**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý****        ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended September30, 2005**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from          to         **

 

**Commission File Number: 001-16159**

 

**WATSON WYATT & COMPANYHOLDINGS**

(Exact name of Registrantas specified in its charter)

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

** **

**901 N. Glebe Road**

**Arlington, VA  22203**

(Address of principalexecutive offices, including zip code)

 

**(703) 258-8000**

(Registrant’s telephonenumber, including area code)

 

 Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days:

 

Yes  ý         No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2). 

 

Yes  ý        No  o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). 

 

Yes  o         No  ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of October 31, 2005.

 
| **Class**                            | ** ** | **Number  of Shares** |
|--------------------------------------|------------|-----------------------|
|                                 |       |                  |
| Class A Common Stock, $.01 par value |       | 42,136,837            |

 

 

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**WATSON WYATT & COMPANYHOLDINGS**

**INDEX TO FORM 10-Q**

 

For the Three monthsEnded September 30, 2005

 
| PART I.        | FINANCIAL INFORMATION                                                                                       |   |
|----------------|-------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                        |   |
| Item 1.        | Financial Statements (Unaudited)                                                                            |   |
|           |                                                                                                        |   |
|           | Consolidated  Statements of Operations—Three months ended September 30, 2005 and 2004                  |   |
|           |                                                                                                        |   |
|           | Consolidated  Balance Sheets—September 30, 2005 and June 30, 2005                                      |   |
|           |                                                                                                        |   |
|           | Consolidated  Statements of Cash Flows—Three months ended September 30, 2005 and 2004                  |   |
|           |                                                                                                        |   |
|           | Consolidated  Statement of Changes in Stockholders’ Equity—Three months ended September 30,  2005 |   |
|           |                                                                                                        |   |
|           | Notes  to the Consolidated Financial Statements                                                             |   |
|           |                                                                                                        |   |
| Item  2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |   |
|           |                                                                                                        |   |
| Item 3.        | Quantitative  and Qualitative Disclosures About Market Risk                                                 |   |
|           |                                                                                                        |   |
| Item 4.        | Controls and  Procedures                                                                                    |   |
|           |                                                                                                        |   |
| PART II.       | OTHER INFORMATION                                                                                           |   |
|           |                                                                                                        |   |
| Item 1.        | Legal Proceedings                                                                                           |   |
|           |                                                                                                        |   |
| Item 2.        | Unregistered  Sales of Equity Securities and Use of Proceeds                                                |   |
|           |                                                                                                        |   |
| Item 3.        | Defaults  Upon Senior Securities                                                                            |   |
|           |                                                                                                        |   |
| Item 4.        | Submission  of Matters to a Vote of Security Holders                                                        |   |
|           |                                                                                                        |   |
| Item 5.        | Other Information                                                                                           |   |
|           |                                                                                                        |   |
| Item  6.       | Exhibits                                                                                                    |   |
|           |                                                                                                        |   |
| Signatures     |                                                                                                        |   |
|           |                                                                                                        |   |
| Certifications |                                                                                                        |   |

 

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**WATSON WYATT & COMPANY HOLDINGS**

**ConsolidatedStatements of Operations**

(Thousandsof U.S. Dollars, Except Per Share Data)

 
| ** **                                                                                                                                     | ** ** | **Three months ended September 30** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                                                                                                     | ** ** | **(Unaudited)**                          | ** ** |
|                                                                                                                                           |       |                                     |       |   |   |
| Revenue                                                                                                                                        |       | $                                        | 265,886    |   | $ | 175,391 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Costs of providing services:                                                                                                                   |       |                                     |       |   |   |
| Salaries and  employee benefits                                                                                                                |       | 147,550                                  |       | 97,076 |   |
| Professional and  subcontracted services                                                                                                       |       | 19,011                                   |       | 11,979 |   |
| Occupancy,  communications and other                                                                                                           |       | 32,853                                   |       | 24,100 |   |
| General and  administrative expenses                                                                                                           |       | 31,389                                   |       | 16,888 |   |
| Depreciation and  amortization                                                                                                                 |       | 9,677                                    |       | 4,683 |   |
|                                                                                                                                           |       | 240,480                                  |       | 154,726 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Income from operations                                                                                                                         |       | 25,406                                   |       | 20,665 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Income from affiliates                                                                                                                         |       | 1,351                                    |       | 2,206 |   |
| Interest (expense)/income, net                                                                                                                 |       | (88                                      | )          | 455 |   |
| Other non-operating (loss)/income                                                                                                              |       | (1,862                                   | )          | 28 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Income from continuing operations before income  taxes                                                                                         |       | 24,807                                   |       | 23,354 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Provision for income taxes                                                                                                                     |       | 10,915                                   |       | 9,603 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Income from continuing operations                                                                                                              |       | 13,892                                   |       | 13,751 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Discontinued operations:                                                                                                                       |       |                                     |       |   |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Sublease income  from discontinued operations, less applicable income tax expense for the  three months ended September 30, 2005 and 2004 |       | 9                                        |       | 2 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Net income                                                                                                                                     |       | $                                        | 13,901     |   | $ | 13,753 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Basic earnings per share:                                                                                                                      |       |                                     |       |   |   |
| Income from  continuing operations                                                                                                             |       | $                                        | 0.36       |   | $ | 0.42 |   |
| Income from  discontinued operations                                                                                                           |       | —                                   |       | — |   |
| Net income                                                                                                                                     |       | $                                        | 0.36       |   | $ | 0.42 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Diluted earnings per share:                                                                                                                    |       |                                     |       |   |   |
| Income from  continuing operations                                                                                                             |       | $                                        | 0.36       |   | $ | 0.42 |   |
| Income from  discontinued operations                                                                                                           |       | —                                   |       | — |   |
| Net income                                                                                                                                     |       | $                                        | 0.36       |   | $ | 0.42 |   |
|                                                                                                                                           |       |                                     |       |   |   |
| Weighted average shares of common stock, basic (000)                                                                                           |       | 38,841                                   |       | 32,358 |   |
| ** **                                                                                                                                     |       |                                     |       |   |   |
| Weighted average shares of common stock, diluted  (000)                                                                                        |       | 39,095                                   |       | 32,679 |   |

 

See accompanying notes totheconsolidated financial statements

 

1

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**WATSON WYATT & COMPANY HOLDINGS**

**ConsolidatedBalance Sheets**

(Thousandsof U.S. Dollars, Except Share and Per Share Data)

 
| ** **                                                                                                 | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                 | ** ** | **2005**               | ** ** | **2005**          | ** ** |
| ** **                                                                                                 | ** ** | **(unaudited)**        | ** ** | ** **        | ** ** |
| **Assets**                                                                                                 | ** ** | ** **             | ** ** | ** **        | ** ** |
| Cash and cash equivalents                                                                                  |       | $                      | 72,188     |              | $          | 168,076 |   |
| Receivables from clients:                                                                                  |       |                   |       |              |       |
| Billed, net of  allowances of $4,765 and $2,114                                                            |       | 160,478                |       | 95,977            |       |
| Unbilled, net of  allowances of $1,980 and $264                                                            |       | 111,128                |       | 62,840            |       |
|                                                                                                       |       | 271,606                |       | 158,817           |       |
| Deferred income taxes                                                                                      |       | 11,312                 |       | 24,718            |       |
| Other current assets                                                                                       |       | 71,880                 |       | 12,599            |       |
| Total current  assets                                                                                      |       | 426,986                |       | 364,210           |       |
|                                                                                                       |       |                   |       |              |       |
| Investment in affiliates                                                                                   |       | 9,420                  |       | 30,857            |       |
| Fixed assets, net                                                                                          |       | 117,479                |       | 94,033            |       |
| Deferred income taxes                                                                                      |       | 117,989                |       | 92,915            |       |
| Goodwill                                                                                                   |       | 309,426                |       | 21,888            |       |
| Intangible assets                                                                                          |       | 185,040                |       | 776               |       |
| Other assets                                                                                               |       | 6,585                  |       | 14,000            |       |
|                                                                                                       |       |                   |       |              |       |
| **Total Assets**                                                                                           |       | $                      | 1,172,925  |              | $          | 618,679 |   |
| ** **                                                                                                 | ** ** | ** **             | ** ** | ** **        | ** ** |
| **Liabilities**                                                                                            | ** ** | ** **             | ** ** | ** **        | ** ** |
| Accounts payable and accrued liabilities, including discretionary  compensation                            |       | $                      | 209,353    |              | $          | 122,621 |   |
| Deferred income taxes                                                                                      |       | —                 |       | 283               |       |
| Income taxes payable                                                                                       |       | 9,669                  |       | 4,648             |       |
| Total current  liabilities                                                                                 |       | 219,022                |       | 127,552           |       |
|                                                                                                       |       |                   |       |              |       |
| Note payable                                                                                               |       | 102,000                |       | —            |       |
| Accrued retirement benefits                                                                                |       | 268,704                |       | 205,029           |       |
| Deferred rent and accrued lease losses                                                                     |       | 19,272                 |       | 18,701            |       |
| Deferred income taxes                                                                                      |       | 347                    |       | 370               |       |
| Other noncurrent liabilities                                                                               |       | 71,495                 |       | 32,824            |       |
|                                                                                                       |       |                   |       |              |       |
| **Total Liabilities**                                                                                      |       | 680,840                |       | 384,476           |       |
|                                                                                                       |       |                   |       |              |       |
| Commitments and contingencies                                                                              |       |                   |       |              |       |
|                                                                                                       |       |                   |       |              |       |
| **Stockholders’ Equity**                                                                              |       |                   |       |              |       |
| Preferred Stock -  No par value:                                                                           |       |                   |       |              |       |
| 1,000,000 shares  authorized; none issued and outstanding                                                  |       | —                 |       | —            |       |
| Class A  Common Stock - $.01 par value:                                                               |       |                   |       |              |       |
| 99,000,000  shares authorized; 42,463,451 and 33,372,880 issued and 42,087,564 and 32,627,226  outstanding |       | 425                    |       | 334               |       |
| Additional  paid-in capital                                                                                |       | 387,213                |       | 147,948           |       |
| Treasury stock,  at cost - 375,887 and 745,654 shares                                                      |       | (9,438                 | )          | (18,705           | )          |
| Retained  earnings                                                                                         |       | 178,820                |       | 168,075           |       |
| Accumulated  other comprehensive loss                                                                      |       | (64,935                | )          | (63,449           | )          |
| **Total Stockholders’ Equity**                                                                        |       | 492,085                |       | 234,203           |       |
|                                                                                                       |       |                   |       |              |       |
| **Total Liabilities and Stockholders’ Equity**                                                        |       | $                      | 1,172,925  |              | $          | 618,679 |   |

 

See accompanying notes to theconsolidated financial statements

 

2

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**WATSON WYATT & COMPANY HOLDINGS**

**ConsolidatedStatements of Cash Flows**

(Thousandsof U.S. Dollars)

 
| ** **                                                                     | ** ** | **Three months ended September 30** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(Unaudited)**                          | ** ** |
| Cash flows (used  in) from operating activities:                               |       |                                     |       |   |   |
| Net income                                                                     |       | $                                        | 13,901     |   | $ | 13,753 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                     |       |   |   |
| Loss on foreign  currency forward contract                                     |       | 3,602                                    |       | — |   |
| Income from  discontinued operations, net of income tax expense                |       | (9                                       | )          | (2 | ) |
| Provision for  doubtful receivables from clients                               |       | 5,832                                    |       | 3,463 |   |
| Depreciation                                                                   |       | 8,157                                    |       | 4,610 |   |
| Amortization of  intangible assets                                             |       | 1,520                                    |       | 73 |   |
| Provision for  deferred income taxes                                           |       | (281                                     | )          | (6,717 | ) |
| Income from  affiliates                                                        |       | (1,351                                   | )          | (2,206 | ) |
| Distributions  from affiliates                                                 |       | 1,639                                    |       | 1,491 |   |
| Other, net                                                                     |       | (1,070                                   | )          | 43 |   |
| Changes in  operating assets and liabilities (net of discontinued operations)  |       |                                     |       |   |   |
| Receivables from  clients                                                      |       | (2,398                                   | )          | (11,110 | ) |
| Other current  assets                                                          |       | (21,919                                  | )          | (13,294 | ) |
| Other assets                                                                   |       | (517                                     | )          | (2,350 | ) |
| Accounts payable  and accrued liabilities                                      |       | (59,265                                  | )          | (28,938 | ) |
| Income taxes  payable                                                          |       | (1,488                                   | )          | (2,013 | ) |
| Accrued  retirement benefits                                                   |       | 8,878                                    |       | 2,976 |   |
| Deferred rent  and accrued lease losses                                        |       | (13                                      | )          | 40 |   |
| Other noncurrent  liabilities                                                  |       | 3,361                                    |       | (1,134 | ) |
| Cash flows (used  in) operating activities:                                    |       | (41,421                                  | )          | (41,315 | ) |
|                                                                           |       |                                     |       |   |   |
| Cash flows (used  in) from investing activities:                               |       |                                     |       |   |   |
| Purchases of  marketable securities                                            |       | —                                   |       | (166,000 | ) |
| Sales and  maturities of marketable securities                                 |       | —                                   |       | 178,200 |   |
| Acquisitions and  contingent consideration payments                            |       | (133,169                                 | )          | (41 | ) |
| Purchases of  fixed assets                                                     |       | (7,823                                   | )          | (4,504 | ) |
| Capitalized  software costs                                                    |       | (8,736                                   | )          | — |   |
| Proceeds from  divestitures                                                    |       | 1,740                                    |       | 28 |   |
| Cash flows (used  in) from investing activities:                               |       | (147,988                                 | )          | 7,683 |   |
|                                                                           |       |                                     |       |   |   |
| Cash flows from  (used in) financing activities                                |       |                                     |       |   |   |
| Borrowings                                                                     |       | 102,000                                  |       | — |   |
| Foreign currency  hedge                                                        |       | (8,405                                   | )          | — |   |
| Dividends paid                                                                 |       | (3,156                                   | )          | (2,424 | ) |
| Repurchases of  common stock                                                   |       | —                                   |       | (4,188 | ) |
| Issuances of  common stock - exercises of stock options                        |       | 356                                      |       | 424 |   |
| Issuances of  common stock - employee stock purchase plan                      |       | 1,647                                    |       | 1,793 |   |
| Cash flows from  (used in) financing activities                                |       | 92,442                                   |       | (4,395 | ) |
|                                                                           |       |                                     |       |   |   |
| Effect of  exchange rates on cash                                              |       | 1,079                                    |       | 412 |   |
|                                                                           |       |                                     |       |   |   |
| Decrease in cash  and cash equivalents                                         |       | (95,888                                  | )          | (37,615 | ) |
|                                                                           |       |                                     |       |   |   |
| Cash and cash  equivalents at beginning of period                              |       | 168,076                                  |       | 136,940 |   |
|                                                                           |       |                                     |       |   |   |
| Cash and cash  equivalents at end of period                                    |       | $                                        | 72,188     |   | $ | 99,325 |   |

 

See accompanying notes totheconsolidated financial statements

 

3

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**WATSONWYATT & COMPANY HOLDINGS**

 

**ConsolidatedStatement of Changes in Stockholders’ Equity**

(Thousandsof U.S. Dollars)

 
| ** **                                                       | ** ** | **Class A** | ** ** | ** **       | ** ** | ** **     | ** ** | ** **   | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------------|------------|------------------|------------|----------------|------------|--------------|------------|------------------|------------|-------------------|------------|------------|------------|
| ** **                                                       | ** ** | **Common**       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **   | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Stock**        | ** ** | ** **       | ** ** | ** **     | ** ** | ** **   | ** ** | **Retained**     | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Outstanding**  | ** ** | **Class A** | ** ** | **Additional** | ** ** | **Treasury** | ** ** | **Earnings**     | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **(number of**   | ** ** | **Common**       | ** ** | **Paid-in**    | ** ** | **Stock,**   | ** ** | **(Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **shares)**      | ** ** | **Stock**        | ** ** | **Capital**    | ** ** | **at Cost**  | ** ** | **Deficit)**     | ** ** | **(Loss)/Income** | ** ** | **Total**  | ** ** |
|                                                             |       |             |       |             |       |           |       |         |       |             |       |              |       |       |       |
| Balance at  June 30, 2005                                   |       | 32,627           |       | $                | 334        |           | $          | 147,948      |       | $                | (18,705    | )                 | $          | 168,075    |       | $ | (63,449 | ) | $ | 234,203 |   |
|                                                             |       |             |       |             |       |           |       |         |       |             |       |              |       |       |       |
| Comprehensive  income:                                           |       |             |       |             |       |           |       |         |       |             |       |              |       |       |       |
| Net income                                                       |       |             |       |             |       |           |       |         |       | 13,901           |       |              |       | 13,901     |       |
| Additional  minimum pension liability                            |       |             |       |             |       |           |       |         |       |             |       | 60                |       | 60         |       |
| Foreign currency  translation adjustment                         |       |             |       |             |       |           |       |         |       |             |       | (1,546            | )          | (1,546     | )          |
| Total  comprehensive income                                      |       |             |       |             |       |           |       |         |       |             |       |              |       | 12,415     |       |
| Cash dividends  declared                                         |       |             |       |             |       |           |       |         |       | (3,156           | )          |              |       | (3,156     | )          |
| Issuances of  common stock - employee stock purchase plan shares |       | 64               |       |             |       | 51             |       | 1,596        |       |             |       |              |       | 1,647      |       |
| Issuances of  common stock - deferred stock units                |       | 177              |       |             |       | 329            |       | 4,448        |       |             |       |              |       | 4,777      |       |
| Issuances of  common stock to outside directors                  |       | 9                |       |             |       | 4              |       | 211          |       |             |       |              |       | 215        |       |
| Issuances of  common stock - stock options                       |       | 27               |       |             |       | (328           | )          | 684          |       |             |       |              |       | 356        |       |
| Acquisition of  WWLLP                                            |       | 9,091            |       | 91               |       | 238,627        |       |         |       |             |       |              |       | 238,718    |       |
| Other business  acquisition                                      |       | 93               |       |             |       | 172            |       | 2,328        |       |             |       |              |       | 2,500      |       |
| Non-qualified  stock option expense                              |       |             |       |             |       | 218            |       |         |       |             |       |              |       | 218        |       |
| Tax benefit of  exercises of stock options                       |       |             |       |             |       | 192            |       |         |       |             |       |              |       | 192        |       |
|                                                             |       |             |       |             |       |           |       |         |       |             |       |              |       |       |       |
| Balance at  September 30, 2005                              |       | 42,088           |       | $                | 425        |           | $          | 387,213      |       | $                | (9,438     | )                 | $          | 178,820    |       | $ | (64,935 | ) | $ | 492,085 |   |

 

See accompanying notes totheconsolidated financial statements

 

4

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**WATSON WYATT & COMPANYHOLDINGS**

 

**Notes to the ConsolidatedFinancial Statements**(Tabular amounts are in thousands, except per share data)

(Unaudited)

 

**Note 1 – Basis of Presentation.**

 

The accompanying unaudited quarterly consolidated financial statementsof Watson Wyatt & Company Holdings and our subsidiaries (collectivelyreferred to as “we,” “Watson Wyatt,” “Watson Wyatt & Company” or the “company”)are presented in accordance with the rules and regulations of the Securitiesand Exchange Commission (“SEC”) for quarterly reports on Form 10-Q.  In the opinion of management, these financialstatements reflect all adjustments, consisting only of normal recurringadjustments, which are necessary for a fair presentation of the consolidatedfinancial statements for the interim periods. The consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto contained inthe company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005,which is filed with the SEC and may be accessed via EDGAR on the SEC’s web siteat www.sec.gov.

