**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

** **

**x***                             *QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**                                               **For the quarterly period ended March31, 2007

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the transition periodfrom                    to                   **

** **

**Commission File Number:001-16159**

** **

**WATSON WYATT WORLDWIDE, INC.**

(Exact name of Registrantas specified in its charter)

| **Delaware**                              |   | **52-2211537**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)           |   |                                  |
|                                      |   |                                  |
| **901 N.  Glebe Road**                    |   |                                  |
| **Arlington,  VA**                        |   | **22203**                             |
| (Address of  principal executive offices) |   | (zip code)                            |

** **

**(703) 258-8000**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes x      Noo

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. 

Large acceleratedfiler x      Acceleratedfiler o      Non-accelerated filer o

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

Yes o      No x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of April 30, 2007.

| **Class**                                      | ** ** | **Outstanding  at April 30, 2007** |
|------------------------------------------------|------------|------------------------------------|
| Class A Common Stock, $.01 par value per share |       | 42,763,451 shares                  |

 

 

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**WATSONWYATT WORLDWIDE, INC.INDEX TO FORM 10-Q**

For the Three and Nine Months Ended March 31, 2007
| PART I.        |   | FINANCIAL INFORMATION                                                                                           |   |   |   |
|----------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|           |   |                                                                                                            |   |   |   |
| Item  1.       |   | Condensed Consolidated Financial Statements  (Unaudited)                                                        |   |   |   |
|           |   |                                                                                                            |   |   |   |
|           |   | Condensed Consolidated Statements of Operations—Three  and Nine Months Ended March 31, 2007 and 2006       |   | 1      |   |
|           |   |                                                                                                            |   |   |   |
|           |   | Condensed Consolidated Balance Sheets—March 31, 2007  and June 30, 2006                                    |   | 2      |   |
|           |   |                                                                                                            |   |   |   |
|           |   | Condensed Consolidated Statements of Cash Flows—Nine  Months Ended March 31, 2007 and 2006                 |   | 3      |   |
|           |   |                                                                                                            |   |   |   |
|           |   | Condensed Consolidated Statement of Changes in  Stockholders’ Equity—Nine Months Ended March 31, 2007 |   | 4      |   |
|           |   |                                                                                                            |   |   |   |
|           |   | Notes to the Condensed Consolidated Financial  Statements                                                       |   | 5      |   |
|           |   |                                                                                                            |   |   |   |
| Item 2.        |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                     |   | 26     |   |
|           |   |                                                                                                            |   |   |   |
| Item 3.        |   | Quantitative and Qualitative Disclosures About Market  Risk                                                     |   | 52     |   |
|           |   |                                                                                                            |   |   |   |
| Item 4.        |   | Controls and Procedures                                                                                         |   | 52     |   |
|           |   |                                                                                                            |   |   |   |
| PART  II.      |   | OTHER  INFORMATION                                                                                              |   |   |   |
|           |   |                                                                                                            |   |   |   |
| Item  1.       |   | Legal  Proceedings                                                                                              |   | 53     |   |
|           |   |                                                                                                            |   |   |   |
| Item  1A.      |   | Risk  Factors                                                                                                   |   | 53     |   |
|           |   |                                                                                                            |   |   |   |
| Item 2.        |   | Unregistered Sales of Equity Securities and Use of  Proceeds                                                    |   | 53     |   |
|           |   |                                                                                                            |   |   |   |
| Item 3.        |   | Defaults Upon Senior Securities                                                                                 |   | 54     |   |
|           |   |                                                                                                            |   |   |   |
| Item 4.        |   | Submission of Matters to a Vote of Security Holders                                                             |   | 54     |   |
|           |   |                                                                                                            |   |   |   |
| Item  5.       |   | Other  Information                                                                                              |   | 54     |   |
|           |   |                                                                                                            |   |   |   |
| Item 6.        |   | Exhibits                                                                                                        |   | 55     |   |
|           |   |                                                                                                            |   |   |   |
| Signatures     |   | 56                                                                                                              |   |
|           |   |                                                                                                            |   |   |   |
| Certifications |   | 57                                                                                                              |   |

 

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** **

**WATSON WYATT WORLDWIDE, INC.Condensed Consolidated Statements of Operations**(Thousands of U.S. Dollars, Except Per Share Data)(Unaudited)
| ** **                                             | ** ** | **Three months ended March 31** | ** ** | **Nine months ended March 31** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Revenue                                                |       | $                                                   | 395,598    |                                               | $          | 343,072 |   | $ | 1,098,027 |   | $ | 924,722 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Costs of providing  services:                          |       |                                                |       |                                               |       |   |   |   |   |
| Salaries and  employee benefits                        |       | 211,807                                             |       | 191,582                                            |       | 598,447 |   | 514,339 |   |
| Professional and  subcontracted services               |       | 26,494                                              |       | 17,884                                             |       | 72,659 |   | 56,490 |   |
| Occupancy,  communications and other                   |       | 49,375                                              |       | 41,689                                             |       | 136,008 |   | 118,229 |   |
| General and  administrative expenses                   |       | 40,445                                              |       | 39,300                                             |       | 118,005 |   | 107,895 |   |
| Depreciation and  amortization                         |       | 15,123                                              |       | 11,510                                             |       | 41,797 |   | 32,319 |   |
|                                                   |       | 343,244                                             |       | 301,965                                            |       | 966,916 |   | 829,272 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Income from operations                                 |       | 52,354                                              |       | 41,107                                             |       | 131,111 |   | 95,450 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| (Loss)/income from  affiliates                         |       | (4,490                                              | )          | 310                                                |       | (5,357 | ) | 1,732 |   |
| Interest expense                                       |       | (304                                                | )          | (1,344                                             | )          | (1,336 | ) | (3,703 | ) |
| Interest income                                        |       | 889                                                 |       | 1,047                                              |       | 3,101 |   | 2,344 |   |
| Other non-operating  income/(loss)                     |       | 37                                                  |       | 44                                                 |       | 141 |   | (2,106 | ) |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Income from continuing  operations before income taxes |       | 48,486                                              |       | 41,164                                             |       | 127,660 |   | 93,717 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Provision for income  taxes                            |       | 14,652                                              |       | 11,828                                             |       | 43,018 |   | 33,314 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Income from continuing  operations                     |       | 33,834                                              |       | 29,336                                             |       | 84,642 |   | 60,403 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Discontinued  operations:                              |       |                                                |       |                                               |       |   |   |   |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Adjustment to reduce  estimated loss on disposal of    |       |                                                |       |                                               |       |   |   |   |   |
| discontinued  operations [less applicable income       |       |                                                |       |                                               |       |   |   |   |   |
| tax expense for  the three and nine months ended       |       |                                                |       |                                               |       |   |   |   |   |
| March 31, 2007  and 2006]                              |       | —                                              |       | 1,035                                              |       | — |   | 1,035 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Sublease income from  discontinued operations, less    |       |                                                |       |                                               |       |   |   |   |   |
| applicable  income tax expense for the three and nine  |       |                                                |       |                                               |       |   |   |   |   |
| months ended  March 31, 2007 and 2006                  |       | —                                              |       | 10                                                 |       | — |   | 27 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Net income                                             |       | $                                                   | 33,834     |                                               | $          | 30,381 |   | $ | 84,642 |   | $ | 61,465 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Basic earnings per  share:                             |       |                                                |       |                                               |       |   |   |   |   |
| Income from  continuing operations                     |       | $                                                   | 0.80       |                                               | $          | 0.69 |   | $ | 1.99 |   | $ | 1.47 |   |
| Income from  discontinued operations                   |       | —                                              |       | 0.02                                               |       | — |   | 0.03 |   |
| Net income                                             |       | $                                                   | 0.80       |                                               | $          | 0.71 |   | $ | 1.99 |   | $ | 1.50 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Diluted earnings per  share:                           |       |                                                |       |                                               |       |   |   |   |   |
| Income from  continuing operations                     |       | $                                                   | 0.76       |                                               | $          | 0.69 |   | $ | 1.90 |   | $ | 1.46 |   |
| Income from  discontinued operations                   |       | —                                              |       | 0.02                                               |       | — |   | 0.03 |   |
| Net income                                             |       | $                                                   | 0.76       |                                               | $          | 0.71 |   | $ | 1.90 |   | $ | 1.49 |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
|                                                   |       |                                                |       |                                               |       |   |   |   |   |
| Weighted average shares  of common stock, basic (000)  |       | 42,488                                              |       | 42,234                                             |       | 42,430 |   | 41,074 |   |
| Weighted average shares of common stock, diluted (000) |       | 44,586                                              |       | 42,466                                             |       | 44,562 |   | 41,341 |   |

 

See accompanyingnotes to the consolidated financial statements

 

1

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** **

**WATSON WYATT WORLDWIDE, INC.Condensed Consolidated Balance Sheets**(Thousands of U.S. Dollars, Except Share and Per Share Data)(Unaudited)
| ** **                                           | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **2007**           | ** ** | **2006**          | ** ** |
| **Assets**                                           | ** ** | ** **         | ** ** | ** **        | ** ** |
| Cash and cash  equivalents                           |       | $                  | 69,176     |              | $          | 165,345 |   |
| Receivables from  clients:                           |       |               |       |              |       |
|                                                 |       |               |       |              |       |
| Billed, net of allowances of $6,699 and $3,678       |       | 222,890            |       | 180,533           |       |
| Unbilled, at estimated net realizable value          |       | 139,900            |       | 123,044           |       |
|                                                 |       | 362,790            |       | 303,577           |       |
|                                                 |       |               |       |              |       |
| Deferred income  taxes                               |       | 13,524             |       | 567               |       |
| Other current  assets                                |       | 52,735             |       | 24,158            |       |
| Total current assets                                 |       | 498,225            |       | 493,647           |       |
|                                                 |       |               |       |              |       |
| Investment in  affiliates                            |       | 3,058              |       | 8,564             |       |
| Fixed assets,  net                                   |       | 167,816            |       | 147,738           |       |
| Deferred income  taxes                               |       | 55,108             |       | 70,417            |       |
| Goodwill                                             |       | 373,871            |       | 324,041           |       |
| Intangible  assets                                   |       | 210,860            |       | 187,075           |       |
| Other assets                                         |       | 7,468              |       | 8,877             |       |
|                                                 |       |               |       |              |       |
| **Total  Assets**                                    |       | $                  | 1,316,406  |              | $          | 1,240,359 |   |
| ** **                                           | ** ** | ** **         | ** ** | ** **        | ** ** |
| **Liabilities**                                      | ** ** | ** **         | ** ** | ** **        | ** ** |
| Accounts payable  and accrued liabilities, including |       |               |       |              |       |
| discretionary compensation                           |       | $                  | 270,319    |              | $          | 288,396 |   |
| Deferred income  taxes                               |       | —             |       | 168               |       |
| Income taxes  payable                                |       | 12,523             |       | 7,771             |       |
| Total current liabilities                            |       | 282,842            |       | 296,335           |       |
|                                                 |       |               |       |              |       |
| Note payable                                         |       | —             |       | 30,000            |       |
| Accrued  retirement benefits                         |       | 158,616            |       | 162,505           |       |
| Deferred rent  and accrued lease losses              |       | 29,649             |       | 28,982            |       |
| Deferred income  taxes                               |       | 444                |       | 480               |       |
| Other noncurrent  liabilities                        |       | 84,901             |       | 73,296            |       |
|                                                 |       |               |       |              |       |
| **Total  Liabilities**                               |       | 556,452            |       | 591,598           |       |
|                                                 |       |               |       |              |       |
| 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;                        |       |               |       |              |       |
| 42,763,451 and 42,463,451 issued and                 |       |               |       |              |       |
| 42,501,230 and 42,385,513 outstanding                |       | 428                |       | 425               |       |
| Additional  paid-in capital                          |       | 396,839            |       | 386,392           |       |
| Treasury stock,  at cost - 262,221 and 77,938 shares |       | (11,971            | )          | (2,134            | )          |
| Retained earnings                                    |       | 317,714            |       | 242,599           |       |
| Accumulated  other comprehensive income              |       | 56,944             |       | 21,479            |       |
| **Total  Stockholders’ Equity**                 |       | 759,954            |       | 648,761           |       |
|                                                 |       |               |       |              |       |
| **Total  Liabilities and Stockholders’ Equity** |       | $                  | 1,316,406  |              | $          | 1,240,359 |   |

 

See accompanyingnotes to the consolidated financial statements

 

2

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** **

**WATSON WYATT WORLDWIDE, INC.Condensed Consolidated Statements of Cash Flows**(Thousands of U.S. Dollars)
| ** **                                                                  | ** ** | **Nine months ended March 31** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| ** **                                                                  | ** ** | **(Unaudited)**                                    | ** ** |
| Cash flows from  operating activities:                                      |       |                                               |       |   |   |
| Net income                                                                  |       | $                                                  | 84,642     |   | $ | 61,465 |   |
| Adjustments to reconcile net income to net cash from  operating activities: |       |                                               |       |   |   |
| Loss on foreign currency forward contract                                   |       | —                                             |       | 3,602 |   |
| Income from discontinued operations, net of income  tax expense             |       | —                                             |       | (1,035 | ) |
| Provision for doubtful receivables from clients                             |       | 17,172                                             |       | 6,089 |   |
| Depreciation                                                                |       | 34,512                                             |       | 26,448 |   |
| Amortization of intangible assets                                           |       | 7,285                                              |       | 5,872 |   |
| Provision for deferred income taxes                                         |       | 2,145                                              |       | 9,876 |   |
| Loss/(income) from affiliates                                               |       | 5,357                                              |       | (1,732 | ) |
| Distributions from affiliates                                               |       | —                                             |       | 1,614 |   |
| Other, net                                                                  |       | 454                                                |       | 326 |   |
| Changes in operating assets and liabilities, net of  business combination   |       |                                               |       |   |   |
| Receivables from clients                                                    |       | (68,865                                            | )          | (33,731 | ) |
| Other current assets                                                        |       | (13,362                                            | )          | (4,929 | ) |
| Other assets                                                                |       | 599                                                |       | (684 | ) |
| Accounts payable and accrued liabilities                                    |       | (9,198                                             | )          | (31,278 | ) |
| Income taxes payable                                                        |       | (7,743                                             | )          | 16,620 |   |
| Accrued retirement benefits                                                 |       | (3,889                                             | )          | 412 |   |
| Deferred rent and accrued lease losses                                      |       | 667                                                |       | 1,870 |   |
| Other noncurrent liabilities                                                |       | 6,045                                              |       | 4,205 |   |
| Cash flows from operating activities:                                       |       | 55,821                                             |       | 65,010 |   |
|                                                                        |       |                                               |       |   |   |
| Cash flows used  in investing activities:                                   |       |                                               |       |   |   |
| Acquisitions and contingent consideration payments                          |       | (46,534                                            | )          | (132,844 | ) |
| Purchases of fixed assets                                                   |       | (29,244                                            | )          | (24,153 | ) |
| Capitalized software costs                                                  |       | (16,010                                            | )          | (20,477 | ) |
| Proceeds from divestitures                                                  |       | 141                                                |       | 1,496 |   |
| Cash flows used in investing activities:                                    |       | (91,647                                            | )          | (175,978 | ) |
|                                                                        |       |                                               |       |   |   |
| Cash flows (used  in)/from financing activities:                            |       |                                               |       |   |   |
| Borrowings                                                                  |       | 55,000                                             |       | 102,000 |   |
| Repayment on borrowings                                                     |       | (85,000                                            | )          | (57,000 | ) |
| Foreign currency forward contract                                           |       | —                                             |       | (8,405 | ) |
| Dividends paid                                                              |       | (9,527                                             | )          | (9,487 | ) |
| Repurchases of common stock                                                 |       | (33,420                                            | )          | (3,937 | ) |
| Tax benefit on exercise of stock options and other                          |       | 2,375                                              |       | 1,444 |   |
| Issuances of common stock - exercises of stock  options                     |       | 2,896                                              |       | 2,921 |   |
| Issuances of common stock - employee stock purchase  plan                   |       | 4,718                                              |       | 4,777 |   |
| Cash flows (used in)/from financing activities:                             |       | (62,958                                            | )          | 32,313 |   |
|                                                                        |       |                                               |       |   |   |
| Effect of  exchange rates on cash                                           |       | 2,615                                              |       | 3,253 |   |
|                                                                        |       |                                               |       |   |   |
| Decrease in cash  and cash equivalents                                      |       | (96,169                                            | )          | (75,402 | ) |
|                                                                        |       |                                               |       |   |   |
| Cash and cash  equivalents at beginning of period                           |       | 165,345                                            |       | 168,076 |   |
|                                                                        |       |                                               |       |   |   |
| Cash and cash  equivalents at end of period                                 |       | $                                                  | 69,176     |   | $ | 92,674 |   |

 

See accompanyingnotes to the consolidated financial statements

 

