stockholders' deficit                                                   | (28,253                                 | )       | (74,269 | ) | (74,351 | ) | (84,510 | ) | (12,205 | ) |
| Shares outstanding                                                            | 33,033                                  |    | 29,610 |   | 32,224 |   | 31,834 |   | 36,260 |   |

----

| a | Following the initial public offering, we  terminated the stock incentive bonus plan and replaced it with equity-based  incentive plans more customary to publicly-traded companies.                                                                                                                                                                                                              |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b | In fiscal year 1998, we recorded a one-time  non-cash compensation charge against continuing operations of $69.9 million  to reflect a change in the method of calculating the redemption value of our  redeemable common stock.                                                                                                                                                                  |
| c | In the third quarter of fiscal year 1998 we  discontinued our benefits administration outsourcing business and recorded a  $69.9 million charge to earnings in the "Discontinued operations"  line.  The discontinuation is more  fully described under "Management's Discussion and Analysis of Financial  Condition and Results of Operations" in Item 7 of this 10-K. |

**Item 7.****Management'sDiscussion and Analysis of Financial Condition and Results of Operations.**

*Overview*

Watson Wyattis a global provider of human capital consulting services. We provide servicesin three principal practice areas: Benefits, HR Technologies and Human CapitalConsulting. We operate from 62 offices in 18 countries throughout NorthAmerica, Asia-Pacific and Latin America. We also operate through our affiliatesin Europe. Our principal affiliates are Watson Wyatt Partners which conductsoperations in the United Kingdom and Ireland, and in which we hold a 10%interest in a defined distribution pool, and Watson Wyatt & CompanyHoldings (Europe) Limited, a holding company through which we conductContinental European operations. We own 25% of Watson Wyatt & Company Holdings(Europe) Limited and Watson Wyatt Partners owns the remaining 75%.

We operateglobally as an alliance with our affiliates. However, the revenues andoperating expenses in the Consolidated Statements of Operations reflect solelythe results of operations of Watson Wyatt. Our share of the results of ouraffiliates, recorded using the equity method of accounting is reflected in the''Income from affiliates'' line.

We derivesubstantially all of our revenue from fees for consulting services, whichgenerally are billed at standard hourly rates or on a fixed-fee basis;management believes the approximate percentages are 60% and 40%,respectively.  Clients are typicallyinvoiced on a monthly basis with revenue recognized as services areperformed.  For the most recent threefiscal years, revenue from U.S. consulting operations have comprisedapproximately 80% of consolidated revenue. No single client accounted for more than 4% of our consolidated revenuefor any of the most recent three fiscal years.

In deliveringconsulting services, our principal direct expenses relate to compensation ofpersonnel.  Salaries and employeebenefits are comprised of wages paid to associates, related taxes, benefitexpenses such as pension, medical and insurance costs and fiscal year-endincentive bonuses.  In addition,professional and subcontracted services represent fees paid to external serviceproviders for legal, marketing and other services, approximately 50% of whichare specifically 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 asnon-client-reimbursed travel by associates, publications and professionaldevelopment.  General and administrativeexpenses include the operational costs and professional fees paid by corporatemanagement, general counsel, marketing, human resources, finance, research andtechnology support.

Historically,we have paid incentive bonuses to associates under a fiscal year-end bonusprogram. In fiscal years 1999 and 2000, in addition to annual fiscal year-endbonuses, we provided supplemental bonus compensation to our associatestockholders pursuant to our stock incentive bonus plan in an amount representingall income in excess of a targeted amount. The supplemental bonus compensationpursuant to our stock incentive bonus plan accrued in fiscal year 1999 andfiscal year 2000 was paid in January 2000 and 2001, respectively. We terminatedthe stock incentive bonus plan in conjunction with our initial public offeringand replaced it with equity-based incentives.

During thethird quarter of fiscal year 1998, we elected to exit the benefitsadministration outsourcing business and to end our participation in WellspringResources, LLC, a joint venture that we had formed in 1996 with State StreetBank and Trust Company in order to focus our management attention and corporateresources on our core consulting business. The $69.9 million after-tax charge that we recorded in connection withour exit from this business reduced our book value and, as such, would havereduced the redemption value of our redeemable common stock. We altered theformula for calculating the redemption value of our common stock to eliminate theeffect of the $69.9 million charge. This change in the formula resulted in anadditional one-time, non-cash compensation charge of $69.9 million in fiscalyear 1998.

*Results of Operations. *Thefollowing table sets forth Consolidated Statement of Operations data as apercentage of revenue for the periods indicated.

|                                                          | Year  Ended June 30,                     |   |
|---------------------------------------------------------------|------------------------------------------|--------|
|                                                          |                                          |   |
|                                                          | 2001                                     |   | 2000 |   | 1999 |   |
|                                                          |                                          |   |  |   |  |   |
|                                                          |                                     |   |   |   |   |   |
| Revenue                                                       | 100.0                                    | %      | 100.0 | % | 100.0 | % |
|                                                          |                                          |   |  |   |  |   |
|                                                          |                                     |   |   |   |   |   |
| Costs of providing  services:                                 |                                     |   |   |   |   |   |
|                                                          | Salaries and employee  benefits          | 52.9   |   | 53.2 |   | 53.7 |   |
|                                                          | Stock incentive bonus  plan              | -      |   | 4.9 |   | 4.1 |   |
|                                                          | Professional and  subcontracted services | 7.7    |   | 7.9 |   | 8.6 |   |
|                                                          | Occupancy,  communications and other     | 16.0   |   | 16.0 |   | 16.7 |   |
|                                                          | General and  administrative expenses     | 9.9    |   | 10.2 |   | 10.1 |   |
|                                                          | Depreciation and  amortization           | 3.1    |   | 2.9 |   | 2.7 |   |
|                                                          |                                          |   |  |   |  |   |
|                                                          | 89.6                                     |   | 95.1 |   | 95.9 |   |
|                                                          |                                          |   |  |   |  |   |
|                                                          |                                     |   |   |   |   |   |
| Income from operations                                        | 10.4                                     |   | 4.9 |   | 4.1 |   |
|                                                          |                                     |   |   |   |   |   |
| Other:                                                        |                                     |   |   |   |   |   |
|                                                          | Interest income                          | 0.4    |   | 0.3 |   | 0.2 |   |
|                                                          | Interest expense                         | (0.2   | ) | (0.3 | ) | (0.5 | ) |
|                                                          |                                     |   |   |   |   |   |
| Income from affiliates                                        | 0.6                                      |   | 0.5 |   | 0.5 |   |
|                                                          |                                          |   |  |   |  |   |
|                                                          |                                     |   |   |   |   |   |
| Income before income  taxes and minority interest             | 11.2                                     |   | 5.4 |   | 4.3 |   |
|                                                          |                                     |   |   |   |   |   |
| Provision for income  taxes                                   | 4.8                                      |   | 2.4 |   | 2.1 |   |
|                                                          |                                          |   |  |   |  |   |
|                                                          |                                     |   |   |   |   |   |
| Income before minority  interest                              | 6.4                                      |   | 3.0 |   | 2.2 |   |
|                                                          |                                     |   |   |   |   |   |
| Minority interest in  net income of consolidated subsidiaries | (0.1                                     | )      | - |   | - |   |
|                                                          |                                          |   |  |   |  |   |
|                                                          |                                     |   |   |   |   |   |
| Income from continuing  operations                            | 6.3                                      |   | 3.0 |   | 2.2 |   |
|                                                          |                                     |   |   |   |   |   |
| Discontinued  operations:                                     |                                     |   |   |   |   |   |
|                                                          |                                     |   |   |   |   |   |
| Adjustment on disposal  of discontinued outsourcing business  | -                                        |   | - |   | 1.5 |   |
|                                                          |                                          |   |  |   |  |   |
|                                                          |                                     |   |   |   |   |   |
| Net income                                                    | 6.3                                      | %      | 3.0 | % | 3.7 | % |
|                                                          |                                          |   |  |   |  |   |

*Fiscal Year Ended June 30,2001 Compared to Fiscal Year Ended June 30, 2000*

*Revenue. *Revenue from continuing operations was $700.2million in fiscal year 2001, compared to $624.6 million in the prior year, anincrease of $75.6 million, or 12%.  Thisrevenue growth was comprised of a $37.2 million, or 11% increase in ourBenefits Group, a $16.2 million, or 20% increase in our HR Technologies Group,a $4.5 million, or 9% increase in our Human Capital Group, a $6.4 million, or9% increase in International and a $9.5 million, or 15% increase in Otherpractice areas in North America.  Therevenue increase for the North American practices was mainly due to therealization of net rate increases, reflecting our continued focus on largevalue-added projects, to increased chargeable hours and to improved managementof the scope of projects.

*Salaries and Employee Benefits. *Salariesand employee benefit expenses for fiscal year 2001 were $370.0 million,compared to $332.3 million for the previous fiscal year, an increase of $37.7million, or 11%.  Salaries and employeebenefit expenses for the year ended June 30, 2001 include a $3.5 millioncompensation charge the Company incurred resulting from agreements with ouremployee stockholders related to our initial public offering.  The remaining increase was mainly due to anincrease in compensation, which is partly the result of annual salary increasesaveraging 8%, coupled with an 11% increase in headcount.  As a percentage of revenue, salaries andemployee benefits decreased to 52.9% from 53.2%.

*Stock Incentive Bonus Plan. *Thestock incentive bonus plan was discontinued in conjunction with our initialpublic offering.  Accordingly, there wasno accrued bonus under this plan for the year ended June 30, 2001.

*Professional and Subcontracted Services. *Professional and subcontracted services used inconsulting operations were $53.9 million for fiscal year 2001, compared to$49.6 million for fiscal year 2000, an increase of $4.3 million, or 9%.  The increase was mainly due to higherreimbursable services generated on behalf of clients of $2.7 million and anincrease in our consulting office's use of resources from our national practicegroups of $3.2 million, partially offset by lower professional services in ourCanadian region.  As a percentage ofrevenue, professional and subcontracted services decreased to 7.7% from 7.9%.

*Occupancy, Communications and Other. *Occupancy, communications and other expenses were$112.3 million for fiscal year 2001, compared to $100.1 million for fiscal year2000, an increase of $12.2 million, or 12%. The increase was mainly due to a $3.9 million increase in rent expense,attributable to an increase in the amount of space required to support ourexpanding operations and higher real estate taxes and operating expenses, a$2.3 million increase in travel expenses which is mainly due to expensesincurred in the first quarter of fiscal year 2001 relative to our annualleadership conference held in Europe this fiscal year, a $1.0 millioninvestment in a strategic relationship, a $0.8 million increase in equipmentrental expenses, and a $3.5 million increase in general office expensesincluding insurance, business taxes, telephone, office supplies andprofessional development.  As apercentage of revenue, occupancy, communications and other expenses remained at16.0%.

*General and Administrative Expenses. *General and administrative expenses for fiscal year2001 were $69.4 million, compared to $63.6 million for fiscal year 2000, anincrease of $5.8 million, or 9%.  Theincrease is mainly due to an increase in compensation of $5.7 million, which isdue to the planning and implementation of corporate initiatives involvingknowledge management, systems infrastructure and human resources and otheroperating expenses of $3.1 million, partially offset by an increase in ourconsulting office's use of resources from our national practice groups of $3.2million.  As a percentage of revenue,general and administrative expenses decreased to 9.9% from 10.2%.

*Depreciation and Amortization*. Depreciation and amortization expenses for fiscal year 2001 were $22.0million, compared to $17.9 million for fiscal year 2000, an increase of $4.1million, or 23%.  The increase wasmainly due to a $3.4 million increase in the depreciation of computer hardwareand leasehold improvements, resulting from higher purchases to support our expandingoperations.  The remaining $0.7 millionis mainly due to an increase in amortization of intangibles, which is mainlydue to recent acquisitions.  As apercentage of revenue, depreciation and amortization expenses increased to 3.1%from 2.9%.

*InterestIncome**. *Interest income for fiscal year 2001 was $2.9million, compared to $1.8 million for fiscal year 2000, an increase of $1.1million, or 61%. The increase was due to interest earned on a higher averageinvestment balance during fiscal year 2001 as a result of our initial publicoffering.  As a percentage of revenue,interest income increased to 0.4% from 0.3%.

*Interest Expense*.  Interest expense forfiscal year 2001 was $1.1 million, compared to $1.9 million for fiscal year2000, a decrease of $0.8 million, or 42%. This decrease reflects reduced borrowings against our revolving line ofcredit in fiscal year 2001.  As apercentage of revenue, interest expense decreased to 0.2% from 0.3%.

*Incomefrom Affiliates**. *Income from affiliates for fiscal year 2001 was$4.1 million, compared to $3.1 million for fiscal year 2000, an increase of$1.0 million, or 32%.  The increasereflects improvement in business operations by our affiliates in ContinentalEurope and strong business performance by our United Kingdom affiliate.

*Provision for Income Taxes*.  Income taxes for fiscalyear 2001 were $33.6 million, compared to $15.2 million for fiscal year2000.  Our effective tax rate was 42.9%for fiscal year 2001, compared to 44.9% for fiscal year 2000.  The change was due to the increase inforeign source income taxed at lower foreign tax rates, a decrease in theeffective state tax rate due to state tax credits and incentives and a decreasein the tax effect of non-deductible expenses as a result of higher pre-taxearnings.  Our effective tax rate wasaffected by differing foreign tax rates in various jurisdictions.  We record a tax benefit on foreign netoperating loss carryovers and foreign deferred expenses only if it is morelikely than not that a benefit will be realized.

*Net Income*.  Net income for fiscalyear 2001 was $44.4 million, compared to $18.5 million in fiscal year 2000, anincrease of $25.9 million, or 140%.  The increase is due to our revenue growth and the absence of the stockincentive bonus plan accrual in fiscal year 2001. As a percentage of revenue,net income increased to 6.3% from 3.0%.