 

The results of operations for the three months ended September 30, 2005are not necessarily indicative of the results that can be expected for theentire fiscal year ending June 30, 2006. The results reflect certain estimates, including estimated bonuses andanticipated tax liabilities.

 

**Note 2 – Revision in the Classification of CertainSecurities.**

 

As of the end of the third quarter of fiscal year 2005, in connectionwith recent interpretations regarding the classification of auction ratesecurities, the company concluded that it was appropriate to classify itsauction rate securities as marketable securities instead of cash and cashequivalents, which was the historical classification.  Auction rate securities are investments thatare typically backed by preferred stock or long-term, variable-rate debtinstruments whose interest rates are reset at predetermined short-termintervals through an auction process.

 

At September 30, 2005 and June 30, 2005, the company had no auctionrate securities classified as available-for-sale short-term investments,compared to $20.0 million at June 30, 2004 and $7.8 million at September 30,2004.  Accordingly, the company hasrevised the Consolidated Statements of Cash Flows for the first quarter offiscal year 2005 to reflect the gross purchases of $166.0 million and sales andmaturities of these securities of $178.2 million as cash flows from/used ininvesting activities, rather than as a component of cash and cashequivalents.  This change inclassification does not affect cash flows from operations or financingactivities in the company’s previously reported Consolidated Statements of CashFlows.  This change in classificationdoes not affect the company’s Consolidated Statements of Operations orConsolidated Balance Sheets for any period presented.

 

**Note 3 – Business Combination.**

 

On April 18, 2005,the company announced the signing of a definitive agreement to acquiresubstantially all of the assets and certain liabilities of Watson Wyatt LLP (“WWLLP”),a leading United Kingdom-based actuarial, benefits and human resourcesconsulting partnership.  The company andWWLLP had jointly offered services since 1995 pursuant to alliance agreementsand as a result, have business segments that are very similar in nature.  See Note 4 for further information regarding theoperating segments of the combined company.

 

On July 31, 2005,after obtaining regulatory, governmental, and stockholder approvals, thecombination was completed and WWLLP’s operations were assumed by the company’sprincipal U.K. subsidiary, Watson Wyatt Limited, thereby strengthening WatsonWyatt’s global market presence. The purchase

 

5

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price of $432.6 millionconsisted of £88.3 million in cash, or $156.1 million at the exchange rate ineffect at August 1, 2005, the issuance of 9,090,571 shares of the company’scommon stock valued at $238.7 million, transaction costs of $14.6 million andadditional consideration including debt forgiveness and investment elimination. The shares paid were valued at $26.26per share, the average market price of the company’s stock over the two-dayperiod before and after the terms of the acquisition were agreed to and announcedon January 18, 2005.  In addition, afurther 1,950,000 shares may be paid after June 30, 2007, contingent upon theachievement by the acquired business of certain agreed-upon financialperformance goals.  Watson Wyatt Limited’sresults of operations are included in the consolidated financial statementsbeginning August 1, 2005.

 

*Accountingand Goodwill Allocation*

 

The businesscombination has been accounted for using the purchase method of accounting asprescribed in Statement of Financial Accounting Standards Board No. 141, “BusinessCombinations” (SFAS 141), where the assets acquired and liabilities assumed arerecorded at their respective fair values as of the combination date.  As of the date of combination, the companydetermined the following estimated fair values for the proportionate assetspurchased and liabilities assumed.  Thedetermination of estimated fair value requires management to make significantestimates and assumptions. The company hired an independent third party toassist in the valuation of assets. Although the company does not anticipate any significant adjustments, tothe extent that the estimates used need to be refined, the company will do soupon making that determination but not later than one year from the date ofcombination.

 
| ** **                               | ** ** | **August 1, 2005** | ** ** |
|------------------------------------------|------------|--------------------|------------|
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Total purchase  price                    |       |               |       | $ | 432,618 |   |
| Less net assets  acquired:               |       |               |       |   |   |
| Trademark and  trade name                |       | $                  | 108,000    |   |   |   |
| Customer related  intangibles            |       | 60,600             |       |   |   |
| Core/developed  technology               |       | 17,500             |       |   |   |
| Cash and cash  equivalents               |       | 26,419             |       |   |   |
| Client  receivables and unbilled revenue |       | 94,324             |       |   |   |
| Other current  assets                    |       | 40,892             |       |   |   |
| Fixed assets                             |       | 11,270             |       |   |   |
| Other assets                             |       | 3,368              |       |   |   |
| Current  liabilities                     |       | (138,126           | )          |   |   |
| Accrued  retirement benefits             |       | (43,064            | )          |   |   |
| Other non  current liabilities           |       | (29,240            | )          |   |   |
|                                     |       |               |       | 151,943 |   |
| Preliminary  allocation of goodwill      |       |               |       | $ | 280,675 |   |
|                                          |            |                    |            |  |  |  |  |

 

The preliminaryallocation of the purchase price resulted in the allocation of $280.7 million togoodwill, which has been assigned to our segments as follows:

 
| ** **                                   | ** ** | **Goodwill** | ** ** |
|----------------------------------------------|------------|--------------|------------|
| Benefits                                     |       | $            | 135,543    |   |
| Technology and Administrative Services Group |       | 39,940       |       |
| Human Capital Group                          |       | 16,032       |       |
| Insurance & Financial Services Group     |       | 37,127       |       |
| Investment Consulting Group                  |       | 52,033       |       |
| Allocation of goodwill to business segments  |       | $            | 280,675    |   |

 

The majority of thegoodwill will be deductible in the U.S. and the U.K.

 

6

----

 

*HedgeTreatment*

 

During the thirdquarter of fiscal year 2005, the company entered into a foreign currencyforward contract to offset the risk associated with the foreign exchange (BritishPound) exposure inherent in the combination. The forward contract provides for the purchase of £88 million at a fixedprice of $164.5 million, with a settlement date of July 29, 2005.  In accordance with Statement of FinancialAccounting Standards Board No. 133, “Accounting for Derivative Instruments andHedging Activities” (SFAS 133), as amended and interpreted, since the forwardcontract is associated with a business combination that is subject to theprovisions of SFAS 141 and the combination involves an equity methodinvestment, the forward contract does not qualify for hedge accounting.  As a result, changes in fair value associatedwith the forward contract are required to be recognized in the currentConsolidated Statement of Operations.  Consequently,a loss of $3.6 million has been recognized during the first quarter of fiscalyear 2006 and included in other non-operating income.  Losses recognized under this forward contractsince inception of the contract total $8.4 million.

 

*Pro FormaFinancial Information*

 

The followingunaudited pro forma combined statements of operations have been provided topresent illustrative combined unaudited statements of operations for the threemonth periods ended September 30, 2005 and 2004, giving effect to thecombination as if it had been completed on July 1, 2005 and 2004, respectively.  The unaudited pro forma combined statement ofoperations for the three month period ended September 30, 2004 combines thehistorical financial results of Watson Wyatt for the three months endedSeptember 30, 2004 with the pro forma historical financial results from WWLLPfor the three months ended September 30, 2004.

 

The unaudited proforma combined financial information shows the impact of the combination withWWLLP on Watson Wyatt’s historical results of operations.  The unaudited pro forma combined incomestatements are presented for illustrative purposes only and are not indicativeof the results of operations that might have occurred had the combinationactually taken place as of the dates specified, or that may be expected tooccur in the future.  They do not assumeany benefits from any cost savings or synergies and do not reflect anyintegration costs that the combined company realized or incurred after the combination.

 

7

----

 

**Pro-Forma Combined Statements of Operations**

(in thousands, except per share data)

 
| ** **                                              | ** ** | **Three Months Ended September 30** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(Unaudited)**                     | ** ** |
|                                                    |       |                                |       |   |   |
| Revenue                                                 |       | $                                   | 302,805    |   | $ | 284,793 |   |
|                                                    |       |                                |       |   |   |
| Costs of providing services:                            |       |                                |       |   |   |
| Salaries and  employee benefits                         |       | 171,592                             |       | 165,451 |   |
| Professional and  subcontracted services                |       | 20,202                              |       | 16,116 |   |
| Occupancy,  communications and other                    |       | 36,043                              |       | 34,084 |   |
| General and  administrative expenses                    |       | 37,987                              |       | 35,625 |   |
| Depreciation and  amortization                          |       | 11,101                              |       | 9,170 |   |
|                                                    |       | 276,925                             |       | 260,446 |   |
|                                                    |       |                                |       |   |   |
| Income from operations                                  |       | 25,880                              |       | 24,347 |   |
| Income from affiliates                                  |       | 859                                 |       | 340 |   |
| Interest expense, net                                   |       | (501                                | )          | (723 | ) |
| Other non-operating income                              |       | (1,862                              | )          | 28 |   |
|                                                    |       |                                |       |   |   |
| Income from continuing operations before income  taxes  |       | 24,376                              |       | 23,992 |   |
| Provision for income taxes                              |       | 10,726                              |       | 9,861 |   |
|                                                    |       |                                |       |   |   |
| Income from continuing operations                       |       | $                                   | 13,651     |   | $ | 14,131 |   |
|                                                    |       |                                |       |   |   |
| Basic earnings per share:                               |       | $                                   | 0.33       |   | $ | 0.34 |   |
| Diluted earnings per share:                             |       | $                                   | 0.32       |   | $ | 0.34 |   |
|                                                    |       |                                |       |   |   |
| Weighted average shares of common stock, basic (000)    |       | 41,871                              |       | 41,449 |   |
| Weighted average shares of common stock, diluted  (000) |       | 42,125                              |       | 41,770 |   |

 

8

----

 

**Note 4 – Segment Information.**

 

In North America and Europe, the company is primarily organized andmanaged by practice.  Although ourconsultants in our Asia Pacific and Latin America offices provide services inthese same practice areas, their operations as a whole are managedgeographically and comprise a single operating segment.  As a result, we have seven reportableoperating segments or practice areas as follows:

 
| (1) |   | Benefits Group                                                  |
|-----|--------|-----------------------------------------------------------------|
| (2) |   | Technology and Administrative Services Group                    |
| (3) |   | Human Capital Group                                             |
| (4) |   | Insurance & Financial Services Group                        |
| (5) |   | Investment Consulting Group                                     |
| (6) |   | International – Comprising Asia Pacific and Latin  America |
| (7) |   | Other (including Communication)                                 |

 

The company evaluates the performance of its segments and allocatesresources to them based on net operating income on a pre-bonus, pre-tax basis.

 

The table below presents specified information about reported segmentsas of and for the three months ended September 30, 2005.  As a result, it includes the consolidatedresults from Watson Wyatt Limited since August 1, 2005:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administrative  Services  Group** | ** ** | **Human  Capital  Group** | ** ** | **Insurance  & Financial  Services Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Asia  Pacific/  Latin America** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------------------------------|------------|---------------------------|------------|------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|-----------|------------|-----------|------------|
|                                    |       |                |       |                                                 |       |                      |       |                                           |       |                              |       |                              |       |      |       |      |       |
| Revenue (net of  reimbursable expenses) |       | $                   | 148,695    |                                                 | $          | 24,707                    |       | $                                              | 23,392     |                              | $          | 15,253                            |       | $         | 13,344     |      | $          | 21,471 |   | $ | 10,927 |   | $ | 257,789 |   |
| Net operating  income (loss)            |       | 37,791              |       | 952                                                  |       | 3,327                     |       | 2,662                                          |       | 1,661                             |       | (982                              | )          | 629       |       | 46,040    |       |
| Receivables                             |       | 166,971             |       | 14,614                                               |       | 23,931                    |       | 19,907                                         |       | 11,768                            |       | 20,175                            |       | 9,585     |       | 266,951   |       |
|                                         |            |                     |            |                                                      |            |                           |            |                                                |            |                                   |            |                                   |            |           |            |           |            |  |  |  |  |  |  |  |  |

 

The table below presents specified information about reported segmentsas of and for the three months ended September 30, 2004.  As a result, it does not include results fromWatson Wyatt Limited since the combination was not completed until July 31,2005:  

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administrative  Services  Group** | ** ** | **Human  Capital  Group** | ** ** | **Insurance  &  Financial  Services  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Asia  Pacific/  Latin America** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|------------------------------------------------------|------------|---------------------------|------------|--------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|-----------|------------|-----------|------------|
|                                    |       |                |       |                                                 |       |                      |       |                                             |       |                              |       |                              |       |      |       |      |       |
| Revenue (net of  reimbursable expenses) |       | $                   | 100,886    |                                                 | $          | 17,182                    |       | $                                                | 13,062     |                              | $          | —                            |       | $         | 4,025      |      | $          | 21,053 |   | $ | 11,510 |   | $ | 167,718 |   |
| Net operating  income                   |       | 23,231              |       | 2,726                                                |       | 2,967                     |       | —                                           |       | 60                                |       | 618                               |       | 2,399     |       | 32,001    |       |
| Receivables                             |       | 107,766             |       | 8,959                                                |       | 13,284                    |       | —                                           |       | 3,928                             |       | 17,455                            |       | 3,953     |       | 155,345   |       |
|                                         |            |                     |            |                                                      |            |                           |            |                                                  |            |                                   |            |                                   |            |           |            |           |            |  |  |  |  |  |  |  |  |

 

9

----

 

Information about interest income and tax expense is not presented as asegment expense because such items are not considered a responsibility of thesegments’ operating management.  Prioryear data has been restated to be consistent with current classifications forcomparative purposes.

 

Reconciliations of the information reported by segment to the historicalconsolidated amounts follow for the three month periods ended September 30,2005 and 2004:

 
| ** **                                                                                 | ** ** | **Three Months Ended September 30** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                                                                       |       |                                |       |   |   |
| Revenue:                                                                                   |       |                                |       |   |   |
| Total segment  revenue                                                                     |       | $                                   | 257,789    |   | $ | 167,718 |   |
| Reimbursable  expenses not included in total segment revenue                               |       | 8,934                               |       | 8,241 |   |
| Other, net                                                                                 |       | (837                                | )          | (568 | ) |
| Consolidated  revenue                                                                      |       | $                                   | 265,886    |   | $ | 175,391 |   |
|                                                                                       |       |                                |       |   |   |
| Net Operating  Income:                                                                     |       |                                |       |   |   |
| Total segment  net operating income                                                        |       | $                                   | 46,040     |   | $ | 32,001 |   |
| Income from  affiliates                                                                    |       | 1,351                               |       | 2,206 |   |
| Differences in  allocation methods for depreciation, G&A, medical and pension costs(1) |       | (514                                | )          | (1,300 | ) |
| Gain on sale of  business units                                                            |       | 1,740                               |       | 28 |   |
| Loss on hedge                                                                              |       | (3,602                              | )          | — |   |
| Discretionary  compensation                                                                |       | (21,320                             | )          | (11,000 | ) |
| Other, net                                                                                 |       | 1,112                               |       | 1,419 |   |
| Consolidated  income before income taxes                                                   |       | $                                   | 24,807     |   | $ | 23,354 |   |
|                                                                                       |       |                                |       |   |   |
| Receivables:                                                                               |       |                                |       |   |   |
| Total segment  receivables - billed and unbilled                                           |       | $                                   | 266,951    |   | $ | 155,345 |   |
| Net valuation  differences(2)                                                              |       | 4,655                               |       | 2,137 |   |
| Total billed and  unbilled receivables                                                     |       | 271,606                             |       | 157,482 |   |
| Assets not  reported by segment(3)                                                         |       | 901,319                             |       | 335,551 |   |
| Consolidated  assets                                                                       |       | $                                   | 1,172,925  |   | $ | 493,033 |   |

 

----

(1) Depreciation, general and administrative,pension, and medical costs are allocated to our segments based on budgetedexpenses determined at the beginning of the fiscal year as management believesthat these costs are largely uncontrollable to the segment.  To the extent that the actual expense baseupon which allocations are made differs from the forecast/budget amount, areconciling item will be created between internally allocated expenses and theactual expense that we report for GAAP purposes.