3

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** **

**WATSON WYATTWORLDWIDE, INC.Condensed Consolidated Statement of Changes in Stockholders’ Equity**(Thousands of U.S. Dollars)(Unaudited)
| ** **                                                            | ** ** | **Class A**             | ** ** | ** **        | ** ** | ** **           | ** ** | ** **               | ** ** | ** **             | ** ** | ** **                | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|-------------------|------------|----------------------|------------|--------------------------|------------|------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                                            | ** ** | **Common**                   | ** ** | ** **        | ** ** | ** **           | ** ** | ** **               | ** ** | ** **             | ** ** | ** **                | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Stock**                    | ** ** | ** **        | ** ** | ** **           | ** ** | ** **               | ** ** | ** **             | ** ** | **Accumulated**           | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Outstanding**              | ** ** | **Class A**  | ** ** | **Additional**       | ** ** | **Treasury**             | ** ** | ** **             | ** ** | **Other**                 | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **(number  of shares)** | ** ** | **Common  Stock** | ** ** | **Paid-in  Capital** | ** ** | **Stock,  at Cost** | ** ** | **Retained  Earnings** | ** ** | **Comprehensive  Income** | ** ** | **Total**  | ** ** |
|                                                                  |       |                         |       |              |       |                 |       |                     |       |                   |       |                      |       |       |       |
| Balance at June 30, 2006                                              |       | 42,386                       |       | $                 | 425        |                 | $          | 386,392                  |       | $                      | (2,134     | )                         | $          | 242,599    |       | $ | 21,479 |   | $ | 648,761 |   |
|                                                                  |       |                         |       |              |       |                 |       |                     |       |                   |       |                      |       |       |       |
| Comprehensive income:                                                 |       |                         |       |              |       |                 |       |                     |       |                   |       |                      |       |       |       |
| Net income                                                            |       |                         |       |              |       |                 |       |                     |       | 84,642                 |       |                      |       | 84,642     |       |
| Additional minimum pension  liability, net of tax                     |       |                         |       |              |       |                 |       |                     |       |                   |       | (212                      | )          | (212       | )          |
| Foreign currency translation  adjustment, net of tax                  |       |                         |       |              |       |                 |       |                     |       |                   |       | 35,677                    |       | 35,677     |       |
| Total comprehensive income                                            |       |                         |       |              |       |                 |       |                     |       |                   |       |                      |       | 120,107    |       |
| Cash dividends declared                                               |       |                         |       |              |       |                 |       |                     |       | (9,527                 | )          |                      |       | (9,527     | )          |
| Repurchases of common stock                                           |       | (786                         | )          |              |       |                 |       | (33,420                  | )          |                   |       |                      |       | (33,420    | )          |
| Issuance of common stock — Brans acquisition                     |       | 250                          |       | 3                 |       | 11,274               |       | 99                       |       |                   |       |                      |       | 11,376     |       |
| Issuances of common stock —  employee stock purchase plan shares |       | 120                          |       |              |       | 114                  |       | 4,604                    |       |                   |       |                      |       | 4,718      |       |
| Issuances of common stock —  deferred stock units                |       | 305                          |       |              |       | 2,182                |       | 10,173                   |       |                   |       |                      |       | 12,355     |       |
| Issuances of common stock to outside directors                        |       | 9                            |       |              |       | 62                   |       | 252                      |       |                   |       |                      |       | 314        |       |
| Issuances of common stock — stock options                        |       | 217                          |       |              |       | (5,560               | )          | 8,455                    |       |                   |       |                      |       | 2,895      |       |
| Tax benefit of exercises of stock options and other                   |       |                         |       |              |       | 2,375                |       |                     |       |                   |       |                      |       | 2,375      |       |
|                                                                  |       |                         |       |              |       |                 |       |                     |       |                   |       |                      |       |       |       |
| Balance at March 31, 2007                                             |       | 42,501                       |       | $                 | 428        |                 | $          | 396,839                  |       | $                      | (11,971    | )                         | $          | 317,714    |       | $ | 56,944 |   | $ | 759,954 |   |

 

See accompanying notes tothe consolidated financial statements

4

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**WATSONWYATT WORLDWIDE, INC.**

**Notes to the Condensed Consolidated FinancialStatements**(Tabular amounts are in thousands, except per share data)(Unaudited)

**Note 1 —Basis of Presentation.**

The accompanyingunaudited quarterly condensed consolidated financial statements of Watson WyattWorldwide, Inc. and our subsidiaries (collectively referred to as “we,” “WatsonWyatt,” “Watson Wyatt Worldwide” or the “company”) are presented in accordancewith the rules and regulations of the Securities and Exchange Commission (“SEC”)for quarterly reports on Form 10-Q and therefore do not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples. In the opinion of management, these condensed consolidatedfinancial statements reflect all adjustments, consisting only of normalrecurring adjustments, which are necessary for a fair presentation of thecondensed consolidated financial statements and results for the interimperiods.  All intercompany accounts andtransactions have been eliminated in consolidation. The condensed consolidatedfinancial statements should be read together with the audited condensedconsolidated financial statements and notes thereto contained in the company’sAnnual Report on Form 10-K for the fiscal year ended June 30, 2006, which isfiled with the SEC and may be accessed via EDGAR on the SEC’s web site atwww.sec.gov.  The year-end balance sheetdata was derived from audited financial statements.

Our fiscal year 2007began July 1, 2006 and ends June 30, 2007.

The results of operationsfor the nine months ended March 31, 2007 are not necessarily indicative of theresults that can be expected for the entire fiscal year.  The results reflect certain estimates andassumptions made by management including estimated bonuses and anticipated taxliabilities that affect the amounts reported in the condensed consolidatedfinancial statements and related notes. Certain prior year amounts have been reclassified to conform to thecurrent year’s presentation.

**Note 2 —Business Acquisitions.**

Watson Wyatt Brans & Co.

On February 1, 2007, the company acquired the netassets of Watson Wyatt Brans & Co. (“Brans”), its long-time alliancepartner in the Netherlands.  As of thedate of the acquisition, Brans employed approximately 180 associates in five offices throughout theNetherlands.  Revenues generated incalendar year 2006 were approximately $37 million (Euro 28 million).  Brans was established in 1945 as anactuarial firm and has extended its services from retirement consulting toincorporate legal aspects of employee benefits and investment consulting to awide range of clients.  The company andBrans had jointly offered services since 1999 pursuant to alliance agreementsand as a result, have business segments that are very similar in nature.

The purchase priceof $57.2 million consisted of €34.3 million in cash, or $44.5 million, theissuance of 252,285 shares of the company’s common stock valued at $11.4million transaction costs and investment elimination of $1.3 million.  The shares paid were valued at $45.09 pershare, which was the average of the closing market prices of the company’sstock over five business days beginning with two business days prior to theannouncement date of January 3, 2007 and ending with the two business daysfollowing the announcement date.   Inconnection with this acquisition, payment of up to an additional €8.0 millionworth of Class A shares (approximately 220,000 shares) after January 31,2008 is contingent upon achievement by the acquired business of certainfinancial performance goals during the twelve month period ending January 31,2008.  The contingent consideration is payable byWatson Wyatt Limited, an indirect wholly owned subsidiary of Watson WyattWorldwide, Inc., and the payment obligations are guaranteed by thecompany.  If the contingent sharesare issued they will be accounted for as goodwill.

5

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*Purchase Price Allocation*

The business combination has been accounted for usingthe purchase method of accounting as prescribed in Statement of FinancialAccounting Standards No. 141, “Business Combinations” (“FAS 141”), where theassets acquired and liabilities assumed are recorded at their respective fairvalues as of the business combination date. The company has determined the following preliminary fair values for theproportionate assets purchased and liabilities assumed.  The determination of estimated fair valuerequires management to make significant estimates and assumptions. The companyhired an independent third party to assist in the valuation of assets.

|                                         | ** ** | **February 1, 2007  (in thousands)** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| Total purchase  price                   |       |                                                |       | $ | 57,194 |   |
| Less net assets acquired:               |       |                                                |       |   |   |
| Customer related intangibles            |       | 18,671                                              |       |   |   |
| Non-compete agreements                  |       | 596                                                 |       |   |   |
| Client receivables and unbilled revenue |       | 7,519                                               |       |   |   |
| Fixed assets                            |       | 2,066                                               |       |   |   |
| Other assets                            |       | 2,720                                               |       |   |   |
| Liabilities                             |       | (3,482                                              | )          |   |   |
| Net assets acquired                     |       |                                                |       | 28,090 |   |
| Goodwill                                |       |                                                |       | $ | 29,104 |   |

 

The allocation of the purchase price resulted in theallocation of $29.1 million to goodwill, which has been assigned to oursegments as follows:  

|                                              | ** ** | **Goodwill** | ** ** |
|----------------------------------------------|------------|--------------|------------|
| Benefits Group                               |       | $            | 25,903     |   |
| Human Capital  Group                         |       | 582          |       |
| Investment  Consulting Group                 |       | 2,619        |       |
| Allocation of goodwill  to business segments |       | $            | 29,104     |   |

 

The majority of the goodwill will be deductible fortax purposes in the Netherlands over a period not exceeding 10 years.

Watson Wyatt LLP

On July 31, 2005, the company acquired substantiallyall of the assets and assumed most liabilities of Watson Wyatt LLP (“WWLLP”)(the “business combination”), a leading United Kingdom-based actuarial,benefits and human resources consulting partnership. The company and WWLLP hadjointly offered services since 1995 pursuant to alliance agreements and as aresult, have business segments that are very similar in nature.  See Note 3 for further information regarding therelated accounting and operating segments of the combined company.

6

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The purchase price of $437.0 million consisted of£88.3 million in cash, or $156.1 million at the exchange rate in effect at July31, 2005, the issuance of 9,090,571 shares of the company’s common stock valuedat $238.7 million, transaction costs of $20.5 million and additionalconsideration including debt forgiveness and investment elimination.  The shares paid were valued at $26.26 pershare, which was the average of the closing market prices of the company’sstock over five business days beginning with two business days prior to theannouncement date of January 18, 2005 and ending with the two business daysfollowing the announcement date.  Inaddition, a further 1,950,000 shares may be paid as additional considerationafter June 30, 2007, contingent upon the achievement by the acquired businessof certain agreed-upon financial performance goals.  If the contingent shares are issued they willbe accounted for as goodwill.

*Purchase Price Allocation*

The business combination has been accounted for usingthe purchase method of accounting as prescribed in FAS 141, where the assetsacquired and liabilities assumed are recorded at their respective fair valuesas of the business combination date.  Asof the business combination date, the company determined the followingestimated fair values for the proportionate assets purchased and liabilitiesassumed.  The determination of estimatedfair value requires management to make significant estimates and assumptions.The company hired an independent third party to assist in the valuation ofassets.

|                                         | ** ** | **July 31, 2005  (in thousands)** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| Total purchase  price                   |       |                                             |       | $ | 437,042 |   |
| Less net assets acquired:               |       |                                             |       |   |   |
| Trademark and trade name                |       | $                                                | 108,000    |   |   |   |
| Customer related intangibles            |       | 60,600                                           |       |   |   |
| Core/developed technology               |       | 17,500                                           |       |   |   |
| Cash and cash equivalents               |       | 31,230                                           |       |   |   |
| Client receivables and unbilled revenue |       | 111,305                                          |       |   |   |
| Other current assets                    |       | 47,153                                           |       |   |   |
| Fixed assets                            |       | 13,068                                           |       |   |   |
| Other assets                            |       | 3,795                                            |       |   |   |
| Current liabilities                     |       | (154,854                                         | )          |   |   |
| Accrued retirement benefits             |       | (49,046                                          | )          |   |   |
| Other non current liabilities           |       | (33,657                                          | )          |   |   |
|                                    |       |                                             |       | 155,094 |   |
| Goodwill                                |       |                                             |       | $ | 281,948 |   |
|                                         |            |                                                  |            |  |  |  |  |

 

7

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The allocation of the purchase price resulted in theallocation of $281.9 million to goodwill, which has been assigned to our segmentsas follows:

|                                                | ** ** | **Goodwill** | ** ** |
|------------------------------------------------|------------|--------------|------------|
| Benefits Group                                 |       | $            | 136,463    |   |
| Technology and  Administration Solutions Group |       | 40,037       |       |
| Human Capital  Group                           |       | 16,071       |       |
| Insurance and  Financial Services Group        |       | 52,160       |       |
| Investment  Consulting Group                   |       | 37,217       |       |
| Allocation of goodwill  to business segments   |       | $            | 281,948    |   |

 

The majority of the goodwill will be deductible fortax purposes in the U.K. over a period not exceeding 25 years.

*Hedge Treatment*

During the third quarter of fiscal year 2005, thecompany entered into a foreign currency forward contract to offset the riskassociated with the foreign exchange (British Pound) exposure inherent in thebusiness combination.  The forwardcontract provided for the purchase of £88 million at a fixed price of $164.5million, with a settlement date of July 29, 2005.  In accordance with Statement of FinancialAccounting Standards Board No. 133, “Accounting for Derivative Instruments andHedging Activities” (FAS 133), as amended and interpreted, since the forwardcontract was associated with a business combination that is subject to theprovisions of FAS 141 and the combination involves an equity method investment,the forward contract did not qualify for hedge accounting.  As a result, changes in fair value associatedwith the forward contract were required to be recognized in the CondensedConsolidated Statement of Operations during the first quarter of fiscal year2006.  Consequently, a loss of $3.6million was recognized during the first quarter of fiscal year 2006 in non-operatingincome.

*Pro Forma Financial Information*

The following unaudited pro forma combined statementof operations has been provided to present an illustrative combined unauditedstatement of operations for the nine month period ended March 31, 2006, givingeffect to the business combination as if it had been completed on July 1, 2005.The unaudited combined statements of operations for the three and nine monthsperiod ended March 31, 2007 and the three month period ended March 31, 2006reflect the actual financial results of Watson Wyatt as a combined company. Theunaudited pro forma combined statements of operations for the nine month periodended March 31, 2006 combine the actual financial results for the combinedcompany from August 1, 2005, the date of business combination, through March31, 2006, with the historical financial results of Watson Wyatt for July 2005and the pro forma historical financial results of WWLLP for July 2005. Thediluted earnings per share calculation in this pro forma analysis assumes thatthe 1,950,000 contingent shares related to the business combination had beenissued at the beginning of each period.

The unaudited pro forma combined financial informationshows the impact of the business combination with WWLLP on Watson Wyatt’shistorical results of operations.  Theunaudited pro forma combined income statements are presented for illustrativepurposes only and are not indicative of the results of operations that mighthave occurred had the business combination actually taken place as of the datesspecified, or that may be expected to occur in the future.  They do not assume any benefits from any costsavings or synergies and do not reflect any integration costs that the combinedcompany realized or incurred after the business combination.

8

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**Pro-Forma Combined Statements of Operations**

(in thousands, except per share data)
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                              | ** ** | **Actual**                                           | ** ** | **Actual**                                          | ** ** | **%** | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** | **%** | ** ** |
| ** **                                              | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                              | ** ** | **(Unaudited)**                                      | ** ** | ** **                                          | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
| Revenue                                                 |       | $                                                    | 395,598    |                                                | $          | 343,072 |   | 15.3 | % | $ | 1,098,027 |   | $ | 961,641 |   | 14.2 | % |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Costs of  providing services:                           |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                          |       | 211,807                                              |       | 191,582                                             |       | 10.6 |   | 598,447 |   | 538,379 |   | 11.2 |   |
| Professional and subcontracted services                 |       | 26,494                                               |       | 17,884                                              |       | 48.1 |   | 72,659 |   | 57,681 |   | 26.0 |   |
| Occupancy, communications and other                     |       | 49,375                                               |       | 41,689                                              |       | 18.4 |   | 136,008 |   | 121,420 |   | 12.0 |   |
| General and administrative expenses                     |       | 40,445                                               |       | 39,300                                              |       | 2.9 |   | 118,005 |   | 114,493 |   | 3.1 |   |
| Depreciation and amortization                           |       | 15,123                                               |       | 11,510                                              |       | 31.4 |   | 41,797 |   | 33,744 |   | 23.9 |   |
|                                                    |       | 343,244                                              |       | 301,965                                             |       |   |   | 966,916 |   | 865,717 |   |   |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Income from  operations                                 |       | 52,354                                               |       | 41,107                                              |       | 27.4 |   | 131,111 |   | 95,924 |   | 36.7 |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| (Loss)/income  from affiliates                          |       | (4,490                                               | )          | 310                                                 |       | (1,548.4 | ) | (5,357 | ) | 1,244 |   | (530.6 | ) |
| Interest  income/(expense), net                         |       | 585                                                  |       | (297                                                | )          | 297.0 |   | 1,765 |   | (1,772 | ) | 199.6 |   |
| Other  non-operating income                             |       | 37                                                   |       | 44                                                  |       | (15.9 | ) | 141 |   | 1,496 |   | (90.6 | ) |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations before income taxes  |       | 48,486                                               |       | 41,164                                              |       | 17.8 |   | 127,660 |   | 96,892 |   | 31.8 |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Provision for income  taxes                             |       | 14,652                                               |       | 11,828                                              |       | 23.9 |   | 43,018 |   | 34,610 |   | 24.3 |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Income from continuing  operations                      |       | $                                                    | 33,834     |                                                | $          | 29,336 |   | 15.3 | % | $ | 84,642 |   | $ | 62,282 |   | 35.9 | % |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Basic earnings per  share:                              |       | $                                                    | 0.80       |                                                | $          | 0.69 |   |   |   | $ | 1.99 |   | $ | 1.52 |   |   |   |
| Diluted earnings per  share:                            |       | $                                                    | 0.76       |                                                | $          | 0.69 |   |   |   | $ | 1.90 |   | $ | 1.51 |   |   |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Weighted average shares  of common stock, basic (000)   |       | 42,488                                               |       | 42,234                                              |       |   |   | 42,430 |   | 41,074 |   |   |   |
| Weighted average shares  of common stock, diluted (000) |       | 44,586                                               |       | 42,466                                              |       |   |   | 44,562 |   | 41,341 |   |   |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |

 

The pro forma information for the nine months endedMarch 31, 2006 excludes, in Other non-operating income, a loss of $3.6 millionon a foreign exchange forward contract entered into in conjunction with thebusiness combination with WWLLP.