*Fiscal Year Ended June 30,2000 Compared to Fiscal Year Ended June 30, 1999*

*Revenue. *Revenuefrom continuing operations was $624.6 million in fiscal year 2000, compared to$556.9 million in the prior year, an increase of $67.7 million, or 12%.  This revenue growth was primarily due to a$25.5 million, or 14% increase in revenue generated by our U.S. East region, a$21.2 million, or 14% increase in revenue generated by our U.S. Central region,a $5.6 million, or 8% increase in our U.S. West region, and a $2.2 million, or4% increase in other North American regions. The revenue increase in the North American regions was due primarily tothe realization of net billing rate increases, accounting for approximately$32.1 million, increased chargeable hours accounting for $10.2 million andimproved management of the scope of projects, resulting in $12.2 million lessnet fee markdowns in fiscal year 2000 than in fiscal year 1999.  In addition, our Asia/Pacific regiongenerated $11.0 million, or 23% higher revenue than in the previous fiscal yearand our Latin American region generated $1.0 million, or 14% higher revenuethan in the previous fiscal year. Within North America the following individual lines of business, not allinclusive, showed the following trends: revenue for our Benefits Group was$334.3 million in fiscal year 2000, compared to $307.1 million in fiscal year1999, an increase of $27.2 million, or 9%; revenue for our HR TechnologiesGroup was $79.7 million in fiscal year 2000, compared to $66.3 million infiscal year 1999, an increase of $13.4 million, or 20%; and revenue for ourHuman Capital Group was $49.7 million in fiscal year 2000, compared to $41.0million in fiscal year 1999, an increase of $8.7 million, or 21%.

*Salariesand Employee Benefits**. *Salaries and employee benefit expenses for fiscalyear 2000 were $332.3 million, compared to $298.9 million for the previousfiscal year, an increase of $33.4 million, or 11%.  The increase was mainly due to a $22.4 million increase incompensation expenses, which is partly the result of annual salary increasesaveraging 5% and a 5% increase in headcount. The remainder of the difference was attributable to $7.5 million higherfiscal year-end bonuses and a $3.2 million increase in other employeebenefits.  As a percentage of revenue,salaries and employee benefits decreased to 53.2% from 53.7%.  This decrease reflects the overallutilization of our operating personnel.

*Stock Incentive Bonus Plan. *The accrued bonus underour stock incentive bonus plan for fiscal year 2000 was $30.3 million, comparedto $22.6 million for fiscal year 1999, an increase of $7.7 million, or34%.  As a percentage of revenue, theaccrued bonus under our stock incentive bonus plan increased to 4.9% from4.1%.  The amount of the bonus is at thediscretion of our Board of Directors.

*Professional and Subcontracted Services. *Professionaland subcontracted services used in consulting operations were $49.6 million forfiscal year 2000, compared to $47.9 million for fiscal year 1999, an increaseof $1.7 million or 4%.  The increase wasmainly due to a $2.5 million increase in international professional services, a$1.2 million actuarial and strategic consulting expense from a sub-contractor,and $0.9 million in non-compete payments, partially offset by lowerreimbursable expenses incurred on behalf of clients of $2.3 million and a $1.0million insurance claim.  As apercentage of revenue, professional and subcontracted services decreased to7.9% from 8.6%, due primarily to a reduction in the level of outside servicesspecifically incurred for and reimbursed by clients.

*Occupancy, Communications and Other. *Occupancy,communications and other expenses were $100.1 million for fiscal year 2000,compared to $92.7 million for fiscal year 1999, an increase of $7.4 million, or8%.  The increase was mainlyattributable to the $3.0 million net gain from the sale of our definedcontribution daily record-keeping software recognized in fiscal year 1999 whichreduced expense, a $2.1 million increase in non-reimbursable travel expenses,an increase in rent expense of $1.0 million and a $0.5 million increase intelephone expenses.  As a percentage ofrevenue, occupancy, communications and other expenses decreased to 16.0% from16.7%, as we leveraged these expenses over a larger revenue base.

*General and Administrative Expenses. *Generaland administrative expenses for fiscal year 2000 were $63.6 million, comparedto $56.6 million for fiscal year 1999, an increase of $7.0 million, or12%.  The increase was mainlyattributable to increased legal expenses of $2.2 million, increasedprofessional services of $2.2 million, a $1.1 million, or 5% increase in basesalaries and $1.2 million in higher non-client related travel expenses.  As a percentage of revenue, general andadministrative expenses increased slightly to 10.2% from 10.1%.

*Depreciation and Amortization. *Depreciation andamortization expenses for fiscal year 2000 were $17.9 million, compared to$15.2 million for fiscal year 1999, an increase of $2.7 million, or 18%.  The increase was mainly due to a $1.4million increase in computer hardware depreciation.  The remaining increase was due primarily to higher computersoftware and furniture, fixtures and equipment purchases during fiscal year2000, which account for $0.8 million of the increase, and an increase in amortization of intangibles of$0.3 million.  As a percentage ofrevenue, depreciation and amortization expenses increased to 2.9% from 2.7%.

*Interest Income.* Interest income for fiscal year 2000 was $1.8 million, compared to $0.9million for fiscal year 1999, an increase of $0.9 million, or 100%.  The increase was attributable to the receiptof interest of $0.5 million related to a federal tax refund and to additionalinterest income of $0.4 million earned during the year on a higher averageinvestment balance.

*InterestExpense. *Interestexpense for fiscal year 2000 was $1.9 million, compared to $2.6 million forfiscal year 1999, a decrease of $0.7 million, or 27%.  On average, we borrowed less money against our revolving line ofcredit during fiscal year 2000 than in fiscal year 1999.

*Income from Affiliates. *Incomefrom affiliates for fiscal year 2000 was $3.1 million, compared to $2.5 millionfor fiscal year 1999, an increase of $0.6 million, or 24%.  The increase reflects improvement inbusiness operations by our affiliates in Continental Europe and strong businessperformance by our United Kingdom affiliate.

*Provision for Income Taxes.* Income taxes for fiscal year 2000 were $15.2 million, compared to $11.4million for fiscal year 1999.  Oureffective tax rate was 44.9% for fiscal year 2000, compared to 48.1% for fiscalyear 1999.  The change was due to theutilization of federal and state tax credits, a decrease in operating losses ofcertain foreign affiliates and the utilization of tax benefits related toforeign operating loss carryovers of certain foreign affiliates.  Our effective tax rate was also affected by differing foreign tax rates in variousjurisdictions.  We record a tax benefiton foreign net operating loss carryovers and foreign deferred expenses only ifit is more likely than not that a benefit will be realized.

*Discontinued Operations. *During fiscal year 1999, we further resolved our futureobligations related to the discontinuation of our benefits administrationoutsourcing business and reduced the expected loss on disposal by $8.7 million,net of tax.  The discontinuation isessentially completed, with contingencies remaining only on guaranteed leasesfor real estate and equipment.  Webelieve that we have adequate provisions for any remaining costs related to thediscontinuation.  (See Notes 14 and 15of Notes to the Consolidated Financial Statements, included in Item 14 of thisreport, for further discussion of discontinued operations.)

*Net Income.* Net income for fiscal year 2000 was $18.5 million, compared to $20.8million in fiscal year 1999, a decrease of $2.3 million, or 11%.  As a percentage of revenue, net income decreasedto 3.0% from 3.7%.  However, income fromcontinuing operations in fiscal year 2000 was $6.4 million higher than infiscal year 1999, reflecting improved operating performance.  This increase was more than offset by the$8.7 million after-tax adjustment to reduce the loss on disposal of thediscontinued benefits administration outsourcing business recorded in fiscalyear 1999.  Income from continuingoperations for fiscal year 2000 and 1999 also reflect the stock incentive bonusplan accruals discussed above.

*Liquidity andCapital Resources*

Our cash andcash equivalents at June 30, 2001 totaled $81.7 million, compared to $41.4million at June 30, 2000.  The $40.3million increase in cash from June 30, 2000 to June 30, 2001 was mainlyattributable to $158.8 million in cash generated from our ongoing operations,before bonuses, taxes and stockholder reimbursements, $35.0 million of netproceeds from the initial public offering and $1.8 million of net proceeds fromthe secondary offering, partially offset by fiscal year 2000 bonus payments of$51.3 million, the payment of supplemental bonus compensation to our employeestockholders pursuant to our stock incentive bonus plan of $30.3 million, $29.5million spent for fixed assets and acquisitions, $30.7 million of corporate taxpayments, $8.0 million in contingent acquisition payments, $4.2 million ofpayments to retirees and $2.7 million that we paid to selling stockholders asreimbursement for commission payments resulting from the sale of their sharesin our initial public offering.

*Cash From OperatingActivities. *Cash from operating activities* *forfiscal year 2001 was $39.6 million, compared to cash from operating activitiesof $36.9 million for fiscal year 2000. The variance is primarily due to a net increase of cash received fromthe Company's consulting operations of $21.1 million and lower net payments toretirees of $7.7 million, partially offset by $7.7 million in higher netsupplemental bonus compensation to our employee stockholders pursuant to ourstock incentive bonus plan, $6.7 million in higher net fiscal year-end bonuses,higher net corporate taxes of $9.0 million and the $2.7 million that we paid toselling stockholders as reimbursement for commission payments resulting fromthe sale of their shares in our initial public offering.

Cash fromoperating activities* *for fiscal year 2000 was $36.9million, compared to cash from operating activities of $52.1 million for fiscalyear 1999.  However, cash received fromour operations increased $36.4 million in fiscal year 2000.  This increase was more than offset by higherbonus payments of $29.8 million, higher tax payments of $16.3 million, andhigher payments to retirees of $5.5 million.

*Cash Used in InvestingActivities.*  Cash used in investing activities for fiscalyear 2001 was $32.8 million, compared to $21.6 million for fiscal year2000.  The increase in cash usage wasdue to $9.3 million in higher current year fixed asset purchases, $4.9 millionin higher contingent consideration payments associated with acquisitions,partially offset by $2.4 million in higher distributions from affiliates and$0.6 million of higher proceeds from the sale of fixed assets and investments.

Cash used ininvesting activities for fiscal year 2000 was $21.6 million, compared to $21.4million for fiscal year 1999.  Theincrease in cash usage was due to $3.0 million in lower distributions fromaffiliates and $0.6 million in higher current year fixed asset purchases,partially offset by $3.1 million in lower contingent consideration paymentsassociated with acquisitions and higher proceeds from the sale of fixed assetsand investments of $0.3 million.

*Cash From/Used for FinancingActivities.*  Cash from financing activities was $36.7million for fiscal year 2001, compared to $9.2 million used for financingactivities for fiscal year 2000.  Thischange reflects the proceeds received from the sale of stock in our initialpublic offering and secondary offering of $36.9 million and a $9.1 milliondecrease in repurchases of redeemable common stock.

Cash usedfor financing activities were $9.2 million for fiscal year 2000, compared to$8.7 million for fiscal year 1999.  Thischange reflects the net repayments of $9.0 million against our revolving lineof credit and a $5.8 million decrease in repurchases of redeemable commonstock, partially offset by a $15.3 million decrease in issuances of redeemablecommon stock.  The decrease in issuancesoccurred because we completed a formal stock sale during fiscal year 1999 butdid not have a formal stock sale during fiscal year 2000.

We have a$95.0 million senior secured revolving credit facility that matures on June 30,2003.  A portion of the revolvingfacility is used to support required letters of credit issued under the creditline.  As a result, $3.0 million iscurrently unavailable for operating needs. We had no borrowings outstanding at June 30, 2001 or June 30, 2000.

Anticipatedcommitments of funds for capital expenditures are estimated at $45.9 millionfor fiscal year 2002, mainly for computer hardware purchases, officerelocations and renovations, development and upgrade of financial and knowledgemanagement systems, and acquisition-related payments. Capital expenditures willbe required in conjunction with office lease renewals and relocations requiredto support our growth strategy. Additionally, our consultants require access tohardware and software that will support servicing our clients. In a rapidlychanging technological environment, management anticipates we will need to makecontinued investments in our knowledge sharing and financial systemsinfrastructure. We expect cash from operations to adequately provide for thesecash needs.

Our foreignoperations do not materially impact liquidity or capital resources.  At June 30, 2001, $26.2 million of the totalcash balance of $81.7 million was held outside of North America, which we havethe ability to readily utilize, if necessary. There are no significant repatriation restrictions other than local orU.S. taxes associated with repatriation. Our foreign operations in total are substantially self-sufficient fortheir working capital needs.

In July2001, the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 142, "Goodwill and Other Intangible Assets"(FAS 142) which addresses the accounting for goodwill and intangible assets atand subsequent to their acquisition. The provisions of FAS 142 will be effective for fiscal years beginningafter December 15, 2001, though early adoption is permitted.  We have not determined when we will adoptFAS 142 or what the impact of adoption will have on our financial statements,except that we will no longer record amortization of goodwill when adopted.

In June1998, the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 133, "Accounting for Derivative Instruments andHedging Activities" (FAS 133), which requires an entity to recognize allderivatives as either assets or liabilities in the Consolidated Balance Sheetsand measure those instruments at fair value. Effective July 1, 2000, we adopted FAS 133, as amended.  It had no impact on our financial statementsbecause we do not use derivative instruments as a hedging strategy or for anyother purpose.

**Item 7A. Quantitative andQualitative Disclosures About Market Risk.**

We areexposed to market risks in the ordinary course of business.  These risks include interest rate risk andforeign currency exchange risk.  We haveexamined our exposure to these risks and concluded that none of our exposuresin these areas are material to fair values, cash flows or earnings.

*Special Note Regarding Forward-Looking Statements*

This filingcontains 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 first and second paragraph ofPart II, Item 3 "Legal Proceedings"; the ninth paragraph under *Liquidity and CapitalResources*; under the subheading "Stock-BasedCompensation" in Note 1 "Summary of Significant AccountingPolicies"; in the first paragraph of Note 11 "Equity"; and inthe first paragraph of Note 16"Commitments and Contingent Liabilities."  In some cases, you can identify thesestatements 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 readthese statements carefully because they contain projections of our futureresults of operations or financial condition, or state other"forward-looking" information. A number of risks and uncertaintiesexist which could cause actual results to differ materially from the resultsreflected in these forward-looking statements. Such factors include, but arenot limited to our continued ability to recruit and retain highly qualifiedassociates, outcomes of litigation, a significant decrease in the demand forthe consulting services we offer as a result of changing economic conditions orother factors, actions by competitors offering human resources consulting services,including public accounting and consulting firms, technology consulting firmsand internet/intranet development firms, regulatory, legislative andtechnological developments that may affect the demand for or costs of ourservices and other factors discussed under "risk factors" in ourprospectus dated October 11, 2000, which is filed with the SEC and may beaccessed via EDGAR on the SEC's web site at www.sec.gov. These statements arebased on assumptions that may not come true. All forward-looking disclosure isspeculative by its nature. The Company undertakes no obligation to update anyof the forward-looking information included in this report, whether as a resultof new information, future events, changed expectations or otherwise.