 

(2) Total segment receivables, which reflectsthe receivable balances used by management to make business decisions, areincluded for management reporting purposes net of deferred revenues – cashcollections and invoices generated in excess of revenue recognized in thesegment revenues and cash held in suspense.

 

(3) Assets not reported by segment formanagement reporting purposes include goodwill and intangible assets of $496.4 million.

 

10

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**Note 5 – Share-based Compensation.**

 

In December 2004, the Financial AccountingStandards Board (FASB) published revisions to Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123R).  SFAS 123(R) requires companies to account forshare-based payment transactions with employees using a fair-value basedmethod, thereby eliminating the disclosure-only provisions of SFAS 123. SFAS 123(R) became effective for the company as of July 1, 2005.

 

The company has four share-based compensationplans, which are described below.  Thesecompensation plans include the 2001 Employee Stock Purchase Plan, the 2001Deferred Stock Unit Plan for Selected Employees, the Compensation Plan forOutside Directors and the 2000 Long-Term Incentive Plan.  All four plans have been approved bystockholders.

 

*2001 Employee Stock Purchase Plan*

 

The employee stock purchase plan enables employeesto purchase shares of the company’s stock. No compensation expense is recognized as a result of this plan.

 

##### *2001 Deferred Stock Unit Plan for Selected Employees*

##### * *

The 2001 Deferred Stock Unit Plan forSelected Employees is intended to provide selected associates of the companywith additional incentives by permitting the company to grant them an equityinterest in the company in the form of restricted stock units, in lieu of aportion of their annual fiscal year end bonus.  During the first quarter of fiscal year 2006,177,300 shares of common stock, at a market price of $26.94 were awarded for atotal fair value of $4.8 million.  Duringthe first quarter of fiscal year 2005, 151,610 shares of common stock, at amarket price of $26.68 were awarded, for a total fair value of $4.0 million.

 

The Board of Directors of the company also approveda new long-term bonus arrangement pursuant to the company’s 2001 Deferred StockUnit Plan for Selected Employees.  The new arrangement, called thePerformance Share Bonus Incentive Program (the “SBI Program”), is a long-termstock bonus arrangement for senior executives of the company and its affiliatesthat is designed to strengthen incentives and align behaviors to grow thebusiness in a way that is consistent with the strategic goals of the company.

 

Incentives under the SBI Program are providedthrough grants of deferred stock units pursuant to the company’s 2001 DeferredStock Unit Plan for Selected Employees.  Grants of deferred stock unitsare based on the value of the cash portion of the eligible participant’s fiscalyear-end bonus target and a multiplier, which is then converted into a targetnumber of deferred stock units based upon the company’s stock price as of thefiscal year-end prior to grant.  Participants may vest between zero and170% of the target number of deferred stock units based on the extent to whichfinancial and strategic performance metrics are achieved over a three fiscalyear period.  The financial and strategic performance metrics are establishedat the beginning of each performance period.  For the fiscal 2004 through2007 performance period, the vesting criteria are based upon earnings per sharegrowth, market penetration and cross-selling ratios.

 

No compensation expense was recorded pursuantto this plan for the first quarter of fiscal year 2006.  Expenses for this plan will be recognizedwhen awards are both probable and reasonably estimable.  If applicable, compensation expense will berecognized as a component of the discretionary annual bonus recorded insalaries and employee benefits.

 

11

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##### *Compensation Plan for Outside Directors*

##### * *

The Compensation Plan for Outside Directors(the “Outside Director’s Plan”) provides for the cash and stock compensation ofoutside Directors.  Under the Outside Director’sPlan, outside Directors are initially paid in shares of the company’s commonstock, or in a combination of cash and shares, quarterly for services providedduring the preceding quarter.  Approximately$0.2 million of compensation expense was recorded relative to this plan duringthe first quarter of fiscal year 2006 compared to $50,000 in the first quarter fiscalyear 2005.

 

##### *2000 Long-Term Incentive Plan*

##### * *

The company issued non-qualified stock optionsunder the 2000 Long-Term Incentive Plan (the “Stock Option Plan”) inconjunction with its initial public offering. No options have been granted under the stock option plan since fiscalyear 2001 and the company does not currently intend to issue further stockoptions under the Stock Option Plan.  Forthe first quarter of fiscal year 2006, the company recognized $0.2 million incompensation expense related to the Stock Option Plan, in accordance with SFAS123(R).  For the first quarter of fiscalyear 2005, the company disclosed pro forma compensation cost of $0.3 million,related to the Stock Option Plan.

 

**Note 6 –Retirement Benefits.**

 

*DefinedBenefit Plans*

 

We sponsor both qualified and non-qualified, non-contributory definedbenefit pension plans covering substantially all of our associates.  Under our plans in North America and HongKong, benefits are based on the number of years of service and the associates’compensation during the five highest paid consecutive years of service.  The non-qualified plan, included only inNorth America, provides for pension benefits that would be covered under thequalified plan but are limited by the Internal Revenue Code.  The non-qualified plan has no assets andtherefore is an unfunded arrangement. The benefit liability is reflected on the balance sheet.  The measurement date for the plans is June30.

 

As a result of the business combination described in Note 3, we haveincluded the defined benefit pension plan disclosures for our newly acquired U.K.operations.  The disclosures for thisplan, along with our historical U.K. plan, are shown separately because theamounts are significant relative to all plans and the assumptions used aresignificantly different than all other plans. Under our plans in the U.K., benefitsare based on the number of years of service and the associates’ compensationduring the three years before leaving the plan. The measurement date for theplan is July 31.

 

12

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*Componentsof Net Periodic Benefit Cost for Defined Benefit Pension Plans*

 

The followingtable sets forth the components of net periodic benefit cost for the company’sdefined benefit pension plan for North America and Hong Kong for the threemonth periods ended September 30, 2005 and 2004, and for the newly acquired U.K.defined benefit pension plan for the two months ended September 30, 2005:

 
| ** **                            | ** ** | **North America  & Hong Kong** | ** ** | **U.K.** | ** ** | **Total** | ** ** | **North America  & Hong Kong** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|----------|------------|-----------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2005**                           | ** ** | **2005** | ** ** | **2005**  | ** ** | **2004**                           | ** ** |
|                                  |       |                               |       |     |       |      |       |                               |       |
| Service Cost                          |       | $                                  | 7,382      |     | $          | 2,090     |       | $                                  | 9,472      |   | $ | 6,439 |   |
|                                  |       |                               |       |     |       |      |       |                               |       |
| Interest Cost                         |       | 9,177                              |       | 2,445    |       | 11,622    |       | 8,744                              |       |
|                                  |       |                               |       |     |       |      |       |                               |       |
| Expected return on plan assets        |       | (11,135                            | )          | (2,309   | )          | (13,444   | )          | (10,138                            | )          |
|                                  |       |                               |       |     |       |      |       |                               |       |
| Amortization of transition obligation |       | (2                                 | )          | —   |       | (2        | )          | (1                                 | )          |
|                                  |       |                               |       |     |       |      |       |                               |       |
| Amortization of net loss              |       | 3,776                              |       | —   |       | 3,776     |       | 1,737                              |       |
|                                  |       |                               |       |     |       |      |       |                               |       |
| Amortization of prior service cost    |       | (412                               | )          | —   |       | (412      | )          | (541                               | )          |
|                                  |       |                               |       |     |       |      |       |                               |       |
| Net periodic benefit cost             |       | $                                  | 8,786      |     | $          | 2,226     |       | $                                  | 11,012     |   | $ | 6,240 |   |

 

The fiscal year 2006 net periodic benefit cost is based, in part, onthe following rate assumptions as of June 30, 2005 for the North America andHong Kong plans and July 31, 2005 for the U.K. plans:

 
| ** **                                  | ** ** | **North America  & Hong Kong** | ** ** | **U.K.** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|----------|------------|
| Discount rate                               |       | 5.25                               | %          | 5.00     | %          |
|                                        |       |                               |       |     |       |
| Expected long-term rate of return on assets |       | 9.00                               | %          | 5.63     | %          |
|                                        |       |                               |       |     |       |
| Rate of increase in compensation levels     |       | 3.34                               | %          | 4.75     | %          |

 

*Employer contributions*

 

The company made $800,000 in contributions to the North America andHong Kong plans during the first quarter of fiscal year 2006 and anticipatesmaking $12.4 million in contributions over the remainder of the fiscal year.

 

The company made $1.5 million in contributions to the U.K. plans duringthe first quarter of fiscal year 2006 and anticipates making $8.3 million incontributions over the remainder of the fiscal year.

 

*Defined Contribution Plans*

 

In the U.S., wesponsor a savings plan that provides benefits to substantially all U.S.associates. Effective July 1, 2004, the company reinstituted a match toemployee contributions at a rate of 50 percent of the first 6 percent up to$60,000 of associates’ eligible compensation. The company may also make an annual profit sharing contribution to theplan in an amount that is dependant upon the company’s financial performanceduring the fiscal year.

 

13

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In the U.K., wesponsor a savings plan that provides benefits to substantially all U.K.associates.  The company provides a basiccontribution and a match to employee contributions both of which depend onage.  The maximum employer contributionis 10% up to $161,000.

 

*HealthCare Benefits*

 

In the U.S., wesponsor a contributory health care plan that provides hospitalization, medicaland dental benefits to substantially all U.S. associates.  We accrue a liability for estimated incurredbut unreported claims based on projected use of the plan as well as prior planhistory.

 

In the U.K., wesponsor a non-contributory medical insurance plan that provides hospitalizationand medical benefits and a contributory dental plan that provides dentalbenefits to substantially all U.K. associates.

 

*PostretirementBenefits*

 

We provide certainhealth 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 principalpost-retirement benefit plans are unfunded. We accrue a liability for these benefits.

 

*Componentsof Net Periodic Benefit Cost for Other Postretirement Plans*

 

The followingtable sets forth the components of net periodic benefit cost for the company’shealthcare and post-retirement plans for the three months ended September 30,2005 and 2004:

 
| ** **                            | ** ** | **Three Months Ended September 30** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                  |       |                                |       |   |   |
| Service cost                          |       | $                                   | 452        |   | $ | 413 |   |
| Interest cost                         |       | 603                                 |       | 605 |   |
| Expected return on plan assets        |       | —                              |       | — |   |
| Amortization of transition obligation |       | —                              |       | 12 |   |
| Amortization of net gain              |       | (82                                 | )          | (143 | ) |
| Amortization of prior service cost    |       | (165                                | )          | (105 | ) |
| Net periodic benefit cost             |       | $                                   | 808        |   | $ | 782 |   |

 

*Employer contributions*

 

The company made contributions in the form of premiums and medicalclaim payments to its healthcare and post-retirement plans of $1.1 million and$800,000 in the three months ended September 30, 2005 and 2004, respectively.  We plan to make additional payments estimatedto total $2.8 million through the end of June 30, 2006.

 

14

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**Note 7 -Goodwill & Intangible Assets.**

 

The increases in goodwill and intangible assets outlined below for thethree months ended September 30, 2005 are principally attributable to theacquisition of WWLLP during the quarter. See Note 3 for further details regarding the acquisition.   

 
| ** **                         | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administrative  Services  Group** | ** ** | **Human  Capital  Group** | ** ** | **Insurance &  Financial  Services  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Asia Pacific/  Latin  America** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------------------|------------|------------------------------------------------------|------------|---------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|-----------|------------|-----------|------------|
|                               |       |                |       |                                                 |       |                      |       |                                            |       |                              |       |                              |       |      |       |      |       |
| Balance as of  June 30, 2005       |       | $                   | 16,790     |                                                 | $          | 1,449                     |       | $                                               | 77         |                              | $          | —                            |       | $         | —     |      | $          | 2,358 |   | $ | 1,214 |   | $ | 21,888 |   |
|                               |       |                |       |                                                 |       |                      |       |                                            |       |                              |       |                              |       |      |       |      |       |
| Goodwill  acquired during the year |       | 142,866             |       | 39,856                                               |       | 15,998                    |       | 51,925                                          |       | 37,049                            |       | 136                               |       | —    |       | 287,830   |       |
|                               |       |                |       |                                                 |       |                      |       |                                            |       |                              |       |                              |       |      |       |      |       |
| Impairment  losses                 |       | —              |       | —                                               |       | —                    |       | —                                          |       | —                            |       | —                            |       | —    |       | —    |       |
|                               |       |                |       |                                                 |       |                      |       |                                            |       |                              |       |                              |       |      |       |      |       |
| Translation  adjustment            |       | (8                  | )          | (92                                                  | )          | (32                       | )          | (121                                            | )          | (85                               | )          | 46                                |       | —    |       | (292      | )          |
|                               |       |                |       |                                                 |       |                      |       |                                            |       |                              |       |                              |       |      |       |      |       |
| Balance as of  September 30, 2005  |       | $                   | 159,648    |                                                 | $          | 41,213                    |       | $                                               | 16,043     |                              | $          | 51,804                            |       | $         | 36,964     |      | $          | 2,540 |   | $ | 1,214 |   | $ | 309,426 |   |

 

The following table reflects changes in the net carrying amount of thecomponents of intangible assets for the three months ended September 30, 2005:

 
| ** **                                  | ** ** | **Pension** | ** ** | **Trademark  & trade  name** | ** ** | **Customer  related  intangible** | ** ** | **Core/  developed  technology** | ** ** | **Non-compete  agreements** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-------------|------------|----------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|-----------------------------|------------|-----------|------------|
|                                        |       |        |       |                             |       |                              |       |                             |       |                        |       |      |       |
| Balance as of  June 30, 2005                |       | $           | 608        |                             | $          | —                            |       | $                                | 84         |                        | $          | —    |       | $ | 84 |   | $ | 776 |   |
| Intangible  assets acquired during the year |       | —      |       | 108,000                          |       | 60,600                            |       | 17,578                           |       | —                      |       | 186,178   |       |
| Amortization  expense                       |       | —      |       | —                           |       | (905                              | )          | (591                             | )          | (23                         | )          | (1,519    | )          |
| Translation  adjustment                     |       | 25          |       | (244                             | )          | (136                              | )          | (40                              | )          | —                      |       | (395      | )          |
| Balance as of  September 30, 2005           |       | $           | 633        |                             | 107,756    |                              | $          | 59,643                           |       | $                           | 16,947     |      | $          | 61 |   | $ | 185,040 |   |
|                                             |            |             |            |                                  |            |                                   |            |                                  |            |                             |            |           |            |  |  |  |  |  |  |

 

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The following table reflects the carrying value of intangible assets atSeptember 30, 2005 and June 30, 2005:

 
| ** **                                           | ** ** | **September 30, 2005** | ** ** | **June 30, 2005** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **Gross**              | ** ** | ** **        | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Carrying**           | ** ** | **Accumulated**   | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                                           | ** ** | **Amount**             | ** ** | **Amortization**  | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Intangible assets and intangible pension asset:      |       |                   |       |              |       |   |   |   |   |
| Trademark & trade name                           |       | $                      | 107,756    |              | $          | — |   | $ | — |   | $ | — |   |
| Customer related intangibles                         |       | 61,510                 |       | 1,867             |       | 1,001 |   | 917 |   |
| Core/developed technology                            |       | 17,538                 |       | 591               |       | — |   | — |   |
| Non-compete                                          |       | 672                    |       | 611               |       | 672 |   | 588 |   |
| Intangible pension asset                             |       | 633                    |       | —            |       | 608 |   | — |   |
| Total intangible assets and intangible pension asset |       | $                      | 188,109    |              | $          | 3,069 |   | $ | 2,281 |   | $ | 1,505 |   |

 

A component of thechange in the gross carrying amount of trademark & trade name, customer relatedintangibles, core/developed technology and the intangible pension asset reflects translationadjustments between June 30, 2005 and September 30, 2005.  These intangible assets are denominated inthe currencies of our subsidiaries outside the United States, and aretranslated into our reporting currency, the U.S. dollar, based on exchangerates at the balance sheet date.

 

The weighted average remaining life of amortizable intangible assets atSeptember 30, 2005, was 10.3 years.  Estimatedamortization expense for the remainder of 2006 and thereafter is as follows:

 
| **Fiscal  year ending June 30:** | ** ** | **Amount** | ** ** |
|----------------------------------|------------|------------|------------|
| 2006                             |       | 7,783      |       |
| 2007                             |       | 8,362      |       |
| 2008                             |       | 8,344      |       |
| 2009                             |       | 8,344      |       |
| 2010                             |       | 8,344      |       |
| Thereafter                       |       | 35,474     |       |

 

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**Note 8 – Earnings Per Share.**

 

Basic earnings per share is calculated on the basis of the weightedaverage number of common shares outstanding during the three months ended September30, 2005 and 2004.  Diluted earnings pershare is calculated on the basis of the weighted average number of commonshares outstanding plus the effect of outstanding stock options and employeestock purchase plan shares using the “treasury stock” method.  The components of basic and diluted earningsper share are as follows:
| ** **                                                                         | ** ** | **Three Months Ended September 30** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                                                               |       |                                |       |   |   |
| Income from  continuing operations                                                 |       | $                                   | 13,892     |   | $ | 13,751 |   |
| Discontinued  operations                                                           |       | 9                                   |       | 2 |   |
| Net income                                                                         |       | $                                   | 13,901     |   | $ | 13,753 |   |
|                                                                               |       |                                |       |   |   |
| Weighted average  outstanding shares of common stock                               |       | 38,841                              |       | 32,358 |   |
| Dilutive effect  of employee stock options and employee stock purchase plan shares |       | 254                                 |       | 321 |   |
|                                                                               |       |                                |       |   |   |
| Common stock and  stock equivalents                                                |       | 39,095                              |       | 32,679 |   |
|                                                                               |       |                                |       |   |   |
| Basic earnings  per share:                                                         |       |                                |       |   |   |
| Income from  continuing operations                                                 |       | $                                   | 0.36       |   | $ | 0.42 |   |
| Discontinued  operations                                                           |       | —                              |       | — |   |
| Net income                                                                         |       | $                                   | 0.36       |   | $ | 0.42 |   |
|                                                                               |       |                                |       |   |   |
| Diluted earnings  per share:                                                       |       |                                |       |   |   |
| Income from  continuing operations                                                 |       | $                                   | 0.36       |   | $ | 0.42 |   |
| Discontinued  operations                                                           |       | —                              |       | — |   |
| Net income                                                                         |       | $                                   | 0.36       |   | $ | 0.42 |   |

 

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**Note 9 – VariableInterest Entities.**

 

In January 2003, the FASB issued FASB Interpretation No. 46,“Consolidation of Variable Interest Entities,” which was later revised inDecember 2003 (FIN 46(R)) and effective March 31, 2004 for the company.  FIN 46(R) expands existing accountingguidance about when a company should include in its consolidated financialstatements the assets, liabilities, and activities of another entity.  In general, FIN 46(R) requires a variableinterest entity (VIE), as defined by FIN 46(R), to be consolidated by itsprimary beneficiary.  The primarybeneficiary is defined as the company that will absorb a majority of the VIE’sexpected losses or residual returns if they occur.