9

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**Note 3 —Segment Information.**

Watson Wyatt isorganized and managed through a matrix form of organization.  During fiscal year 2006, we substantiallycompleted the global implementation of our financial systems which has enabledsegment reporting around the world.  As aresult, beginning fiscal year 2007, the Asia-Pacific and Latin Americaoperations have been reported on a practice basis and are included in ouroperating segments listed below. We now have five reportable operating segmentsor practice areas as follows:

(1)            BenefitsGroup

(2)            Technologyand Administration Solutions Group

(3)            HumanCapital Group 

(4)            InvestmentConsulting Group 

(5)            Insuranceand Financial Services Group

Management evaluates the performance of its segmentsand allocates resources to them based on net operating income on a pre-bonus,pre-tax basis.  The category previouslyreported as “other” has been reclassified as “All other segments” in thereconciliation of reportable segments to consolidated amounts as prescribed inStatement of Financial Accounting Standards No. 131 “Disclosures about Segmentsof an Enterprise and Related Information” (FAS 131).  This includes communication and changemanagement implementation support services. Prior period amounts have been reclassified to conform to the currentclassification.

The table below presentsspecified information about reported segments as of and for the three monthsended March 31, 2007:
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 220,708    |                                                  | $          | 39,329                    |       | $                                 | 41,153     |                                           | $          | 34,294    |       | $ | 30,288 |   | $ | 365,772 |   |
| Net operating income                    |       | 66,696              |       | 8,229                                                 |       | 5,929                     |       | 11,680                            |       | 6,400                                          |       | 98,934    |       |
| Receivables                             |       | 235,167             |       | 18,986                                                |       | 46,030                    |       | 28,275                            |       | 33,530                                         |       | 361,988   |       |
|                                         |            |                     |            |                                                       |            |                           |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

The table belowpresents specified information about reported segments as of and for the threemonths ended March 31, 2006 as reclassified to reflect the elimination of the “Asia-Pacific/LatinAmerica” and “Other” segments:
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 197,921    |                                                  | $          | 36,444                    |       | $                                 | 36,200     |                                           | $          | 23,760    |       | $ | 27,947 |   | $ | 322,272 |   |
| Net operating  income                   |       | 57,408              |       | 9,052                                                 |       | 2,605                     |       | 4,899                             |       | 8,096                                          |       | 82,060    |       |
| Receivables                             |       | 197,510             |       | 14,354                                                |       | 34,075                    |       | 15,539                            |       | 28,802                                         |       | 290,280   |       |
|                                         |            |                     |            |                                                       |            |                           |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

10

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The table below presentsspecified information about reported segments as of and for the nine monthsended March 31, 2007:
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 602,772    |                                                  | $          | 118,034                   |       | $                                 | 126,269    |                                           | $          | 94,219    |       | $ | 83,656 |   | $ | 1,024,950 |   |
| Net operating  income                   |       | 159,541             |       | 27,314                                                |       | 19,305                    |       | 28,364                            |       | 14,730                                         |       | 249,254   |       |
| Receivables                             |       | 235,167             |       | 18,986                                                |       | 46,030                    |       | 28,275                            |       | 33,530                                         |       | 361,988   |       |
|                                         |            |                     |            |                                                       |            |                           |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

The table belowpresents specified information about reported segments as of and for the ninemonths ended March 31, 2006 as reclassified to reflect the elimination of the “Asia-Pacific/LatinAmerica” and “Other” segments.  Thesegment information below includes the consolidated results from Watson WyattLimited, formerly WWLLP, from August 1, 2005, the date of business combination,through March 31, 2006:
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 531,509    |                                                  | $          | 98,637                    |       | $                                 | 105,910    |                                           | $          | 61,390    |       | $ | 65,918 |   | $ | 863,364 |   |
| Net operating  income                   |       | 135,810             |       | 24,937                                                |       | 9,252                     |       | 8,457                             |       | 13,809                                         |       | 192,265   |       |
| Receivables                             |       | 197,510             |       | 14,354                                                |       | 34,075                    |       | 15,539                            |       | 28,802                                         |       | 290,280   |       |
|                                         |            |                     |            |                                                       |            |                           |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

Information aboutinterest income and tax expense is not presented as a segment expense becausesuch items are not considered a responsibility of the segments’ operatingmanagement.  Prior year data has beenrestated to be consistent with current classifications for comparative purposes.

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Reconciliations ofthe information reported by segment to the historical consolidated amountsfollow for the three and nine month periods ended March 31, 2007 and 2006:
| ** **                                                   | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Revenue:                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Total segment revenue                                        |       | $                                                    | 365,772    |                                                | $          | 322,272 |   | $ | 1,024,950 |   | $ | 863,364 |   |
| Reimbursable expenses not included in total segment  revenue |       | 18,280                                               |       | 11,370                                              |       | 42,615 |   | 34,361 |   |
| All other segments                                           |       | 10,408                                               |       | 9,786                                               |       | 30,695 |   | 30,962 |   |
| Other, net                                                   |       | 1,138                                                |       | (356                                                | )          | (233 | ) | (3,965 | ) |
| Consolidated revenue                                         |       | $                                                    | 395,598    |                                                | $          | 343,072 |   | $ | 1,098,027 |   | $ | 924,722 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net Operating  Income:                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Total segment  net operating income                          |       | $                                                    | 98,934     |                                                | $          | 82,060 |   | $ | 249,254 |   | $ | 192,265 |   |
| (Loss)/income from affiliates                                |       | (4,490                                               | )          | 310                                                 |       | (5,357 | ) | 1,732 |   |
| Differences in allocation methods for                        |       |                                                 |       |                                                |       |   |   |   |   |
| Depreciation, G&A, medical and pension costs (1)         |       | (875                                                 | )          | 500                                                 |       | (8,137 | ) | (5,887 | ) |
| Gain on sale of business units                               |       | 37                                                   |       | 44                                                  |       | 141 |   | 1,496 |   |
| Loss on hedge                                                |       | —                                               |       | —                                              |       | — |   | (3,602 | ) |
| Discretionary compensation                                   |       | (39,604                                              | )          | (33,073                                             | )          | (105,984 | ) | (80,305 | ) |
| All other segments                                           |       | (1,340                                               | )          | (1,110                                              | )          | (5,096 | ) | (3,109 | ) |
| Other, net                                                   |       | (4,176                                               | )          | (7,567                                              | )          | 2,839 |   | (8,873 | ) |
| Consolidated  income before income taxes                     |       | $                                                    | 48,486     |                                                | $          | 41,164 |   | $ | 127,660 |   | $ | 93,717 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Receivables:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Total segment receivables - billed and unbilled              |       | $                                                    | 361,988    |                                                | $          | 290,280 |   | $ | 361,988 |   | $ | 290,280 |   |
| All other segments                                           |       | 6,557                                                |       | 5,383                                               |       | 6,557 |   | 5,383 |   |
| Net valuation differences (2)                                |       | (5,755                                               | )          | 4,879                                               |       | (5,755 | ) | 4,879 |   |
| Total billed and unbilled receivables                        |       | 362,790                                              |       | 300,542                                             |       | 362,790 |   | 300,542 |   |
| Assets not reported by segment (3)                           |       | 953,616                                              |       | 897,563                                             |       | 953,616 |   | 897,563 |   |
| Consolidated  assets                                         |       | $                                                    | 1,316,406  |                                                | $          | 1,198,105 |   | $ | 1,316,406 |   | $ | 1,198,105 |   |

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(1)             Depreciation,general and administrative, pension, and medical costs are allocated to oursegments based on budgeted expenses determined at the beginning of the fiscalyear as management believes that these costs are largely uncontrollable to thesegment.  To the extent that the actualexpense base upon which allocations are made differs from the forecast/budgetamount, a reconciling item will be created between internally allocatedexpenses and the actual expense that we report for GAAP purposes.

(2)             Totalsegment receivables, which reflects the receivable balances used by managementto make business decisions, are included for management reporting purposes netof deferred revenues — cash collections and invoices generated in excess ofrevenue recognized in the segment revenues.

(3)             Assetsnot reported by segment for management reporting purposes include goodwill andintangible assets of $584.7 million.

12

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**Note 4 —Share-based Compensation.**

TheFinancial Accounting Standards Board (FASB) issued FAS123(R), “Share-basedPayment” as a  revision to Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation.”  FAS 123(R) requirescompanies to account for share-based payment transactions with employees usinga fair-value based method, thereby eliminating the disclosure-only provisionsof FAS 123.  FAS 123(R) became effective for the company as of July 1,2005.

Thecompany has four share-based compensation plans, which are describedbelow.  These compensation plans includethe 2001 Employee Stock Purchase Plan, the 2001 Deferred Stock Unit Plan forSelected Employees, the Amended Compensation Plan for Outside Directors and the2000 Long-Term Incentive Plan.  All fourplans have been approved by the stockholders.

*2001Employee Stock Purchase Plan*

Theemployee stock purchase plan enables employees to purchase shares of thecompany’s stock.  No compensation expensewas recognized as a result of this plan during the nine months of fiscal years2007 or 2006.

*2001Deferred Stock Unit Plan for Selected Employees*

DeferredStock Units — The2001 Deferred Stock Unit Plan for Selected Employees is intended to provideselected associates of the company with additional incentives by permitting thecompany to grant them an equity interest in the company in the form ofrestricted stock units, in lieu of a portion of their annual fiscal year endbonus.  Shares under this plan areawarded during the first quarter of each fiscal year.  During the first quarter of fiscal year 2007,300,552 shares of common stock, at an average market price of $40.48 wereawarded for a total fair value of $12.2 million.  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.

SBIProgram  — On November 19, 2004, the company’s Boardof Directors approved a long-term bonus arrangement pursuant to the company’s2001 Deferred Stock Unit Plan for Selected Employees.  The arrangement,called the Performance Share Bonus Incentive Program (the “SBI Program”), is along-term stock bonus arrangement for senior executives of the company and itsaffiliates that is designed to strengthen incentives and align behaviors togrow the business in a way that is consistent with the strategic goals of thecompany.

Incentivesunder the SBI Program are provided through grants of deferred stock unitspursuant to the company’s 2001 Deferred Stock Unit Plan for SelectedEmployees.  Grants of deferred stock units are based on the value of thecash portion of the eligible participant’s fiscal year-end bonus target and amultiplier, which is then converted into a target number of deferred stockunits based upon the company’s stock price as of the fiscal year-end prior togrant.  Participants may vest between zero and 170% of the target numberof deferred stock units based on the extent to which financial and strategicperformance metrics are achieved over a three fiscal year period.  Thefinancial and strategic performance metrics are established at the beginning ofeach performance period.  For the fiscal year 2005 through 2007performance period, the vesting criteria are based upon earnings per sharegrowth, market penetration and cross-selling ratios.  For the fiscal year 2006 through 2008 and2007 through 2009 performance periods, the vesting criteria are based upongrowth in earnings per share and revenue.

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Compensationexpense of $0.7 million and $2.1 million was recorded pursuant to these plansfor the third quarter and nine months of fiscal year 2007, respectively,compared to no compensation expense for the nine months of fiscal year2006.  Expenses for these plans arerecognized when awards are both probable and reasonably estimable.

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

TheAmended Compensation Plan for Outside Directors (the “Outside Director’s Plan”)provides for the cash and stock compensation of outside, or non-employee,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 calendar quarter. In addition, outside Directors receive shares with a grant date marketvalue of $45,000 at the end of each fiscal year for services performed duringthe preceding fiscal year. Approximately $0.3 million of compensation expensewas recorded relative to this plan during the nine months of each of fiscalyears 2007 and 2006.

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

Thecompany issued non-qualified stock options under the 2000 Long-Term IncentivePlan (the “Stock Option Plan”) in conjunction with its initial public offeringin fiscal year 2001.  No options havebeen granted under the stock option plan since fiscal year 2001 and the companydoes not currently intend to issue further stock options under the Stock OptionPlan. For the nine months of fiscal year 2007, the company recognized less than$0.1 million in compensation expense related to the Stock Option Plan, inaccordance with FAS 123(R).  Compensationexpense of $0.1 million and $0.3 million was recorded pursuant to the StockOption Plan for the third quarter and the nine months of fiscal year 2006,respectively.

**Note 5 —Retirement Benefits.**

*DefinedBenefit Plans*

We sponsor both qualifiedand non-qualified, non-contributory defined benefit pension plans coveringsubstantially all of our associates. Under our plans in North America, benefits are based on the number ofyears of service and the associates’ compensation during the five highest paidconsecutive years of service.  Under ourplan in the U.K., benefits are based on the number of years of service and theassociates’ compensation during the three years before leaving the plan. Thenon-qualified plan, included only in North America, provides for pensionbenefits that would be covered under the qualified plan but are limited by theInternal Revenue Code.  The non-qualifiedplan has no assets and therefore is an unfunded arrangement.  The benefit liability is reflected on thebalance sheet.  The measurement date foreach of the plans is June 30.

*Components of Net PeriodicBenefit Cost for Defined Benefit Pension Plans*

The followingtable sets forth the components of net periodic benefit cost for the company’sdefined benefit pension plans for North America for the three and nine month periodsended March 31, 2007 and 2006, and for the U.K. defined benefit pension planfor the three and nine month periods ended March 31, 2007 and the three andeight month periods ended March 31, 2006:

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| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | **North  America**                                   | ** ** | **U.K.**                                            | ** ** | **North  America** | ** ** | **U.K.** | ** ** | **North  America** | ** ** | **U.K.** | ** ** | **North  America** | ** ** | **U.K** | ** ** |
| Service Cost                           |       | $                                                    | 6,350      |                                                | $          | 3,257 |   | $ | 7,362 |   | $ | 3,049 |   | $ | 19,064 |   | $ | 9,708 |   | $ | 22,035 |   | $ | 8,275 |   |
| Interest Cost                          |       | 10,013                                               |       | 4,148                                               |       | 9,209 |   | 3,430 |   | 30,058 |   | 12,365 |   | 27,574 |   | 9,307 |   |
| Expected Return  on Plan Assets        |       | (11,755                                              | )          | (4,018                                              | )          | (10,963 | ) | (3,229 | ) | (35,289 | ) | (11,978 | ) | (32,830 | ) | (8,762 | ) |
| Amortization of  Transition Obligation |       | (10                                                  | )          | —                                              |       | (10 | ) | — |   | (29 | ) | — |   | (28 | ) | — |   |
| Amortization of  Net Loss              |       | 2,161                                                |       | (218                                                | )          | 4,041 |   | — |   | 6,489 |   | (649 | ) | 12,104 |   | — |   |
| Amortization of  Prior Service Cost    |       | (735                                                 | )          | —                                              |       | (429 | ) | — |   | (2,204 | ) | — |   | (1,290 | ) | — |   |
| Net Periodic Benefit  Cost             |       | $                                                    | 6,024      |                                                | $          | 3,169 |   | $ | 9,210 |   | $ | 3,250 |   | $ | 18,089 |   | $ | 9,446 |   | $ | 27,565 |   | $ | 8,820 |   |

 

As prescribed by Financial Accounting Standards No. 88, “Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits” (FAS 88), the company recognized asettlement expense of $900,000 during the quarter ended March 31, 2007 as lump sumpayments made from the North America non-qualified plan were greater than theservice cost plus interest cost of the plan.

The fiscal year 2007 netperiodic benefit cost is based, in part, on the following rate assumptions asof June 30, 2006 for the North America and U.K. plans:
| ** **                                   | ** ** | **North America** | ** ** | **U.K.** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|
| Discount rate                                |       | 6.25                   | %          | 5.10     | %          |
| Expected  long-term rate of return on assets |       | 8.75                   | %          | 5.69     | %          |
| Rate of increase in  compensation levels     |       | 3.84                   | %          | 4.75     | %          |

 

Discount rates for the NorthAmerican and U.K. plans are determined by the capital markets in which theplans operate and for that reason may vary. The expected long-term rate of return on assets is based on the expectedmix of investments purchased by the respective plans.  The North American pension plans invest themajority of their assets  in equitieswhich are expected to provide returns several hundred basis points higher thanbonds, which are the primary investment vehicle for the U.K. pension plans.  As a result, the expected long-term rate ofreturn on assets is higher for the North American plans compared to the U.K.plans.

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*Employer Contributions*

The company made $16.0million in contributions to North American plans during the nine months offiscal year 2007.  We anticipate that$300,000 will be contributed by the company to the North American pension plansduring the last quarter of fiscal year 2007.

The company made $11.5million in contributions to the U.K. plans during the nine months of fiscalyear 2007 and anticipates making $4.1 million in contributions over theremainder of the fiscal year. Discussions are currently underway with the pension trustee regardingthe appropriate level of future contributions.

*Defined Contribution Plans*

In the U.S., we sponsor a savings plan that providesbenefits to substantially all U.S. associates with a match to employeecontributions at a rate of 50 percent of the first 6 percent up to $60,000 ofassociates’ eligible compensation.  Thecompany may also make an annual profit sharing contribution to the plan in anamount that is dependant upon the company’s financial performance during thefiscal year.

In the U.K., we sponsor a savings plan that providesbenefits to substantially all U.K. associates. The company provides a basic contribution and a match to employeecontributions, both of which depend on age and base salary.  The maximum employer contribution is up to12% of an associate’s base salary up to $180,000.

*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.

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*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 and nine months ended March31, 2007 and 2006:
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Service cost                           |       | $                                                    | 404        |                                                | $          | 363 |   | $ | 1,215 |   | $ | 1,271 |   |
| Interest cost                          |       | 647                                                  |       | 538                                                 |       | 1,944 |   | 1,746 |   |
| Expected return  on plan assets        |       | —                                               |       | —                                              |       | — |   | — |   |
| Amortization of  transition obligation |       | —                                               |       | —                                              |       | — |   | — |   |
| Amortization of  net loss              |       | (39                                                  | )          | 166                                                 |       | (117 | ) | 2 |   |
| Amortization of  prior service cost    |       | (165                                                 | )          | (165                                                | )          | (495 | ) | (495 | ) |
| Net periodic benefit  cost             |       | $                                                    | 847        |                                                | $          | 902 |   | $ | 2,547 |   | $ | 2,524 |   |

 

*Employer Contributions*

The company madecontributions in the form of premiums and medical claim payments to itshealth-care and post-retirement plans of $800,000 and $900,000 in the threemonths ended March 31, 2007 and 2006, respectively, and contributions of $2.5million in each of the nine month periods ended March 31, 2007 and 2006.  We plan to make additional payments estimatedto total $900,000 through June 30, 2007.