**Item 8.****FinancialStatements and Supplementary Data.**

Thefinancial statements and supplementary data are included as Item 14 of thisreport.

**Item 9.****Changes inand Disagreements with Accountants on Accounting and Financial Disclosure.**

There are no changes in accountants or disagreements withaccountants on accounting principles and financial disclosures required to bedisclosed in this Item 9.

**PART III**

**Item 10. Directors andExecutive Officers of the Registrant.**

The response to this item will be included in a definitive proxystatement 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 proxystatement 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 proxystatement 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 responseto this item will be included in a definitive proxy statement filed within 120days after the end of the Registrant's fiscal year, which proxy statement isincorporated herein by this reference.

**PART IV**

**Item 14. Exhibits, FinancialStatement Schedules, and Reports on Form 8-K.**

| a)     | Financial Information                                                                                    |                                                                                                                                                             |
|--------|----------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                     |                                                                                                                                                             |
| (1)    | Consolidated Financial Statements of Watson  Wyatt & Company Holdings                                |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
|   | Report of Independent  Accountants                                                                       |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
|   | Financial Statements:                                                                                    |                                                                                                                                                             |
|   |                                                                                                     | Consolidated  Statements of Operations for each of the three years in the period ended June  30, 2001                                                            |   |
|   |                                                                                                     |                                                                                                                                                             |
|   |                                                                                                     | Consolidated Balance Sheets  at June 30, 2001 and 2000                                                                                                           |   |
|   |                                                                                                     |                                                                                                                                                             |
|   |                                                                                                     | Consolidated  Statements of Cash Flows for each of the three years in the period ended June  30, 2001                                                            |   |
|   |                                                                                                     |                                                                                                                                                             |
|   |                                                                                                     | Consolidated  Statements of Changes in Permanent Stockholders' Equity and Redeemable Common  Stock for each of the three years in the period ended June 30, 2001 |   |
|   |                                                                                                     |                                                                                                                                                             |
|   |                                                                                                     | Notes to  the Consolidated Financial Statements                                                                                                                  |   |
|   |                                                                                                     |                                                                                                                                                             |
| (2)    | Consolidated Financial Statement Schedule for  each of the three years in the period ended June 30, 2001 |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
|   | Valuation and Qualifying Accounts and Reserves  (Schedule II)                                            |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
|   |                                                                                                     | All other schedules are omitted because they  are not applicable or the required information is shown in the financial  statements or notes thereto.             |   |
|   |                                                                                                     |                                                                                                                                                             |
| (3)    | Exhibits                                                                                                 |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
|   | See (c) below.                                                                                           |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
| b)     | Reports on Form 8-K                                                                                      |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
|   | None.                                                                                                    |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
| c)     | Exhibits                                                                                                 |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
|   | See Exhibit Index                                                                                        |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
| d)     | Financial Statement Schedules.                                                                           |                                                                                                                                                             |
|   |                                                                                                     |                                                                                                                                                             |
|   | Not applicable.                                                                                          |                                                                                                                                                             |

SIGNATURES

Pursuant tothe 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 theundersigned, thereunto duly authorized.

|                         | WATSON WYATT & COMPANY HOLDINGS |
|------------------------------|-------------------------------------|
|                         | (Registrant)                        |
|                         |                                |   |
| Date:   August 17, 2001 | By:                                 | /s/ John J. Haley |
|                         |                                |  |
|                         |                                | John J. Haley |
|                         |                                | President and Chief Executive Officer |

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

| Signature                    |   | Title                                            |   | Date    |
|------------------------------|--------|--------------------------------------------------|--------|---------|
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ John J. Haley            |   | President, Chief Executive Officer and  Director |   | 8/17/01 |
|                              |   |                                             |   |    |
| John J. Haley                |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Carl D. Mautz            |   | Vice President and Chief Financial Officer       |   | 8/17/01 |
|                              |   |                                             |   |    |
| Carl D. Mautz                |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Peter L. Childs          |   | Controller                                       |   | 8/17/01 |
|                              |   |                                             |   |    |
| Peter L. Childs              |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Thomas W. Barratt        |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| Thomas W. Barratt            |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Elizabeth M. Caflisch    |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| Elizabeth M. Caflisch        |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Paula A. DeLisle         |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| Paula A. DeLisle             |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Barbara Hackman Franklin |   | Director                                         |   | 8/17/01 |
|                              |   |                                             |   |    |
| Barbara Hackman Franklin     |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ David B. Friend, M.D.    |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| David B. Friend, M.D.        |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ John J. Gabarro          |   | Director                                         |   | 8/17/01 |
|                              |   |                                             |   |    |
| John J. Gabarro              |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Eric P. Lofgren          |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| Eric P. Lofgren              |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Paul N. Thornton         |   | Director                                         |   | 8/17/01 |
|                              |   |                                             |   |    |
| Paul N. Thornton             |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ David P. Marini          |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| David P. Marini              |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ R. Michael McCullough    |   | Director                                         |   | 8/17/01 |
|                              |   |                                             |   |    |
| R. Michael McCullough        |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Gail E. McKee            |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| Gail E. McKee                |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Kevin L. Meehan          |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| Kevin L. Meehan              |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ John Philip Orbeta       |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| John Philip Orbeta           |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Gilbert T. Ray           |   | Director                                         |   | 8/17/01 |
|                              |   |                                             |   |    |
| Gilbert T. Ray               |   |                                             |   |    |
|                         |   |                                             |   |    |
|                         |   |                                             |   |    |
| /s/ Charles P. Wood, Jr.     |   | Vice President and Director                      |   | 8/17/01 |
|                              |   |                                             |   |    |
| Charles P. Wood, Jr.         |   |                                             |   |    |

**REPORT OFINDEPENDENT ACCOUNTANTS**

To the Boardof Directors andShareholders of Watson Wyatt &Company Holdings

In ouropinion, the consolidated financial statements listed in the index appearingunder Item 14(a)(1) of thisForm 10-K present fairly, in all material respects, the financial position ofWatson Wyatt & Company Holdings and its subsidiaries at June 30, 2001 and2000, and the results of their operations and their cash flows for each of thethree years in the period ended June 30, 2001, in conformity with accountingprinciples generally accepted in the United States of America.  In addition, in our opinion, the financialstatement schedule listed in the index appearing under Item 14(a)(2) of this Form 10-K presentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements.  These financial statements and the financialstatement schedule are the responsibility of the Company's management; ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.  We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinions.

PricewaterhouseCoopersLLP

Washington,D.C.July 25, 2001

**WATSON WYATT & COMPANY HOLDINGS********Consolidated Statements of Operations******(Thousands ofU.S. Dollars, Except Per Share Amounts)
|                                                                                                                              | Year  Ended June 30,                    |    |
|-----------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|---------|
|                                                                                                                              |                                         |    |
|                                                                                                                              | 2001                                    |    | 2000 |   | 1999 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Revenue                                                                                                                           | $                                       | 700,189 |   | $ | 624,583 |   | $ | 556,860 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Costs of providing  services:                                                                                                     |                                    |    |   |   |   |   |
|                                                                                                                              | Salaries and employee benefits          | 370,045 |   | 332,339 |   | 298,915 |   |
|                                                                                                                              | Stock incentive bonus plan              | -       |   | 30,283 |   | 22,610 |   |
|                                                                                                                              | Professional and subcontracted services | 53,865  |   | 49,608 |   | 47,863 |   |
|                                                                                                                              | Occupancy, communications and other     | 112,314 |   | 100,099 |   | 92,668 |   |
|                                                                                                                              | General and administrative expenses     | 69,402  |   | 63,596 |   | 56,578 |   |
|                                                                                                                              | Depreciation and amortization           | 21,995  |   | 17,878 |   | 15,248 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              | 627,621                                 |    | 593,803 |   | 533,882 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Income from operations                                                                                                            | 72,568                                  |    | 30,780 |   | 22,978 |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Other:                                                                                                                            |                                    |    |   |   |   |   |
|                                                                                                                              | Interest income                         | 2,855   |   | 1,823 |   | 944 |   |
|                                                                                                                              | Interest expense                        | (1,144  | ) | (1,876 | ) | (2,646 | ) |
|                                                                                                                              |                                    |    |   |   |   |   |
| Income from affiliates                                                                                                            | 4,098                                   |    | 3,116 |   | 2,524 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Income before income  taxes and minority interest                                                                                 | 78,377                                  |    | 33,843 |   | 23,800 |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Provision for income  taxes:                                                                                                      |                                    |    |   |   |   |   |
|                                                                                                                              | Current                                 | 32,375  |   | 12,344 |   | 18,744 |   |
|                                                                                                                              | Deferred                                | 1,248   |   | 2,851 |   | (7,296 | ) |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              | 33,623                                  |    | 15,195 |   | 11,448 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Income before minority  interest                                                                                                  | 44,754                                  |    | 18,648 |   | 12,352 |   |
|                                                                                                                              |                                    |    |   |   |   |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Minority interest in  net income of consolidated  subsidiaries                                                               | (318                                    | )       | (115 | ) | (217 | ) |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Income from continuing  operations                                                                                                | 44,436                                  |    | 18,533 |   | 12,135 |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Discontinued  operations:                                                                                                         |                                    |    |   |   |   |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Adjustment on disposal  of discontinued outsourcing business     (net of applicable  income tax expense of $6,322) | -                                       |    | - |   | 8,678 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Net income (see Note  14)                                                                                                         | $                                       | 44,436  |   | $ | 18,533 |   | $ | 20,813 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Basic earnings per  share, continuing operations                                                                                  | $                                       | 1.39    |   | $ | 0.62 |   | $ | 0.40 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Diluted earnings per  share, continuing operations                                                                                | $                                       | 1.37    |   | $ | 0.62 |   | $ | 0.40 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Basic earnings per  share, net income                                                                                             | $                                       | 1.39    |   | $ | 0.62 |   | $ | 0.68 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Diluted earnings per  share, net income                                                                                           | $                                       | 1.37    |   | $ | 0.62 |   | $ | 0.68 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Weighted average  shares of Common Stock, basic                                                                                   | 32,068                                  |    | 30,000 |   | 30,430 |   |
|                                                                                                                              |                                         |    |  |   |  |   |
|                                                                                                                              |                                    |    |   |   |   |   |
| Weighted average  shares of Common Stock, diluted                                                                                 | 32,363                                  |    | 30,000 |   | 30,430 |   |
|                                                                                                                              |                                         |    |  |   |  |   |

Seeaccompanying notes

 

**WATSON WYATT & COMPANY HOLDINGS********Consolidated Balance Sheets******(Thousands ofU.S. Dollars)

|                                                                                             | June  30,2001                                                                          |       | June  30,2000 |       |
|--------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|------------|---------------|------------|
|                                                                                             |                                                                                        |       |               |       |
| **Assets**                                                                                       | ** **                                                                             |
|                                                                                             |                                                                                   |       |          |       |
| Cash and cash  equivalents                                                                       | $                                                                                      | 81,735     |          | $          | 41,410 |   |
| Receivables from  clients:                                                                       |                                                                                   |       |          |       |
|                                                                                             | Billed, net of allowances of $2,695 and $2,832                                         | 84,361     |          | 76,729     |   |
|                                                                                             | Unbilled, net of allowances of $1,130 and $676                                         | 67,229     |          | 66,009     |   |
|                                                                                             |                                                                                        |       |               |       |
|                                                                                             | 151,590                                                                                |       | 142,738       |       |
|                                                                                             |                                                                                   |       |          |       |
| Deferred income taxes                                                                            | 13,581                                                                                 |       | -             |       |
| Other current assets                                                                             | 11,027                                                                                 |       | 11,705        |       |
|                                                                                             |                                                                                        |       |               |       |
|                                                                                             | Total current assets                                                                   | 257,933    |          | 195,853    |   |
|                                                                                             |                                                                                   |       |          |       |
| Investment in  affiliates                                                                        | 16,196                                                                                 |       | 16,615        |       |
| Fixed assets, net of  accumulated depreciation of $83,722 and $83,211                            | 52,616                                                                                 |       | 45,237        |       |
| Deferred income taxes                                                                            | 38,526                                                                                 |       | 53,355        |       |
| Intangible assets, net  of accumulated amortization of $17,532 and $15,288                       | 13,374                                                                                 |       | 8,721         |       |
| Other assets                                                                                     | 8,811                                                                                  |       | 10,179        |       |
|                                                                                             |                                                                                        |       |               |       |
|                                                                                             |                                                                                   |       |          |       |
| Total Assets                                                                                     | $                                                                                      | 387,456    |          | $          | 329,960 |   |
|                                                                                             |                                                                                        |       |               |       |
|                                                                                             |                                                                                   |       |          |       |
| **Liabilities and Stockholders' Equity**                                                         | ** **                                                                             |
|                                                                                             |                                                                                   | ** ** |          | ** ** |
|                                                                                             |                                                                                   |       |          |       |
| Accounts payable and  accrued liabilities                                                        | $                                                                                      | 148,140    |          | $          | 167,833 |   |
| Income taxes payable                                                                             | 13,622                                                                                 |       | 11,843        |       |
|                                                                                             |                                                                                        |       |               |       |
|                                                                                             | Total current liabilities                                                              | 161,762    |          | 179,676    |   |
|                                                                                             |                                                                                   |       |          |       |
| Accrued retirement  benefits                                                                     | 77,660                                                                                 |       | 79,462        |       |
| Deferred rent and  accrued lease losses                                                          | 3,484                                                                                  |       | 5,456         |       |
| Other noncurrent  liabilities                                                                    | 25,085                                                                                 |       | 23,657        |       |
|                                                                                             |                                                                                   |       |          |       |
| Minority interest in  subsidiaries                                                               | 740                                                                                    |       | 498           |       |
|                                                                                             |                                                                                   |       |          |       |
| Commitments and  contingencies                                                                   |                                                                                   |       |          |       |
|                                                                                             |                                                                                   |       |          |       |
| Redeemable common  stock - $1 par value:                                                         |                                                                                   |       |          |       |
|                                                                                             | 50,000,000 shares authorized;  14,805,145 issued and outstanding;  at redemption value |       |          | 115,480    |   |
|                                                                                             |                                                                                   |       |          |       |
| Permanent  stockholders' equity:                                                                 |                                                                                   |       |          |       |
| Adjustment for  redemption value greater     than amounts paid in by stockholders |                                                                                   |       | (6,097        | )          |
|                                                                                             |                                                                                   |       |          |       |
| Preferred stock - No  par value:                                                                 |                                                                                   |       |          |       |
|                                                                                             | 1,000,000 shares authorized;  None issued and outstanding                              | -          |          |       |   |
| Class A common stock -  $.01 par value:                                                          |                                                                                   |       |          |       |
|                                                                                             | 69,000,000 shares authorized;  9,390,000 issued and outstanding                        | 94         |          |       |   |
| Class B-1 common stock  - $.01 par value:                                                        |                                                                                   |       |          |       |
|                                                                                             | 15,000,000 shares authorized;  10,398,640 issued and outstanding                       | 104        |          |       |   |
| Class B-2 common stock  - $.01 par value:                                                        |                                                                                   |       |          |       |
|                                                                                             | 15,000,000 shares authorized;  13,244,355 issued and outstanding                       | 132        |          |       |   |
| Additional paid-in  capital                                                                      | 146,649                                                                                |       |          |       |
|                                                                                             |                                                                                   |       |          |       |
| Retained deficit                                                                                 | (19,893                                                                                | )          | (64,223       | )          |
| Cumulative translation  adjustment (accumulated other comprehensive loss)                   | (8,361                                                                                 | )          | (3,949        | )          |
|                                                                                             |                                                                                        |       |               |       |
|                                                                                             |                                                                                   |       |          |       |
| Total Liabilities and  Stockholders' Equity                                                      | $                                                                                      | 387,456    |          | $          | 329,960 |   |
|                                                                                             |                                                                                        |       |               |       |