 

We have evaluated underFIN 46(R) our consolidated subsidiaries as listed in Exhibit 21 of the Form 10-Kfor the year ended June 30, 2005, all of our affiliates as listed in Note 4 ofthe same Form 10-K, and bothWellspring and Gabriel, Roeder, Smith & Company (“GRS”), and believe that our accounting anddisclosure is in compliance with the pronouncement.  Therefore,the adoption of FIN 46(R) had no effect on the company.

 

The company’s Investment in Affiliates hashistorically consisted of investments in three entities:  WWLLP, Watson Wyatt Holdings (Europe) Limited(WWHE) and Professional Consultants Insurance Company, Inc. (PCIC), ourinvestment in each of which was accounted for under the equity method.  As a result of our acquisition of substantiallyall of the assets and most liabilities of WWLLP, effective August 1, 2005, the company owns 100% of the operations ofWWLLP and WWHE.  For the quarter endedSeptember 30, 2005 the company has accounted for its share of earnings fromWWLLP and WWHE for the month of July 2005 under the equity method and has consolidatedresults from Watson Wyatt Limited for the months of August and September, 2005.

 

As of September 30, 2005, our Investment in Affiliate consists solelyof an equity investment in PCIC, which will continue to be accounted for underthe equity method.  The company evaluatedthis investment based on FIN 46(R)’s criteria in order to determine the applicabilityof FIN 46(R).  Since the company is notobligated to absorb a majority of expected losses or residual returns in thisentity, the company is not required to consolidate this entity.

 

PCIC was organized in 1987 as a captive insurance company under thelaws of the State of Vermont.  PCICprovides professional liability insurance on a claims-made basis to WatsonWyatt and two other actuarial and management consulting firms, all of whichparticipate in the program as both policyholders and stockholders.  The company currently owns 34.15 percent ofPCIC.  Capital contributions to PCIC arerequired when approved by a majority of its stockholders.  Management believes that the company’smaximum financial statement exposure to loss is limited to the carrying valueof the company’s investment in PCIC of $8.6 million, combined with letters ofcredit totaling $8.0 million for which PCIC has been designated as beneficiary,for a total maximum exposure of $16.6 million.

 

**Note 10 – Comprehensive Income.**

 

Comprehensive income includes net income, changes in the additionalminimum pension liability resulting from translation adjustments and changes inthe cumulative translation adjustment gain or loss.  For the three months ended September 30, 2005,comprehensive income totaled $12.4 million, compared with $14.6 million for thethree months ended September 30, 2004.

 

**Note 11 – Restricted Shares.**

 

In conjunction with our initial public offering in October 2000, weentered into agreements providing for additional transfer restrictions withmajor stockholders, executive officers and employee directors.  At each of the first four anniversaries ofour initial public offering, an equal portion of these shares became freelytransferable.  The final 1,665,400 ClassA shares became freely transferable in October, 2004.

 

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Subsequent to the end of fiscal year 2005, in conjunction with ourbusiness acquisition of WWLLP, we issued 9,090,571 Class A shares,4,749,797 of which are subject to sale restrictions.  Sale restrictions will expire on 2,339,761shares on the first anniversary and 2,410,036 shares on the second anniversaryof the business acquisition.  The paymentof up to an additional 1,950,000 Class A shares after June 30, 2007is contingent upon achievement by the acquired business of certain financialperformance goals.  Sale of these shares,if issued, will be restricted until the fourth anniversary of the businesscombination.  See Note 3 of this reportfor further information regarding the acquisition of WWLLP.

 

**Note 12 – Guarantees.**

 

The company historically has provided guarantees on an infrequent basisto third parties in the ordinary course of business.  The guarantees described below are currentlyin effect and could require the company to make payments to third parties undercertain circumstances.

 

*Acquisition of WWLLP*.  OnJuly 31, 2005, the company completed the acquisition of substantially all theassets and most liabilities of WWLLP, the company’s long-time alliancepartner.  The company entered intoindemnity arrangements with WWLLP relating to the acquisition and also agreedthat certain indemnity obligations relating to the alliance arrangements willcontinue after the acquisition.  In theacquisition agreement, Watson Wyatt Limited, the company’s principal U.K.subsidiary, has agreed to indemnify Watson Wyatt LLP against liabilitiesarising with respect to certain liabilities assumed in the acquisition byWatson Wyatt Limited and also with respect to certain tax liabilities.

 

As part of the original alliance arrangementsin 1995, the company sold its then-existing businesses in the U.K. and Europeto the predecessor of WWLLP or its subsidiaries.  The company agreed to indemnify the buyersagainst liabilities arising with respect to prior acts or omissions of thebusinesses transferred.  Furthermore, thecompany agreed to indemnify Watson Wyatt LLP against liabilities arising withrespect to acts or omissions of the company and its subsidiaries during thealliance arrangements.  These indemnitieswill continue following the acquisition.

 

The company is unable to estimate an amountof any potential future payments under these arrangements because theoccurrence of any of the events to which the indemnities apply is entirelyspeculative and the amount of any payment would depend upon the nature of theevent triggering such indemnity. Management believes that any potential forpayment under such indemnities should decline with the passage of time.  The company has insurance to coverliabilities arising from acts or omissions by the company and its subsidiaries,and such insurance may cover some or all of its indemnity obligations relatingto prior acts or omissions.  Except forsuch insurance, there are no provisions for recourse to third parties, nor areany assets held by any third parties that the company as indemnitor canliquidate to recover amounts paid under such indemnities.

 

A portion of the consideration payable to WWLLPfor the assets acquired is contingent upon the achievement of agreed-upon financialperformance targets by the acquired business for the fiscal year ended June 30,2007. The contingent consideration consists of up to 1,950,000 shares of the company’scommon stock, all, some, or none of which may become payable depending on thetargets achieved. The value of all the contingent stock was $51.7 million basedon the NYSE closing price on October 31, 2005. The contingent consideration ispayable by Watson Wyatt Limited and the company has guaranteed the paymentobligations.

 

Under the acquisition agreement, Watson WyattLimited is obligated to make payments to members of WWLLP representing profitsand tax payments relating to periods before the closing date of thetransaction. The company has guaranteed these obligations and has properly reflectedthem on the company’s consolidated financial statements as of September 30,2005.

 

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*Letters of Credit*.  The company has outstanding letters of creditto two beneficiaries totaling $10.6  million under our existing credit facility toguarantee payment in the event that the company fails to meet its financialobligations to these beneficiaries.  Oneletter of credit for $2.6 million will expire in October 2006, while the remainingletters of credit totaling $8.0 million will remain outstanding as long as weretain an ownership share of our affiliated captive insurance company,PCIC.  The estimated fair market value ofthese letters of credit is nominal because they have never been used, and the companybelieves that future usage is remote.

 

*Indemnification Agreements*.  The company has various agreements thatprovide that it may be obligated to indemnify the other party with respect tocertain matters.  Generally, theseindemnification clauses are included in contracts arising in the normal courseof business and in connection with the purchase and sale of certainbusinesses.  Although it is not possibleto predict the maximum potential amount of future payments under theseindemnification agreements due to the conditional nature of the company’sobligations and the unique facts of each particular agreement, the company doesnot believe that any potential liability that might arise from such indemnityprovisions is probable or material. There are no provisions for recourse to third parties, nor are anyassets held by any third parties that any guarantor can liquidate to recoveramounts paid under such indemnities.

 

*Wellspring Leases*.  We continue to guarantee three leases foroffice premises for Wellspring Resources, LLC (“Wellspring”), the benefitsadministration outsourcing business that we exited from in fiscal year1998.  At September 30, 2005, minimumremaining payments guaranteed under these leases, which expire at various datesthrough 2007, total $9.9 million, excluding anticipated future subleaseincome.  See Note 14 for more informationregarding our obligation to guarantee Wellspring’s leases.

 

**Note 13 – Contingent Liabilities.**

 

From time to time, we are a party to variouslawsuits, arbitrations or mediations that arise in the ordinary course ofbusiness.  We have received subpoenas andrequests for information in connection with government investigations.  The matters reported on below involve the mostsignificant pending or potential claims against us.

 

We reserve for contingent liabilities basedon Statement of Financial Accounting Standards No. 5, “Accounting forContingencies” (SFAS 5) when it is determined that a liability, inclusive ofdefense costs, is probable and reasonably estimable.

 

*Government Investigations:*

 

*Department of JusticeAntitrust Investigation. *In September 2005 anAmended Final Judgment was entered between the United States Department of Justice (DOJ) and ProfessionalConsultants Insurance Company, (PCIC), in an investigation relating to contractuallimitations of liability.  PCIC is a captive malpractice insurancecarrier that provides some of our malpractice coverage.  PCIC settled without admitting to anyviolation of antitrust laws.  No actionhas been brought against Watson Wyatt or any of the PCIC members, and wecontinue to be a stockholder of and to obtain insurance from PCIC. The AmendedFinal Judgment is pending ratification by the court.

 

*New York State Attorney General*.  OnDecember 17, 2004, the New York State Attorney General issued a subpoena toWatson Wyatt seeking information about “override” and other insurance placementcompensation.   Preliminary data indicatethat such payments accounted for less than 0.2 percent of Watson Wyatt’srevenue over the past four years. Watson Wyatt has provided information to theNew York State Attorney General’s in response to the subpoena in January 2005.We have received no further inquiries from the New York State AttorneyGeneral since responding.

 

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*SEC Investigation of General Motors Corporation:*

 

In October 2005, the Securities and Exchange Commission (SEC) elevatedits inquiry into Accounting Issues Involving Pensions and Other Post-EmploymentBenefits at General Motors Corporation from an informal inquiry to a formalinvestigation. On October 31, 2005, the SEC issued Watson Wyatt, as GeneralMotor’s actuary, a subpoena for documents and testimony related to theinvestigation. Watson Wyatt has provided, and will continue to provide,information to the SEC in response to the subpoena and will cooperate in thisinvestigation.

 

*Professional Liability Claims:*

 

*Iron Workers Local 25 et al. v. Watson Wyatt & Co. *On July 8, 2004, Watson Wyatt was served with an amended complaintfiled by a former client in the United States District Court for the EasternDistrict of Michigan.  The complaintalleged malpractice, breach of contract, and related claims in the performanceof actuarial consulting.  The complaintstated that the plaintiff’s pension fund is underfunded as a result of thealleged deficiencies in our work.  Inresponse to a discovery request, in January the plaintiffs disclosed that theirminimum damage claim is $53.7 million.  Wehave established a loss and loss expense reserve in the amount of ourprofessional liability insurance self-retention for this case.

 

*SBC Holdings, Inc. *On July 23, 2004, we received a demand letterfrom counsel for a client alleging that errors in valuations for 2001 andsubsequent years understated the liabilities of its pension plan and overstatedits net worth.  As a result, the clientclaimed it did not annuitize its defined benefit plan and redeemed its stock atan inflated price.  On April 15, 2005 wefiled a declaratory action in the U.S. District Court for the Eastern Districtof Michigan to compel arbitration of the matter.  On May 5, 2005, SBC filed an answer andcounterclaim to the declaratory judgment action, alleging damages in excess of$46 million.  The Motion to CompelArbitration is pending. We have established a loss and loss expense reserve inthe amount of our professional liability insurance self-retention for thiscase.

 

*Client Demand Letter.*On  February 8, 2005, we received a demand letterfrom counsel for a client alleging failure to ensure that the method forperforming certain benefit calculations under the pension administration systemdeveloped by Watson Wyatt for the client was consistent with the methodrequired under the client’s pension equity plan and the summary plandescription, and failure to advise the client of the discrepancies between theplan documents and the pension system. The client has claimed $14 million in damages and also sought to holdthe client’s outside ERISA counsel responsible for the damages.  On March 3, 2005, we entered into a tollingagreement with the client and the client’s ERISA counsel in order to pursueresolution of this matter through mediation. We have established a reserve within our self-insured retention for thismatter.

 

**Note 14 – Discontinued Operations.**

 

As discussed in Note 12, the company continues to guarantee threeleases for office premises for Wellspring. In accordance with the contractual arrangements pursuant to which WatsonWyatt divested its interest in Wellspring, Watson Wyatt agreed to share withState Street either costs or benefits arising from these facilities leased byWellspring.  Since one of the threeWellspring leases is currently sub-leased at rates in excess of the lease rate, the companyis contractually entitled to a share of the benefit of the excess cash flowfrom the sub-leases.  Through the first threemonths of fiscal year 2006, the company received sublease income ofapproximately $15,000 in excess of lease payments related to thisbusiness.  Since the second quarter offiscal year 2003, the leases have been generating positive cash flows of lessthan $100,000 per fiscal year.  The company’scurrent assessment is that the positive cash flow from the sub-leases willcontinue until they expire in December 2006. The company has no direct cashobligation to Wellspring in the sense that its obligation is contingent uponthe remaining space being vacated.

 

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During the third quarter of fiscal years 2004and 2005, the company evaluated its accrual for the estimated remaining futureobligations and costs related to the exit from Wellspring.  The evaluations included an analysis ofoccupancy rates of the three guaranteed leases, along with an analysis of real estatemarket conditions in cities in which the leases exist and an assessment ofprobable future sublease income for these leases.  As a result of the analysis performed, the companyreduced its accrual during fiscal year 2004 by $1.0 million and by $1.25 millionduring fiscal year 2005, less the associated income tax expenses.  Such adjustments are reflected in theConsolidated Statement of Operations for the third quarter of fiscal years 2004and 2005 in the line “Adjustment to reduce estimated loss on disposal ofdiscontinued operations.”  Theremaining non-current liability of $1.75 million represents management’sestimate of potential future cash outflows related to guarantees associatedwith Wellspring leases.

 

**Note15 – Recent Accounting Pronouncements.**

 

In June 2004, the Emerging Issues Task Force (EITF) issued EITF 02-14****“Whether an Investor Should Apply the Equity Method ofAccounting to Investments Other Than Common Stock if the Investor Has theAbility to Exercise Significant Influence Over the Operating and FinancialPolicies of the Investee.”  This EITFindicates that an investor should only apply the equity method of accountingwhen it has investments in either common stock or in-substance common stock ofa corporation, provided that the investor has the ability to exercisesignificant influence over the operating and financial policies of theinvestee.  The issuance of EITF 02-14 hasnot had an effect on our accounting for equity investments which has been inaccordance with EITF 02-14.

 

In December 2004, the Financial Accounting Standards Board (FASB)published revisions to Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (SFAS 123R). SFAS 123(R) requires companies to account for share-based paymenttransactions with employees using a fair-value based method, therebyeliminating the disclosure-only provisions of SFAS 123.  The company implemented SFAS 123(R) duringthis current quarter under the modified perspective method.  As a result, compensation expense totaling $0.2million related to the outstanding stock options as of July 1, 2005 has been recognizedbased on the fair values of the awards previously calculated in preparing thepro forma disclosures in accordance with the provisions of SFAS 123, lessadjustments for forfeitures.  The adoption of SFAS 123(R) has not had amaterial impact on the financial condition or results of operations for thecompany.  Refer to Note 5 of theConsolidated Financial Statements for more information about SFAS 123(R).

 

In April 2005, the Securities and Exchange Commission (SEC) issuedStaff Accounting Bulletin No. 107, “Share-Based Payments” (SAB 107) in whichthe SEC expressed views regarding the interaction between SFAS 123(R) andcertain SEC rules and regulations and provide the staff’s views regarding thevaluation of share-based payment arrangements for public companies.

 

On October 22, 2004, the American Jobs Creation Act (AJCA) was signedinto law.  The AJCA includes a one-time election to exclude 85 percent ofits foreign unrepatriated earnings in fiscal year 2006.  The company hasevaluated the effect of the repatriation provision, however, at this time doesnot expect to repatriate earnings from foreign operations in fiscal year 2006.

 

**ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**Overview**

 

Watson Wyatt & Company Holdings, including its subsidiaries, is aglobal consulting firm focusing on human capital and financial management. Wehelp our clients enhance business performance by improving their ability toattract, retain, and motivate qualified employees. We focus on deliveringvalue-added consulting services that help our clients anticipate, identify andcapitalize on emerging opportunities in human capital management.  We also provide independent financial adviceregarding all

 

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aspects of life assurance and general insurance, as well as investmentadvice to assist our clients in developing disciplined and efficient investmentstrategies to meet their investment goals. Our target market clients include those companies in the fortune 1000,Pension & Investments (P&I) 1000, the FTSE 100, and locally-definedequivalent organizations.