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**Note 6 —Goodwill & Intangible Assets.**

Goodwill andintangible assets are presented below by segment for the nine months endedMarch 31, 2007:
| ** **                           | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **All Other  Segments** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|---------------------------|------------|------------------------------------------------|------------|-----------------------------------|------------|------------------------------|------------|-----------|------------|
| Balance as of  June 30, 2006    |       | $                   | 167,538    |                                                  | $          | 43,168                    |       | $                                              | 18,990     |                              | $          | 54,351                       |       | $         | 38,780     |   | $ | 1,214 |   | $ | 324,041 |   |
| Goodwill  acquired during the period |       | 26,135              |       | —                                                |       | 1,869                     |       | —                                         |       | 2,619                             |       | —                       |       | 30,623    |       |
| Impairment  losses                   |       | —              |       | —                                                |       | —                    |       | —                                         |       | —                            |       | —                       |       | —    |       |
| Other                                |       | (276                | )          | (77                                                   | )          | (31                       | )          | (100                                           | )          | (71                               | )          | —                       |       | (555      | )          |
| Translation  adjustment              |       | 9,484               |       | 2,802                                                 |       | 1,213                     |       | 3,651                                          |       | 2,612                             |       | —                       |       | 19,762    |       |
| Balance as of  March 31, 2007   |       | $                   | 202,881    |                                                  | $          | 45,893                    |       | $                                              | 22,041     |                              | $          | 57,902                       |       | $         | 43,940     |   | $ | 1,214 |   | $ | 373,871 |   |

 

The following tablereflects changes in the net carrying amount of the components of intangibleassets for the nine months ended March 31, 2007:
| ** **                                    | ** ** | **Pension** | ** ** | **Trademark  & trade  name** | ** ** | **Customer  related  intangible** | ** ** | **Core/  developed  technology** | ** ** | **Non-  compete  agreements** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-------------|------------|---------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|-------------------------------|------------|-----------|------------|
| Balance as of  June 30, 2006                  |       | $           | 569        |                                  | $          | 112,966                           |       | $                                | 58,546     |                          | $          | 14,973    |       | $ | 21 |   | $ | 187,075 |   |
| Intangible  assets acquired during the period |       | —      |       | —                                |       | 18,671                            |       | —                           |       | 596                           |       | 19,267    |       |
| Amortization  expense                         |       | —      |       | —                                |       | (4,352                            | )          | (2,879                           | )          | (54                           | )          | (7,285    | )          |
| Translation  adjustment                       |       | (12         | )          | 7,245                                 |       | 3,678                             |       | 891                              |       | 1                             |       | 11,803    |       |
| Balance as of March 31,  2007                 |       | $           | 557        |                                  | $          | 120,211                           |       | $                                | 76,543     |                          | $          | 12,985    |       | $ | 564 |   | $ | 210,860 |   |

 

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The followingtable reflects the carrying value of intangible assets at March 31, 2007 andJune 30, 2006:
| ** **                                            | ** ** | **March 31, 2007** | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **Gross**                    | ** ** | ** **                  | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Carrying**                 | ** ** | **Accumulated**             | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                                            | ** ** | **Amount**                   | ** ** | **Amortization**            | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Intangible assets and intangible pension asset:       |       |                         |       |                        |       |   |   |   |   |
| Trademark and trade name                              |       | $                            | 120,211    |                        | $          | — |   | $ | 112,966 |   | $ | — |   |
| Customer related intangibles                          |       | 83,513                       |       | 6,970                       |       | 64,210 |   | 5,664 |   |
| Core/developed technology                             |       | 17,679                       |       | 4,694                       |       | 18,443 |   | 3,470 |   |
| Non-compete                                           |       | 1,018                        |       | 454                         |       | 672 |   | 651 |   |
| Intangible pension asset                              |       | 557                          |       | —                      |       | 569 |   | — |   |
| Total intangible  assets and intangible pension asset |       | $                            | 222,978    |                        | $          | 12,118 |   | $ | 196,860 |   | $ | 9,785 |   |

 

A component of the change in the gross carrying amountof trademark and trade name, customer related intangibles,core/developed technology and the intangible pension asset reflects translation adjustmentsbetween June 30, 2006 and March 31, 2007. These intangible assets are denominated in the currencies of oursubsidiaries outside the United States, and are translated into our reportingcurrency, the U.S. dollar, based on exchange rates at the balance sheet date.

The weighted average remaining life of amortizable intangible assets atMarch 31, 2007, was 9.58 years.  Futureestimated amortization expense is as follows:

| Fiscal year ending June 30: | ** ** | **Amount** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| 2007                                            |       | $          | 2,819      |   |
| 2008                                            |       | 11,276     |       |
| 2009                                            |       | 11,276     |       |
| 2010                                            |       | 11,193     |       |
| 2011                                            |       | 7,506      |       |
| 2012                                            |       | 7,180      |       |
| Thereafter                                      |       | 38,842     |       |
| Total                                           |       | $          | 90,092     |   |

 

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**Note 7 —Earnings Per Share.**

Basic earnings per shareare calculated on the basis of the weighted average number of common sharesoutstanding during the three and nine month periods ending March 31, 2007 and2006.  Diluted earnings per share is calculatedby dividing net income by the weighted average number of common sharesoutstanding, plus the dilutive effect of outstanding stock options and employeestock purchase plan shares using the “treasury stock” method over the samemeasurement period and contingent shares associated with the businesscombination.  The components of basic anddiluted earnings per share are as follows:
| ** **                                                                             | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Income from continuing  operations                                                     |       | $                                                    | 33,834     |                                                | $          | 29,336 |   | $ | 84,642 |   | $ | 60,403 |   |
| Discontinued operations                                                                |       | —                                               |       | 1,045                                               |       | — |   | 1,062 |   |
| Net income                                                                             |       | $                                                    | 33,834     |                                                | $          | 30,381 |   | $ | 84,642 |   | $ | 61,465 |   |
|                                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  outstanding shares of common stock                                   |       | 42,488                                               |       | 42,234                                              |       | 42,430 |   | 41,074 |   |
| Dilutive effect of  employee stock options and employee stock purchase plan shares (1) |       | 2,098                                                |       | 232                                                 |       | 2,132 |   | 267 |   |
|                                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Common stock and stock  equivalents                                                    |       | 44,586                                               |       | 42,466                                              |       | 44,562 |   | 41,341 |   |
|                                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings per  share:                                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Income from continuing  operations                                                     |       | $                                                    | 0.80       |                                                | $          | 0.69 |   | $ | 1.99 |   | $ | 1.47 |   |
| Discontinued operations                                                                |       | —                                               |       | 0.02                                                |       | — |   | 0.03 |   |
| Net income                                                                             |       | $                                                    | 0.80       |                                                | $          | 0.71 |   | $ | 1.99 |   | $ | 1.50 |   |
|                                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted earnings per  share:                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Income from continuing  operations                                                     |       | $                                                    | 0.76       |                                                | $          | 0.69 |   | $ | 1.90 |   | $ | 1.46 |   |
| Discontinued operations                                                                |       | —                                               |       | 0.02                                                |       | — |   | 0.03 |   |
| Net income                                                                             |       | $                                                    | 0.76       |                                                | $          | 0.71 |   | $ | 1.90 |   | $ | 1.49 |   |

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(1)             Theincrease in shares is principally caused by the inclusion of the 1,950,000contingent shares related to the business combination with WWLLP that we assumeare issued and outstanding for all of fiscal year 2007 when calculatingearnings per share for the three and nine month periods ended March 31, 2007.

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**Note 8 —Variable Interest Entities.**

FASB Interpretation No.46, “Consolidation of Variable Interest Entities,” as revised (FIN 46(R)),expands existing accounting guidance about when a company should include in itscondensed consolidated financial statements the assets, liabilities, andactivities of another entity.  In general,FIN 46(R) requires a variable interest entity (VIE), as defined by FIN 46(R),to be consolidated by its primary beneficiary. The primary beneficiary is defined as the company that will absorb amajority of the VIE’s expected losses or residual returns if they occur.  The adoption of FIN 46(R) had no effect onthe company.

The company’s Investmentin affiliates has historically consisted of investments in three entities:  WWLLP, Watson Wyatt Holdings (Europe) Limited(WWHE) and Professional Consultants Insurance Company, Inc. (PCIC).  As a result of our acquisition ofsubstantially all of the assets and most liabilities of WWLLP on July 31, 2005,the company owns 100% of the operations of the former WWLLP and WWHE.  For the nine months ended March 31, 2006 thecompany has accounted for its share of earnings from WWLLP and WWHE for themonth of July 2005 under the equity method and has consolidated results fromWatson Wyatt Limited for the months of August 2005 thru March 2006.

As of August 1, 2005, ourInvestment in affiliate consists solely of an equity investment in PCIC, whichwill continue to be accounted for under the equity method.  The company evaluated this investment inorder to determine the applicability of FIN 46(R).  Since the company is not obligated to absorba majority of expected losses or residual returns in this entity, the companyis not required to consolidate this entity.

PCIC was organized in1987 as a captive insurance company under the laws of the State ofVermont.  PCIC provides professionalliability insurance on a claims-made basis up to specified limits (after whicheach participant may obtain its own insurance) to Watson Wyatt and two otheractuarial and management consulting firms, all of which participate in theprogram as both policyholders and stockholders. Risk of loss is shared by the three member firms, though premiums are experience-rated toreflect differentials in loss experience. PCIC reserves for known claims associated with all threeparticipating firms and assesses the adequacy of these reserves on a quarterlybasis.   Any initial reserves andsubsequent changes in reserves are reflected in PCIC’s financialstatements.  The company records itsshare of PCIC’s results quarterly, but on a three month lag, based on itsownership percentage, which is currently 34.15 percent.  Capital contributions to PCIC are requiredwhen 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 $3.1 million, combined with letters ofcredit totaling $8.0 million for which PCIC has been designated as beneficiary,for a total maximum exposure of $11.1 million. Our agreements with PCIC could require additional payments to PCIC inthe event that the company decided to exit PCIC and adverse claimssignificantly exceed prior expectations. If these circumstances were to occur, the company would record aliability at the time it becomes probable and reasonably estimable.

**Note 9 —Comprehensive Income.**

Comprehensive incomeincludes net income, changes in the additional minimum pension liabilityresulting from translation adjustments and revaluations, and changes in thecumulative translation adjustment gain or loss. For the three months ended March 31, 2007, comprehensive income totaled$38.1 million, compared with $34.0 million for the three months ended March 31,2006.  For the nine months ended March31, 2007, comprehensive income totaled $120.1 million compared with $53.0million for the nine months ended March 31, 2006.

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**Note 10 —Restricted Shares.**

In conjunctionwith our business combination of WWLLP on July 31, 2005, we issued 9,090,571Class A common shares, 4,749,797 of which were subject to contractualtransfer restrictions.  Transferrestrictions expired on 2,339,761 of these shares on July 31, 2006 and willexpire on the remaining 2,410,036 shares on July 31, 2007.  The payment of up to an additional 1,950,000Class A shares after June 30, 2007 is contingent upon achievement bythe acquired business of certain financial performance goals.  Public sale of these shares, if issued, willbe restricted until July 31, 2009.

In conjunctionwith our acquisition of Brans on February 1, 2007, we issued 252,285Class A common shares which were subject to contractual transferrestrictions.  Transfer restrictions willexpire on 50% of these shares on each of February 1, 2008 and 2009.  The payment of up to an additional €8.0million of Class A shares (approximately 220,000 shares) after January 31,2008 is contingent upon achievement by the acquired business of certainfinancial performance goals during the twelve month period ending January 31,2008.  Sale of these shares, if issued,will also be subject to contractual transfer restrictions that will expire on50% of these shares on each of the first and second anniversaries of issuanceof the shares.

See Note 2 of thisreport for further information regarding these acquisitions.

**Note 11 — Guarantees andCommitments.**

The company historicallyhas provided guarantees on an infrequent basis to third parties in the ordinarycourse of business.  The guaranteesdescribed below are currently in effect and could require the company to makepayments to third parties under certain circumstances.

*Business combination with WWLLP*.  OnJuly 31, 2005, the company acquired substantially all of the assets and assumedmost liabilities of WWLLP, the company’s long-time alliance partner in the U.K.and Europe.  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 thebusiness combination agreement, Watson Wyatt Limited, the company’s principalU.K. subsidiary, has agreed to indemnify WWLLP against liabilities arising withrespect to certain liabilities assumed in the business combination by WatsonWyatt Limited and also with respect to certain tax liabilities.

Aspart of the original alliance arrangements in 1995, the company sold itsthen-existing businesses in the U.K. and Europe to the predecessor of WWLLP orits subsidiaries.  The company agreed toindemnify the buyers against liabilities arising with respect to prior acts oromissions of the businesses transferred. Furthermore, the company agreed to indemnify WWLLP against liabilitiesarising with respect to acts or omissions of the company and its subsidiariesduring the alliance arrangements.  Theseindemnities will continue following the business combination.

Thecompany is unable to estimate an amount of any potential future payments underthese arrangements because the occurrence of any of the events to which theindemnities apply is entirely speculative and the amount of any payment woulddepend upon the nature of the event triggering such indemnity. Managementbelieves that any potential for payment under such indemnities should declinewith the passage of time.  The companyhas insurance to cover liabilities arising from acts or omissions by thecompany and its subsidiaries, and such insurance may cover some or all of itsindemnity obligations relating to prior acts or omissions.  Except for such insurance, there are noprovisions for recourse to third parties, nor are any assets held by any thirdparties that the company as indemnitor can liquidate to recover amounts paidunder such indemnities.

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Inconnection with our business combination, payment of an additional 1,950,000shares of the company’s common stock after June 30, 2007 is contingent upon theachievement by the acquired business of agreed-upon financial performancegoals. The value of the contingent stock was $91.9 million based on the NYSEclosing price on April 30, 2007. The contingent consideration is payable byWatson Wyatt Limited and the payment obligations are guaranteed by Watson WyattWorldwide, Inc.

*Brans Acquisition*.  On February 1, 2007,the company acquired substantially all of the assets and assumed mostliabilities of Brans, its long-time alliance partner in the Netherlands.  In connection with this acquisition, paymentof up to an additional €8.0 million worth of Class A shares (approximately220,000 shares) after January 31, 2008 is contingent upon achievement by theacquired business of certain financial performance goals during the twelvemonth period ending January 31, 2008.  The contingent consideration is payable byWatson Wyatt Limited, an indirect wholly owned subsidiary of Watson WyattWorldwide, Inc., and the payment obligations are guaranteed by the company.

*Letters of Credit*.  The company has outstanding letters of creditto three beneficiaries totaling $14.6 million to guarantee payment in the eventthat the company fails to meet its financial obligations to thesebeneficiaries.  One letter of credit for$2.6 million expired in April 2007, while the second letter of credit totaling$8.0 million will remain outstanding as long as we retain an ownership share ofour affiliated captive insurance company, PCIC. The company has also provided a $5.0 million Australiandollar-denominated letter of credit (US $4.0 million) to an Australiangovernmental agency as required by local regulations. The estimated fair marketvalue of these letters of credit is immaterial because they have never beenused, and the company believes that the likelihood of any future usage isremote.

*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.  Thereare no provisions for recourse to third parties, nor are any assets held by anythird parties that any guarantor can liquidate to recover amounts paid undersuch indemnities.

*Wellspring Leases*.  We continue to guarantee two leases foroffice premises for Wellspring Resources, LLC (“Wellspring”), the benefitsadministration outsourcing business that we exited from in fiscal year1998.  The last guaranteed lease willexpire in November, 2007.  Based on ouranalysis and the limited duration of the remaining lease obligations, thecompany no longer records an obligation as the probability of any payment underthese lease guarantees is remote.

**Note 12 —Contingent Liabilities.**

*LegalProceedings*:  From time to time, we are a party to variouslawsuits, arbitrations or mediations that arise in the ordinary course ofbusiness. The matters reported on below involve the most significant pending orpotential claims against us.  We also have received subpoenas and requestsfor information in connection with government investigations.

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Wecarry substantial professional liability insurance with a self-insuredretention of $1 million per occurrence, which provides coverage forprofessional liability claims including the cost of defending such claims. Wereserve for contingent liabilities based on Statement of Financial AccountingStandards No. 5, “Accounting for Contingencies” (FAS 5) when it is determinedthat a liability, inclusive of defense costs, is probable and reasonablyestimable. Management believes, based on currently available informationincluding the existence of professional liability insurance, that the resultsof all pending claims against the company will not have a material adverseeffect on the results of operations, but litigation is subject to many factorswhich are difficult to predict so there can be no assurance that in the eventof a material unfavorable result in one or more of such matters, we will notincur material costs.

*Iron Workers Local No. 25 et al. v. Watson Wyatt & Co.:* As previously disclosed in the company’sreport on Form 8-K filed on March 23, 2007, the company has entered into asettlement with the Trustees of the Iron Workers, Local No. 25 Pension Fund, ofa previously disclosed lawsuit related to actuarial services providedto the Fund.

*WatsonWyatt v. SBC Holdings, Inc. (Stroh Brewery Company): *  On July23, 2004, we received a demand letter from Stroh’s counsel alleging that errorsin valuations for 2001 and subsequent years understated the liabilities of itspension plan and overstated the company’s net worth.  As a result, Strohclaimed it did not annuitize its defined benefit plan and redeemed its stock atan inflated price.  On April 15, 2005, Watson Wyatt filed a petition infederal court to compel arbitration of the matter. Subsequently, Stroh filed ananswer and counterclaim, alleging damages in excess of $46 million.  Thecourt granted in part and denied in part our motion for summary judgment, andwe have filed an appeal to the Sixth Circuit Court of Appeals that is pending.