Seeaccompanying notes

 

**WATSON WYATT & COMPANY HOLDINGS********Consolidated Statements of Cash Flows******(Thousands ofU.S. Dollars)

|                                              | Year  Ended June 30,                                                                |    |
|---------------------------------------------------|-------------------------------------------------------------------------------------|---------|
|                                              |                                                                                     |    |
|                                              | 2001                                                                                |    | 2000 |   | 1999 |   |
|                                              |                                                                                     |    |  |   |  |   |
|                                              |                                                                                |    |   |   |   |   |
| Cash flows from  operating activities:            |                                                                                |    |   |   |   |   |
|                                              | Net income                                                                          | $       | 44,436 |   | $ | 18,533 |   | $ | 20,813 |   |
|                                              | Adjustments to reconcile net income to net cash   provided by operating activities: |    |   |   |   |   |   |
|                                              | Net adjustment from discontinued operations                                         | -       |   | - |   | (8,678 | ) |
|                                              | Provision for doubtful receivables from clients                                     | 7,062   |   | 6,338 |   | 9,086 |   |
|                                              | Depreciation                                                                        | 19,445  |   | 16,025 |   | 13,680 |   |
|                                              | Non-cash compensation charge                                                        | 751     |   | - |   | - |   |
|                                              | Amortization of intangible assets                                                   | 2,550   |   | 1,852 |   | 1,568 |   |
|                                              | Provision for (benefit from) deferred income taxes                                  | 1,248   |   | 2,851 |   | (7,295 | ) |
|                                              | Income from affiliates                                                              | (4,098  | ) | (3,116 | ) | (2,524 | ) |
|                                              | Minority interest in net income of consolidated  subsidiaries                       | 318     |   | 115 |   | 217 |   |
|                                              | (Increase) decrease in assets (net of discontinued  operations):                    |    |   |   |   |   |   |
|                                              | Receivables from clients                                                            | (15,914 | ) | (13,210 | ) | (25,071 | ) |
|                                              | Income taxes receivable                                                             | -       |   | - |   | 2,216 |   |
|                                              | Other current assets                                                                | 678     |   | (871 | ) | (3,889 | ) |
|                                              | Other assets                                                                        | 1,179   |   | (717 | ) | 480 |   |
|                                              | (Decrease) increase in liabilities (net of discontinued  operations):               |    |   |   |   |   |   |
|                                              | Accounts payable and accrued liabilities                                            | (19,335 | ) | 15,871 |   | 52,149 |   |
|                                              | Income taxes payable                                                                | 1,779   |   | (6,531 | ) | 12,052 |   |
|                                              | Accrued retirement benefits                                                         | (1,802  | ) | 2,322 |   | (5,388 | ) |
|                                              | Deferred rent and accrued lease losses                                              | (1,972  | ) | (3,814 | ) | (3,406 | ) |
|                                              | Other noncurrent liabilities                                                        | 1,731   |   | 1,810 |   | 1,132 |   |
|                                              | Other, net                                                                          | 1,764   |   | 563 |   | 514 |   |
|                                              | Discontinued operations, net                                                        | (265    | ) | (1,090 | ) | (5,537 | ) |
|                                              |                                                                                     |    |  |   |  |   |
|                                              | Net cash from operating activities                                                  | 39,555  |   | 36,931 |   | 52,119 |   |
|                                              |                                                                                     |    |  |   |  |   |
|                                              |                                                                                |    |   |   |   |   |
| Cash flows used in  investing activities:         |                                                                                |    |   |   |   |   |
|                                              | Purchases of fixed assets                                                           | (29,486 | ) | (20,235 | ) | (19,684 | ) |
|                                              | Proceeds from sales of fixed assets and investments                                 | 1,067   |   | 495 |   | 237 |   |
|                                              | Acquisitions and contingent consideration payments                                  | (7,992  | ) | (3,069 | ) | (6,207 | ) |
|                                              | Distributions from affiliates                                                       | 3,623   |   | 1,187 |   | 4,220 |   |
|                                              |                                                                                     |    |  |   |  |   |
|                                              | Net cash used in investing activities                                               | (32,788 | ) | (21,622 | ) | (21,434 | ) |
|                                              |                                                                                     |    |  |   |  |   |
|                                              |                                                                                |    |   |   |   |   |
| Cash flows from/(used  for) financing activities: |                                                                                |    |   |   |   |   |
|                                              | Borrowings and book overdrafts                                                      | (6      | ) | - |   | (9,000 | ) |
|                                              | Issuances of common stock, net of stock issuance costs                              | 36,869  |   | - |   | - |   |
|                                              | Issuances of redeemable common stock                                                | 134     |   | 132 |   | 15,451 |   |
|                                              | Repurchases of redeemable common stock                                              | (252    | ) | (9,347 | ) | (15,124 | ) |
|                                              |                                                                                     |    |  |   |  |   |
|                                              | Net cash from/(used for) financing activities                                       | 36,745  |   | (9,215 | ) | (8,673 | ) |
|                                              |                                                                                     |    |  |   |  |   |
|                                              |                                                                                |    |   |   |   |   |
| Effect of exchange  rates on cash                 | (3,187                                                                              | )       | (669 | ) | 568 |   |
|                                              |                                                                                     |    |  |   |  |   |
|                                              |                                                                                |    |   |   |   |   |
| Increase in cash and  cash equivalents            | 40,325                                                                              |    | 5,425 |   | 22,580 |   |
|                                              |                                                                                |    |   |   |   |   |
| Cash and cash equivalents  at beginning of period | 41,410                                                                              |    | 35,985 |   | 13,405 |   |
|                                              |                                                                                     |    |  |   |  |   |
|                                              |                                                                                |    |   |   |   |   |
| Cash and cash  equivalents at end of period       | $                                                                                   | 81,735  |   | $ | 41,410 |   | $ | 35,985 |   |
|                                              |                                                                                     |    |  |   |  |   |
|                                                   |                                                                                     |         |  |  |  |  |  |  |  |  |  |  |

Seeaccompanying notes

**WATSONWYATT & COMPANY HOLDINGS********Consolidated Statement of Changes in Permanent Stockholders'Equity and Redeemable Common Stock******(Thousands ofU.S. Dollars)

|                                                                                                                                                     | Redeemable  Common Stock                 |                 | Retained  Deficit |                 | Cumulative  Translation Loss |                 | Adjustment  for Redemption Value(Greater)/Less Than Amounts Paid in by  Stockholders |                 | Class  A  Common Stock |                 | Class  B-1  Common Stock |                 | Class  B-2  Common Stock |                 | Additional  Paid in Capital |          | Total                |                 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------|----------------------|-------------------|----------------------|------------------------------|----------------------|--------------------------------------------------------------------------------------|----------------------|------------------------|----------------------|--------------------------|----------------------|--------------------------|----------------------|-----------------------------|---------------|----------------------|----------------------|
|                                                                                                                                                     |                                          |                 |                   |                 |                              |                 |                                                                                      |                 |                        |                 |                          |                 |                          |                 |                             |          |                      |                 |
| Balance  at June 30, 1998                                                                                                                           | $                                        | 96,296               |              | $                    | (106,834                     | )                    | $                                                                                    | (2,916               | )                      | $                    | 25,240                   |                 |                     |                 |                        |          |                 |                 |   |   | $ | (84,510 | ) |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
| Comprehensive  Income:                                                                                                                                   |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
|                                                                                                                                                     | Net income                               |                 |              | 20,813               |                         | -                    |                                                                                 | -                    |                   |                 |                     |                 |                     |                 |                        |          |                 | 20,813               |   |
|                                                                                                                                                     | Foreign currency translation  adjustment |                 |              | -                    |                         | 354                  |                                                                                 | -                    |                   |                 |                     |                 |                     |                 |                        |          |                 | 354                  |   |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                      |                 |
| Total  Comprehensive Income                                                                                                                              |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          | 21,167               |                 |
| Effect  of repurchases of 2,361,542 shares of redeemable common stock (various prices per share)                                               | (15,124                                  | )                    | 2,812             |                 | -                            |                 | (2,812                                                                               | )                    |                   |                 |                     |                 |                     |                 |                        |          | -                    |                 |
| Effect  of issuance of 2,557,201 shares of redeemable common stock                                                                                  | 15,451                                   |            |              |            |                         |            |                                                                                 |            |                   |            |                     |            |                     |            |                        |     |                 |            |
| Adjustment  of redemption value for change in Formula Book Value per share                                                                          | 11,008                                   |            | -                 |            | -                            |            | (11,008                                                                              | )                    |                   |            |                     |            |                     |            |                        |     | (11,008              | )                    |
|                                                                                                                                                     |                                          |                 |                   |                 |                              |                 |                                                                                      |                 |                        |                 |                          |                 |                          |                 |                             |          |                      |                 |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
| Balance  at June 30, 1999                                                                                                                           | 107,631                                  |                 | (83,209           | )                    | (2,562                       | )                    | 11,420                                                                               |                 |                   |                 |                     |                 |                     |                 |                        |          | (74,351              | )                    |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
| Comprehensive  Income:                                                                                                                                   |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
|                                                                                                                                                     | Net income                               |                 |              | 18,533               |                         | -                    |                                                                                 | -                    |                   |                 |                     |                 |                     |                 |                        |          |                 | 18,533               |   |
|                                                                                                                                                     | Foreign currency translation  adjustment |                 |              | -                    |                         | (1,387               | )                                                                                    | -                    |                   |                 |                     |                 |                     |                 |                        |          |                 | (1,387               | ) |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                      |                 |
| Total  Comprehensive Income                                                                                                                              |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          | 17,146               |                 |
| Effect  of repurchases of 1,326,971 shares of  redeemable common stock (various prices per   share)                                  | (9,347                                   | )                    | 453               |       | -                            |       | (453                                                                                 | )                    |                   |       |                     |                 |                     |                 |                        |          | -                    |                 |
| Effect  of issuance of 19,700 shares of redeemable common stock                                                                                     | 132                                      |            |              |            |                         |            |                                                                                 |            |                   |            |                     |            |                     |            |                        |     |                 |            |
| Adjustment  of redemption value for change in Formula Book Value per share                                                                          | 17,064                                   |            | -                 |            | -                            |            | (17,064                                                                              | )                    |                   |            |                     |            |                     |            |                        |     | (17,064              | )                    |
|                                                                                                                                                     |                                          |                 |                   |                 |                              |                 |                                                                                      |                 |                        |                 |                          |                 |                          |                 |                             |          |                      |                 |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
| Balance  at June 30, 2000                                                                                                                           | 115,480                                  |                 | (64,223           | )                    | (3,949                       | )                    | (6,097                                                                               | )                    |                   |                 |                     |                 |                     |                 |                        |          | (74,269              | )                    |
| Effect  of repurchases of 21,540 shares of redeemable common stock                                                                             | (146                                     | )                    | (106              | )                    |                         |            | 106                                                                                  |            |                   |            |                     |            |                     |            |                        |     | -                    |            |
| Effect  of issuance of 20,000 shares of redeemable common stock                                                                                     | 134                                      |            |              |            |                         |            |                                                                                 |            |                   |            |                     |            |                     |            |                        |     | -                    |            |
| Adjustment  of redemption value for change in Formula Book Value per share                                                                          |                                     |            |              |            |                         |            | (118                                                                                 | )                    |                   |            |                     |            |                     |            |                        |     | (118                 | )                    |
| Elimination  of redeemable feature of common stock and 2-for-1 share exchange (see Note 2)                                           | (115,468                                 | )                    |              |       |                         |       | 6,109                                                                                |       | $                      | -                    |           | $                    | 148                      |       | $                           | 148           |       | $                    | 109,063 |     | 115,468 |       |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
| Reclassification  for sale of 3,118,500 shares by existing stockholders                                                                             |                                     |            |              |            |                         |            |                                                                                 |            | 32                     |            | (16                      | )                    | (16                      | )                    |                        |     | -                    |            |
| Proceeds  from sale of 3,321,500 shares by the Company, net of offering costs                                                                       |                                     |            |              |            |                         |            |                                                                                 |            | 33                     |            |                     |            |                     |            | 34,993                      |     | 35,026               |            |
| Non  cash compensation charge related to the sale of 44,796 shares  of redeemable common stock prior to the initial public  offering |                                     |       |              |       |                         |       |                                                                                 |       |                   |       |                     |       |                     |       | 751                         |     | 751                  |       |
| Reclassification  for sale of 2,845,715 shares by existing stockholders                                                                             |                                     |            |              |            |                         |            |                                                                                 |            | 28                     |            | (28                      | )                    |                     |            |                        |          | -                    |            |
| Proceeds  from sale of 104,285 shares by the Company, net of offering costs                                                                         |                                     |            |              |            |                         |            |                                                                                 |            | 1                      |            |                     |            |                     |            | 1,842                       |     | 1,843                |            |
| Comprehensive  Income                                                                                                                                    |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
|                                                                                                                                                     | Net income                               |                 |              | 44,436               |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 | 44,436               |   |
|                                                                                                                                                     | Foreign currency translation  adjustment |                 |              |                 |                         | (4,412               | )                                                                                    |                 |                   |                 |                     |                 |                     |                 |                        |          |                 | (4,412               | ) |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                      |                 |
| Total  Comprehensive Income                                                                                                                              |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          | 40,024               |                 |
|                                                                                                                                                     |                                          |                 |                   |                 |                              |                 |                                                                                      |                 |                        |                 |                          |                 |                          |                 |                             |          |                      |                 |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
|                                                                                                                                                     |                                     |                 |              |                 |                         |                 |                                                                                 |                 |                   |                 |                     |                 |                     |                 |                        |          |                 |                 |
| Balance  at June 30, 2001                                                                                                                           | $                                        | -                    |              | $                    | (19,893                      | )                    | $                                                                                    | (8,361               | )                      | $                    | -                        |                 | $                        | 94                   |                        | $             | 104                  |                 | $ | 132 |   | $ | 146,649 |   | $ | 118,725 |   |
|                                                                                                                                                     |                                          |                 |                   |                 |                              |                 |                                                                                      |                 |                        |                 |                          |                 |                          |                 |                             |          |                      |                 |

Seeaccompanying notes

**WATSON WYATT & COMPANY HOLDINGS**

**Notes to the Consolidated Financial Statements****(Tabular Amounts in Thousands of U.S.Dollars Except Share and Percentage Data)**

**NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Nature of the Business* - Watson Wyatt & CompanyHoldings (collectively referred to as "we", "Watson Wyatt"or the "Company"), together with our subsidiaries, is aninternational company engaged in the business of providing professionalconsultative services on a fee basis, primarily in the human resource areas ofemployee benefits and compensation, but also in other areas of specializationsuch as human capital consulting and human resource related technologyconsulting.