 

As leading economies worldwide become more services-oriented, humancapital and financial management has become increasingly important to companiesand other organizations. The heightened competition for skilled employees,unprecedented changes in workforce demographics, regulatory changes related tocompensation and retiree benefits and rising employee-related costs haveincreased the importance of effective human capital management. Insurance andinvestment decisions become increasingly complex and important in the face ofchanging economies and dynamic financial markets.  We help our clients address these issues bycombining our expertise in human capital and financial management withconsulting and technology, to improve the design and implementation of varioushuman resources and financial programs, including compensation, retirement,health care, insurance and investment plans.

 

**General**

 

Effective as of July 31, 2005, the company completed the acquisition ofassets and assumption of liabilities of WWLLP, a privately held limitedliability partnership registered in the U.K. (See Note 3 for additional information regardingthe company’s acquisition of WWLLP). Prior to this date, the company and WWLLP jointly offered services underthe Watson Wyatt Worldwide brand, sharing resources, technologies, processesand business referrals through an alliance established in 1995.  The combined company now maintains 90 officesin 30 countries and employs 6,000 associates as follows: 

 

| Benefits Group                                             |   | 2,300 |   |
|------------------------------------------------------------|--------|-------|--------|
| Technology and Administrative Services Group               |   | 730   |   |
| Human Capital Group                                        |   | 400   |   |
| Insurance & Financial Services Group                   |   | 300   |   |
| Investment Consulting Group                                |   | 250   |   |
| International - Comprising Asia Pacific and Latin  America |   | 950   |   |
| Other (including Communication)                            |   | 550   |   |
| Corporate                                                  |   | 520   |   |
| Total                                                      |   | 6,000 |   |

 

**Principal Services**

 

We design, develop and implement human resource and risk management strategiesand programs through the following closely-interrelated practice areas:

 

**Benefits Group**

 

•                  Retirementplans, including pension, 401(k) and executive benefit plans

•                  Healthcare, disability and other group benefit plans

•                  Compensation,benefits, expatriate and HR practice strategy, implementation andadministration

•                  Actuarialservices

•                  Strategicworkforce planning

 

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**Technology and Administrative Services Group**

 

•                  Web-basedapplications for health and welfare, pension and compensation administration

•                  Administrationoutsourcing solutions for health and welfare and pension benefits

•                  Callcenter strategy, design and tools

•                  Strategichuman resource technology and service delivery consulting

•                  Targetedonline compensation and benefits statements, content management and call centercase management solutions

 

**Human Capital Group**

 

•                  Compensationplans, including broad-based and executive compensation,  stock and other long-term incentive programs

•                  Strategiesto align workforce performance with business objectives

•                  Organizationeffectiveness consulting, including talent management

•                  Strategiesfor attracting, retaining and motivating employees

•                  Dataservices

 

**Insurance & Financial Services Group**

 

•                  Independentactuarial and strategic advice

•                  Assessmentand advice regarding financial condition and risk management

•                  Financialmodeling software tools for product design and pricing, planning andprojections, reporting, valuations and risk management

 

**Investment Consulting Group**

 

•                  Investmentconsulting services to pension plans and foundations

•                  Governanceand regulatory issues

•                  Assetallocation strategies

•                  Investmentstructure analysis, selection and evaluation of managers, and performancemonitoring

 

Our clients include many of the world’s largest corporations as well asemerging growth companies, public institutions and nonprofit organizations.

 

**International – Comprising Asia Pacific and LatinAmerica Operations**

 

Outside of North America and Europe, our consultants, working inAsia-Pacific and Latin America, operate on a geographic basis from 25 officesin 17 countries and provide consulting services in the practice areas describedabove.

 

**Other**

 

While we focus our consulting services in the areas described above,management believes that one of our primary strengths is our ability to drawupon consultants from our different practices to deliver integrated services tomeet the needs of our clients.  Thisincludes communication and change management implementation support services.

 

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**Executive Overview**

 

Watson Wyatt is a global provider of human capital and financial managementconsulting services.  We provide servicesin five principal practice areas: Benefits, Technology and AdministrativeServices Group, Human Capital Consulting, Insurance & Financial Services,and Investment Consulting operating from 90 offices in 30 countries throughoutNorth America, Europe, Asia Pacific and Latin America.  We design, develop and implement humanresource and risk management strategies and programs through the followingclosely-interrelated practice areas:

 

*Benefits Group –*The BenefitsGroup, accounting for 56 percent of our total first quarter 2006 revenues, isthe foundation of our business. Retirement, the core of our Benefits business, is less impacted bydiscretionary spending reductions than our other segments, mainly due to the recurringnature of client relationships.  Ourcorporate client retention rate within our target market has remained veryhigh.

 

*Technology and Administrative Services Group –*OurTechnology and Administrative Services Group, accounting for 9 percent of ourtotal first quarter fiscal year 2006 revenues, provides information technologyservices to our customers.

 

*Human Capital Group –*Our**Human Capital Group, accounting for 9 percent of our totalfirst quarter fiscal year 2006 revenues, generally encompasses short-termprojects and as a result is most sensitive to economic conditions.

 

*Insurance & Financial Services Group –*OurInsurance & Financial Services Group accounts for 6 percent of our totalfirst quarter fiscal year 2006 revenues. This business is characterized by ongoingrelationships with our clients who will typically use our skills on a number ofdifferent projects.

 

*Investment Consulting Group –*OurInvestment Consulting Group, accounts for 5 percent of our total first quarterfiscal year 2006 revenues.  Thisbusiness, although relationship based, can be impacted by volatility ininvestment returns, particularly as clients look to us for assistance inmanaging that volatility.

 

In the short term, our revenues are driven by many factors including thegeneral state of the global economy and the resulting level of discretionaryspending by our clients, the ability of our consultants to attract new clientsor cross-sell to existing clients, and the impact of new regulations in thelegal and accounting fields that most recently increased demand for ourexecutive compensation and benefits practices.

 

The human resources consulting industry, although highly fragmented, ishighly competitive and is comprised of major human capital consulting firms,specialist firms, consulting arms of accounting firms and informationtechnology consulting firms.  While theenvironment and pricing remain competitive, we believe that with our combinedresources the company is in a position to attract new clients and better serveexisting clients.

 

In the long term, we believe that benefits spending will continue to bethe largest component of corporate spending around the world.  We believe that the aging workforce, theprojected shortfall in workers over the next decade and changing regulationswill translate into opportunities for us. We believe that the company’s financial results will depend in largepart upon how well we succeed in deepening our existing client relationshipsthrough thought leadership and focus on cross-practice solutions, activelypursuing new clients in our target markets, cross selling and strategicacquisitions.  We also forsee tremendousopportunities for growth as we expand our financial management services inNorth America.  We believe that the highlyfragmented industry in which we operate represents tremendous growthopportunities for us, because we offer a unique combination of benefits andhuman capital consulting, financial management and strategic technology andadministrative solutions.

 

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**Financial Statement Overview**

 

Watson Wyatt’s fiscal year ends June 30. The financial statementscontained in this quarterly report reflect Consolidated Balance Sheets as ofthe end of the first quarter of fiscal year 2006 (September 30, 2005) and as ofthe end of fiscal year 2005 (June 30, 2005), Consolidated Statements ofOperations for the three month periods ended September 30, 2005 and 2004,Consolidated Statements of Cash Flows for the three month periods ended September30, 2005 and 2004 and a Consolidated Statement of Changes in Stockholders’Equity for the three month period ended September 30, 2005.

 

The company acquired two of its affiliates, WWLLP and WWHE, effectiveJuly 31, 2005 and as a result, our financial statements reflect theconsolidation of the European operations through Watson Wyatt Limited beginningAugust 1, 2005.  Prior to July 31, 2005,or for one month of the current quarter, the company recorded its share of theresults of WWLLP and WWHE using the equity method of accounting.  This income is reflected in the “Income fromaffiliates” line on our income statement. Our share of the results of our affiliated captive insurance company,PCIC, continues to be recorded using the equity method of accounting, and is alsoreflected in the “Income from affiliates” line.

 

We derive substantially all of our revenue from fees for consultingservices, which generally are billed based on time and materials or on afixed-fee basis.  Clients are typicallyinvoiced on a monthly basis with revenue generally recognized as services areperformed. Before the company’s business combination, for the most recent threefiscal years, revenue from U.S. consulting operations has comprisedapproximately 80 percent of consolidated revenue.  For the first quarter of fiscal year 2006,U.S. Consulting operations comprised approximately 60 percent of consolidatedrevenue.  Before and after the businesscombination, no single client accounted for more than 2 percent of our consolidatedrevenue for any of the most recent three fiscal years.

 

In delivering consulting services, our principal direct expenses relateto compensation of personnel. Salaries and employee benefits are comprised ofwages paid to associates, related taxes, benefit expenses such as pension,medical and insurance costs and fiscal year-end incentive bonuses.

 

Professional and subcontracted services represent fees paid to externalservice providers for employment, marketing and other services.  Before the company’s business combination,for the most recent three fiscal years, approximately 60 to 70 percent of theseprofessional and subcontracted services were directly incurred on behalf of ourclients and were reimbursed by them, with such reimbursements being included inrevenue.  For the first quarter of fiscalyear 2006, approximately 50 percent of professional and subcontracted servicesrepresent these reimbursable services.

 

Occupancy, communications and other expenses represent expenses forrent, utilities, supplies and telephone to operate office locations as well asnon-client-reimbursed travel by associates, publications and professionaldevelopment. This line item also includes miscellaneous expenses, includinggains and losses on foreign currency transactions.

 

General and administrative expenses include the operational costs,professional fees and insurance paid by corporate management, general counsel,marketing, human resources, finance, research and technology support.

 

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**CriticalAccounting Policies and Estimates**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosures of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated basedon available information and experience. Because of the use of estimates inherent in the financial reportingprocess, actual results could differ from those estimates.  The accounting policies discussed below are criticalto the understanding of the use of estimates in the company’s financialstatements.

 

***RevenueRecognition***

 

Revenue includes fees primarily generated from consulting servicesprovided in the areas of employee benefits, human capital strategies, technologyand administrative services group and financial management.  We recognize revenue from these consultingengagements when hours are worked, either on a time-and-materials basis or on afixed-fee basis, depending on the terms and conditions defined at the inceptionof an engagement with a client.  The terms of our contracts with clients arefixed and determinable and can only be changed based on agreement of bothparties.  Individual consultants’ billingrates are principally based on a multiple of salary and compensation costs.

 

Revenue for fixed-fee arrangements, which span multiple months, isbased upon the percentage of completion method.* *The company typically has threetypes of fixed-fee arrangements:  annualrecurring projects, projects of a short duration, and non-recurring systemprojects.  Annual recurring projects andthe projects of short duration are typically straightforward and highlypredictable in nature.  As a result, theproject manager and financial staff are able to identify, as the project statusis reviewed and bills are prepared monthly, the rare occasion when costoverruns could lead to the recording of an unexpected loss accrual.

 

Our non-recurring system projects are typically found in our Technologyand Administrative Services Group.  Theytend to be more complex, to incur changes in scope as the project progressesand to be longer-term projects.  We evaluateat least quarterly, and more often as needed, project managers’ estimates-to-completeto assure that the projects’ current status is accounted for properly.  Contracts are written such that, in the unexpected event that thecustomer terminates a contract, the company gets paid for work performedthrough termination.

 

Revenue recognition for fixed-fee engagements is affected by a numberof factors that change the estimated amount of work required to complete theproject such as changes in scope, the staffing on the engagement and/or thelevel of client participation.  Theperiodic engagement evaluations require us to make judgments and estimatesregarding the overall profitability and stage of project completion that, inturn, affect how we recognize revenue. The company recognizes a loss on an engagement when estimated revenue tobe received for that engagement is less than the total estimated direct andindirect costs associated with the engagement. Losses are recognized in the period in which the loss becomes probableand the amount of the loss is reasonably estimable.  The company has experienced certain costs in excess ofestimates from time to time.  Managementbelieves that it is rare, however, for these excess costs to result in overallproject losses.

 

The company hasdeveloped various software programs and technologies that we provide to clientsin connection with consulting services. In most instances, such software is hosted and maintained by the companyand ownership of the technology and rights to the related code remain with thecompany.  Software developed to beutilized in providing services to a client, but for which the client does nothave the contractual right to take possession, is capitalized in accordancewith the AICPA’s Statement of Position 98-1 “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use.”  Revenue associated with the related contract,together with amortization of the related capitalized software, is recognizedover the service period.

 

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As a result, andin accordance with EITF 00-3, we do not recognize revenue during thecustomization phase of an engagement.

 

Revenue recognizedin excess of billings is recorded as unbilled accounts receivable.  Cash collections and invoices generated inexcess of revenue recognized are recorded as deferred revenue until the revenuerecognition criteria are met.  Clientreimbursable expenses, including those relating to travel, other out-of-pocketexpenses and any third-party costs, are included in revenue, and an equivalentamount of reimbursable expenses are included in professional and subcontractedservices as a cost of revenue.

 

***Valuationof Billed and Unbilled Receivables from Clients***

 

We maintain allowances for doubtful accounts to reflect estimatedlosses resulting from our clients’ failure to pay for our services after theservices have been rendered, including allowances when customer disputes mayexist.  The related provision is generallyrecorded as a reduction to revenue.  Ourallowance policy is based on the aging of our billed and unbilled clientreceivables and has been developed based on our write-off history.  Facts and circumstances such as the averagelength of time the receivables are past due, general market conditions, currenteconomic trends and our clients’ ability to pay may cause fluctuations in ourvaluation of billed and unbilled receivables.

 

***DiscretionaryCompensation***

 

The company’s compensation program includes a discretionary annualbonus that is determined by management and paid once per fiscal year in theform of cash and/or deferred stock units after the company’s annual operatingresults are finalized.

 

An estimated annual bonus amount is initially developed at thebeginning of each fiscal year in conjunction with our budgeting process.  Quarterly, estimated annual operatingperformance is reviewed by the company and the discretionary annual bonusamount is then adjusted, if necessary, by management to reflect changes in theforecast of pre-bonus profitability for the year.   After determining the estimated annual bonusamount, the bonus is then allocated to remaining quarterly reporting periods asa constant percentage of estimated pre-bonus profitability.  In those quarters where the estimated annualbonus level changes, the remaining estimated annual bonus is accrued over theremaining quarters as a constant percentage of estimated future pre-bonusprofitability.  Annual bonus levels mayvary from current expectations as a result of changes in the company’s forecastof pre-bonus profitability and competitive employment market conditions.

 

***IncomeTaxes***

 

Determining the consolidated provision for income tax expense, deferredtax assets and liabilities and the related valuation allowance involvesjudgment.  As a global company, we arerequired to calculate and provide for estimated income tax liabilities for eachof the tax jurisdictions in which we operate. This process involves estimating current tax obligations and exposuresin each jurisdiction as well as making judgments regarding the futurerecoverability of deferred tax assets. Tax costs can involve complex issues and may require an extended periodto resolve.  Changes in the geographicmix or estimated level of annual pre-tax income, limitations on the use of thecompany’s foreign subsidiary losses, changes in tax laws and changes resultingfrom tax audits can all affect the overall effective income tax rate which, inturn, impacts the overall level of income tax expense and net income.

 

***PensionAssumptions***

 

We sponsor both qualified and non-qualified, non-contributory definedbenefit pension plans covering substantially all of our associates.  Under our plans in North America and HongKong, benefits are based on the number of years of service and the associates’compensation during the five highest paid consecutive years of service.  The non-qualified plan, included only inNorth America, provides for pension benefits that would be covered under thequalified plan but are limited by the Internal Revenue

 

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Code.  The non-qualified plan hasno assets and therefore is an unfunded arrangement.  The benefit liability is reflected on thebalance sheet.  The measurement date forthe plans is June 30.

 

As a result of the business combination described in Note 3, we haveincluded the defined benefit pension plan disclosures for our newly acquired U.K.operations.  The disclosures for thisplan, along with our historical U.K. plan, are shown separately because theamounts are significant relative to all plans and the assumptions used in theplan are significantly different than those used in all other plans. Under our newlyacquired plan in the U.K., benefits are based on the number of years of serviceand the associates’ compensation during the three years before leaving the plan.The measurement date for the plan is July 31.

 

Determination of our obligations and annual expense under the plans isbased on a number of assumptions that, given the longevity of the plans, arelong-term in focus.  A change in one or acombination of these assumptions could have a material impact on our pensionbenefit obligation and related expense. For this reason, management employs a long-term view so that assumptionsdo not change frequently in response to short-term volatility in the economy.  Any difference between actual and assumedresults is amortized into our pension expense over the average remainingservice period of participating employees. We consider several factors prior to the start of each fiscal year whendetermining the appropriate annual assumptions, including economic forecasts,historical trends, portfolio composition and peer comparisons.

 

*NorthAmerica and Hong Kong*

 

The followingassumptions were used at the end of the past three fiscal years in thevaluation of our North American plans, which comprises the majority of theNorth America and Hong Kong defined benefit pension plans:

 
| ** **                                  | ** ** | **Year Ended June 30** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **2005**               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate                               |       | 5.25                   | %          | 6.25 | % | 6.00 | % |
|                                        |       |                   |       |   |   |   |   |
| Expected long-term rate of return on assets |       | 9.00                   | %          | 9.00 | % | 9.00 | % |
|                                        |       |                   |       |   |   |   |   |
| Rate of increase in compensation levels     |       | 3.34                   | %          | 3.34 | % | 3.09 | % |

 

The 5.25 percentdiscount rate assumption used at the end of fiscal year 2005 represents a 100basis point decrease from the 6.25 percent discount rate used at the end offiscal year 2004 and represents a 75 basis point reduction from the 6.00percent discount rate used at the end of fiscal year 2003.  The company’s 2005 discount rate assumptionwas determined by matching future pension benefit payments with expected futureAA bond yields for the same periods.