*Departmentof Labor Investigation:*On November 17, 2006, Watson WyattInvestment Consulting Inc. (“WWIC”) received a subpoena from the United StatesDepartment of Labor (“DOL”) in connection with its investigation into thecompensation of consultants and other investment advisers.  WWIC hasresponded to the subpoena and continues to cooperate with the DOL.

**Note 13 — Recent Accounting Pronouncements**.

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) publishedStatement of Financial Accounting Standards No. 158, “Employers’ Accounting forDefined Benefit Pension Plans and Other Postretirement Plans” (FAS 158), whichis an amendment to FAS 87, “Employers’ Accounting for Pensions”; FAS 88, “Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits”; and FAS 132(R), revision to FAS132, “Employers’Disclosures about Pensions and Other Postretirement Benefits”.  FAS 158 requires companies to recognize thefunded status of defined benefit pension and postretirement plans as an assetor liability in its statement of financial position and to recognize changes inthat funded status in the year in which the changes occur through comprehensiveincome. The provisions of FAS 158 are effective for fiscal years ending afterDecember 15, 2006 and the transition method is prospective.  As a result, the company will adopt theprovisions of FAS 158 for the fiscal year ending June 30, 2007.  The company is currently evaluating theimpact that adoption of FAS 158 will have on the condensed consolidatedfinancial statements.

In September 2006, the U.S.Securities and Exchange Commission staff issued Staff Accounting Bulletin No.108, “ Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (SAB 108).   SAB 108 eliminates the diversity of practicesurrounding how public companies quantify financial statement misstatements. Itestablishes an approach that requires quantification of financial statementmisstatements based on the effects of the misstatements on each of the company’sfinancial statements and the related financial statement disclosures. SAB 108must be applied to our annual financial statements for the year ending June 30,2007. The adoption of SAB 108 is expected to have no impact on the company’scondensed consolidated financial statements.

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InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes —an interpretation of FASB Statement No. 109”(“FAS 109”), which clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FAS No. 109, “Accounting for IncomeTaxes.”  FIN 48 prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return.  ThisInterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition.  This Interpretation is effective for fiscal years beginningafter December 15, 2006 so it will be effective for the company in fiscal year2008, which begins on July 1, 2007.  The company is currently evaluatingthe effects that this Interpretation may have on its condensed consolidatedfinancial statements.

**Note 14 — Subsequent Event**

PCIC, the company’scaptive insurance company (as further described in note 8), notified WatsonWyatt in April 2007 that it had substantially increased reserves during thequarter ended March 31, 2007 in response to unusually rapid development ofcertain specific claims against its three participating firms.  These reserve increases were unrelated to thecompany’s Iron Workers claim (as further discussed in Note 12) which had beenfully reserved by PCIC prior to this quarter.

As a result of theclaims development withrespect to these specific cases (and not to any change in reserving methodology),PCIC has determined that it will experience an unusually large loss for thequarter ended March 31, 2007.  Thecompany’s share of this loss is $4.1 million, as determined under the equitymethod of accounting that the company employs relative to PCIC.  The company has included this loss in itsresults for the quarter ended March 31, 2007 due to materiality, as opposed torecording it on a three month lag as has been the practice historically.

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

**ExecutiveOverview**

**General**

Watson Wyatt is a globalconsulting firm focusing on providing human capital and financial consultingservices. We provide services in five principal practice areas: Benefits,Technology and Administration Solutions, Human Capital Consulting, Insuranceand Financial Services and Investment Consulting, operating from 95 offices in30 countries throughout North America, Europe, Asia-Pacific and Latin America.The company employed approximately 6,370 and 6,000 associates as of March31,2007 and 2006 respectively, in the following practice areas:  

|                                                | ** ** | **As of March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|
| ** **                                     | ** ** | **2007**                           | ** ** | **2006** | ** ** |
| Benefits Group                                 |       | 2,710                              |       | 2,600 |   |
| Technology and  Administration Solutions Group |       | 755                                |       | 730 |   |
| Human Capital Group                            |       | 800                                |       | 760 |   |
| Insurance and Financial  Services Group        |       | 370                                |       | 330 |   |
| Investment Consulting  Group                   |       | 365                                |       | 340 |   |
| Other (including  Communication)               |       | 790                                |       | 680 |   |
| Corporate                                      |       | 580                                |       | 560 |   |
| Total                                          |       | 6,370                              |       | 6,000 |   |

 

We help our clientsenhance business performance by improving their ability to attract, retain, andmotivate qualified employees. We focus on delivering consulting services thathelp our clients anticipate, identify and capitalize on emerging opportunitiesin human capital management.  We alsoprovide independent financial advice regarding all aspects of life assuranceand general insurance, as well as investment advice to assist our clients indeveloping disciplined and efficient investment strategies to meet theirinvestment goals.  Our target marketclients include those companies in the Fortune 1000, Pension & Investments(P&I) 1000, the FTSE 100, and equivalent organizations in markets around theworld.

As leading economiesworldwide become more services-oriented, human capital and financial managementhas become increasingly important to companies and other organizations. Theheightened competition for skilled employees, unprecedented changes inworkforce demographics, regulatory changes related to compensation and retireebenefits and rising employee-related costs have increased the importance ofeffective human capital management. Insurance and investment decisions havebecome increasingly complex and important in the face of changing economies anddynamic financial markets.  We help ourclients address these issues by combining our expertise in human capital andfinancial management with consulting and technology, to improve the design andimplementation of various human resources and financial programs, includingcompensation, retirement, health care, insurance and investment plans.

The human resourcesconsulting industry, although highly fragmented, is highly competitive and iscomprised of major human capital consulting firms, specialist firms, consultingarms of accounting firms and information technology consulting firms.  We believe we have successfully managed coststhroughout the company by leveraging our variable compensation cost structure,initiating targeted job reductions and controlling discretionary spending. Webelieve we are well positioned to take advantage of continued improvement inthe overall economy.

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In the short term, ourrevenues are driven by many factors including the general state of the globaleconomy and the resulting level of discretionary spending by our clients, theability of our consultants to attract new clients or cross-sell to existingclients, and the impact of new regulations in the legal and accounting fieldsthat most recently increased demand for our executive compensation and benefitspractices.  In the long term, we expectthat the company’s financial results will depend in large part upon how well wesucceed in deepening our existing client relationships through thoughtleadership and focus on cross-practice solutions, actively pursuing new clientsin our target markets, cross selling and strategic acquisitions.  We believe that the highly fragmentedindustry in which we operate represents tremendous growth opportunities for us,because we offer a unique business combination of benefits and human capitalconsulting as well as strategic technology solutions.

**PrincipalServices**

We design, develop andimplement human resource and risk management strategies and programs throughthe following closely-interrelated practice areas:

**Benefits Group-**The Benefits Group, accountingfor 56 percent of our total third quarter fiscal year 2007 revenues, is thefoundation of our business.  Retirement,the core of our Benefits Group business, is less impacted by discretionaryspending reductions than our other segments, mainly due to the recurring natureof client relationships.  Our corporateclient retention rate within our target market has remained very high. Revenuefor our retirement practice is seasonal, with the third and fourth quarters ofeach fiscal year being the busier periods. Major revenue growth drivers in this practice include changes inregulations, particularly those affecting pension plans in the U.K., leveragefrom other practices, an improving economy, increased global demand andincreased market share.   Servicesprovided through the Benefits Group include the following:**

·                  Servicesrelated to the design of retirement plans, including pension, 401(k) andexecutive benefit plans

·                  Advicerelated to health care, disability and other group benefit plans

·                  Compensation,benefits, expatriate and human resources practice strategy, implementation andadministration

·                  Actuarialservices

·                  Strategicworkforce planning

**Technology and AdministrationSolutions Group -**Our Technology and AdministrationSolutions Group (TAS), accounting for 10 percent of our total third quarterfiscal year 2007 revenues, provides information technology services to ourcustomers.  Services provided through theTAS Group include the following:

·                  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

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**HumanCapital Group** - Our**Human CapitalGroup (HCG), accounting for 10 percent of our total third quarter fiscal year2007 revenues, generally encompasses short-term projects. As a result, thissegment is most sensitive to cyclical economic fluctuations.  Services provided through HCG include thefollowing:

·                  Adviceconcerning compensation plans, including broad-based and executivecompensation, 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 & FinancialServices Group** - Our Insurance & Financial ServicesGroup (I&FS) accounts for 8 percent of our total third quarter fiscal year2007 revenues. This business is characterized by ongoing relationships with ourclients that will typically utilize our services on a number of differentprojects.  Services provided throughI&FS include the following:

·                  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-**Our Investment Consulting Group accounts for 9 percent of our total thirdquarter fiscal year 2007 revenues.  Thisbusiness, although relationship based, can be affected by volatility ininvestment returns, particularly as clients look to us for assistance inmanaging that volatility.  Servicesprovided through our Investment Consulting Group include the following:

·                  Investmentconsulting services to pension plans and other institutional funds

·                  Inputon governance and regulatory issues

·                  Analysisof asset allocation and investment strategies

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

While we focus ourconsulting services in the areas described above, management believes that oneof our primary strengths is our ability to draw upon consultants from ourdifferent practices to deliver integrated services to meet the needs of ourclients.  This capability includescommunication and change management implementation support services.

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

**Financial Statement Overview**

Watson Wyatt’s fiscalyear ends June 30. The financial statements contained in this quarterly reportreflect Condensed Consolidated Balance Sheets as of the end of the thirdquarter of fiscal year 2007 (March 31, 2007) and as of the end of fiscal year2006 (June 30, 2006), Condensed Consolidated Statements of Operations for thethree and nine month period ended March 31, 2007 and 2006, CondensedConsolidated Statements of Cash Flows for the nine month period ended March 31,2007 and 2006 and a Condensed Consolidated Statement of Changes in Stockholders’Equity for the nine month period ended March 31, 2007.

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The company’s acquisitionof substantially all of the assets and assumption of most liabilities of WWLLPwas completed July 31, 2005 and, as a result, our financial statements reflectthe consolidation of the European operations of Watson Wyatt Limited beginningAugust 1, 2005.  Prior to July 31, 2005,or for one month of the first quarter of fiscal year 2006, the company recordedits share of the results of WWLLP and WWHE using the equity method ofaccounting.  This prior year income isreflected in the “Income from affiliates” line on our income statement.  Our share of the results of our affiliatedcaptive insurance company, PCIC, continues to be recorded using the equitymethod of accounting, and is also reflected in the “Income from affiliates”line.

Wederive substantially all of our revenue from fees for consulting services,which generally are billed based on time and materials or on a fixed-feebasis.  Clients are typically invoiced ona monthly basis with revenue generally recognized as services are performed.For fiscal years 2004, 2005, and 2006, revenue from U.S. consulting operationshas comprised approximately 80, 80 and 50 percent of consolidated revenue,respectively.  For the first threequarters of fiscal year 2007, revenue from U.S. consulting operations comprisedapproximately 45 percent of consolidated revenue.  No single client accounted for more than 2percent of our consolidated revenue for any of the most recent three fiscalyears.

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

Professionaland subcontracted services represent fees paid to external service providersfor employment, marketing and other services, including reserves forprofessional liability claims.  For thelast three fiscal years, approximately 60 to 70 percent of these professionaland subcontracted services were directly incurred on behalf of our clients andwere reimbursed by them, with such reimbursements being included in revenue.

Occupancy, communicationsand other expenses represent expenses for rent, utilities, supplies andtelephone to operate office locations as well as non-client-reimbursed travelby associates, publications and professional development. This line item alsoincludes miscellaneous expenses, including gains and losses on foreign currencytransactions.

General andadministrative expenses include the operational costs, professional fees andinsurance premiums associated with corporate management, general counsel,marketing, human resources, finance, research and technology support.

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**CriticalAccounting Policies and Estimates**

Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosures of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Our estimates, judgments andassumptions are continually evaluated based on available information andexperience. Because of the use of estimates inherent in the financial reportingprocess, actual results could differ from those estimates. The areas that webelieve are critical accounting policies include revenue recognition, valuationof billed and unbilled receivables from clients, discretionary compensation,income taxes, pension assumptions, incurred but not reported claims, andgoodwill and intangible assets. The critical accounting policies discussedbelow involves making difficult, subjective or complex accounting estimatesthat could have a material effect on our financial condition and results ofoperations. These critical accounting policies require us to make assumptionsabout matters that are highly uncertain at the time of the estimate orassumption and different estimates that we could have used or changes in theestimate that are reasonably likely to occur may have a material impact on ourfinancial statements and results of operations.

***RevenueRecognition***

Revenue includes feesprimarily generated from consulting services provided.  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 may change based upon agreement by both parties.Individual consultants’ billing rates are principally based on a multiple ofsalary and compensation costs.

Revenue for fixed-feearrangements, which span multiple months, is based upon the percentage ofcompletion method.* *Thecompany typically has three types of fixed-fee arrangements:  annual recurring projects, projects of ashort duration, and non-recurring system projects.  Annual recurring projects and the projects ofshort duration are typically straightforward and highly predictable innature.  As a result, the project managerand financial staff are able to identify, as the project status is reviewed andbills are prepared monthly, the occasions when cost overruns could lead to therecording of a loss accrual.

Our non-recurring systemprojects are typically found in our Technology and Administration SolutionsGroup.  They tend to be more complexprojects that are longer in duration and subject to more changes in scope asthe project progresses than projects undertaken in other segments. We evaluateat least quarterly, and more often as needed, project managers’estimates-to-complete to assure that the projects’ current status is accountedfor properly.  Our Technology andAdministration Solutions Group contracts generally provide that if the client terminates a contract,the company is entitled to payment for services performed through termination.

Revenue recognition forfixed-fee engagements is affected by a number of factors that change theestimated amount of work required to complete the project such as changes inscope, the staffing on the engagement and/or the level of clientparticipation.  The periodic engagementevaluations require us to make judgments and estimates regarding the overallprofitability and stage of project completion that, in turn, affect how werecognize revenue.  The companyrecognizes a loss on an engagement when estimated revenue to be received forthat engagement is less than the total estimated direct and indirect costsassociated with the engagement.  Lossesare recognized in the period in which the loss becomes probable and the amountof the loss is reasonably estimable.  Thecompany has experiencedcertain costs in excess of estimates from time to time.  Management believes that it is rare, however,for these excess costs to result in overall project losses.

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The company has developed various software programsand technologies that we provide to clients in connection with consultingservices.  In most instances, suchsoftware is hosted and maintained by the company and ownership of thetechnology and rights to the related code remain with the company.  Software developed to be utilized inproviding services to a client, but for which the client does not have thecontractual right to take possession, is capitalized in accordance with theAICPA’s Statement of Position 98-1 “Accounting for the Costs of ComputerSoftware 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.  As a result wedo not recognize revenue during the implementation phase of an engagement.

Revenue recognized in excess of billings is recordedas unbilled accounts receivable.  Cashcollections and invoices generated in excess of revenue recognized are recordedas deferred revenue until the revenue recognition criteria are met.  Client reimbursable expenses, including thoserelating to travel, other out-of-pocket expenses and any third-party costs, areincluded in revenue, and an equivalent amount of reimbursable expenses areincluded in professional and subcontracted services as a cost of revenue.

***Valuation of Billed and UnbilledReceivables 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 isgenerally recorded as a reduction to revenue. Our allowance policy is based on the aging of our billed and unbilledclient receivables 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.

***Discretionary Compensation***

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. In those quarters where theestimated annual bonus level changes, the remaining estimated annual bonus isaccrued over the remaining quarters as a constant percentage of estimatedfuture pre-bonus profitability.  Annualbonus levels may vary from current expectations as a result of changes in thecompany’s forecast of pre-bonus profitability and competitive employment marketconditions.

 

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***Income Taxes***

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 significant judgments regarding the futurerecoverability of deferred tax assets. The company does not provide deferred taxes on cumulative earnings offoreign subsidiaries that have been reinvested indefinitely as asserted underAccounting Principles Board (APB) 23, “Accounting for Income Taxes — SpecialAreas”.  Due to the availability offoreign tax credits, it is not practicable to estimate the company’s income taxliability that might be payable if such earnings were not reinvestedindefinitely, however, deferred taxes are provided for earnings of foreignsubsidiaries which the company plans to remit. 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.

***Pension Assumptions***

We sponsor both qualified and non-qualified, non-contributory definedbenefit pension plans covering substantially all of our associates.  Under our plans in North America, benefitsare based on the number of years of service and the associates’ compensationduring the five highest paid consecutive years of service.  Under our plan in the U.K., benefits arebased on the number of years of service and the associates’ compensation duringthe three years before leaving the plan. The non-qualified plan, included onlyin North America, provides for pension benefits that would be covered under thequalified plan but are limited by the Internal Revenue Code.  The non-qualified plan is an unfundedarrangement and therefore has no assets. The benefit liability is reflected on the balance sheet.  The measurement date for each of the plans isJune 30.

Determination of ourobligations and annual expense under the plans is based on a number ofassumptions that, given the longevity of the plans, are long-term infocus.  A change in one or a combinationof these assumptions could have a material impact on our pension benefitobligation and related expense.  For thisreason, management employs a long-term view so that assumptions do not changefrequently 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.

Discount rates for the NorthAmerican and U.K. plans are determined by the capital markets in which theplans operate and for that reason may vary. The expected long-term rate of return on assets is based on the expectedmix of investments purchased by the respective plans.  The North American pension plans invest themajority of their assets in equities which are expected to provide returnsseveral hundred basis points higher than bonds, which are the primaryinvestment vehicle for the U.K. pension plans. As a result, the expected long-term rate of return on assets is higherfor the North American plans compared to the U.K. plans.