In 1998, wediscontinued our benefits administration outsourcing business as furtherdescribed in Note 14.  The ConsolidatedStatement of Operations in 1999 reflects an adjustment to the charges recordedin 1998 for that discontinuation.

*Use of Estimates* - Preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting period.  Actual results could differ from thoseestimates.  Estimates are used whenaccounting for revenue, allowances for uncollectible receivables, investmentsin affiliates, depreciation and amortization, profits on long-term contracts,asset write-downs, employee benefit plans, taxes, accruals for premiums forprofessional liability insurance and discontinued operations.

*Principles of Consolidation* - Our consolidated financialstatements include the accounts of the Company and our majority-owned andcontrolled subsidiaries after elimination of intercompany accounts andtransactions.  Investments in affiliatedcompanies over which we have the ability to exercise significant influence areaccounted for using the equity method.

*Reclassifications* - Certain amounts previouslypresented have been reclassified to conform to the current presentation.

*Cash and Cash Equivalents* - We consider short-term, highlyliquid investments with original maturities of 90 days or less to be cashequivalents.  Such investments were$53,600,000 at June 30, 2001 and $23,500,000 at June 30, 2000.

*Receivables from Clients* - Billed receivables from clientsare presented at their billed amount less an allowance for doubtful accounts.Unbilled receivables are stated at full billing rates less an allowance forunbillable amounts.

*Revenue Recognition* - For consulting services, revenuefrom clients are recorded as services are performed and are presented net ofwrite-offs and estimated unbillable amounts. Services rendered are generally billed on a monthly basis using feearrangements defined at the inception of the project. Revenue includesreimbursable expenses billed to clients. Revenue from long-term contracts is recognized on the percentage ofcompletion basis.  Anticipated losses onlong-term contracts are recognized as they become known.

In December1999, the SEC issued Staff Accounting Bulletin No. 101 "RevenueRecognition in Financial Statements" (SAB 101) which summarizes certain ofthe staff's views on revenue recognition. Our revenue recognition policies have been and continue to be inaccordance with SAB 101.

*Intangible Assets* - Intangible assets consistprimarily of goodwill related to the excess cost over net assets of purchasedcompanies.  Goodwill is generallyamortized on a straight-line basis over seven to fifteen years.  We regularly assess the recoverability ofunamortized goodwill and other long-lived assets by comparing the probablefuture cash flows with the net book value of the underlying assets.  Losses so identified are then measured asthe difference between the net book value of the asset and the discountedpresent value of the cash flows and are recorded as identified.

In July2001, the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 142, "Goodwill and Other Intangible Assets"(FAS 142) which addresses the accounting for goodwill and intangible assets atand subsequent to their acquisition. The provisions of FAS 142 will be effective for fiscal years beginningafter December 15, 2001, though early adoption is permitted.  We have not determined when we will adoptFAS 142 or what the impact of adoption will have on our financial statements,except that we will no longer record amortization of goodwill when adopted.

*Other AccountingPronouncements* - In June 1998, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 133, "Accounting forDerivative Instruments and Hedging Activities" (FAS 133), which requiresan entity to recognize all derivatives as either assets or liabilities in theConsolidated Balance Sheets and measure those instruments at fair value.  Effective July 1, 2000, we adopted FAS 133,as amended.  It had no effect on ourfinancial statements because we do not use derivative instruments as a hedgingstrategy or for any other purpose.

*Employee Receivables* - We had outstanding employeereceivables included in other current and noncurrent assets totaling $1,913,000and $2,173,000 at June 30, 2001 and June 30, 2000, respectively, relatedprimarily to employee relocations.

*Foreign Currency Translation* - Gains and losses on foreigncurrency transactions, including settlement of intercompany receivables andpayables, are recognized currently in the Consolidated Statements ofOperations.  Assets and liabilities ofour subsidiaries outside the United States are translated into the reportingcurrency, the U.S. dollar, based on exchange rates at the balance sheetdate.  Revenue and expenses of oursubsidiaries outside the United States are translated into U.S. dollars at theaverage exchange rates during the year. Gains and losses on translation of our equity interests in oursubsidiaries outside the United States and on intercompany notes that are notexpected to be liquidated are not included in the Consolidated Statements ofOperations but are reported separately and accumulated as the cumulativetranslation gain or loss within permanent stockholders' equity in theConsolidated Balance Sheets.  Prior toJuly 1, 2000, translation gains and losses on intercompany receivables andpayables were included with the cumulative translation gain or loss since,prior to that time, the Company did not settle these accounts.

*Fair Value of FinancialInstruments* - Thecarrying amount of our cash and cash equivalents, short-term investments,receivables from clients and notes and accounts payable approximates fair valuebecause of the short maturity and ready liquidity of those instruments.  We had no borrowings outstanding under ourrevolving credit agreement at June 30, 2001 and June 30, 2000.  We know of no event of default that wouldrequire us to satisfy the guarantees described in Notes 10 and 16 other than asreflected in the Consolidated Financial Statements.

*Concentration of Credit Risk* - Financial instruments whichpotentially subject the Company to concentrations of credit risk consistprincipally of certain cash and cash equivalents, short-term investments andreceivables from clients.  We invest ourexcess cash with high quality financial institutions.  Concentrations of credit risk with respect to receivables fromclients are limited due to our large number of customers and their dispersionacross many industries and geographic regions.

*Stock-Based Compensation* - We have elected to followAccounting Principles Board Opinion No. 25, "Accounting for Stock Issuedto Employees" (APB 25), for the stock option plan adopted on June 26,2000.  See Note 11. Compensationexpense, if any, would be recorded and measured as the difference between thefair market value of the stock at the date of the grant and the optionprice.  The compensation expense wouldbe recognized over the five-year vesting period identified in the plan.  For any cash based, non-stock awards, suchas stock appreciation rights, compensation expense will be recognized over thevesting period to the extent that the market price of the stock increases.  We have elected the disclosure-onlyprovisions of Statement of Financial Accounting Standards No. 123,"Accounting for Stock-Based Compensation" (FAS 123).

*Earnings per Share* - The computation of basic earningsper share is based upon the weighted average number of common sharesoutstanding.  Diluted earnings per shareis calculated on the basis of the weighted average number of common sharesoutstanding plus the effect of outstanding stock options using the "treasurystock" method.  See Note 17 foridentification of the components of basic and diluted earnings per share.

**NOTE 2 - CORPORATERESTRUCTURING AND PUBLIC STOCK OFFERINGS**

In October2000, we completed an initial public offering ("IPO") of our class Acommon stock. In conjunction with this offering, on October 16, 2000 wecompleted changes in our corporate structure involving the merger of WatsonWyatt & Company with WW Merger Subsidiary, Inc., a wholly-owned subsidiaryof Watson Wyatt & Company Holdings. As a result, Watson Wyatt & Companyis now a wholly-owned subsidiary of Watson Wyatt & Company Holdings.

At the timeof the reorganization, each share of Watson Wyatt & Company's redeemablecommon stock was converted into one share of class B-1 common stock and oneshare of class B-2 common stock of Watson Wyatt & Company Holdings. Theclass B common stock is divided into two classes to accommodate differenttransfer restriction periods. The class B-1 shares are subject to a transferrestriction period of 12 months following the public offering date, while theclass B-2 shares are subject to a transfer restriction period of 24 monthsfollowing the public offering date, unless waived by the Board of Directors.The Board of Directors waived the transfer restrictions on a total of 1,559,250class B-1 and 1,559,250 class B-2 shares to allow for conversion into the classA shares sold by selling stockholders in the initial public offering describedbelow.  Following the expiration orwaiver of the respective transfer restriction periods, the remaining class B-1and class B-2 shares will automatically convert into class A common stock.

Inconjunction with our initial public offering, we entered into agreementsproviding for additional transfer restrictions with major stockholders,executive officers and employee directors affecting approximately 36% of ourremaining class B common stock. The agreements restrict transfers of all sharesheld by such persons immediately following the offering, and the restrictionsterminate as to 25% of such shares on each of the first, second, third andfourth anniversaries of the consummation of the public offering.

Thetwo-for-one share conversion, the elimination of the redeemable feature ofWatson Wyatt & Company's redeemable common stock and the reclassificationto permanent stockholders' equity has been reflected in the ConsolidatedBalance Sheet as of June 30, 2001, and has also been reflected in all earningsper share data on the Consolidated Statements of Operations for the years endedJune 30, 2001, 2000 and 1999 as if the conversion were effective at thebeginning of each period.

A total of5,600,000 shares of class A common stock was offered and sold in our initialpublic offering at an offering price of $12.50 per share. Of the sharesincluded in this transaction, Watson Wyatt & Company Holdings offered2,800,000 newly-issued shares, and the selling stockholders offered theremaining 2,800,000 shares. On November 8, 2000, our underwriters exercisedtheir over-allotment option. As a result, the underwriters purchased 840,000shares of class A common stock from us and from the selling stockholders at theinitial public offering price of $12.50 per share less the underwritingdiscount. Of the shares included in this transaction, Watson Wyatt &Company Holdings sold 521,500 newly-issued shares, and the selling stockholderssold 318,500 shares.

Net proceedsto the Company from these transactions were $35.0 million, net of underwritingdiscounts, commissions and other offering, merger and restructuring costs. Wedid not receive any proceeds from the sale of shares by the sellingstockholders. We also paid $2.7 million to selling stockholders asreimbursement for commission payments resulting from the sale of their shares.This amount was recorded in the salaries and employee benefits line for theyear ended June 30, 2001.

In June2001, we completed a secondary public offering ("the Secondary") ofour class A common stock.  In thisoffering, a total of 2,950,000 shares of class A common stock was offered andsold at a price of $22.00 per share.  Ofthe shares included in this transaction, Watson Wyatt & Company Holdingsoffered an additional 104,285 newly-issued shares, and the selling stockholdersoffered the remaining 2,845,715 shares. On July 6, 2001, our underwriters exercised their over-allotmentoption.  As a result, the underwriterspurchased an additional 442,500 shares of class A common stock from the sellingstockholders at the offering price of $22.00 per share less the underwritingdiscount.

Inconjunction with this offering, the Board of Directors waived the transferrestrictions on a total of 3,288,215 class B-1 shares to allow for conversioninto the class A shares sold by selling stockholders.

Net proceedsto the Company from the Secondary were $1.8 million, net of underwritingdiscounts, commissions and other offering costs.  We did not receive any proceeds from the sale of shares by theselling stockholders.

**NOTE 3 - CASH FLOW INFORMATION**

Net cashfrom operating activities in the Consolidated Statements of Cash Flows includescash payments for:

|              | Year Ended June 30, |   |
|-------------------|---------------------|--------|
|              |                     |   |
|              | 2001                |   | 2000 |   | 1999 |   |
|              |                     |   |  |   |  |   |
|              |                |   |   |   |   |   |
| Interest  expense | $                   | 1,491  |   | $ | 1,879 |   | $ | 1,889 |   |
| Income  taxes     | $                   | 30,660 |   | $ | 21,707 |   | $ | 5,462 |   |

**NOTE 4 - INVESTMENTS IN AFFILIATES**

Entities accounted for under theequity method are:

|                                                  |               |   | June 30, |   |
|-------------------------------------------------------|--------------------|--------|----------|--------|
|                                                  |               |   |          |   |
|                                                  | Ownership Interest |   |     |   |
|                                                  |               | 2001   |     | 2000   |   |
|                                                  |                    |   |          |   |  |   |
|                                                  |               |   |     |   |   |   |
| Watson  Wyatt Partners                                | 10.0               | %      | $        | 11,029 |   | $ | 11,113 |   |
| Watson  Wyatt & Company Holdings (Europe) Limited | 25.0               | %      | 5,167    |   | 5,502 |   |
| Professional  Consultants Insurance Company, Inc.     | 27.4               | %      | -        |   | - |   |
|                                                  |               |   |          |   |  |   |
|                                                  |               |   |     |   |   |   |
| Total  Investment in affiliates                       |               |   | $        | 16,196 |   | $ | 16,615 |   |
|                                                  |               |   |          |   |  |   |

On April 1, 1995, we transferred ourUnited Kingdom ("U.K.") operations to Watson Wyatt Partners, formerlyR. Watson & Sons ("Watsons"), an actuarial partnership based inthe U.K., and received a beneficial interest in Watsons and a 10% interest in adefined profit pool of Watsons.  We alsotransferred our Continental European operations to a newly-formed holdingcompany, Watson Wyatt & Company Holdings (Europe) Limited("WWHE"), jointly owned and controlled by us and Watsons, in exchangefor 50.1% of its shares.  The Company'shistorical basis in the assets and liabilities carried over.  Effective July 1, 1998, we sold one half ofour investment in WWHE to Watsons; no gain or loss was recognized on thetransaction.