 

The expectedlong-term rate of return on assets assumption remained at 9.00 percent perannum for the past three fiscal years. The rate of return was lowered in fiscalyear 2003 to 9.00 percent from 10.00 percent at the end of fiscal year 2002.  Selection of the return assumption at 9.00percent per annum was supported by an analysis performed by the company of theweighted average yield expected to be achieved with the anticipated makeup ofinvestments.  The investment makeup isheavily weighted towards equities.  Thereturn on assets through the first three months of fiscal year 2006 has been1.0 percent, compared to a return of (1.0) percent in the first three months offiscal year 2005.

 

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The following information illustrates thesensitivity to a change in certain assumptions for the U.S. pension plans:

 
| **Change  in Assumption**                            | ** ** | **Effect on FY2006   Pre-Tax Pension Expense** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|
|                                                 |       |                                           |       |
| 25 basis point decrease in discount rate             |       | +$3.3 million                                  |       |
|                                                 |       |                                           |       |
| 25 basis point increase in discount rate             |       | -$3.2 million                                  |       |
|                                                 |       |                                           |       |
| 25 basis point decrease in expected return on assets |       | +$1.0 million                                  |       |
|                                                 |       |                                           |       |
| 25 basis point increase in expected return on assets |       | -$1.0 million                                  |       |

 

The above sensitivities reflect the impact ofchanging one assumption at a time. It should be noted that economic factors andconditions often affect multiple assumptions simultaneously and the effects ofchanges in key assumptions are not necessarily linear. The company’s U.S. OtherPostretirement Employee Benefits Plan is relatively insensitive to discountrate changes due to the plan provisions that have been established to controlcosts and as such no sensitivity results are shown in this display.

 

*UnitedKingdom*

 

The followingassumptions were used at April 30, 2005, the former WWLLP fiscal year end, andJuly 31, the date of the business combination and the valuation of our U.K.plan:

 
| ** **                                  | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|---------------------------------------------|------------|--------------|------------|---------------|------------|
| ** **                                  | ** ** | **2005**     | ** ** | **2005**      | ** ** |
| Discount rate                               |       | 5.00         | %          | 5.30          | %          |
| Expected long-term rate of return on assets |       | 5.63         | %          | 5.76          | %          |
| Rate of increase in compensation levels     |       | 4.75         | %          | 4.75          | %          |

 

The 5.00 percentdiscount rate assumption used at the end of July 31, 2005 represents a 30 basispoint reduction from the discount rate at April 30, 2005. The discount rate isset having regard to yields on AA corporate bonds at the measurement date andthis reduction reflects the reduction in yields between these two dates.

 

The expectedlong-term rate of return on assets assumption was reduced slightly from April30, 2005 to July 31, 2005 and was supported by an analysis performed by thecompany of the weighted average return expected to be achieved with theanticipated makeup of investments which is heavily weighted towards bonds.  The return on assets through the first twomonths of fiscal year 2006 has been 3.0 percent.

 

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The following information illustrates thesensitivity to a change in certain assumptions for the U.K. pension plans:

 
| **Change  in Assumption**                            | ** ** | **Effect on FY2006   Pre-Tax Pension Expense** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|
|                                                 |       |                                           |       |
| 25 basis point decrease in discount rate             |       | +$1.3 million                                  |       |
|                                                 |       |                                           |       |
| 25 basis point increase in discount rate             |       | -$1.2 million                                  |       |
|                                                 |       |                                           |       |
| 25 basis point decrease in expected return on assets |       | +$0.5 million                                  |       |
|                                                 |       |                                           |       |
| 25 basis point increase in expected return on assets |       | -$0.5 million                                  |       |

 

***IncurredBut Not Reported Claims***

 

Thecompany uses actuarial assumptions to estimate and record a liability forincurred but not reported (IBNR) professional liability claims and engaged anexternal actuarial firm to assist in the calculation of these estimates.  Our estimated IBNR liability is based onlong-term trends and averages, and considers a number of factors, includingchanges in claim reporting patterns, claim settlement patterns, judicialdecisions, and legislation and economic decisions, but excludes the effect ofclaims data for large cases due to the insufficiency of actual experience withsuch cases.  Management does notcurrently expect significant fluctuations in the IBNR liability, based on thecompany’s historical claims experience. However, our estimated IBNR liability will fluctuate if claimsexperience changes over time.

 

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**Results of Operations**

 

The table below sets forth our historical Consolidated Statements ofOperations data for continuing operations as a percentage of revenue for theperiods indicated:

 

**Consolidated Statements ofOperations**

 
| ** **                                     | ** ** | **Three months ended September 30** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                |       |   |   |   |   |   |   |
| Revenue                                        |       | $                                   | 265,886    |   | $ | 175,391 |   | 100 | % | 100 | % |
|                                           |       |                                |       |   |   |   |   |   |   |
| Costs of providing services:                   |       |                                |       |   |   |   |   |   |   |
| Salaries and  employee benefits                |       | 147,550                             |       | 97,076 |   | 55.5 |   | 55.3 |   |
| Professional and  subcontracted services       |       | 19,011                              |       | 11,979 |   | 7.2 |   | 6.8 |   |
| Occupancy,  communications and other           |       | 32,853                              |       | 24,100 |   | 12.4 |   | 13.7 |   |
| General and  administrative expenses           |       | 31,389                              |       | 16,888 |   | 11.8 |   | 9.6 |   |
| Depreciation and  amortization                 |       | 9,677                               |       | 4,683 |   | 3.6 |   | 2.7 |   |
|                                           |       | 240,480                             |       | 154,726 |   | 90.5 |   | 88.2 |   |
|                                           |       |                                |       |   |   |   |   |   |   |
| Income from operations                         |       | 25,406                              |       | 20,665 |   | 9.5 |   | 11.8 |   |
|                                           |       |                                |       |   |   |   |   |   |   |
| Income from affiliates                         |       | 1,351                               |       | 2,206 |   | 0.5 |   | 1.3 |   |
| Interest (expense)/income, net                 |       | (88                                 | )          | 455 |   | 0.0 |   | 0.3 |   |
| Other non-operating (loss)/income              |       | (1,862                              | )          | 28 |   | (0.7 | ) | 0.0 |   |
|                                           |       |                                |       |   |   |   |   |   |   |
| Income from continuing operations before taxes |       | 24,807                              |       | 23,354 |   | 9.3 |   | 13.4 |   |
|                                           |       |                                |       |   |   |   |   |   |   |
| Provision for income taxes                     |       | 10,915                              |       | 9,603 |   | 4.1 |   | 5.5 |   |
|                                           |       |                                |       |   |   |   |   |   |   |
| Income from continuing operations              |       | $                                   | 13,892     |   | $ | 13,751 |   | 5.2 | % | 7.9 | % |

 

 

**Three Months Ended September 30, 2005 Compared tothe Three Months Ended September 30, 2004**

 

As a result of the August 1, 2005 effective date of our acquisition ofWWLLP, the quarter ended September 30, 2005 includes the consolidated operatingresults of Watson Wyatt Limited for the months of August and September 2005,whereas the operating results for the three months ended September 30, 2004 donot include comparative consolidated operating results.  The analysis below highlights the changesbetween the consolidated statements of operations for the quarters ended September30, 2005 and 2004 and segregates the effects of the acquisition from the company’sresults without the impact of Watson Wyatt Limited’s consolidated results (thehistorical company).

 

***Revenue.***

 

Revenue from operations for the first quarterof fiscal year 2006 was $265.9 million, an increase of $90.5 million, or 51percent, from $175.4 million in the prior period.  Of the increase, $78.8 million relates to theacquisition of WWLLP.  The remaining increase of $11.7 millionrelates to the historical company.  TheBenefits Group increased revenues $8.5 million, or 8 percent over prior-yearfirst quarter revenues, related to new client wins that occurred in the prioryear and increasing demand for plan design work.  Revenue from our Technology and AdministrativeServices Group was down $1.9 million as compared to prior-year first quarter revenues,reflecting time spent customizing administration systems.

 

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In accordance with EITF 00-3, “Application ofAICPA Statement of Position 97-2 to Arrangements that Include the Right to UseSoftware Stored on Another Entity’s Hardware” (EITF 00-3), revenue for certaincontracts for which the company provides a hosting arrangement is recognizedover the hosting period.  Revenue fromour Human Capital Group increased $4.4 million, or 34 percent during the firstquarter of fiscal year 2006, partially due to the reclassification of WatsonWyatt Data Services revenues, as well as continuing demand for executivecompensation consulting.  Revenue fromour Investment Consulting practice was up $0.9 million or 21 percent due to anincrease in pension funding and asset performance consulting.  Our International segment, comprising AsiaPacific and Latin America, finished the quarter with revenue growth of $0.4million.  However, revenue decreased 2percent on a constant currency basis, partially due to the divestiture ofselected administration operations in Australia in fiscal year 2005.  Revenue for other practice areas decreased $0.7million from the prior-year first quarter, which reflects growth in ourcommunication practice.

 

***Salariesand Employee Benefits*.**

 

Salaries and employee benefit expenses for the first quarter of fiscalyear 2006 were $147.6 million compared to $97.1 million for the first quarterof fiscal year 2005, an increase of $50.5 million or 52 percent.  The increase in mainly due to additionalsalary expenses of $46.2 million related to the acquisition of WWLLP. Theincrease in the historical company was due to higher salaries of $4.2 million,increased pension and post-retirement costs of $2.6 million, a higher accrualfor discretionary compensation of $1.8 million and higher other benefits of$1.9 million including profit sharing partially offset by the capitalization oftime spent customizing in-house administration systems of $6.2 million, inaccordance with AICPA’s Statement of Position 98-1, “Accounting for the Costsof Computer Software Developed or Obtained for Internal Use.”  As a percentage of revenue, salaries andemployee benefits increased to 55.5 percent from 55.3 percent.

 

***Professionaland Subcontracted Services*.**

 

Professional and subcontracted services used in consulting operationsfor the first quarter of fiscal year 2006 were $19.0 million, compared to $12.0million for the first quarter of fiscal year 2005, an increase of $7.0 millionor 59 percent.  The increase in mainlydue to additional expenses of $5.0 million related to the acquisition of WWLLP.The increase in the historical company is attributable to $1.3 million higherreimbursable expenses incurred on behalf of clients, as well as a $0.8 millionincrease in recruiting fees and temporary staff. As a percentage of revenue,professional and subcontracted services increased from 6.8 percent to 7.2percent.

 

***Occupancy,Communications and Other.***

 

Occupancy, communications and other expenses for the first quarter offiscal year 2006 were $32.9 million compared to $24.1 million for the firstquarter of fiscal year 2005, an increase of $8.8 million or 36 percent.  The increase in mainly due to additionalexpenses of $6.7 million related to the acquisition of WWLLP. The increase of$2.1 million associated with the historical company is principally attributableto miscellaneous expenses such as travel, repairs and maintenance, businesstaxes, rent and general office.  As apercentage of revenue, occupancy, communications and other decreased from 13.7percent to 12.4 percent.

 

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***Generaland Administrative Expenses.***

 

General and administrative expenses for the first quarter of fiscalyear 2006 were $31.4 million, compared to $16.9 million for the first quarterof fiscal year 2005, an increase of $14.5 million or 86 percent.  The increase is mainly due to additionalexpenses of $13.1 million related to the acquisition of WWLLP. The increase of$1.4 million in the historical company is mainly due to higher professionalservices fees associated with Sarbanes-Oxley compliance, legal fees and taxresearch of $1.0 million, increased salaries and benefits of $0.6 million,offset by a decrease in travel and general office expenses of $0.2million.  As a percentage of revenue,general and administrative expense increased from 9.6 percent to 11.8 percent.

 

***Depreciationand Amortization.***

 

Depreciation and amortization for the first quarter of fiscal year 2006was $9.7 million, compared to $4.7 million for the first quarter of fiscal year2005, an increase of $5.0 million or 107 percent.  The increase is due to additional expense of$2.8 million related to the acquisition of WWLLP and a $2.2 million increase inthe historical company expense due to depreciation of internally developedsoftware used to support our Benefits Group and Technology and AdministrativeServices Group.  As a percentage ofrevenue, depreciation and amortization increased from 2.7 percent to 3.6percent.

 

***IncomeFrom Affiliates.***

 

Income from affiliates for the first quarter of fiscal year 2006 was$1.4 million, compared to $2.2 million for the first quarter of fiscal year2005, a decrease of $0.8 million.  Thedecrease was due to the absence of two months of income from affiliates in thefirst quarter of fiscal year 2006 because of the acquisition, offset by ourshare of higher operating results of PCIC.

 

***Interest(Expense)/ Income, Net.***

 

Interest expense, net for the first quarter of fiscal year 2006 was$0.1 million, compared to interest income, net of $0.5 million for the firstquarter of fiscal year 2005.  The netexpense in the current period was due to debt incurred as a result of theacquisition of WWLLP and the net income in the prior period relates to interestincome earned on the investment of cash balances.

 

***OtherNon-Operating (Loss)/ Income.***

 

Othernon-operating (loss)/income in the first quarter of fiscal year 2006 includes a$1.7 million gain recognized by the company on the sale of its New Zealandoperations netted against a loss of $3.6 million on a foreign exchange forwardcontract entered into in conjunction with the acquisition of WWLLP.

 

***Provisionfor Income Taxes.***

 

Provision for income taxes for the first three months of fiscal year2006 was $10.9 million, compared to $9.6 million for the first three months offiscal year 2005. Our effective tax rate was 44.0 percent for the first threemonths of fiscal year 2006 and 41.1 percent for the first three months offiscal year 2005.  The tax rate increaseis due to the geographic mix of income and utilization of foreign tax credits.  The company has not provided U.S. deferredtaxes on cumulative earnings of foreign subsidiaries that have been reinvestedindefinitely, which also includes foreign subsidiaries affiliated with ourrecent combination with WWLLP.  We recorda tax benefit on foreign net operating loss carryovers and foreign deferredexpenses only if it is more likely than not that a benefit will be realized.

 

***IncomeFrom Continuing Operations.***

 

Income from continuing operations for the first quarter of fiscal year2006 was $13.9 million, compared to $13.8 million for the first quarter offiscal year 2005.  As a percentage ofrevenue, income from continuing operations decreased from 7.9 percent to 5.2percent.

 

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***EarningsPer Share, Income From Continuing Operations.***

 

Diluted earnings per share, income from continuing operations for thefirst quarter of fiscal year 2006 was $0.36, compared to $0.42 for the firstquarter of fiscal year 2005.

 

***DiscontinuedOperations.***

 

The company received sublease income through the first three months offiscal year 2006 of approximately $15,000 in excess of lease payments relatedto Wellspring, compared to $4,000 in the prior period.

 

**Pro Forma Analysis**

 

For a more meaningful comparison of financial results, the followingtable presents the company’s unaudited pro forma results for the three monthsended September 30, 2005 compared with the unaudited pro forma results for thethree months ended September 30, 2004, as if the combination and consolidationhad occurred at the beginning of each period.

 

In our opinion, information for the three months ended September 30,2005 and the pro forma results for the three months ended September 30, 2004contain all adjustments, consisting only of normal recurring adjustmentsnecessary to fairly present this information. Operating results for any periodare not necessarily indicative of results for any future periods. The unauditedpro forma combined income statement is presented for illustrative purposes onlyand is not indicative of the results of operations that might have occurred hadthe combination actually taken place as of the dates specified, or that may beexpected to occur in the future.

 

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**Pro-Forma Combined Statements ofOperations**

(in thousands, except pershare data)

 
| ** **                                              | ** ** | **Three Months Ended September 30** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2005**                            | ** ** | **2004** | ** ** | **Increase  (Decrease)** | ** ** | **%** | ** ** |
| ** **                                              | ** ** | **(Unaudited)**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                 |       | $                                   | 302,805    |   | $ | 284,793 |   | $ | 18,012 |   | 6.3 | % |
|                                                    |       |                                |       |   |   |   |   |   |   |
| Costs of providing services:                            |       |                                |       |   |   |   |   |   |   |
| Salaries and  employee benefits                         |       | 171,592                             |       | 165,451 |   | 6,141 |   | 3.7 |   |
| Professional and  subcontracted services                |       | 20,202                              |       | 16,116 |   | 4,086 |   | 25.4 |   |
| Occupancy,  communications and other                    |       | 36,043                              |       | 34,084 |   | 1,959 |   | 5.7 |   |
| General and  administrative expenses                    |       | 37,987                              |       | 35,625 |   | 2,362 |   | 6.6 |   |
| Depreciation and  amortization                          |       | 11,101                              |       | 9,170 |   | 1,931 |   | 21.1 |   |
|                                                    |       | 276,925                             |       | 260,446 |   | 16,479 |   | 6.3 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |
| Income from operations                                  |       | $                                   | 25,880     |   | $ | 24,347 |   | $ | 1,533 |   | 6.3 |   |
| Income from affiliates                                  |       | 859                                 |       | 340 |   | 519 |   | 152.6 |   |
| Interest income (expense), net                          |       | (501                                | )          | (723 | ) | 222 |   | (30.7 | ) |
| Other non-operating income                              |       | (1,862                              | )          | 28 |   | (1,890 | ) | (6,750.0 | ) |
|                                                    |       |                                |       |   |   |   |   |   |   |
| Income from continuing operations before income  taxes  |       | 24,376                              |       | 23,992 |   | 384 |   | 1.6 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |
| Provision for income taxes                              |       | 10,726                              |       | 9,861 |   | 865 |   | 8.8 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |
| Income from continuing operations                       |       | $                                   | 13,651     |   | $ | 14,131 |   | $ | (480 | ) | (3.4 | )% |
|                                                    |       |                                |       |   |   |   |   |   |   |
| Basic earnings per share:                               |       | $                                   | 0.33       |   | $ | 0.34 |   | $ | (0.01 | ) | (3.0 | )% |
| Diluted earnings per share:                             |       | $                                   | 0.32       |   | $ | 0.34 |   | $ | (0.02 | ) | (5.9 | )% |
|                                                    |       |                                |       |   |   |   |   |   |   |
| Weighted average shares of common stock, basic (000)    |       | 41,871                              |       | 41,449 |   | 422 |   | 1.0 | % |
| Weighted average shares of common stock, diluted  (000) |       | 42,125                              |       | 41,770 |   | 355 |   | 0.9 | % |

 

 

 

 

 

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**Pro Forma Three Months Ended September 30, 2005Compared to the Pro Forma Three Months Ended September 30, 2004**

 

***Revenue***

 

Revenue fromoperations for the first quarter of fiscal year 2006 was $302.8 million, anincrease of 6 percent from $284.8 million in the prior period.