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*NorthAmerica*

The followingassumptions were used at the end of the past three fiscal years in thevaluation of our North American plans:

|                                              | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Discount rate                                |       | 6.25                                  | %          | 5.25 | % | 6.25 | % |
| Expected  long-term rate of return on assets |       | 8.75                                  | %          | 9.00 | % | 9.00 | % |
| Rate of increase in  compensation levels     |       | 3.84                                  | %          | 3.34 | % | 3.34 | % |

 

The 6.25 percentdiscount rate assumption used at the end of fiscal year 2006 represents a 100basis point increase from the 5.25 percent discount rate used at the end offiscal year 2005 and the same as the discount rate used at the end of fiscalyear 2004.  The company’s 2006 discountrate assumption was determined by matching future pension benefit payments withexpected future U.S. AA corporate bond yields for the same periods.

The expectedlong-term rate of return on assets assumption was 8.75 percent per annum at theend of fiscal year 2006 and represents a 25 basis point reduction from the rateof return used in fiscal years 2005 and 2004. Selection of the returnassumption at 8.75 percent per annum was supported by an analysis performed bythe company of the weighted average yield expected to be achieved with theanticipated makeup of investments.  Theinvestment makeup is heavily weighted towards equities.  The return on assets through the nine monthsof fiscal year 2007 has been 10.1 percent, compared to a return of 8.7 percentin the nine months of fiscal year 2006.

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

|                                                       | **Change in Assumption** | ** ** | ** **    | **Effect on FY2007  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 |                                                              |       |

 

Theabove sensitivities reflect the impact of changing one assumption at a time. Itshould be noted that economic factors and conditions often affect multipleassumptions simultaneously and the effects of changes in key assumptions arenot necessarily linear. The company’s U.S. Other Postretirement EmployeeBenefits Plan is relatively insensitive to discount rate changes due to theplan provisions that have been established to control costs and as such nosensitivity results are shown in the table above.

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*UnitedKingdom*

The followingassumptions were used in the valuation of our U.K. plan at June 30, 2006, July31, 2005, the date of the business combination and April 30, 2005, the formerWWLLP fiscal year end: 

|                                              | ** ** | **Period Ended** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **June 30,**     | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** | **2005** | ** ** |
| Discount rate                                |       | 5.10                  | %          | 5.00 | % | 5.30 | % |
| Expected  long-term rate of return on assets |       | 5.69                  | %          | 5.63 | % | 5.76 | % |
| Rate of increase in  compensation levels     |       | 4.75                  | %          | 4.75 | % | 4.75 | % |

 

The 5.10 percentdiscount rate assumption used at the end of July 30, 2006 represents a 10 basispoint increase from the discount rate at July 31, 2005. The discount rate isset having regard to yields on European AA corporate bonds at the measurementdate and this increase reflects the change in yields between these two dates.

The expectedlong-term rate of return on assets assumption remained the same from July 31,2005 to June 30, 2006 and was supported by an analysis performed by the companyof the weighted average return expected to be achieved given the anticipatedmakeup of investments, which is heavily weighted towards bonds. The return onassets through the first nine months of fiscal year 2007 has been 11.4 percent,compared to a return of 9.8 percent in the first eight months of fiscal year2006.

The followinginformation illustrates the sensitivity to a change in certain assumptions forthe U.K. pension plans:

|                                                       | **Change in Assumption** | ** ** | ** **    | **Effect on FY2007  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***

The company uses actuarial assumptions to estimate and record aliability for incurred but not reported (IBNR) professional liability claimsand engaged an external actuarial firm to assist in the calculation of theseestimates.  Our estimated IBNR liabilityis based on long-term trends and averages, and reflects consideration of anumber of factors, including changes in claim reporting patterns, claimsettlement patterns, judicial decisions, and legislation and economicdecisions, but excludes the effect of claims data for large cases due to theinsufficiency of actual experience with such cases.  Management does not currently expectsignificant fluctuations in the IBNR liability, based on the company’shistorical claims experience.  However,our estimated IBNR liability will fluctuate if claims experience changes overtime.

34

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***Goodwill and Intangible Assets***

In applying the purchasemethod of accounting for business combinations, amounts assigned toidentifiable assets and liabilities acquired have been based on estimated fairvalues as of the date of the acquisitions, with the remainder recorded asgoodwill. Estimates of fair value have been based primarily upon future cashflow projections discounted to present value using a risk adjusted discountrate. We evaluate our goodwill for impairment annually and whenever indicatorsof impairment exist. The evaluation is based upon a comparison of the estimatedfair value of the reporting unit to which the goodwill has been assigned to thesum of the carrying value of the net assets for that reporting unit. The fairvalues used in this evaluation are estimated based upon a multiple of revenuefor the reporting unit. This revenue multiple is based on our experience andknowledge of our own and other deals in the marketplace. Intangible assets areinitially valued at fair market value using generally accepted valuationmethods appropriate for the type of intangible asset. Intangible assets withdefinite lives are amortized over their estimated useful lives and are reviewedfor impairment if indicators of impairment arise. The evaluation of impairmentwould be based upon a comparison of the carrying amount of the intangible assetto the estimated future undiscounted net cash flows expected to be generated bythe asset. If estimated future undiscounted net cash flows are less than thecarrying amount of the asset, the asset would be considered impaired. Theimpairment expense would be determined by comparing the estimated fair value ofthe intangible asset to its carrying value, with any shortfall from fair valuerecognized as an expense in the current period.

35

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**Resultsof Operations**

Thetable below sets forth our historical Condensed Consolidated Statements ofOperations data for continuing operations as a percentage of change betweenperiods indicated:  

**Condensed Consolidated Statements of Operations**

(in thousands)
| ** **                                             | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **%** | ** ** |
| ** **                                             | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**                                      | ** ** | ** **                                          | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Revenue                                                |       | $                                                    | 395,598    |                                                | $          | 343,072 |   | 15.3 | % | $ | 1,098,027 |   | $ | 924,722 |   | 18.7 | % |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Costs of providing  services:                          |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Salaries and  employee benefits                        |       | 211,807                                              |       | 191,582                                             |       | 10.6 |   | 598,447 |   | 514,339 |   | 16.4 |   |
| Professional and  subcontracted services               |       | 26,494                                               |       | 17,884                                              |       | 48.1 |   | 72,659 |   | 56,490 |   | 28.6 |   |
| Occupancy,  communications and other                   |       | 49,375                                               |       | 41,689                                              |       | 18.4 |   | 136,008 |   | 118,229 |   | 15.0 |   |
| General and  administrative expenses                   |       | 40,445                                               |       | 39,300                                              |       | 2.9 |   | 118,005 |   | 107,895 |   | 9.4 |   |
| Depreciation and  amortization                         |       | 15,123                                               |       | 11,510                                              |       | 31.4 |   | 41,797 |   | 32,319 |   | 29.3 |   |
|                                                   |       | 343,244                                              |       | 301,965                                             |       |   |   | 966,916 |   | 829,272 |   |   |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Income from operations                                 |       | 52,354                                               |       | 41,107                                              |       | 27.4 |   | 131,111 |   | 95,450 |   | 37.4 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| (Loss)/Income from  affiliates                         |       | (4,490                                               | )          | 310                                                 |       | (1,548.4 | ) | (5,357 | ) | 1,732 |   | (409.3 | ) |
| Interest expense                                       |       | (304                                                 | )          | (1,344                                              | )          | 77.4 |   | (1,336 | ) | (3,703 | ) | 63.9 |   |
| Interest income                                        |       | 889                                                  |       | 1,047                                               |       | (15.1 | ) | 3,101 |   | 2,344 |   | 32.3 |   |
| Other non-operating  income/(loss)                     |       | 37                                                   |       | 44                                                  |       | (15.9 | ) | 141 |   | (2,106 | ) | 106.7 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Income from continuing  operations before income taxes |       | 48,486                                               |       | 41,164                                              |       | 17.8 |   | 127,660 |   | 93,717 |   | 36.2 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Provision for  income taxes                            |       | 14,652                                               |       | 11,828                                              |       | 23.9 |   | 43,018 |   | 33,314 |   | 29.1 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations                     |       | $                                                    | 33,834     |                                                | $          | 29,336 |   | 15.3 | % | $ | 84,642 |   | $ | 60,403 |   | 40.1 | % |

 

**Three andNine Months Ended March 31, 2007 Compared to the Three and Nine Months EndedMarch 31, 2006**

As a result of the July31, 2005 acquisition of WWLLP, the three and nine month periods ended March 31,2007 and the three month period ended March 31, 2006 include the consolidatedoperating results of the business acquired from WWLLP for the entire period,whereas the operating results for the nine months ended March 31, 2006 includesthe acquired business for the months August 2005 through March 2006.  The analysis below highlights the changesbetween the condensed consolidated statements of operations for the quartersended March 31, 2007 and 2006 and segregates the effects of the acquisitionfrom the historical company’s results. The analysis also highlights the impactof the European currencies, principally the British Pound and to a lesserextent the Euro, on our financial results. Following this analysis is a proforma analysis which assumes that the acquisition and consolidation of theacquired business had occurred at the beginning of each period presented.  Management believes that the pro formaanalysis provides a more meaningful comparison of financial results.

36

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***Revenue.***

Revenues for the thirdquarter of fiscal year 2007 were $396 million, an increase of $53 million, or15 percent, from $343 million in the third quarter of fiscal year 2006.  The overall increase in revenues is dueprimarily to growth in our business, but also includes a $17 million increaseassociated with strengthening European currencies during the third quarter of fiscalyear 2007 and a $6.9 million increase in reimbursable expenses incurred onbehalf of our clients. The average exchange rate used to translate our revenuesearned in the U.K. increased to 1.9631 for the third quarter of fiscal year2007 from 1.7476 in the third quarter of fiscal year 2006. The average exchangerate used to translate our revenues earned in Euros increased to 1.3190 for thethird quarter of fiscal year 2007 from 1.2009 in the third quarter of fiscalyear 2006. Changes in the value of the U.S. dollar relative to other foreigncurrencies had a negligible impact on revenues.

The increases in oursegment revenue for the third quarter of fiscal year 2007 as compared to thethird quarter of fiscal year 2006 are due to the following:

·                  Benefitsincreased revenues $22.8 million, or 11 percent, over the third quarter of fiscalyear 2006 due primarily to increased demand for our services from existingclients, including plan design, valuation and administration in the U.S. andplan design and valuation in Europe.  Thestrengthening of the European currencies accounted for 4 percentage points ofthe increase.

·                  Technologyand Administration Solutions increased revenues $2.9 million, or 8 percent,over the third quarter of fiscal year 2006, largely due to an increase in thenumber of projects that went into service during the fiscal year.  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), the company beginsrecognizing revenue after projects go into service.  No revenues are recognized during projectimplementation.  At March 31, 2007, thecompany had 76 projects in service and 66 projects in implementation.  At March 31, 2006, the company had 39 projectsin service and 44 projects in implementation. The strengthening of the European currencies accounted for 5 percentagepoints of the increase.

·                  HumanCapital Group increased revenues $4.9 million, or 13 percent, over the thirdquarter of fiscal year 2007 primarily due to strong demand for compensationconsulting, including executive compensation, sales effectiveness and strategicrewards.  The strengthening of theEuropean currencies accounted for 3 percentage points of the increase.

·                  InvestmentConsulting increased revenues $10.5 million, or 44 percent, over the thirdquarter of fiscal year 2006 due to an increase in demand for our services,especially investment strategy advice. The strengthening of the European currencies accounted for 7 percentagepoints of the increase.

·                  Insuranceand Financial Services increased revenues $2.3 million, or 8 percent, over the thirdquarter of fiscal year 2006 due to the strengthening of the Europeancurrencies.  Excluding the effects offoreign currency, revenues declined 4 percent. The quarter ended March 31, 2006includes revenue from a large demutualization project that was completed priorto the quarter ended March 31, 2007.

37

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Revenues for the ninemonths ended March 31, 2007 were $1.1 billion, an increase of $173 million, or19 percent, from $925 million for the nine months ended March 31, 2006.  The business combination was completed onJuly 31, 2005, and therefore, the nine months ended March 31, 2006 only includeeight months of our European operations. A discussion of pro forma revenue is provided on page 44.  The European currencies strengthened duringthe nine months ended March 31, 2007 and resulted in $34 million of the revenueincrease.  The average exchange rate usedto translate our revenues earned in the U.K. increased to 1.9220 for the ninemonths ended March 31, 2007 from 1.7606 for the nine months ended March 31,2006.  The average exchange rate used totranslate our revenues earned in Euros increased to 1.2983 for the nine monthsended March 31, 2007 from 1.2040 in the nine months ended March 31, 2006.Additionally, reimbursable expenses incurred on behalf of our clients increasedby $8 million during the nine months ending March 31, 2007.

The increases in oursegment revenue for the nine months ended March 31, 2007 as compared to thenine months ended March 31, 2006 are due to the additional month of Europeanoperations as well as the following:

·                  Benefitsincreased revenues $71.3 million, or 13 percent, over the nine months endedMarch 31, 2006 due to increased demand from existing clients for plan design,valuation and administration services. The strengthening of the European currencies accounted for 3 percentagepoints of the increase.

·                  Technologyand Administration Solutions increased revenues $19.4 million, or 20 percent,over the nine months ended March 31, 2006, largely due to an increase in thenumber of projects that went into service during the fiscal year.  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), the company beginsrecognizing revenue after projects go into service.  No revenues are recognized during projectimplementation.  At March 31, 2007, thecompany had 76 projects in service and 66 projects in implementation.  At March 31, 2006, the company had 39projects in service and 44 projects in implementation.  The strengthening of the European currenciesaccounted for 4 percentage points of the increase.

·                  HumanCapital Group increased revenues $20.4 million, or 19 percent, over the ninemonths ended March 31, 2006 primarily due to increased demand for compensationconsulting, including executive compensation, sales effectiveness and strategicrewards.  The strengthening of theEuropean currencies accounted for 2 percentage points of the increase.

·                  InvestmentConsulting increased revenues $32.8 million, or 53 percent, over the ninemonths ended March 31, 2006 due to an increase in demand for our services,especially investment strategy advice. The strengthening of the European currencies accounted for 5 percentagepoints of the increase.

·                  Insuranceand Financial Services increased revenues $17.7 million, or 27 percent, overthe nine months ended March 31, 2006 primarily due to an increase in projectwork, including life insurance consulting projects.  The strengthening of the European currenciesaccounted for 9 percentage points of the increase.

38

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***Salariesand Employee Benefits*.**

Salaries and employeebenefit expenses for the third quarter of fiscal year 2007 were $211.8 millioncompared to $191.6 million for the third quarter of fiscal year 2006, anincrease of $20.2 million or 10.6 percent, 4.5 percentage points of which canbe attributed to the strengthening European currencies. The increase, includingthe impact of foreign exchange, is mainly due to additional salary expense of$14.4 million, higher accrual for discretionary compensation expense of $5.5million, higher benefits expense of $2.1 million, a decrease in capitalizationof $0.2 million related to the capitalization of time spent customizingin-house administration systems in accordance with AICPA’s Statement ofPosition 98-1, “Accounting for the Costs of Computer Software Developed orObtained for Internal Use”, partially offset by a decrease in pension expenseof $2.0 million. As a percentage of revenue, salaries and employee benefitsdecreased to 53.5 percent from 55.8 percent.

Salaries and employee benefitexpenses for the nine months of fiscal year 2007 were $598.4 million comparedto $514.3 million for the nine months of fiscal year 2006, an increase of $84.1million or 16.4 percent, 4.4 percentage points of which can be attributed tothe strengthening European currencies. The increase was mainly due toadditional salary and employee benefit expenses of $56.4 million related to theoperation of WWLLP which we acquired in a business combination. The increase inthe historical company was due to higher salaries of $19.8 million, higheraccrual for discretionary compensation of $8.9 million, and increased benefitexpense of $2.7 million. Also included is less capitalization of $4.5 millionrelated to time spent customizing in-house administration systems in accordancewith AICPA’s Statement of Position 98-1, “Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use”.  Additionally, a decrease in pension expenseof $8.1 million partially offset the increases outlined above.  As a percentage of revenue, salaries andemployee benefits decreased to 54.5 percent from 55.6 percent.

***Professionaland Subcontracted Services*.**

Professional andsubcontracted services expense for the third quarter of fiscal year 2007 were$26.5 million compared to $17.9 million for the third quarter of fiscal year2006, an increase of $8.6 million or 48.0 percent, 9.6 percentage points ofwhich can be attributed to the strengthening European currencies. As apercentage of revenue, professional and subcontracted services increased to 6.7percent from 5.2 percent.  The increaseis mainly due to higher reimbursable expenses incurred on behalf of clients andincreased costs in Europe for temporary staff and consulting fees.

Professional andsubcontracted services used in consulting operations for the nine months offiscal year 2007 were $72.7 million, compared to $56.5 million for the ninemonths of fiscal year 2006, an increase of $16.2 million or 28.6 percent, 6.2percentage points of which can be attributed to the strengthening Europeancurrencies.  The increase was partiallydue to additional expenses of $4.5 million related to the operation of WWLLPwhich we acquired in a business combination as well as to higher reimbursableexpenses incurred on behalf of clients. As a percentage of revenue,professional and subcontracted services increased to 6.6 percent from 6.1percent.

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

Occupancy, communicationsand other expenses for the third quarter of fiscal year 2007 were $49.4 millioncompared to $41.7 million for the third quarter of fiscal year 2006, anincrease of $7.7 million or 18.5 percent, 4.3 percentage points of which can beattributed to the strengthening European currencies.  The increase is mainly due to increases intravel, rent, telephone, and general office as well as the impact of thestrengthening European currencies, offset by a decrease in promotionexpense.  As a percentage of revenue,occupancy, communications and other increased to 12.5 percent from 12.2percent.