Our interest in Watsons is aninvestment in a general partnership.  Weretain the ability to exercise significant influence over WWHE.  As a result, both investments are accountedfor under the equity method.

At June 30, 2001, our investments inWWHE and Watsons exceeded our share of the underlying net assets by $1,822,000due primarily to the capitalization of external transaction costs incurred byus.  This basis differential is beingamortized over periods of 10 to 15 years.

The Company's pre-tax income fromaffiliates includes the following:

|                               | Year Ended  June 30, |   |
|------------------------------------|----------------------|--------|
|                               |                      |   |
|                               | 2001                 |   | 2000 |   | 1999 |   |
|                               |                      |   |  |   |  |   |
|                               |                 |   |   |   |   |   |
| Equity in income from affiliates   | $                    | 4,309  |   | $ | 3,326 |   | $ | 2,760 |   |
| Amortization of basis differential |                 | (211   | ) |   | (210 | ) |   | (236 | ) |
|                               |                      |   |  |   |  |   |
|                               |                 |   |   |   |   |   |
| Income from affiliates             | $                    | 4,098  |   | $ | 3,116 |   | $ | 2,524 |   |
|                               |                      |   |  |   |  |   |

Combined summarized balance sheetinformation at June 30 for the Company's affiliates follows: 

|                                          | 2001    |    | 2000   |   |
|-----------------------------------------------|---------|---------|--------|--------|
|                                          |         |    |        |   |
|                                          |    |    |   |   |
| Current assets                                | $       | 133,950 |   | $      | 120,372 |   |
| Noncurrent assets                             | 116,086 |    | 53,528 |   |
|                                          |         |    |        |   |
|                                          |    |    |   |   |
| Total assets                                  | $       | 250,036 |   | $      | 173,900 |   |
|                                          |         |    |        |   |
|                                          |    |    |   |   |
| Current liabilities                           | $       | 55,557  |   | $      | 38,270 |   |
| Noncurrent liabilities                        | 132,407 |    | 78,653 |   |
| Stockholders' equity                          | 62,072  |    | 56,977 |   |
|                                          |         |    |        |   |
|                                          |    |    |   |   |
| Total liabilities & stockholders'  equity | $       | 250,036 |   | $      | 173,900 |   |
|                                          |         |    |        |   |

Income from affiliates include ourproportionate share of income from these equity investments from the dates ofinvestment.  Combined summarizedoperating results for the years ended June 30, reported by the affiliatesfollow:

|               | 2001    |    | 2000    |   | 1999    |   |
|--------------------|---------|---------|---------|--------|---------|--------|
|               |         |    |         |   |         |   |
|               |    |    |    |   |    |   |
| Revenue            | $       | 254,699 |    | $      | 224,507 |   | $ | 206,463 |   |
| Operating expenses | 187,395 |    | 166,265 |   | 155,330 |   |
|               |         |    |         |   |         |   |
|               |    |    |    |   |    |   |
| Income before tax  | $       | 67,304  |    | $      | 58,242  |   | $ | 51,133 |   |
|               |         |    |         |   |         |   |
|               |    |    |    |   |    |   |
| Net income         | $       | 65,784  |    | $      | 58,312  |   | $ | 51,116 |   |
|               |         |    |         |   |         |   |

**NOTE 5 - FIXED ASSETS**

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

The components of fixed assets are:

|                                             | June 30, |   |
|--------------------------------------------------|----------|--------|
|                                             |          |   |
|                                             | 2001     |   | 2000 |   |
|                                             |          |   |  |   |
|                                             |     |   |   |   |
| Furniture, fixtures and equipment                | $        | 98,322 |   | $ | 98,578 |   |
| Leasehold improvements                           | 38,016   |   | 29,870 |   |
|                                             |          |   |  |   |
|                                             | 136,338  |   | 128,448 |   |
|                                             |     |   |   |   |
| Less: accumulated depreciation and  amortization | (83,722  | )      | (83,211 | ) |
|                                             |          |   |  |   |
|                                             |     |   |   |   |
| Net fixed assets                                 | $        | 52,616 |   | $ | 45,237 |   |
|                                             |          |   |  |   |

**NOTE 6 - PENSION AND SAVINGS PLANS**

*Defined Benefit Plans*

We sponsor both qualified andnon-qualified non-contributory defined benefit pension plans coveringsubstantially all of our associates. Under our principal plans (U.S., Canada, and Hong Kong), benefits arebased on the number of years of service and the associate's compensation duringthe three highest paid consecutive years of service.

Contributionsare limited to amounts that are currently deductible for tax purposes, and theexcess of expense over such contributions and direct payments undernon-qualified plan provisions is accrued.

Thenoncurrent portions of accrued costs related to our principal retirement plansare:

|                                         | June 30, |   |
|----------------------------------------------|----------|--------|
|                                         |          |   |
|                                         | 2001     |   | 2000 |   |
|                                         |          |   |  |   |
|                                         |     |   |   |   |
| Defined benefit retirement plans             | $        | 25,615 |   | $ | 27,905 |   |
| Canadian Separation Allowance Plan           | 5,225    |   | 6,116 |   |
| Postretirement benefits other than  pensions | 46,820   |   | 45,441 |   |
|                                         |          |   |  |   |
|                                         |     |   |   |   |
| Accrued retirement benefits                  | $        | 77,660 |   | $ | 79,462 |   |
|                                         |          |   |  |   |

Net periodicpension cost consists of the following components:

|                                    | Year Ended  June 30, |   |
|-----------------------------------------|----------------------|--------|
|                                    |                      |   |
|                                    | 2001                 |   | 2000 |   | 1999 |   |
|                                    |                      |   |  |   |  |   |
|                                    |                 |   |   |   |   |   |
| Service cost                            | $                    | 25,432 |   | $ | 23,968 |   | $ | 22,976 |   |
| Interest cost                           | 28,612               |   | 26,163 |   | 23,909 |   |
| Expected return on plan  assets         | (44,970              | )      | (40,138 | ) | (37,437 | ) |
| Amortization of  transition obligation  | 202                  |   | 201 |   | 201 |   |
| Amortization of net unrecognized  gains | (8,190               | )      | (6,188 | ) | (5,979 | ) |
| Amortization of prior  service cost     | 2,008                |   | 2,012 |   | 1,841 |   |
|                                    |                      |   |  |   |  |   |
|                                    |                 |   |   |   |   |   |
| Net periodic pension cost               | $                    | 3,094  |   | $ | 6,018 |   | $ | 5,511 |   |
|                                    |                      |   |  |   |  |   |

The following tables set forth thechanges in the projected pension benefit obligation and fair value of thepension plan assets for the qualified and non-qualified plans:

|                                            | June 30, |    |
|-------------------------------------------------|----------|---------|
|                                            |          |    |
|                                            | 2001     |    | 2000 |   |
|                                            |          |    |  |   |
|                                            |     |    |   |   |
| Benefit  obligation at beginning of year        | $        | 394,024 |   | $ | 377,407 |   |
| Service cost                                    | 25,432   |    | 23,968 |   |
| Interest  cost                                  | 28,612   |    | 26,163 |   |
| Actuarial  losses/(gains)                       | 13,962   |    | (13,959 | ) |
| Benefit  payments                               | (16,091  | )       | (21,352 | ) |
| Plan  amendments                                | 5        |    | 1,948 |   |
| Foreign  currency adjustment                    | (862     | )       | (151 | ) |
|                                            |          |    |  |   |
| Benefit  obligation at end of year              | $        | 445,082 |   | $ | 394,024 |   |
|                                            |          |    |  |   |
|                                            |     |    |   |   |
|                                            | June 30, |    |
|                                            |          |    |
|                                            | 2001     |    | 2000 |   |
|                                            |          |    |  |   |
|                                            |     |    |   |   |
| Fair value  of plan assets at beginning of year | $        | 460,154 |   | $ | 411,102 |   |
| Actual  return on plan assets                   | (34,589  | )       | 58,077 |   |
| Divestitures                                    | -        |    | (254 | ) |
| Company  contributions                          | 5,147    |    | 12,786 |   |
| Benefit  payments                               | (16,091  | )       | (21,352 | ) |
| Foreign  currency adjustment                    | (837     | )       | (205 | ) |
|                                            |          |    |  |   |
| Fair value  of plan assets at end of year       | $        | 413,784 |   | $ | 460,154 |   |
|                                            |          |    |  |   |

Pension plan assets consist ofdomestic equity, international equity and fixed income securities.

The following table sets forthselected information for plans with accumulated benefit obligations in excessof plan assets:

|                            | June 30, |    |
|---------------------------------|----------|---------|
|                            |          |    |
|                            | 2001     |    | 2000 |   |
|                            |          |    |  |   |
|                            |     |    |   |   |
| Projected  benefit obligation   | $        | 107,252 |   | $ | 86,620 |   |
| Accumulated  benefit obligation | 61,662   |    | 46,892 |   |
| Fair value  of plan assets      | -        |    | - |   |
|                                 |          |         |  |  |  |  |

The accrued pension benefit costrecognized in the Company's Consolidated Balance Sheets is computed as follows:

|                                    | June 30, |    |
|-----------------------------------------|----------|---------|
|                                    |          |    |
|                                    | 2001     |    | 2000 |   |
|                                    |          |    |  |   |
|                                    |     |    |   |   |
| Funded  status at end of year           | $        | (31,298 | ) | $ | 66,384 |   |
| Unrecognized  prior service cost        | 7,161    |    | 9,187 |   |
| Unrecognized  net loss/(gain)           | 630      |    | (101,248 | ) |
| Unrecognized  transition obligation     | 396      |    | 592 |   |
|                                    |          |    |  |   |
| Net accrued  pension liability          | $        | (23,111 | ) | $ | (25,085 | ) |
|                                    |          |    |  |   |
|                                    |     |    |   |   |
| Prepaid  pension benefit cost           | $        | 55,489  |   | $ | 38,918 |   |
| Accrued  pension benefit liability      | (78,600  | )       | (64,003 | ) |
| Intangible  assets                      | -        |    | - |   |
| Accumulated  other comprehensive income | -        |    | - |   |
|                                    |          |    |  |   |
| Net accrued  pension liability          | $        | (23,111 | ) | $ | (25,085 | ) |
|                                    |          |    |  |   |

Assumptions used in the valuationfor the U.S. plan, which comprises the majority of the principal definedbenefit pension plans, include:

|                                         | Year Ended  June 30, |   |
|----------------------------------------------|----------------------|--------|
|                                         |                      |   |
|                                         | 2001                 |   | 2000 |   | 1999 |   |
|                                         |                      |   |  |   |  |   |
|                                         |                 |   |   |   |   |   |
| Discount rate, projected  benefit obligation | 7.25                 | %      | 7.25 | % | 7.00 | % |
| Discount rate, net  periodic pension cost    | 7.25                 | %      | 7.00 | % | 6.75 | % |
| Expected long-term rate  of return on assets | 10.00                | %      | 10.00 | % | 10.00 | % |
| Rate of increase in  compensation levels     | 5.34                 | %      | 5.34 | % | 5.34 | % |

*Defined Contribution Plans*

We sponsor asavings plan which provides benefits to substantially all U.S. associates andunder which we match employee contributions at 50% of the first 6% of totalpay, which includes base salary, overtime and annual performance-basedbonuses.  Vesting of the Company matchoccurs after three years for new employees and is 100% for all employees hiredbefore January 1, 1997.  The expense infiscal years 2001, 2000 and 1999 for the match was $6.6 million, $5.6 millionand $4.5 million, respectively.  Underthe plan, we also have the ability to make discretionary profit-sharingcontributions.  We made no profitsharing contributions during fiscal years 2001, 2000 or 1999.  We also sponsor a Canadian Separation AllowancePlan (CSAP) which provides benefits to substantially all Canadian associates.  The CSAP is an unfunded book reservearrangement; as such, the amounts due to associates are recorded as a liabilityin the consolidated balance sheets of the Company.  CSAP expense for fiscal years 2001, 2000 and 1999 amounted to$357,000, $372,000 and $377,000, respectively.

**NOTE 7 - BENEFITS OTHER THANPENSIONS**

*Health CareBenefits*

We sponsor acontributory health care plan that provides hospitalization, medical and dentalbenefits to substantially all U.S. associates. We accrue a liability for estimated incurred but unreported claims basedon projected use of the plan as well as paid claims of prior periods.  The liability of $2,483,000 remainedunchanged from June 30, 2000 to June 30, 2001, and is included in accountspayable and accrued liabilities in the Consolidated Balance Sheets.

*Postretirement Benefits*

We providecertain health care and life insurance benefits for retired associates.  The principal plans cover associates in theU.S. and Canada who have met certain eligibility requirements. Our principalplans are unfunded.