 

The Benefits Groupincreased revenue $9.9 million or 6 percent during the first quarter of fiscalyear 2006 due to new client wins that occurred in the prior year and increasingdemand for plan design work.  Revenuefrom our Technology and Administrative Services Group decreased $1.5 million,reflecting time spent customizing administration systems that could not yet berecognized as revenue.  In accordancewith EITF 00-3, “Application of AICPA Statement of Position 97-2 to ArrangementsThat Include the Right to Use Software Stored on Another Entity’s Hardware”(EITF 00-3), revenue for certain contracts for which the company provides ahosting arrangement is recognized over the hosting period. Revenue from ourHuman Capital Group increased $3.6 million or 17 percent during the firstquarter of fiscal year 2006, partially due to the reclassification of WatsonWyatt Data Services revenues, as well as continuing demand for executivecompensation consulting.  Revenue fromour Insurance & Financial Services group was up $3.1 million, due tocontinuing work around legislative changes and new client wins.  Revenue from our Investment Consultingpractice was up $1.8 million or 12% due to an increase in work related topension funding and asset performance. Our International segment, comprising Asia Pacific and Latin America,finished the quarter with revenue growth of $0.4 million.  However, revenue decreased 2 percent on aconstant currency basis, partially due to the divestiture of selectedadministration operations in Australia in fiscal 2005.  Revenue for other practice areas decreased$1.0 million largely due to the reclassification of Watson Wyatt Data Servicesinto the Human Capital Group.   Reimbursableexpenses and other revenue adjustments increased $1.6 million over theprior-year first quarter.

 

***Salariesand Employee Benefits*.**

 

Salaries and employee benefit expenses for the first quarter of fiscalyear 2006 were $171.6 million, compared to $165.5 million for the first quarterof fiscal year 2005, an increase of $6.1 million or 4 percent.  The increase was mainly due to highersalaries of $4.6 million, increased pension and post-retirement costs of $2.7million, a higher accrual for discretionary compensation of $2.6 million, higherbenefits of $2.9 million, partially offset by the capitalization of time spentcustomizing in-house administration systems of $6.2 million, in accordance withAICPA’s Statement of Position 98-1, “Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use.”  As a percentage of revenue, salaries andemployee benefits decreased to 56.7 percent from 58.1 percent.

 

***Professionaland Subcontracted Services*.**

 

Professional and subcontracted services used in consulting operationsfor the first quarter of fiscal year 2006 were $20.2 million, compared to $16.1million for the first quarter of fiscal year 2005, an increase of $4.1 millionor 25 percent.  The increase isprincipally attributable to higher reimbursable expenses incurred on behalf ofclients, as well as increased recruiting fees and temporary staff.  As a percentage of revenue, professional andsubcontracted services increased from 5.7 percent to 6.7 percent.

 

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***Occupancy,Communications and Other.***

 

Occupancy, communications and other expenses for the first quarter offiscal year 2006 were $36.0 million compared to $34.1 million for the firstquarter of fiscal year 2005, an increase of $2.0 million or 6 percent.  The increase is principally attributable tomiscellaneous expenses such as travel, repairs and maintenance, business taxes,rent and general office.  As a percentageof revenue, occupancy, communications and other was 12 percent for bothperiods.

 

***Generaland Administrative Expenses.***

 

General and administrative expenses for the first quarter of fiscalyear 2006 were $38.0 million, compared to $35.6 million for the first quarterof fiscal year 2005, an increase of $2.4 million or 7 percent.  The increase is mainly due to increasedsalaries and benefits of $0.9 million, professional services fees associatedwith Sarbanes-Oxley compliance, legal fees and tax research of $1.3 million andincreased travel of $0.3 million.  As apercentage of revenue, general and administrative expense was 12.5 percent forboth periods.

 

***Depreciationand Amortization.***

 

Depreciation and amortization for the first quarter of fiscal year 2006was $11.1 million, compared to $9.2 million for the first quarter of fiscalyear 2005, an increase of $1.9 million or 21 percent.  The increase is mainly due to depreciation oninternally developed software used to support our Benefits and Technology andAdministrative Services Groups.  As apercentage of revenue, depreciation and amortization increased to 3.7 percent from3.2 percent.

 

***IncomeFrom Affiliates.***

 

Income from affiliates for the first quarter of fiscal year 2006 was $0.8million, compared to $0.3 million for the first quarter of fiscal year 2005, anincrease of $0.5 million.  The increasewas due to our share of higher operating results of PCIC.

 

***InterestExpense, Net.***

 

Interest expense, net for the first quarter of fiscal year 2006 was $0.5million, compared to $0.7 million for the first quarter of fiscal year 2005.  The net expense in both periods was due todebt incurred as a result of the combination with WWLLP net of interest incomeearned on remaining cash balances.

 

***OtherNon-operating Expenses.***

 

Othernon-operating expenses in the first quarter of fiscal year 2006 includes a $1.7million gain recognized by the company on the sale of its New Zealand operationsnetted against a loss of $3.6 million on a foreign exchange forward contractentered into in conjunction with the acquisition of WWLLP.

 

***Provisionfor Income Taxes.***

 

Provision for income taxes for the first three months of fiscal year2006 was $10.7 million, compared to $9.9 million for the first three months offiscal year 2005. Our effective tax rate was 44.0 percent for the first threemonths of fiscal year 2006 and 41.1 percent for the first three months offiscal year 2005.  The tax rate increaseis due to the geographic mix of income and utilization of foreign tax credits.  The company has not provided U.S. deferredtaxes on cumulative earnings of foreign subsidiaries that have been reinvestedindefinitely, which also includes foreign subsidiaries affiliated with ourrecent combination with WWLLP.  We recorda tax benefit on foreign net operating loss carryovers and foreign deferredexpenses only if it is more likely than not that a benefit will be realized.

 

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***IncomeFrom Continuing Operations.***

 

Income from continuing operations for the first quarter of fiscal year2006 was $13.7 million, compared to $14.1 million for the first quarter offiscal year 2005.  As a percentage ofrevenue, income from continuing operations decreased from 8.4 percent to 8.1percent.

 

***EarningsPer Share, Income From Continuing Operations.***

 

Diluted earnings per share, income from continuing operations for the firstquarter of fiscal year 2006 was $0.33, compared to $0.34 for the first quarterof fiscal year 2005.

 

***DiscontinuedOperations.***

 

The company received sublease income through the first three months offiscal year 2006 of approximately $15,000 in excess of lease payments relatedto Wellspring, compared to $4,000 in the prior period.

 

**Liquidity and Capital Resources**

 

The following analysis is based on the company’s historical consolidatedfinancial statements.

 

Our cash and cash equivalents at September 30, 2005, totaled $72.2million, compared to $168.1 million at June 30, 2005.  The decrease in cash from June 30, 2005 toSeptember 30, 2005 was mainly attributable to our acquisition of WWLLP (seeNote 3 of Notes to the Consolidated Financial Statements), representing a cashuse of approximately $133.2 million.  Aportion of the decrease is also attributable to a typical pattern of cash flowfor the company due to the payment of previously accrued discretionarycompensation which totaled $73.7 million during the first three months offiscal year 2006. We also paid $14.9 million in corporate taxes, $7.8 millionin capital expenditures and $3.2 million in dividends during the quarter.  These outflows of cash were funded by cashflow from current consulting operations, from existing cash balances and fromborrowings under our revolving credit facility. Consistent with the company’s liquidity position, management considersvarious alternative strategic uses of cash reserves including acquisitions,dividends and stock buybacks, or any combination of these options. The companybelieves that it has sufficient resources to fund operations through the nexttwelve months.

 

Our non U.S. operations do not materially impact liquidity or capitalresources as they are substantially self-sufficient for their working capitalneeds.  At September 30, 2005, $59.3million of the total cash balance of $72.2 million was held outside of NorthAmerica, which we have the ability to utilize, if necessary. There are nosignificant repatriation restrictions other than local or U.S. taxes associatedwith repatriation.

 

***CashUsed in Operating Activities.***

 

Cash used in operating activities for the first three months of fiscalyear 2006 was $41.4 million, compared to cash used in operating activities of $41.3million for the first three months of fiscal year 2005.  The difference is attributable to accrueddiscretionary compensation, increases in other current assets includingprepayments, partially offset by a reduction in our accounts receivable balance.

 

The allowance for doubtful accounts increased $2.7 million and theallowance for work in process increased $1.7 million from June 30, 2005, toSeptember 30, 2005. The number of days of accounts receivable and work inprocess outstanding was 83 at September 30, 2005, compared to 80 at June 30,2005.

 

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***Cash (Usedin)/From Investing Activities.***

 

Cash used in investing activities for the first three months of fiscalyear 2006 was $146.0 million, compared to $7.7 million from investing activitiesfor the first three months of fiscal year 2005. The difference can be primarily attributed to acquisition and contingentconsideration payments of $133.2 million, higher purchases of fixed assets of$3.3 million and higher costs associated with the capitalization of time spentcustomizing in-house administration systems of $8.7 million, in accordance withAICPA’s Statement of Position 98-1.  Wehave made reclassifications to our Consolidated Statement of Cash Flows for thethree months ended September 30, 2004 to reflect the gross purchases of $166.0million and sales of $178.2 million of Dutch auction rate securities asinvesting activities rather than as a component of cash and cashequivalents.  Refer to Note 2 of theNotes to the Consolidated Financial Statements for additional informationregarding this reclassification.

 

Expenditures of capital funds were $11.0 million for the first threemonths of fiscal year 2006.  Anticipatedcommitments of capital funds are estimated at $40 million for the remainder offiscal year 2006, mainly for dividends, computer hardware purchases, officerelocations and renovations, development and upgrade of financial andretirement systems and acquisition-related payments. We expect cash fromoperations to adequately provide for these cash needs.  The company anticipates that future annualcommitments of capital funds will include approximately $10 million individends and $30 million in purchases of fixed assets.

 

***CashFrom/(Used in) Financing Activities.***

 

Cash from financing activities for the first quarter of fiscal year2006 was $92.4 million, compared to cash used in financing activities of $4.4million for the first quarter of fiscal year 2005.  The increase can be attributed to $102.0million of borrowings related to the acquisition of WWLLP and the absence ofcommon stock repurchases, compared to $4.2 million in repurchases in the prioryear, offset by $8.4 million recognized under the forward contract discussed inNote 3 of the Notes to the Consolidated Financial Statements, and $0.7 millionin higher dividends paid during the first three months of fiscal year 2006.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 

***Operating Leases***. We lease office space, furniture and selected computer equipment underoperating lease agreements with terms ranging from one to ten years.  Future expected payments are as follows: 

 
| ** **                         | ** ** | **Remaining payments due by fiscal year as of September 30, 2005** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Contractual  Cash  Obligations** | ** ** | **Total**                                                          | ** ** | **Remaining  2006** | ** ** | **2007  through  2008** | ** ** | **2009  through  2010** | ** ** | **Thereafter** | ** ** |
| Lease commitments                  |       | $                                                                  | 367,982    |   | $ | 39,183 |   | $ | 93,840 |   | $ | 76,592 |   | $ | 158,367 |   |
|                                    |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Management has determined that there is not a large concentration ofleases that will expire in any one fiscal year. Consequently, management anticipates that any increase in future rentexpense will be mainly market driven.

 

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***Guarantees***

 

*Wellspring Leases*.  The company continues to guarantee certainleases for office premises and equipment for Wellspring.  At September 30, 2005, minimum remainingpayments guaranteed under these leases, which expire at various dates through2007, totaled $9.9 million, excluding anticipated sublease income.  The leases are currently generating positivecash flows of less than $0.1 million per fiscal year.  Management will continue to evaluate theadequacy of these provisions and make adjustments as appropriate.  See Notes 12 and 14 of the Notes to theConsolidated Financial Statements for more information related to Wellspring.

 

*Acquisition of WWLLP*.  OnJuly 31, 2005, the company completed the acquisition of substantially all theassets and most liabilities of WWLLP, the company’s long-time alliancepartner.  The company entered intoindemnity arrangements with WWLLP relating to the acquisition and also agreedthat certain indemnity obligations relating to the alliance arrangements willcontinue after the acquisition.  In theacquisition agreement, Watson Wyatt Limited, the company’s principal U.K.subsidiary, has agreed to indemnify WWLLP against liabilities arising withrespect to certain liabilities assumed in the acquisition by Watson WyattLimited and also with respect to certain tax liabilities.

 

As part of the original alliance arrangementsin 1995, the company sold its then-existing businesses in the U.K. and Europeto the predecessor of Watson Wyatt LLP or its subsidiaries.  The company agreed to indemnify the buyersagainst liabilities arising with respect to prior acts or omissions of thebusinesses transferred.  Furthermore, thecompany agreed to indemnify WWLLP against liabilities arising with respect toacts or omissions of the company and its subsidiaries during the alliancearrangements.  These indemnities willcontinue following the acquisition.

 

The company is unable to estimate an amountof any potential future payments under these arrangements because theoccurrence of any of the events to which the indemnities apply is entirelyspeculative and the amount of any payment would depend upon the nature of theevent triggering such indemnity. Management believes that any potential forpayment under such indemnities should decline with the passage of time.  The company has insurance to coverliabilities arising from acts or omissions by the company and its subsidiaries,and such insurance may cover some or all of its indemnity obligations relatingto prior acts or omissions.  Except forsuch insurance, there are no provisions for recourse to third parties, nor areany assets held by any third parties that the company as indemnitor canliquidate to recover amounts paid under such indemnities.

 

A portion of the consideration payable to WWLLPfor the assets acquired is contingent upon the achievement of agreed-uponfinancial performance targets by the acquired business for the fiscal yearended June 30, 2007. The contingent consideration consists of up to 1,950,000shares of the company’s common stock, all, some, or none of which may becomepayable depending on the targets achieved. The value of all the contingentstock was $51.7 million based on the NYSE closing price on October 31, 2005.The contingent consideration is payable by Watson Wyatt Limited and the companyhas guaranteed the payment obligations.

 

Under the acquisition agreement, Watson WyattLimited is obligated to make payments to members of WWLLP representing profitsand tax payments relating to periods before the closing date of thetransaction. The company has guaranteed these obligations and has properlyreflected them on the company’s consolidated financial statements as ofSeptember 30, 2005.

 

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**Credit Agreement**

 

During July 2005 the company amended andrestated its credit facility to provide for a new revolving credit facility inan aggregate principal amount of $300 million provided by a syndicate ofbanks.  The credit facility was furtheramended effective September 2005 to correct the wording of a definition in thecredit agreement.  Interest ratesassociated with this facility vary with LIBOR and/or the Prime Rate and arebased on our leverage ratio, as defined by the credit agreement.  We are charged a quarterly commitment fee,currently 0.15 percent of the facility, which varies with our financialleverage and is paid on the unused portion of the credit facility.  Borrowings under this facility were $102.0 millionas of September 30, 2005.  There were noborrowings under our credit facility at June 30, 2005.  Credit under the facility is available upondemand, although the credit facility requires us to observe certain covenants (includingrequirements for minimum net worth, which act to restrict dividends, cash flowleverage ratio and a fixed coverage charge) and is collateralized with a pledgeof stock of material subsidiaries.  Wewere in compliance with all covenants under the credit facility as of September30, 2005. This facility is scheduled to mature on June 30, 2010.

 

A portion of the revolving facility is usedto support required letters of credit issued under the credit line.  As a result, $10.6 million of the facilitywas unavailable for operating needs as of September 30, 2005.  We are also charged a fee for outstandingletters of credit that also fluctuates based on our leverage ratio.

 

**Risk Management**

 

As a part of our overall risk managementprogram, we carry customary commercial insurance policies, including commercialgeneral liability, employment practices liability, and claims-made professionalliability insurance with a self-insured retention of $1 million per claim,which provides coverage for professional liability claims against the company and its non-European subsidiaries not previouslyowned by WWLLP**,**including the cost of defending suchclaims.  Our primary insurance coveragebeyond this retention is written by an affiliated captive insurance company(PCIC) owned by us and two other professional services firms.

 

In formulating its premium structure, PCICestimates the amount it expects to pay for losses (and loss expenses) for allthe members as a whole and then allocates that amount to the member firms basedon the individual member’s expected losses. PCIC bases premium calculations, which are determined annually based onexperience through March of each year, on relative risk of the various lines ofbusiness performed by each of the owner companies, past claim experience ofeach owner company, growth of each of those companies, industry risk profilesin general and the overall insurance markets. As of July 1, 2005, the captive insurance company carries reinsurancefor 100% of losses it insures above $25 million.

 

Our agreements with PCIC could requireadditional payments to PCIC in the event that the company decided to exit PCICand adverse claims significantly exceed prior expectations.  If these circumstances were to occur, the companywould record a liability at the time it becomes estimable and probable.

 

The company will continue to provide for theself-insured retention where specific estimated losses and loss expenses forknown claims in excess of $1 million are considered probable and reasonablyestimable.****In addition, our subsidiary,Watson Wyatt Limited, maintains customary commercial insurance policies,including claims-made professional liability insurance covering our Europeansubsidiaries as well as certain predecessor companies, including WWLLP andWatson Wyatt Partners.  This programcarries a self-insured retention of £2 million in the aggregate and £100,000 perclaim, including the cost of defending such claims.