39

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Occupancy, communicationsand other expenses for the nine months of fiscal year 2007 were $136.0 millioncompared to $118.2 million for the nine months of fiscal year 2006, an increaseof $17.8 million or 15.1 percent, 3.5 percentage points of which can beattributed to the strengthening European currencies. The increase was mainlydue to additional expenses of $13.4 million related to the operation of WWLLPwhich we acquired in a business combination. The increase of $4.4 millionassociated with the historical company was principally attributable toincreases in expenses such as travel, telephone, repairs and maintenance, duesand entertainment, insurance and promotion partially offset by decreases inexpenses such as rent, and general office expense.  As a percentage of revenue, occupancy,communications and other decreased to 12.4 percent from 12.8 percent.

***Generaland Administrative Expenses.***

General andadministrative expenses for the third quarter of fiscal year 2007 were $40.4million, compared to $39.3 million for the third quarter of fiscal year 2006,an increase of $1.1 million or 2.9 percent. The increase is primarily due toincreased salaries and benefits of $1.9 million, increased equipment rentalexpense of $1.0 million, and increased general office, repairs and maintenanceand promotion expense of $2.5 million partially offset by decreases ininsurance expense of $2.3 million, rent and utilities, dues, and professionaldevelopment expense of $0.8 million and telephone expense of $1.2 million.  As a percentage of revenue, general andadministrative expense decreased to 10.2 percent from 11.4 percent. Excludingthe impact of foreign exchange, general and administrative expenses decreasedby 2.6%.

General andadministrative expenses for the nine months of fiscal year 2007 were $118.0million, compared to $107.9 million for the nine months of fiscal year 2006, anincrease of $10.1 million or 9.4 percent, 4.6 percentage points of which can beattributed to the strengthening European currencies.  The increase is mainly due to additionalexpenses of $9.7 million related to the operation of WWLLP which we acquired ina business combination. The increase of $0.4 million in the historical companyis mainly due to higher salary expense of $0.4 million, higher professionalservices expense of $3.2 million, and higher rent and utility expense of $0.5million partially offset by a decrease in insurance expense of $3.7million.  As a percentage of revenue,general and administrative expense decreased to 10.7 percent from 11.7 percent.

***Depreciationand Amortization.***

Depreciation andamortization for the third quarter of fiscal year 2007 was $15.1 million,compared to $11.5 million for the third quarter of fiscal year 2006, anincrease of $3.6 million or 31.4 percent, 5.0 percentage points of which can beattributed to the strengthening European currencies. The increase, includingthe impact of foreign exchange, is mainly due to a $2.9 million increase inamortization of internally developed software used to support our BenefitsGroup and Technology and Administration Solutions Group, and $0.7 millionincrease in depreciation on capital assets and amortization ofintangibles.  As a percentage of revenue,depreciation and amortization increased to 3.8 percent from 3.4 percent.

Depreciation andamortization for the nine months of fiscal year 2007 was $41.8 million,compared to $32.3 million for the nine months of fiscal year 2006, an increaseof $9.5 million or 29.4 percent, 4.2 percentage points of which can beattributed to the strengthening European currencies. The increase is due toadditional expense of $2.3 million related to the operation of WWLLP which weacquired in a business combination. The increase of $7.2 million in thehistorical company is due to $5.0 million of amortization on internallydeveloped software used to support our Benefits Group and Technology andAdministration Solutions Group and $2.2 million higher depreciation expense oncapital assets and amortization of intangibles. As a percentage of revenue, depreciation and amortization increased to3.8 percent from 3.5 percent.

 

40

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***(Loss)/Income From Affiliates.***

Loss from affiliates forthe third quarter of fiscal year 2007 was $4.5 million, compared to income of$0.3 million for the third quarter of fiscal year 2006, a decrease of $4.8million.  Loss from affiliates for thenine months of fiscal year 2007 was $5.4 million compared to income of $1.7million for the nine months of fiscal year 2006.  The income in fiscal year 2006 includes notonly our share of income from PCIC but also our share of results from ourEuropean affiliates for the month of July 2005, after which time the businesscombination was consummated.

PCIC’s losses, andconsequently our share of those losses, are the result of a substantialincrease in PCIC’s reserves during the quarter ended March 31, 2007 in responseto unusually rapid development of several claims against its threeparticipating firms.

***InterestExpense.***

Interest expense for thethird quarter of fiscal year 2007 was $0.3 million, compared to $1.3 millionfor the third quarter of fiscal year 2006. Interest expense for the nine months of fiscal year 2007 was $1.3million, compared to $3.7 million for the nine months of fiscal year 2006.  The decrease in both periods was due to alower average debt balance.

***InterestIncome.***

Interest incomefor the third quarter of fiscal year 2007 was $0.9 million, compared to $1.0million for the third quarter of fiscal year 2006. Interest income for the ninemonths of fiscal year 2007 was $3.1 million, compared to $2.3 million for thenine months of fiscal year 2006.  Theyear to date increase is mainly due to a higher average cash balance in thecurrent period compared to the prior period combined with higher short-terminterest rates in the United States and Europe.

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

Other non-operating income/(loss) in the nine months offiscal year 2006 includes a $1.4 million gain recognized by the company on thesale of its New Zealand operations, netted against a loss of $3.6 million on aforeign exchange forward contract entered into in conjunction with the businesscombination.

***Provisionfor Income Taxes.***

Provision for incometaxes for the nine months of fiscal year 2007 was $43.0 million, compared to$33.3 million for the nine months of fiscal year 2006. Our effective tax ratewas 33.7 percent for the nine months of fiscal year 2007 and 35.6 percent forthe nine months of fiscal year 2006.  Thetax rate decrease is due to the geographic mix of income and the release of taxreserves.  The company has not providedU.S. deferred taxes on cumulative earnings of foreign subsidiaries that havebeen reinvested indefinitely, which also includes foreign subsidiariesaffiliated with our recent business combination with WWLLP.  We record a tax benefit on foreign net operatingloss carryovers and foreign deferred expenses only if it is more likely thannot that a benefit will be realized.

***IncomeFrom Continuing Operations.***

Income from continuingoperations for the third quarter of fiscal year 2007 was $33.8 million,compared to $29.3 million for the third quarter of fiscal year 2006.  As a percentage of revenue, income fromcontinuing operations remained at 8.6 percent. Income from continuingoperations for the nine months of fiscal year 2007 was $84.6 million, compared to$60.4 million for the nine months of fiscal year 2006.  As a percentage of revenue, income fromcontinuing operations increased to 7.7 percent from 6.5 percent.

41

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

Diluted earnings pershare, income from continuing operations for the third quarter of fiscal year2007 was $0.76, compared to $0.69 for the third quarter of fiscal year2006.   Diluted earnings per share,income from continuing operations for the nine months of fiscal year 2007 was$1.90, compared to $1.46 for the nine months of fiscal year 2006. The dilutedearnings per share calculation for the three and nine months of fiscal year2007 assumes that the 1,950,000 contingent shares related to the businesscombination had been issued and outstanding for the entire three and nine months.

**Pro FormaStatement of Operations**

For a more meaningful comparison of financial results,the following table presents the company’s unaudited results for the ninemonths ended March 31, 2007, compared with the unaudited pro forma results forthe nine months ended March 31, 2006, as if the business combination hadoccurred at the beginning of each period. The diluted earnings per share calculation in this pro forma analysisassumes that the 1,950,000 shares related to the business combination had beenissued at the beginning of each period. The financial results for the three month period ended March 31, 2007and for the three month period ended March 31, 2006 are comparable anddiscussion regarding these quarters is provided beginning on page 36.

In our opinion,information for the nine months ended March 31, 2007 and the pro forma resultsfor the nine months ended March 31, 2006 contain all adjustments, consistingonly of normal recurring adjustments necessary to fairly present thisinformation. Operating results for any period are not necessarily indicative ofresults for any future periods. The unaudited pro forma combined incomestatement is presented for illustrative purposes only and is not indicative ofthe results of operations that might have occurred had the business combinationactually taken place as of the dates specified, or that may be expected tooccur in the future.

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**Pro-Forma Combined Statements of Operations**

(in thousands,except per share data)

 
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                              | ** ** | **Actual**                                           | ** ** | **Actual**                                          | ** ** | **%** | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** | **%** | ** ** |
| ** **                                              | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                              | ** ** | **(Unaudited)**                                      | ** ** | ** **                                          | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Revenue                                                 |       | $                                                    | 395,598    |                                                | $          | 343,072 |   | 15.3 | % | $ | 1,098,027 |   | $ | 961,641 |   | 14.2 | % |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Costs of  providing services:                           |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                          |       | 211,807                                              |       | 191,582                                             |       | 10.6 |   | 598,447 |   | 538,379 |   | 11.2 |   |
| Professional and subcontracted services                 |       | 26,494                                               |       | 17,884                                              |       | 48.1 |   | 72,659 |   | 57,681 |   | 26.0 |   |
| Occupancy, communications and other                     |       | 49,375                                               |       | 41,689                                              |       | 18.4 |   | 136,008 |   | 121,420 |   | 12.0 |   |
| General and administrative expenses                     |       | 40,445                                               |       | 39,300                                              |       | 2.9 |   | 118,005 |   | 114,493 |   | 3.1 |   |
| Depreciation and amortization                           |       | 15,123                                               |       | 11,510                                              |       | 31.4 |   | 41,797 |   | 33,744 |   | 23.9 |   |
|                                                    |       | 343,244                                              |       | 301,965                                             |       |   |   | 966,916 |   | 865,717 |   |   |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Income from  operations                                 |       | 52,354                                               |       | 41,107                                              |       | 27.4 |   | 131,111 |   | 95,924 |   | 36.7 |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| (Loss)/income  from affiliates                          |       | (4,490                                               | )          | 310                                                 |       | (1,548.4 | ) | (5,357 | ) | 1,244 |   | (530.6 | ) |
| Interest  income/(expense), net                         |       | 585                                                  |       | (297                                                | )          | 297.0 |   | 1,765 |   | (1,772 | ) | 199.6 |   |
| Other  non-operating income                             |       | 37                                                   |       | 44                                                  |       | (15.9 | ) | 141 |   | 1,496 |   | (90.6 | ) |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations before income taxes  |       | 48,486                                               |       | 41,164                                              |       | 17.8 |   | 127,660 |   | 96,892 |   | 31.8 |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Provision for income  taxes                             |       | 14,652                                               |       | 11,828                                              |       | 23.9 |   | 43,018 |   | 34,610 |   | 24.3 |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Income from continuing  operations                      |       | $                                                    | 33,834     |                                                | $          | 29,336 |   | 15.3 | % | $ | 84,642 |   | $ | 62,282 |   | 35.9 | % |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Basic earnings per  share:                              |       | $                                                    | 0.80       |                                                | $          | 0.69 |   |   |   | $ | 1.99 |   | $ | 1.52 |   |   |   |
| Diluted earnings per  share:                            |       | $                                                    | 0.76       |                                                | $          | 0.69 |   |   |   | $ | 1.90 |   | $ | 1.51 |   |   |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Weighted average shares  of common stock, basic (000)   |       | 42,488                                               |       | 42,234                                              |       |   |   | 42,430 |   | 41,074 |   |   |   |
| Weighted average shares  of common stock, diluted (000) |       | 44,586                                               |       | 42,466                                              |       |   |   | 44,562 |   | 41,341 |   |   |   |

 

The pro forma informationfor the nine months ended March 31, 2006 excludes, in Other non-operatingincome, a loss of $3.6 million on a foreign exchange forward contract enteredinto in conjunction with the business combination with WWLLP.

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***Revenue.***

Revenuesfor the nine months ended March 31, 2007 were $1.1 billion, an increase of $138million, or 14.3 percent, from $962 million for the nine months ended March 31,2006.  The European currenciesstrengthened during the nine months ended March 31, 2007 and resulted in $34million of the revenue increase.  Theaverage exchange rate used to translate our revenues earned in the U.K.increased to 1.9220 for the nine months ended March 31, 2007 from 1.7606 forthe nine months ended March 31, 2006. The average exchange rate used totranslate our revenues earned in Euros increased to 1.2983 for the nine monthsended March 31, 2007 from 1.2040 in the nine months ended March 31, 2006.

Theincreases in our segment revenue for the nine months ended March 31, 2007 ascompared to the nine months ended March 31, 2006 are as follows:

·                  Benefitsincreased revenues $52.5 million, or 9 percent, over the nine months endedMarch 31, 2006, due to increased demand from existing clients for plan design,valuation and administration services. The strengthening of the European currencies accounted for 3 percentagepoints of the increase.

·                  Technologyand Administration Solutions increased revenues $14.8 million, or 14 percent,over the nine months ended March 31, 2006, largely due to an increase in thenumber of projects that went into service during the fiscal year.  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), the company beginsrecognizing revenue after projects go into service.  No revenues are recognized during projectimplementation.  The strengthening of theEuropean currencies accounted for 4 percentage points of the increase.

·                  HumanCapital Group increased revenues $18.0 million, or 17 percent, over the ninemonths ended March 31, 2006, primarily due to continuing strong demand forcompensation consulting services.  Thestrengthening of the European currencies accounted for 2 percentage points ofthe increase.

·                  InvestmentConsulting increased revenues $29.1 million, or 45 percent, over the ninemonths ended March 31, 2006, due to an increase in the number of associatesworking in this practice combined with an overall strong demand for ourservices, especially structured products. The strengthening of the European currencies accounted for 6 percentagepoints of the increase.

·                  Insuranceand Financial Services increased revenues $10.1 million, or 14 percent, overthe nine months ended March 31, 2006, primarily due to an increase in projectwork, including life insurance consulting projects.  The strengthening of the European currenciesaccounted for 9 percentage points of the increase.

 

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***Salariesand Employee Benefits*.**

Salaries and employeebenefit expenses for the nine months of fiscal year 2007 were $598.4 million,compared to $538.4 million for the nine months of fiscal year 2006, an increaseof $60.0 million or 11.1 percent.   Theincrease was mainly due to higher salaries of $38.9 million, a higher accrualfor discretionary compensation of $20.3 million, higher benefits of $7.7million, the impact of the strengthening European currencies and a decrease incapitalization of time spent customizing in-house administration systems of$4.5 million, in accordance with AICPA’s Statement of Position 98-1, “Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use”partially offset by a decrease in pension expense of $11.4 million.  As a percentage of revenue, salaries andemployee benefits decreased to 54.5 percent from 56.0 percent.

***Professionaland Subcontracted Services*.**

Professional andsubcontracted services used in consulting operations for the nine months of fiscalyear 2007 were $72.7 million, compared to $57.7 million for the nine months offiscal year 2006, an increase of $15.0 million or 26.0 percent. As a percentageof revenue, professional and subcontracted services increased to 6.6 percentfrom 6.0 percent.  The increase isprincipally attributable to higher reimbursable expenses incurred on behalf ofclients and increased costs in Europe for temporary staff and consulting fees.

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

Occupancy, communicationsand other expenses for the nine months of fiscal year 2007 were $136.0 millioncompared to $121.4 million for the nine months of fiscal year 2006, an increaseof $14.6 million or 12.0 percent.  Theincrease is mainly due to increases in rent and utilities, repairs and maintenanceexpenses, travel, telephone and dues, as well as the impact of thestrengthening European currencies, partially offset by a decrease in generaloffice expense.  As a percentage ofrevenue, occupancy, communications and other decreased to 12.4 percent from12.6 percent.

***Generaland Administrative Expenses.***

General andadministrative expenses for the nine months of fiscal year 2007 were $118.0million, compared to $114.5 million for the nine months of fiscal year 2006, anincrease of $3.5 million or 3.1 percent.  The increase is mainly due to increases in salaries expense of $6.1million, professional services expense of $3.7 million, rent and utilitiesexpense of $1.9 million, equipment rental expense of $1.0 million partiallyoffset by a decrease in professional indemnity insurance of $7.7 million anddecreases in miscellaneous expenses such as telephone, promotion, repairs andmaintenance, and dues totaling $1.5 million. As a percentage of revenue, general and administrative expensesdecreased to 10.7 percent from 11.9 percent.

***Depreciationand Amortization.***

Depreciation andamortization for the nine months of fiscal year 2007 was $41.8 million comparedto $33.7 million for the nine months of fiscal year 2006, an increase of $8.1million or 24.0 percent. The increase is mainly due to amortization ofinternally developed software used to support our Benefits and Technology andAdministration Solutions Groups of $6.0 million and amortization of intangiblesof $2.1 million.  As a percentage ofrevenue, depreciation and amortization increased to 3.8 percent from 3.5percent.

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***(Loss)/IncomeFrom Affiliates.***

Loss from affiliates forthe nine months of fiscal year 2007 was $5.4 million compared to income of $1.2million for the nine months of fiscal year 2006.  The amount of income or loss recognizedreflects our share of PCIC’s earnings for the relative period.

PCIC’s losses, andconsequently our share of those losses, are primarily the result of asubstantial increase in PCIC’s reserves during the quarter ended March 31, 2007in response to unusually rapid development of several claims against its threeparticipating firms.

***InterestIncome/(Expense), net.***

Net interest income forthe nine months of fiscal year 2007 was $1.8 million compared to net interestexpense of $1.8 million for the nine months of fiscal year 2006.  The increase in net interest income in thecurrent period was due to an increased net investment balance and a decreasedaverage debt balance.

***OtherNon-Operating Income.***

Other non-operating income in the nine months of fiscal year2006 includes a $1.7 million gain recognized by the company on the sale of itsNew Zealand operations.