Net periodic postretirement benefitcost consists of the following components:

|                                     | Year Ended  June 30, |   |
|------------------------------------------|----------------------|--------|
|                                     |                      |   |
|                                     | 2001                 |   | 2000 |   | 1999 |   |
|                                     |                      |   |  |   |  |   |
| Service cost                             | $                    | 1,814  |   | $ | 1,877 |   | $ | 1,898 |   |
| Interest cost                            | 2,294                |   | 2,216 |   | 2,178 |   |
| Amortization of  transition obligation   | 45                   |   | 46 |   | 46 |   |
| Amortization of net  unrecognized gains  | (835                 | )      | (683 | ) | (488 | ) |
| Amortization of prior  service cost      | (128                 | )      | (127 | ) | (127 | ) |
|                                     |                      |   |  |   |  |   |
| Net periodic postretirement benefit cost | $                    | 3,190  |   | $ | 3,329 |   | $ | 3,507 |   |
|                                     |                      |   |  |   |  |   |

The following tables set forth thechanges in the accumulated postretirement benefit obligation, Companycontributions and benefit payments.  

|                                     | June 30, |   |
|------------------------------------------|----------|--------|
|                                     |          |   |
|                                     | 2001     |   | 2000 |   |
|                                     |          |   |  |   |
| Benefit  obligation at beginning of year | $        | 34,810 |   | $ | 34,981 |   |
| Service cost                             | 1,814    |   | 1,877 |   |
| Interest  cost                           | 2,294    |   | 2,216 |   |
| Participant  contributions               | 272      |   | 267 |   |
| Actuarial  gains                         | (2,475   | )      | (3,102 | ) |
| Benefit  payments                        | (1,648   | )      | (1,413 | ) |
| Foreign  currency adjustment             | (81      | )      | (16 | ) |
|                                     |          |   |  |   |
| Benefit  obligation at end of year       | $        | 34,986 |   | $ | 34,810 |   |
|                                     |          |   |  |   |

 

|                                            | June 30, |   |
|-------------------------------------------------|----------|--------|
|                                            |          |   |
|                                            | 2001     |   | 2000 |   |
|                                            |          |   |  |   |
| Fair value  of plan assets at beginning of year | $        | -      |   | $ | - |   |
| Company  contributions                          | 1,376    |   | 1,146 |   |
| Participant  contributions                      | 272      |   | 267 |   |
| Benefit  payments                               | (1,648   | )      | (1,413 | ) |
|                                            |          |   |  |   |
| Fair value  of plan assets at end of year       | $        | -      |   | $ | - |   |
|                                            |          |   |  |   |

The accrued other postretirementbenefit cost recognized in the Company's Consolidated Balance Sheets iscomputed as follows: 

|                                      | June 30, |    |
|-------------------------------------------|----------|---------|
|                                      |          |    |
|                                      | 2001     |    | 2000 |   |
|                                      |          |    |  |   |
| Funded  status at end of year             | $        | (34,986 | ) | $ | (34,810 | ) |
| Unrecognized  prior service cost          | (1,075   | )       | (1,198 | ) |
| Unrecognized  net loss                    | (12,791  | )       | (11,163 | ) |
| Unrecognized  transition obligation       | 541      |    | 604 |   |
|                                      |          |    |  |   |
| Net accrued  postretirement liability     | $        | (48,311 | ) | $ | (46,567 | ) |
|                                      |          |    |  |   |
|                                      |     |    |   |   |
| Prepaid  postretirement benefit cost      | $        | -       |   | $ | - |   |
| Accrued  postretirement benefit liability | (48,311  | )       | (46,567 | ) |
| Intangible  assets                        | -        |    | - |   |
| Accumulated  other comprehensive income   | -        |    | - |   |
|                                      |          |    |  |   |
| Net accrued  postretirement liability     | $        | (48,311 | ) | $ | (46,567 | ) |
|                                      |          |    |  |   |

Assumptions used in the valuationfor the U.S. plan, which comprises the majority of the principal postretirementplans, include:

|                                                     | Year Ended  June 30,                           |   |
|----------------------------------------------------------|------------------------------------------------|--------|
|                                                     |                                                |   |
|                                                     | 2001                                           |   | 2000 |   | 1999 |   |
|                                                     |                                                |   |  |   |  |   |
| Health care cost trend,  accumulated benefit obligation: |                                           |   |   |   |   |   |
| Pre-65 benefits                                          |                                           |   |   |   |   |   |
|                                                     | (decreasing to 5.00% for  2007 and thereafter) | 7.50   | % | 8.00 | % | 7.70 | % |
| Post-65 benefits                                         |                                           |   |   |   |   |   |
|                                                     | (decreasing to 5.00% for  2007 and thereafter) | 8.30   | % | 9.00 | % | 7.10 | % |
| Discount rate,  accumulated benefit obligation           |                                           |   |   |   |   |   |
|                                                     | postretirement benefit                         | 7.25   | % | 7.25 | % | 7.00 | % |
| Discount rate, net  periodic cost                        | 7.25                                           | %      | 7.00 | % | 6.75 | % |

A one percentage point change in theassumed health care cost trend rates would have the following effect:

|                                                                               | 1% Increase |   | 1% Decrease |   |
|------------------------------------------------------------------------------------|-------------|--------|-------------|--------|
|                                                                               |             |   |             |   |
| Effect on  net periodic postretirement benefit cost in fiscal year  2001      | $           | 259    |        | $      | (200 | ) |
| Effect on  accumulated postretirement benefit obligation as of June  30, 2001 | 1,767       |   | (1,816      | )      |
|                                                                                    |             |        |             |        |  |  |

**NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**

Accounts payable and accrued liabilitiesconsist of:

|                                                                                                  | June 30, |    |
|-------------------------------------------------------------------------------------------------------|----------|---------|
|                                                                                                  |          |    |
|                                                                                                  | 2001     |    | 2000 |   |
|                                                                                                  |          |    |  |   |
| Accounts  payable and accrued liabilities                                                             | $        | 53,365  |   | $ | 58,653 |   |
| Accrued  salaries, bonuses and SIBP (a)                                                               | 64,214   |    | 83,357 |   |
| Current  portion of defined benefit retirement plans and postretirement benefits other  than pensions | 2,723    |    | 2,491 |   |
| Accrued  vacation                                                                                     | 15,641   |    | 14,840 |   |
| Advance  billings                                                                                     | 12,197   |    | 8,492 |   |
|                                                                                                  |          |    |  |   |
| Total  accounts payable and accrued liabilities                                                       | $        | 148,140 |   | $ | 167,833 |   |
|                                                                                                  |          |    |  |   |

----

| a | Following the initial public offering, we terminated the stock  incentive bonus plan (SIBP) and replaced it with equity-based incentive plans  more customary to publicly-traded companies. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**NOTE 9 - LEASES**

We leaseoffice space, furniture and selected computer equipment under operating leaseagreements with terms generally ranging from one to ten years.  We have entered into sublease agreements forsome of our excess leased space.  Therental expense was $46,618,000, $44,563,000 and $43,631,000 for fiscal years2001, 2000 and 1999, respectively. Sublease income was $3,895,000, $3,534,000 and $4,208,000 for fiscalyears 2001, 2000 and 1999, respectively.

Future cashoutlays for operating lease commitments and cash inflows for sublease incomeare:FiscalLease Sublease yearcommitments income   2002$41,675 $2,473 200333,541 130 200429,418 - 200524,450 - 200619,495 - Thereafter70,629 -     $219,208 $2,603    
As a result of relocations and the subleasing of excess officespace, we recognized no lease termination losses in fiscal year 2001 or fiscalyear 2000 and $341,000 in fiscal year 1999.

**NOTE 10 -NOTE PAYABLE**

We have a$95,000,000 revolving credit facility with a group of banks at an interest ratethat varies with LIBOR and/or the Prime Rate. We are charged a quarterly commitment fee, currently 3/10 of 1% of thefacility, that varies with our financial leverage and is paid on the unusedportion of the credit facility.  Noamounts were outstanding under the revolving credit facility as of June 30,2001 or 2000.  Credit under the facilityis available upon demand, although the credit facility requires us to observecertain covenants (including requirements as to minimum net worth and otherfinancial and restrictive covenants) and is collateralized by a blanket lien onall assets.  At June 30, 2001 we were incompliance with all covenants under the credit facility. The revolving portionof the credit facility is scheduled to mature on June 30, 2003.  A portion of the revolving facility is usedto support required letters of credit issued under the credit line.  As a result, $3,017,000 of the facility iscurrently unavailable for operating needs.
Additionally,the Company has a facility which is available to collateralize loans toassociates for purchased redeemable common stock under our former StockPurchase Program.  The maximum availableborrowings under this facility were $14,323,000 and $25,000,000 at June 30,2001 and 2000, respectively.  Weguarantee these loans to our stockholders, the aggregate outstanding balancesof which totaled $8,537,000 and $14,385,000 at June 30, 2001 and 2000,respectively.  Shares totaling 4,598,000of Watson Wyatt & Company Holdings Class B shares and 3,273,000 of WatsonWyatt & Company's redeemable common stock were pledged by stockholders tocollateralize these loans at June 30, 2001 and 2000, respectively.

**NOTE 11 - EQUITY**

*2000 Long-Term Incentive Plan*

On June 26, 2000, the Companyadopted the Watson Wyatt & Company Holdings 2000 Long-Term Incentive Plan(the "Plan") which provides for the granting of nonqualified stockoptions and stock appreciation rights (collectively referred to as"Awards") to full-time associates of the Company and to non-associatemembers of the Board of Directors.  Thetotal number of shares of Common Stock with respect to which Awards may begranted under the Plan is 4,500,000 shares. Prior to adopting the Plan, the Company had no outstanding options.

The stock option agreements haveseven year terms and vest 20% at each option anniversary date over a five-yearperiod.  All options under the Plan aregranted with an exercise price equal to the stock's fair market value on thedate of grant.  Generally, options havebeen granted based on a percentage of annual compensation.

The table below presents stockoption activity for fiscal year 2001, the first year of the Plan.
   Weighted    average  Number of exercise  shares price     (in 000's)        Outstanding at October 10, 2001- $- Granted1,932 13.41 Exercised- - Forfeited157 12.90 Expired- -    Outstanding at June 30, 20011,775 $13.45    Options exercisable at June 30, 20015 $12.50    
The table below presents additionalinformation about the options outstanding and exercisable at June 30, 2001:
 Outstanding Options Exercisable Options       Weighted Average   Weighted  Number average remaining Number average Range ofof exercise contractual of exercise exercise priceshares price life (years) shares price       (in 000's)     (in 000's)              $ 12.50-$18.751,629 $12.69 6.30 5 $12.50 $ 18.76-$23.50146 21.98 6.80 - -          $ 12.50-$23.501,775     5            
Effective for fiscal years beginningafter December 15, 1995, FAS 123 establishes accounting and reporting standardsfor stock-based compensation plans.  FAS123 encourages entities to use a "fair value based method" inaccounting for employee stock-based compensation plans but allows the"intrinsic value based method" prescribed by APB 25.  The Company has elected to follow APB 25 inaccounting for its employee stock options. Under APB 25, the Company does not record compensation expense on the issuanceof its options because the exercise price of employee stock options equals thestock's fair market value on the date of grant.

As required by FAS 123, the Companyhas determined pro forma net income and earnings per share as if the Companyhad accounted for stock options granted under the fair value method of FAS123.  FAS 123 permits entities torecognize as expense over the vesting period the fair value of all stock-basedawards on the date of the grant.

The Company used the Black-Scholesoption valuation model to calculate the fair value of options.  Using the Black-Scholes model, the weightedaverage fair value of options granted during the year ended June 30, 2001 was$5.26 per option.  The followingassumptions were used in the calculation.
Expected dividend yield0%Volatility40%Risk free interest rate5.79%Expected life4 years 
The table below reflects the proforma effect on net income and earnings per share for fiscal year 2001 if theCompany were to recognize compensation expense under the "fair value basedmethod" of FAS 123.
 As reported Pro forma    Net income$44,436 $43,751 Basic earnings per share1.39 1.36 Diluted earnings per share1.37 1.35 **Redeemable Common Stock*

Prior to ourinitial public offering in October 2000, the value of the Company's redeemablecommon stock was determined by a formula book value per share, which wascalculated on the last day of the preceding year in accordance with our bylaws.At June 30, 2000, the redemption value of outstanding shares was classified asredeemable common stock and not as permanent capital. At June 30, 2000, therewere 14,805,145 shares issued and outstanding at a redemption price of$7.80.  In the permanent stockholders’equity section, the "adjustment for redemption value greater than amountspaid in by shareholders" represents the amount that the redeemable valueexceeded the cost of the stock.

*Stock Plans*

On March 19,2001 the Board of Directors approved the creation of an employee stock purchaseplan for all associates and a restricted stock program for senior associates.The proposed employee stock purchase plan and the restricted stock program willbe implemented for fiscal 2002 subject to approval by a majority ofstockholders at the annual stockholders' meeting currently scheduled forNovember 5, 2001. Management believes that these programs will not diluteearnings per share.

**NOTE 12 - INCOME TAXES**

The provision for income taxes isbased upon reported income before income taxes.  Deferred income tax assets and liabilities reflect the effect oftemporary differences between the assets and liabilities recognized forfinancial reporting purposes and the amounts recognized for income taxpurposes.  The Company recognizesdeferred tax assets if it is more likely than not that a benefit will berealized.

The components of the continuingoperations income tax provision before minority interest and discontinuedoperations include:
 Year Ended  June 30,    2001 2000 1999     Current tax expense:       U.S.$21,441 $5,276 $10,817  State and local5,653 438 4,050  Foreign5,281 6,630 3,877      32,375 12,344 18,744     Deferred tax (benefit)  expense:       U.S.1,010 1,601 (5,776) State and local81 3,231 (1,407) Foreign157 (1,981)(113)     1,248 2,851 (7,296)    Total provision for  income taxes$33,623 $15,195 $11,448     
Current foreign tax expense attributable to income from continuingoperations was net of approximately $167,000, representing the tax benefit of anet operating loss carryover for the year ended June 30, 2001.  The current tax benefit was $180,000 and $0for the years ended June 30, 2000 and 1999, respectively.

Deferredincome tax assets (liabilities) included in the Consolidated Balance Sheets atJune 30, 2001 and June 30, 2000 are comprised of the following:
 June 30,    2001 2000    Change in  accounting method$(31,855)$- Foreign  temporary differences(1,038)(722)    Gross  deferred tax liabilities(32,893)(722)   Cash method  of accounting for U.S. income tax purposes- 2,475 Difference  between book and tax depreciation7,336 4,573 Accrued  retirement benefits34,068 33,817 Deferred  rent2,587 3,804 Foreign  temporary differences4,709 5,125 Foreign net  operating loss carryforwards2,041 1,617 Discontinued  operations exit costs6,351 6,562 Tax credit  carryforwards1,300 1,042 Other accrued  reserves7,811 - Accrued  compensation24,504 - Other204 241     Gross  deferred tax assets90,911 59,256     Deferred tax  assets valuation allowance(5,911)(5,179)    Net deferred  tax asset$52,107 $53,355    
At June 30, 2001 we had foreign tax credit carryforwards for U.S.tax purposes of $1,300,000, which expire in 2002 through 2006.  At June 30, 2001, we had unused losscarryforwards for tax purposes in various jurisdictions outside the U.S. amountingto $6,169,000, of which $3,177,000 can be indefinitely carried forward underlocal statutes.  The remaining foreignloss carryforwards will expire, if unused, in varying amounts from 2002 through2009. The valuation allowance applies to the tax effect of the foreign netoperating loss carryforwards $(2,041,000), the tax effect of certain foreigntemporary expenses $(2,570,000) and foreign tax credit carryovers $(1,300,000)for which realizability is considered uncertain.

The netchange in the valuation allowance of $732,000 in fiscal year 2001 and$(1,703,000) in fiscal year 2000 is due primarily to the tax effect of thechange in realizable foreign tax credits, foreign net operating losses andnon-deductible foreign expenses.