 

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Although the company maintains professionalliability insurance coverage, this insurance does not cover claims made afterexpiration of our current insurance contracts. Generally accepted accounting principles require that we record aliability for incurred but not reported (IBNR) professional liability claims ifthey are estimable and probable, and for which we have not yet contracted forinsurance coverage.  The company usesactuarial assumptions to estimate and record its IBNR liability and has a $31.7million IBNR liability recorded as of September 30, 2005.

 

Recent insurance market conditions for ourindustry include increases in overall premium cost, higher self-insuredretentions and constraints on aggregate excess coverages, trends that areanticipated to continue.  We expect theserecent conditions to recur periodically and to be reflected in our futureannual insurance renewals.  As a result,we will continue to assess our ability to secure future insurancecoverage.  In anticipation of thepossibility of future reductions in risk transfer from PCIC to re-insurers, aswell as the hardening insurance market conditions in recent years, the firmsthat own PCIC, including the company, have increased PCIC’s capital over thepast couple of years, with the most recent capital contributions being made inJuly 2005 in the form of $1.5 million in cash and a letter of credit for $3.1million.

 

In light of increasing worldwide litigation,including litigation against professionals, the company has implemented a requirementthat all client relationships be documented by engagement letters containingspecific risk mitigation clauses that were not included in all historicalclient agreements.  Nearly 100 percent ofthe company’s U.S.****and U.K.****corporate clients have signed engagement letters including mitigationclauses, and initiatives to maintain that process in the United States and theUnited Kingdom and complete it elsewhere are underway.  The company has disengaged from certainclient relationships where satisfactory engagement terms could not be achieved.

 

**Disclaimer Regarding Forward-looking Statements**

 

This filingcontains certain statements that are “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995, including, butnot limited to the following: Note 6 - Retirement Benefits on pages 12 through 14; Note 7 — Goodwill andIntangible Assets on pages 15 and 16; Note 12 — Guarantees on pages 19 and 20;Note 13 — Contingent Liabilities on pages 20 and 21; the Executive Overview onpage 25; Critical Accounting Policies and Estimates on pages 27 through 31; thediscussion of our capital expenditures on pages 39 and 40; Off-Balance SheetArrangements and Contractual Obligations on page 40; Risk Management on pages 42and 43; and Part II, Item 1 “Legal Proceedings” on pages 45 and 46.  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 read these statements carefullybecause they contain projections of our future results of operations orfinancial condition, or state other “forward-looking” information. A number ofrisks and uncertainties exist which could cause actual results to differmaterially from the results reflected in these forward-looking statements.  Such factors include but are not limited toour ability to integrate the business of Watson Wyatt LLP into our ownbusiness, processes and systems, and achieve the anticipated results; ourcontinued ability to recruit and retain qualified associates; the success ofour marketing, client development and sales programs after the acquisition; ourability to maintain client relationships and to attract new clients after theacquisition; declines in demand for our services; outcomes of litigation; theability of the Company to obtain professional liability insurance; asignificant decrease in the demand for the consulting, actuarial and otherservices we offer as a result of changing economic conditions or other factors;actions by competitors offering human resources consulting services, includingpublic accounting and consulting firms, technology consulting firms andInternet/intranet development firms; our ability to achieve cost reductionsafter the acquisition; foreign currency exchange and interest ratefluctuations; exposure to Watson Wyatt LLP liabilities that have not beenexpressly assumed; general economic and business conditions that adverselyaffect us or our clients after the acquisition; the level of capital resourcesrequired for future acquisitions; regulatory, legislative and technologicaldevelopments that may affect the demand for or costs of our services; and otherfactors discussed under “Risk Factors” in the Company’s Annual Report on Form10-K dated

 

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August 24, 2005,and the proxy statement/prospectus filed on June 23, 2005, both of which are onfile with the Securities and Exchange Commission.  These statements are based on assumptionsthat may not come true.  Allforward-looking disclosure is speculative by its nature.  The Company undertakes no obligation toupdate any of the forward-looking information included in this report, whetheras a result of new information, future events, changed expectations orotherwise.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.**

 

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

 

See Note 3 forfurther information regarding our handling of risk associated with the businesscombination.

 

**ITEM 4.  CONTROLS AND PROCEDURES.**

 

**Evaluation of Disclosure Controls and Procedures**

 

An evaluation was performedunder the supervision and with the participation of our management, includingthe chief executive officer, or CEO, and chief financial officer, or CFO, ofthe effectiveness of the design and operation of our disclosure controls and procedures.Based on that evaluation, our management, including the CEO and CFO, concludedthat our disclosure controls and procedures were effective as of September 30,2005.

 

**Changes in Internal Control Over FinancialReporting**

 

There were no significant changes in our internal control overfinancial reporting in the quarter ended September 30, 2005 that materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**Limitations on the Effectiveness of Controls**

 

Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures will necessarily prevent all error and all fraud.  However, our management does expect that the control system provides reasonable assurance that its objectives will be met.  A control system, no matter how well designed and operated, cannot provide absolute assurance that the control system’s objectives will be met.   In addition, the design of such internal controls must take into account the costs of designing and maintaining such a control system.  Certain inherent limitations exist in control systems to make absolute assurances difficult, including the realities that judgments in decision-making can be faulty, that breakdowns can occur because of a simple error or mistake, and that individuals can circumvent controls.  The design of any control system is based in part upon existing business conditions and risk assessments. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in business conditions or deterioration in the degree of compliance with policies or procedures.  As a result, they may require change or revision.  Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.  Nevertheless, the disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives, and the CEO and CFO have concluded that the disclosure controls and procedures are effective at a reasonable assurance level.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS.**

 

From time to time, we are a party to variouslawsuits, arbitrations or mediations that arise in the ordinary course ofbusiness.  We have received subpoenas andrequests for information in connection with government investigations.  The matters reported on below involve themost significant pending or potential claims against us.

 

We reserve for contingent liabilities basedon Statement of Financial Accounting Standards No. 5, “Accounting forContingencies” (SFAS 5) when it is determined that a liability, inclusive ofdefense costs, is probable and reasonably estimable.

 

*Government Investigations:*

 

*Department of Justice AntitrustInvestigation. *In September 2005 anAmended Final Judgment was entered between the United States Department ofJustice (DOJ) and Professional Consultants Insurance Company, (PCIC), in aninvestigation relating to contractual limitations of liability.  PCIC is a captive malpractice insurancecarrier that provides some of our malpractice coverage.  PCIC settled without admitting to anyviolation of antitrust laws.  No actionhas been brought against Watson Wyatt or any of the PCIC members, and wecontinue to be a stockholder of and to obtain insurance from PCIC. The AmendedFinal Judgment is pending ratification by the court.

 

*NewYork State Attorney General*.  On December 17, 2004, the NewYork State Attorney General issued a subpoena to Watson Wyatt seekinginformation about “override” and other insurance placement compensation.   Preliminary data indicate that such paymentsaccounted for less than 0.2 percent of Watson Wyatt’s revenue over the pastfour years.  Watson Wyatt hasprovided information to the New York State Attorney General’s in response tothe subpoena in January 2005. We have received no further inquiries from theNew York State Attorney General since responding.

 

*SEC Investigation of General Motors Corporation:*

 

In October 2005, the Securities and Exchange Commission (SEC) elevatedits inquiry into Accounting Issues Involving Pensions and Other Post-EmploymentBenefits at General Motors Corporation from an informal inquiry to a formalinvestigation. On October 31, 2005, the SEC issued Watson Wyatt, as GeneralMotor’s actuary, a subpoena for documents and testimony related to theinvestigation. Watson Wyatt has provided, and will continue to provide,information to the SEC in response to the subpoena and will cooperate in thisinvestigation.

 

*Professional Liability Claims*

 

*Iron Workers Local 25 et al. v. Watson Wyatt & Co. *On July 8, 2004, Watson Wyatt was served with an amended complaintfiled by a former client in the United States District Court for the EasternDistrict of Michigan.  The complaintalleged malpractice, breach of contract, and related claims in the performanceof actuarial consulting.  The complaintstated that the plaintiff’s pension fund is underfunded as a result of thealleged deficiencies in our work.  Inresponse to a discovery request, in January the plaintiffs disclosed that theirminimum damage claim is $53.7 million.  Wehave established a loss and loss expense reserve in the amount of ourprofessional liability insurance self-retention for this case.

 

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*SBC Holdings, Inc. *On July 23, 2004, we received a demand letterfrom counsel for a client alleging that errors in valuations for 2001 andsubsequent years understated the liabilities of its pension plan and overstatedits net worth.  As a result, the clientclaimed it did not annuitize its defined benefit plan and redeemed its stock atan inflated price.  On April 15, 2005 wefiled a declaratory action in the U.S. District Court for the Eastern Districtof Michigan to compel arbitration of the matter.  On May 5, 2005, SBC filed an answer andcounterclaim to the declaratory judgment action, alleging damages in excess of$46 million.  The Motion to CompelArbitration is pending. We have established a loss and loss expense reserve inthe amount of our professional liability insurance self-retention for thiscase.

 

*Client Demand Letter.*On  February 8, 2005, we received a demand letterfrom counsel for a client alleging failure to ensure that the method forperforming certain benefit calculations under the pension administration systemdeveloped by Watson Wyatt for the client was consistent with the methodrequired under the client’s pension equity plan and the summary plandescription, and failure to advise the client of the discrepancies between theplan documents and the pension system. The client has claimed $14 million in damages and also sought to holdthe client’s outside ERISA counsel responsible for the damages.  On March 3, 2005, we entered into a tollingagreement with the client and the client’s ERISA counsel in order to pursueresolution of this matter through mediation. We have established a reserve within our self-insured retention for thismatter.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS.**

 

The company did notengage in any unregistered sales of equity securities during the quarter.

 

**Issuer Purchases of EquitySecurities**

 

The company did not repurchaseits own stock during the first quarter of fiscal year 2006.  The maximum number of shares that may yet be re-purchasedunder our Board of Director approved plans is 563,934.  Shares that the company repurchases aregenerally issued in connection with the company’s employee benefit plans.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

 

**None.**

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

 

None.

 

**ITEM 5. OTHER INFORMATION.**

 

The company amended its credit facility effective September 30, 2005 inorder to correct the wording of a definition in the credit agreement.  A copy of this amendment has been filed withthis 10-Q.

 

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**ITEM 6.EXHIBITS.**

 
| 3.1   |   | Amended and Restated Certificate of Incorporation of  Watson Wyatt & Company Holdings(1)                                                                                                                                                                                                                                                                                                                      |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   |   | Amended and Restated Bylaws of Watson Wyatt &  Company Holdings(2)                                                                                                                                                                                                                                                                                                                                            |
| 4     |   | Form of Certificate Representing Common Stock(1)                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1  |   | Credit Agreement Among Suntrust Bank and Others  dated July 11, 2005(12)                                                                                                                                                                                                                                                                                                                                          |
| 10.2  |   | Senior Officer Deferred Compensation Plan(3)                                                                                                                                                                                                                                                                                                                                                                      |
| 10.3  |   | 2001 Deferred Stock Unit Plan for Selected  Employees(4)                                                                                                                                                                                                                                                                                                                                                          |
| 10.4  |   | Amended Compensation Plan for Outside Directors(14)                                                                                                                                                                                                                                                                                                                                                               |
| 10.5  |   | Lease between Watson Wyatt & Company and  Arlington Office, L.L.C., dated April 27, 2004(6)                                                                                                                                                                                                                                                                                                                   |
| 10.6  |   | Watson Wyatt & Company Performance Share Bonus  Incentive Program(8)                                                                                                                                                                                                                                                                                                                                          |
| 10.7  |   | First Amendment to Lease between Watson Wyatt &  Company and Arlington Office, L.L.C., dated April 22, 2005(9)                                                                                                                                                                                                                                                                                                |
| 10.8  |   | Business Transfer Agreement, dated as of April 15,  2005, by and among Watson Wyatt & Company Holdings, Watson Wyatt LLP, Watson  Wyatt (UK) Acquisitions 2 Limited and The Watson Company Holdings Limited(10)                                                                                                                                                                                               |
| 10.9  |   | Form of Employment Agreement between Watson Wyatt  Limited and each of Chandrasekhar Ramamurthy, Paul N. Thornton and Roger C.  Urwin(10)                                                                                                                                                                                                                                                                         |
| 10.10 |   | Distribution Agreement, dated as of April 15, 2005,  by and among Watson Wyatt LLP, The Wyatt Company Holdings Limited, The Wyatt  Company (UK) Limited, Wyatt Trustee Limited and Watson Wyatt Limited(10)                                                                                                                                                                                                       |
| 10.11 |   | Deed of Termination and Amendment and Restatement of  Indemnities Relating to the Alliance Documents, dated as of April 15, 2005,  by and among The Wyatt Company Holdings Limited, Watson Wyatt LLP, Watson  Wyatt & Company, Watson Wyatt Holdings Limited, Watson Wyatt Holdings  (Europe) Limited, The Wyatt Company (UK) Limited and Wyatt Trustee Limited  (in its capacity as Wyatt Partner) (10) |
| 10.12 |   | Deed of Contribution, dated as of April 15, 2005, by  and among Watson Wyatt LLP, Watson Wyatt Limited and Watson Wyatt &  Company Holdings(11)                                                                                                                                                                                                                                                               |
| 10.13 |   | Bonuses Deed, dated as of April 15, 2005, by and  among Watson Wyatt LLP, Watson Wyatt Limited and Watson Wyatt & Company  Holdings(10)                                                                                                                                                                                                                                                                       |
| 10.14 |   | Form of P.I. Claims Deed by and among the P.I.  Trustees, Watson Wyatt LLP, Watson Wyatt Limited and Watson Wyatt &  Company Holdings(11)                                                                                                                                                                                                                                                                     |
| 10.15 |   | Form of Stock Transfer Agreement by and between  Watson Wyatt & Company Holdings, Watson Wyatt (UK) Acquisitions 2 Limited  and Watson Wyatt Limited and each of Watson Wyatt LLP and each voting  member(10)                                                                                                                                                                                                 |
| 10.16 |   | Watson Wyatt Share Incentive Plan 2005(13)                                                                                                                                                                                                                                                                                                                                                                        |
| 10.17 |   | Form of Indemnification Agreement among Watson Wyatt  & Company Holdings and each of its directors and Section 16 officers(14)                                                                                                                                                                                                                                                                                |
| 10.18 |   | Amendment to the Credit Agreement Among Suntrust  Bank and Others dated September 30, 2005(15)                                                                                                                                                                                                                                                                                                                    |
| 21    |   | Subsidiaries of Watson Wyatt & Company  Holdings(15)                                                                                                                                                                                                                                                                                                                                                          |
| 31.1  |   | Certification of Chief Executive Officer Pursuant to  Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002(15)                                                                                                                                                                                                                                  |
| 31.2  |   | Certification of Chief Financial Officer Pursuant to  Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002(15)                                                                                                                                                                                                                                  |
| 32    |   | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to Title 18, U.S.C. Section 1350, adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002(15)                                                                                                                                                                                                                           |

 

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| (1)  |   | Incorporated by  reference from Registrant’s Form S-3/A, Amendment No. 1 (File No. 33-394973),  filed on March 17, 2000 |
|------|--------|------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Incorporated by  reference from Registrant’s Form 10-Q, filed on May 2, 2001                                            |
| (3)  |   | Incorporated by  reference from Registrant’s Form 10-K, filed on August 15, 2001                                        |
| (4)  |   | Incorporated by  reference from Registrant’s Form DEF14A, filed on October 5, 2001                                      |
| (5)  |   | Incorporated by  reference from Registrant’s Form DEF14A, filed on October 15, 2004                                     |
| (6)  |   | Incorporated by  reference from Registrant’s Form 10-Q, filed on May 7, 2004                                            |
| (7)  |   | Incorporated by  reference from Registrant’s Form 10-K, filed on August 17, 2004                                        |
| (8)  |   | Incorporated by  reference from Registrant’s Form 10-Q, filed on February 9, 2005                                       |
| (9)  |   | Incorporated by  reference from Registrant’s Form 10-Q, filed on May 10, 2005                                           |
| (10) |   | Incorporated by  reference from Registrant’s Form S-4 (File No. 33-3124629), filed on May 4,  2005                      |
| (11) |   | Incorporated by  reference from Registrant’s Form S-4/A, Amendment No. 1 (File No. 33-3124629)  filed on June 13, 2005  |
| (12) |   | Incorporated by  reference from Registrant’s Form 8-K, filed on July 14, 2005                                           |
| (13) |   | Incorporated by  reference from Registrant’s Form 8-K, filed on August 25, 2005                                         |
| (14) |   | Incorporated by  reference from Registrant’s Form 8-K, filed on October 4, 2005                                         |
| (15) |   | Filed with this  Form 10-Q                                                                                                   |

 

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**Signatures**

 

Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

Watson Wyatt & Company Holdings(Registrant)

 

 
| /s/ John J. Haley   |                    | November 9, 2005 |   |
|---------------------|-------------------------|------------------|--------|
| Name:               | John J. Haley           | Date             |
| Title:              | President and           |             |
|                | Chief Executive Officer |             |
|                |                    |             |
| /s/ Carl D. Mautz   |                    | November 9, 2005 |   |
| Name:               | Carl D. Mautz           | Date             |
| Title:              | Vice President and      |             |
|                | Chief Financial Officer |             |
|                |                    |             |
| /s/ Peter L. Childs |                    | November 9, 2005 |   |
| Name:               | Peter L. Childs         | Date             |
| Title:              | Controller              |             |
|                     |                         |                  |        |  |

 

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