Domestic andforeign components of income before taxes, minority interest and discontinuedoperations for each of the three years ended June 30 are as follows:
 2001 2000 1999     Domestic$64,694 $22,581 $15,203 Foreign13,683 11,262 8,597      $78,377 $33,843 $23,800     
The Companyhas not provided for deferred income taxes on undistributed earnings of foreignsubsidiaries considered permanently invested in these entities.

The reportedincome tax provision for continuing operations differs from the amounts thatwould have resulted had the reported income before income taxes been taxed atthe U.S. federal statutory rate.  Theprincipal reasons for the differences between the actual amounts provided andthose which would have resulted from the application of the U.S. federalstatutory tax rate are as follows:
 Year Ended  June 30,    2001 2000 1999     Tax provision at U.S.  federal statutory tax rate of 35%$27,432 $11,845 $8,330 Increase (reduction)  resulting from:       Foreign income subject to (lower) higher  foreign tax rates(259)432 (377) Tax benefit of foreign  losses reserved, net908 275 881  State income taxes, net  of federal tax effect3,727 2,384 1,207  Non-deductible amortization and other expenses2,317 1,323 849  Tax credits(1,042)(1,282)-  Other540 218 558             Income tax provision$33,623 $15,195 $11,448     
**NOTE 13 - SEGMENT INFORMATION**

During thesecond quarter of fiscal year 2001, we changed the structure of our internalorganization in the manner that caused the composition of our reportablesegments to change.  In order to betterposition the Company to deliver the integrated, global solutions that have thelargest impact on our growth, management consolidated our three U.S. regionsinto a single region.  As a result ofthis consolidation, and because we also use a practice-based matrix form oforganization for our North America Regions, we have changed our reportablesegments to reflect our practice-based structure.  After the change, we have five reportable segments:
(1)Benefits Group(2)HR Technologies Group(3)Human Capital Group(4)International(5)Other (including Data Services and Communications)
The Companyevaluates the performance of its segments and allocates resources to them basedon net operating income.  Prior yeardata has been restated to be consistent with current classifications forcomparative purposes.

The table below presents specified information about reported segments asof and for the year ended June 30, 2001:
   HR Human        Benefits Technologies Capital   All    Group Group Group International Other Total        Revenue (net of reimbursable expenses)$371,518 $95,926 $54,225 $74,240 $71,563 $667,472 Net operating income97,823 23,779 3,807 11,351 5,852 142,612 Interest expense1,865 268 311 23 286 2,753 Depreciation & amortization8,407 2,492 1,447 2,070 2,566 16,982 Receivables87,111 15,109 10,972 17,113 12,941 143,246 
The table below presents specified information about reported segments asof and for the year ended June 30, 2000:
   HR Human        Benefits Technologies Capital   All    Group Group Group International Other Total        Revenue (net of reimbursable expenses)$334,296 $79,675 $49,697 $67,829 $62,129 $593,626 Net operating income80,507 17,812 5,328 10,647 4,791 119,085 Interest expense1,776 456 240 152 296 2,920 Depreciation & amortization8,062 2,381 1,295 1,658 4,201 17,597 Receivables78,623 16,539 11,110 19,243 12,212 137,727 
The table below presents specified information about reported segments asof and for the year ended June 30, 1999:
   HR Human        Benefits Technologies Capital   All    Group Group Group International Other Total        Revenue (net of reimbursable expenses)$307,075 $66,323 $40,992 $55,804 $56,814 $527,008 Net operating income71,115 8,859 (2,992)6,399 4,286 87,667 Interest expense1,631 577 302 115 275 2,900 Depreciation & amortization7,514 2,266 1,298 1,424 4,000 16,502 Receivables77,955 17,979 11,704 16,567 9,375 133,580 
A reconciliation of the information reported by segment to theconsolidated amounts follows for the years ended June 30 (in thousands):
 2001 2000 1999     *Revenue:*      Total segment external and intersegment  revenue$667,472 $593,626 $527,008 Reimbursable expenses not included in  segment revenue32,363 30,829 30,426 Other, net354 128 (574)    Consolidated revenue$700,189 $624,583 $556,860            *Net Operating Income:*      Total segment income$142,612 $119,085 $87,667 Sublease loss- - (341)Income from affiliates4,098 3,116 2,524 Differences in allocation methods from  depreciation, G&A and pension costs(3,683)(3,218)1,277 Gain on sale of business units786 583 2,723 Discretionary bonuses and SIBP (a)(63,326)(81,560)(67,194)IPO-related compensation charge(3,480)- - Other, net1,370 (4,163)(2,856)    Consolidated pretax income from continuing  operations$78,377 $33,843 $23,800            *Interest Expense:*      Total segment expense$2,753 $2,920 $2,900 Differences in allocation method(1,609)(1,044)(254)    Consolidated interest expense$1,144 $1,876 $2,646            *Depreciation & Amortization:*      Total segment expense$16,982 $17,597 $16,502 Capitalized software amortization, not  allocated to segments- - - Goodwill amortization, not allocated to  segments2,550 1,852 1,568 Differences in allocation method and other2,463 (1,571)(2,822)    Consolidated depreciation and amortization  expense$21,995 $17,878 $15,248            *Receivables:*      Total segment receivables$143,246 $137,727 $133,580 Net valuation differences and receivables  of discontinued operations8,344 5,011 2,286     Total billed and unbilled receivables151,590 142,738 135,866 Assets not reported by  segment235,866 187,222 178,094            Consolidated assets$387,456 $329,960 $313,960     aFollowing the initial public offering, we  terminated the SIBP and replaced it with equity-based incentive plans more  customary to publicly-traded companies.
The following represents total revenue and long lived assets informationby geographic area as of and for the years ended June 30:
 Fees Long Lived  Assets     2001 2000 1999 2001 2000 1999                     United States$571,269 $512,826 $464,521 $66,624 $50,772 $53,618 Foreign128,920 111,757 92,339 24,373 29,980 21,451         $700,189 $624,583 $556,860 $90,997 $80,752 $75,069        
Revenue is based on the country ofdomicile for the legal entity which originated the fees.  Exclusive of the United States, fees from nosingle country constituted more than 10% of consolidated revenues.  Fees from no single customer constitutedmore than 10% of consolidated revenues.

**NOTE 14 - DISCONTINUEDOPERATIONS**

During fiscal year 1998, we recorded a pre-tax loss on thediscontinuation of our benefits administration outsourcing business, WellspringResources LLC ("Wellspring").

In fiscalyear 1999, we were able to clarify the remaining future obligations and costsassociated with their discontinuation. As a result, we reduced the amount of our provision for losses fromdisposal of the benefits administration outsourcing business by $15,000,000,less the associated tax expense of $6,322,000. The net credit to income of $8,678,000 is reflected in the ConsolidatedStatement of Operations for fiscal year 1999 in the line "Adjustment ondisposal of discontinued outsourcing business."

Inconjunction with the discontinuation, we agreed to perform certain outsourcingcontracts until their respective contract expirations.  We also agreed to indemnify Wellspring forcertain costs and losses as a result of services provided by Wellspring on ourbehalf.  Further, we were released fromcertain liabilities relating to the Wellspring business.

 **NOTE 15 - RELATED PARTY TRANSACTIONS**

Inconnection with the contractual servicing of the outsourcing contracts (asdiscussed in Note 14), Wellspring provided the services to those clients on ourbehalf.  Our obligation to service theretained clients ceased during fiscal year 1999 and there were no amounts dueto Wellspring at either June 30, 2001 or 2000. Expenses charged to us byWellspring for such services for fiscal 1999 were $11,600,000.

**NOTE 16 -COMMITMENTS AND CONTINGENT LIABILITIES**

We are adefendant in certain lawsuits arising in the normal course of business, some ofwhich are in their earliest stages. Wecarry substantial professional liability insurance with a self-insuredretention of $1 million per occurrence which provides coverage for professionalliability claims including the cost of defending such claims. We also carry employmentpractices liability insurance.  Thereare no such matters currently pending that management believes will have amaterial impact on our financial statements. The Company has provided for the $1 million self-insured retention whereestimated losses in excess of such amount are considered probable.  The actual outcome of any lawsuit does notresult in any additional loss to the Company.

As of June 30, 2001 and 2000, we and our affiliates hadoutstanding letters of credit of $3,017,000 and $2,225,000, respectively.

We continue to guarantee certain leases for office premises andequipment for Wellspring.  Minimumremaining payments guaranteed under these leases at June 30, 2001 total$38,900,000*,* which expire atvarious dates through 2007.  These leasesare also jointly and severally guaranteed by our former partner in Wellspring,State Street Bank and Trust Company. The estimated loss from the potential exercise of these guarantees wasincluded in the loss on disposal of the benefits administration outsourcingbusiness in fiscal year 1998.

**NOTE 17 - EARNINGS PER SHARE**
 Year ended June 30,    2001 2000 1999            Income from continuing operations$44,436 $18,533 $12,135        Discontinued operations:             Adjustment on disposal of discontinued  outsourcing business      (net of applicable income tax expense of $6,322)- - 8,678            Net income$44,436 $18,533 $20,813            Weighted average outstanding shares of  common stock32,068 30,000 30,430 Dilutive effect of employee stock options295 - -            Common stock and stock equivalents32,363 30,000 30,430            Earnings per share, income from continuing  operations:       Basic$1.39 $0.62 $0.40      Diluted$1.37 $0.62 $0.40            Earnings per share, discontinued  operations (net of tax):       Basic$- $- $0.28      Diluted$- $- $0.28            Earnings per share, net income:       Basic$1.39 $0.62 $0.68      Diluted$1.37 $0.62 $0.68     
There were 136,585 outstanding stock options for the year ended June 30,2001 that were not included in the diluted earnings per share calculationbecause their effect would have been antidilutive.

Earnings per share data for the years ended June 30, 2001, 2000 and 1999have been restated to reflect the corporate reorganization and two-for-oneshare conversion as if the corporate reorganization and two-for-one shareconversion were effective at the beginning of each fiscal year.  See Note 2 of the Consolidated FinancialStatements for further information regarding the initial public offering.

**NOTE 18 - QUARTERLY FINANCIALDATA (unaudited)**

Unauditedsummarized financial data by quarter for the years ended June 30, 2001 and 2000is as follows (in thousands, except per share amounts):
 2001 Quarter Ended    September  30 December 31 March 31 June 30               Revenue$170,693 $168,781 $176,345 $184,370 Income from operations22,059 10,655 17,474 22,380 Income before income taxes and minority  interest23,379 11,922 19,242 23,834 Net income$13,335 $6,737 $10,915 $13,449 Earnings per share:         Basic$0.45 $0.21 $0.33 $0.41  Diluted$0.45 $0.20 $0.33 $0.40 
 
 2000 Quarter Ended    September 30 December 31 March 31 June 30               Revenue$146,323 $152,411 $157,502 $168,347 Income from operations10,623 3,289 6,091 10,777 Income before income taxes and minority  interest12,257 3,962 6,373 11,251 Net income$6,356 $2,204 $3,558 $6,415 Earnings per share:         Basic$0.21 $0.07 $0.12 $0.22  Diluted$0.21 $0.07 $0.12 $0.22 
**NOTE 19  - SUBSEQUENT EVENTS (unaudited)**

On August16, we announced the sale of our U.S.-based public sector retirement businessto Gabriel, Roeder, Smith & Company (GRS). The sale includes approximately 120 U.S. public sector retirementclients, representing roughly $6 million in annual revenues.

Simultaneouswith the sale, we have entered into an alliance agreement with GRS under whichwe will mutually refer future business opportunities and explore jointconsulting assignments.  This agreementwill be effective August 31, 2001.

**WATSON WYATT& COMPANY HOLDINGS**

**Schedule IIValuation and Qualifying Accounts and Reserves**(Thousandsof U.S. Dollars)

 
   Additions          Charged Against Additions   Balance at  Balance at (Credited to) Charged to   End of DescriptionBeginning of Year Revenue Other Accounts Deductions Year                     Year Ended June 30, 2001             Allowance for          uncollectible accounts$2,832 $6,608 $- $(6,745)$2,695            Allowance for          unbillable accounts$676 $454 $- $- $1,130            Valuation allowance          for deferred tax assets$5,179 $- $732(1)$- $5,911                          Year Ended June 30, 2000             Allowance for          uncollectible accounts$3,701 $6,458 $- $(7,327)$2,832            Allowance for          unbillable accounts$796 $(120)$- $- $676            Valuation allowance          for deferred tax assets$6,882 $- $(1,703)(2)$- $5,179                          Year Ended June 30, 1999             Allowance for          uncollectible accounts$2,142 $9,503 $- $(7,944)$3,701            Allowance for          unbillable accounts$1,213 $(417)$- $- $796            Valuation allowance          for deferred tax assets$6,271 $- $611(3)$- $6,882 (1)The net increase is  primarily due to the tax effect of the change in realizable foreign tax  credits, foreign net operating loss carryforwards and other foreign temporary  differences.(2)The net decrease is  primarily due to the tax effect of the change in realizable foreign net  operating losses, foreign tax credits, and other foreign temporary  differences.(3)The net increase is  primarily due to the tax effect of the change in realizable net operating  losses, and other foreign temporary differences.
**Item 14(c).  Exhibit Index.**
3.1Amended and Restated Certificate of Incorporation  of Watson Wyatt & Company Holdings13.2Amended and Restated Bylaws of Watson Wyatt  & Company Holdings24Form of Certificate Representing Common Stock110.1Amended Credit Agreement Among Bank of  America, N.A. and Others dated October 6, 2000410.2Consent of Bank of America, N.A. 310.3Agreement with David B. Friend, M.D., dated  October 22, 1999110.4Senior Officer Deferred Compensation Plan310.5Form of agreement among Watson Wyatt &  Company, Watson Wyatt & Company Holdings and employee directors,  executive officers and significant stockholders restricting the transfer of  shares521Subsidiaries of Watson Wyatt & Company  Holdings323Consent of the Company's Independent  Accountants3  1Incorporated by reference from Registrant's Form  S-3/A, Amendment No. 1 (File No. 33-394973), filed on March 17, 20002Incorporated by reference from Registrant's  Form 10-Q, filed on May 2, 20013Filed with this Form 10-K4Incorporated by reference from Registrant's  Form 10-Q, filed on November 14, 20005Incorporated by reference from Registrant's  Form S-3/A, Amendment No. 5 (File No. 33-394973), filed on September 14, 2000
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