***Provisionfor Income Taxes.***

Provision for incometaxes for the nine months of fiscal year 2007 was $43.0 million, compared to$34.6 million for the nine months of fiscal year 2006. Our effective tax ratewas 33.7 percent for the nine months of fiscal year 2007 and 35.7 percent forthe nine months of fiscal year 2006.  Thetax rate decrease is due to the geographic mix of income and the release of taxreserves. The company has not provided U.S. deferred taxes on cumulativeearnings of foreign subsidiaries that have been reinvested indefinitely, whichalso includes foreign subsidiaries affiliated with our recent businesscombination with WWLLP.  We record a taxbenefit on foreign net operating loss carryovers and foreign deferred expensesonly if it is more likely than not that a benefit will be realized.

***IncomeFrom Continuing Operations.***

Income from continuingoperations for the nine months of fiscal year 2007 was $84.6 million, comparedto $62.3 million for the nine months of fiscal year 2006.  As a percentage of revenue, income fromcontinuing operations increased to 7.7 percent from 6.5 percent.

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

Diluted earnings pershare, income from continuing operations for the nine months of fiscal year2007 was $1.90, compared to $1.51 for the nine months of fiscal year 2006. The diluted earnings per share calculationassumes that the 1,950,000 contingent shares related to the businesscombination have been issued and outstanding since the beginning of each fiscalyear presented.

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**Liquidity and Capital Resources**

Our cash and cashequivalents at March 31, 2007 totaled $69.2 million, compared to $165.3 millionat June 30, 2006.  The decrease in cashfrom June 30, 2006 to March 31, 2007 was mainly attributable to the paymentduring the first quarter of fiscal year 2007 of $96.5 million of previouslyaccrued discretionary compensation. We also paid $45.9 million in corporatetaxes, $29.2 million in capital expenditures and $9.5 million in dividendsduring the nine months of fiscal year 2007. These payments were funded by cash flow from current consultingoperations, from existing cash balances and from borrowings under our revolvingcredit facility.  Consistent with thecompany’s liquidity position, management considers various alternativestrategic uses of cash reserves including acquisitions, dividends and stockbuybacks, or any combination of these options. The company utilized cash onhand and $6.4 million from its credit facility toward the cash consideration payment made in connection with theacquisition of substantially all the assets of Brans.   The company believes that it has sufficientresources to fund operations through the next twelve months.

Our non U.S. operationsare substantially self-sufficient for their working capital needs.  At March 31, 2007, $42.6 million of the totalcash balance of $69.2 million was held outside of North America, which we havethe ability to utilize, if necessary. There are no significant repatriationrestrictions other than local or U.S. taxes associated with repatriation.

***CashFrom Operating Activities.***

Cash from operatingactivities for the nine months of fiscal year 2007 was $55.8 million, comparedto $65.0 million for the nine months of fiscal year 2006.  The difference is primarily attributable toan increase in billed and unbilled accounts receivable in fiscal year 2007.

The allowance fordoubtful accounts increased $3.0 million from June 30, 2006 to March 31, 2007.As a result of the increase in accounts receivable and work in process sinceJune 30, 2006, the number of days of accounts receivable and work in processoutstanding increased to 88 at March 31, 2007 from 83 at June 30, 2006.

***CashUsed in Investing Activities.***

Cash used in investingactivities for the nine months of fiscal year 2007 was $91.6 million, comparedto $176.0 million used in investing activities for the nine months of fiscalyear 2006.  The difference can beprimarily attributed to acquisition and contingent consideration paymentsassociated with the business combination of $132.8 million in the nine monthsof fiscal year 2006.

Expenditures of capitalfunds were $29.2 million for the nine months of fiscal year 2007.  Commitments of capital funds are estimated tobe $21.0 million for the remainder of fiscal year 2007. We expect cash fromoperations to adequately provide for these cash needs.

***Cash (Used in)/From Financing Activities.***

Cash used in financingactivities for the nine months of fiscal year 2007 was $63.0 million, comparedto cash from financing activities of $32.3 million for the nine months offiscal year 2006.  This change is primarilyattributable to activity under our credit facility which included netborrowings of $45.0 million in the nine months of fiscal year 2006 compared toa net repayment of $30.0 million in the nine months of fiscal year 2007.  Additionally, during the nine months offiscal year 2007, the company repurchased $33.4 million of common stock,compared to $3.9 million of common stock during the same period in fiscal year2006. The company also made a one-time payment of $8.4 million under a forwardcontract in fiscal year 2006.

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**Off-BalanceSheet Arrangements and Contractual Obligations**

The followingtable summarizes our contractual arrangements at March 31, 2007, and the timingand effect that such commitments are expected to have on our liquidity and cashflow in future periods:
| ** **                                                          | ** ** | **Remaining payments due by fiscal year as of March 31, 2007** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| **Contractual Cash Obligations (in thousands)** | ** ** | ** **                                                                                                       | ** ** | **Total** | ** ** | **Remaining  2007** | ** ** | **2008  through  2009** | ** ** | **2010  through  2011** | ** ** | **Thereafter** | ** ** |
| Lease  commitments                                                  |       | $                                                                                                                | 354,846    |   | $ | 14,196 |   | $ | 107,077 |   | $ | 85,810 |   | $ | 147,763 |   |
|                                                                     |            |                                                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***OperatingLeases.***  We leaseoffice space, furniture and selected computer equipment under operating leaseagreements with terms ranging from one to ten years. Management has determinedthat there is not a large concentration of leases that will expire in any onefiscal year.  Consequently, managementanticipates that any increase in future rent expense will be mainly marketdriven.

***CreditAgreement. ***The company has a credit facility provided bya syndicate of banks in an aggregate principal amount of $300 million.  Interest rates associated with this facilityvary with LIBOR and/or the Prime Rate and are based on our leverage ratio, asdefined by the credit agreement.  We arecharged a quarterly commitment fee, currently 0.125 percent of the facility,which varies with our financial leverage and is paid on the unused portion ofthe credit facility.  There were noborrowings under this facility as of March 31, 2007, compared to net borrowingsof $45 million as of March 31, 2006.  OnFebruary 1, 2007, the company accessed $6.4 million under its credit facilityin connection with the Brans Acquisition. Credit under the facility isavailable upon demand, although the credit facility requires us to observecertain covenants (including requirements for minimum net worth, which act torestrict dividends, cash flow leverage ratio and a fixed coverage charge) andis collateralized with a pledge of stock of material subsidiaries.  We were in compliance with all covenantsunder the credit facility as of March 31, 2007. This facility is scheduled tomature on June 30, 2010.

Aportion of the revolving facility is used to support required letters of creditissued under the credit line.  As aresult, $10.6 million of the facility was unavailable for operating needs as ofMarch 31, 2007.  We are also charged afee for outstanding letters of credit that also fluctuates based on ourleverage ratio.

***PensionContributions.***  Wehave made pension contributions of $27.5 million during the nine months offiscal year 2007.  We anticipatecontributing an additional $4.3 million to various plans over the remainder ofthe fiscal year.

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***Guarantees***

*Wellspring Leases*.  We continue to guarantee two leases foroffice premises for Wellspring Resources, LLC (“Wellspring”), the benefitsadministration outsourcing business that we exited from in fiscal year1998.  The last guaranteed lease willexpire in November, 2007.  Based on ouranalysis and the limited duration of the remaining lease obligations, thecompany no longer records an obligation as the probability of any payment underthese lease guarantees is remote.

*Business Combination with WWLLP*.  OnJuly 31, 2005, the company acquired substantially all the assets and assumedmost liabilities of WWLLP, the company’s long-time alliance partner in the U.K.and Europe.  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 business combination. In the business combination agreement, Watson Wyatt Limited, the company’sprincipal U.K. subsidiary, has agreed to indemnify WWLLP against liabilitiesarising with respect to certain liabilities assumed in the business combinationby Watson Wyatt Limited and also with respect to certain tax liabilities.

Aspart of the original alliance arrangements in 1995, the company sold itsthen-existing businesses in the U.K. and Europe to the predecessor of WWLLP orits subsidiaries.  The company agreed toindemnify the buyers against liabilities arising with respect to prior acts oromissions of the businesses transferred. Furthermore, the company agreed to indemnify WWLLP against liabilitiesarising with respect to acts or omissions of the company and its subsidiariesduring the alliance arrangements.  Theseindemnities will continue following the business combination.

Thecompany is unable to estimate an amount of any potential future payments underthese arrangements because the occurrence of any of the events to which the indemnitiesapply is entirely speculative and the amount of any payment would depend uponthe nature of the event triggering such indemnity. Management believes that anypotential for payment under such indemnities should decline with the passage oftime.  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.

Inconnection with our business combination, payment of an additional 1,950,000shares of the company’s common stock after June 30, 2007 is contingent upon theachievement by the acquired business of agreed-upon financial performancegoals. The value of the contingent stock was $91.9 million based on the NYSEclosing price on April 30, 2007. The contingent consideration is payable byWatson Wyatt Limited and the payment obligations are guaranteed by Watson WyattWorldwide, Inc.

*Brans Acquisition*.  On February 1, 2007,the company acquired substantially all of the assets and assumed mostliabilities of Watson Wyatt Brans & Co. (“Brans”), its long-time alliancepartner in the Netherlands.  Inconnection with this acquisition, payment of up to an additional €8.0 millionof Class A shares (approximately 220,000 shares) after January 31, 2008 iscontingent upon achievement by the acquired business of certain financialperformance goals during the twelve month period ending January 31, 2008.  Thecontingent consideration is payable by Watson Wyatt Limited and the paymentobligations are guaranteed by Watson Wyatt Worldwide, Inc.

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**RiskManagement**

Asa part of our overall risk management program, we carry customary commercialinsurance policies, including commercial general liability, employmentpractices liability, and claims-made professional liability insurance with aself-insured retention of $1 million per claim, which provides coverage forprofessional liability claims of the company and its subsidiaries, includingthe cost of defending such claims.  Ourprimary professional liability insurance coverage beyond our self-insuredretention amount is written by an affiliated captive insurance company (PCIC)owned by us and two other professional services firms.

Informulating its premium structure, PCIC estimates the amount it expects to payfor losses (and loss expenses) for all the members as a whole and thenallocates that amount to the member firms based on the individual member’sexpected losses.  PCIC bases premiumcalculations, which are determined annually based on experience through Marchof each year, on relative risk of the various lines of business performed byeach of the owner companies, past claim experience of each owner company (experiencerating), growth of each of those companies, industry risk profiles in generaland the overall insurance markets.  As ofJuly 1, 2006, the captive insurance company carries reinsurance for 90% oflosses it insures above $25 million.

Ouragreements with PCIC could require additional payments to PCIC in the eventthat the company decided to exit PCIC and adverse claims significantly exceedprior expectations.  If thesecircumstances were to occur, the company would record a liability at the timeit becomes probable and reasonably estimable.

Thecompany will continue to provide for the self-insured retention where specificestimated losses and loss expenses for known claims in excess of $1 million areconsidered probable and reasonably estimable.

Althoughthe company maintains professional liability insurance coverage, this insurancedoes not cover claims made after expiration of our current insurancecontracts.  Generally accepted accountingprinciples require that we record a liability for incurred but not reported(IBNR) professional liability claims if they are probable and reasonablyestimable, and for which we have not yet contracted for insurancecoverage.  The company uses actuarialassumptions to estimate and record its IBNR liability and has a $35.1 millionIBNR liability recorded as of March 31, 2007.

Insurance market conditionsfor our industry and the company include increases in overall premiumcost.  In addition, beginning in 2005PCIC raised the reinsurance attachment point from $15 million to $25 million. Trendstoward higher self-insured retentions and constraints on aggregate excesscoverages for this class of insurance coverage are anticipated to continue orto recur periodically, and to be reflected in our future annual insurancerenewals.  As a result, we will continueto assess our ability to secure future insurance coverage and we cannot assurethat such coverage will continue to be available indefinitely in the event ofspecific adverse claims experience, adverse loss trends, market capacityconstraints or other factors.  Inanticipation of the possibility of future reductions in risk transfer from PCICto re-insurers, as well as the hardening insurance market conditions in recentyears, the firms that own PCIC, including the company, have increased PCIC’scapital in the past and we will continue to re-assess capital requirements on aregular basis.

Inlight of increasing worldwide litigation, including litigation againstprofessionals, the company has implemented a requirement that all clientrelationships be documented by engagement letters containing risk mitigationclauses that were not included in all historical client agreements.  Nearly 100 percent of the company’s U.S.****andU.K.****corporate clients havesigned engagement letters including risk mitigation clauses, and initiatives tomaintain that process in the United States and the United Kingdom and completeit elsewhere are underway.

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**DisclaimerRegarding 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 5 — Retirement Benefits; Note 6 — Goodwilland Intangible Assets; Note 11 — Guarantees; Note 12 — Contingent Liabilities;the Executive Overview; Critical Accounting Policies and Estimates; thediscussion of our capital expenditures; Off-Balance Sheet Arrangements andContractual Obligations; Risk Management; and Part II, Item 1 “LegalProceedings”.  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, expressions or the negative of such terms orother comparable terminology. 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 to:

·              ourability to integrate acquired businesses, including the Brans business, intoour own business, processes and systems, and achieve the anticipated results;

·              ourcontinued ability to recruit and retain qualified associates;

·              thesuccess of our marketing, client development and sales programs after ouracquisitions;

·              ourability to maintain client relationships and to attract new clients after ouracquisitions;

·              declinesin demand for our services;

·              outcomesof pending or future litigation and the availability and capacity ofprofessional liability insurance to fund the outcome of pending cases or futurejudgments or settlements;

·              ourability 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;

·              actionsby competitors offering human resources consulting services, including publicaccounting and consulting firms, technology consulting firms andInternet/intranet development firms;

·              ourability to achieve cost reductions after our recent acquisitions;

·              foreigncurrency exchange and interest rate fluctuations;

·              exposureto liabilities that have not been expressly assumed in our acquisitiontransactions;

·              generaleconomic and business conditions that adversely affect us or our clients;

·              thelevel of capital resources required for future acquisitions and businessopportunities;

·              regulatorydevelopments abroad and domestically that impact our business practice;

·              legislativeand technological developments that may affect the demand for or costs of ourservices;

and other factorsdiscussed under “Risk Factors” in the company’s 2006 Annual Report on Form 10-Kfiled with the SEC on September 1, 2006. These statements are based on assumptions that may not come true.  All forward-looking disclosure is speculativeby its nature.  The company undertakes noobligation to update any of the forward-looking information included in thisreport, whether as a result of new information, future events, changedexpectations or otherwise.

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**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are exposed to market risksin the ordinary course of business. These risks include interest rate risk, foreign currency exchange andtranslation risk.

**Interest Rate Risk**

The primary objective of ourinvestment activities is to preserve principal while at the same timemaximizing yields without significantly increasing risk. To achieve thisobjective, we maintain our portfolio in mainly short term securities that arerecorded on the balance sheet at fair value.

**ForeignCurrency Risk**

International net revenuesresult from transactions by our foreign operations and are typicallydenominated in the local currency of each country. These operations also incurmost of their expenses in the local currency. Accordingly, our foreignoperations use the local currency, as their functional currency and our primaryinternational operations use the British Pound. Our international operationsare subject to risks typical of international operations, including, but notlimited to, differing economic conditions, changes in political climate,differing tax structures, other regulations and restrictions, and foreignexchange rate volatility. Accordingly, our future results could be adverselyimpacted by changes in these or other factors.

**TranslationExposure**

Foreign exchange ratefluctuations may adversely impact our consolidated financial position as wellas our consolidated results of operations and may adversely impact ourfinancial position as the assets and liabilities of our foreign operations aretranslated into U.S. dollars in preparing our condensed consolidated balancesheet. Additionally, foreign exchange rate fluctuations may adversely impactour condensed consolidated results of operations as exchange rate fluctuationson transactions denominated in currencies other than our functional currenciesresult in gains and losses that are reflected in our condensed consolidatedstatement of income.

We consolidate our internationalsubsidiaries by converting them into U.S. dollars in accordance with Statementof Financial Accounting Standards No. 52, “Foreign Currency Translation” (“FAS52”). The results of operations and our financial position will fluctuate whenthere is a change in foreign currency exchange rates.

**ITEM4.  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 andprocedures as such term is defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934. Based on that evaluation, our management, includingthe CEO and CFO, concluded that our disclosure controls and procedures wereeffective as of March 31, 2007.

**Changes in Internal Control OverFinancial Reporting**

There were no significantchanges in our internal control over financial reporting in the quarter endedMarch 31, 2007 that materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

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**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.

**PARTII.  OTHER INFORMATION**

**ITEM1.  LEGAL PROCEEDINGS.**

From time to time, we area party to various lawsuits, arbitrations or mediations that arise in theordinary course of business. The disclosure called for by Part II, Item 1,regarding our legal proceedings is incorporated by reference herein from Note12 “Contingent Liabilities,” of the Notes to the Condensed ConsolidatedFinancial Statements in this Form 10-Q for the quarter ending March 31,2007.

**ITEM1A.  RISK FACTORS.**

There are no materialchanges from the risk factors previously disclosed in our 2006 Annual Report onForm 10-K (File No. 001-16159) filed on September 1, 2006.

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS.**

The company did notengage in any unregistered sales of equity securities during the quarter.  See Item 5 below, however, with respect toour unregistered issuance of shares in connection with an off-shore acquisitionafter the interim reporting period.

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**Issuer Purchases of EquitySecurities**

The table belowpresents specified information about the company’s stock repurchases andrepurchase plans:
| **Period**                                  | ** ** | ** ** | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number of  Shares that May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1, 2007 through  January 31, 2007   |       | 84,000     |       | $                                                | 43.99      |                                             | 84,000     |                                                                                                                             | 1,329,534  |                                                                                                                                    |
|                                        |       |       |       |                                             |       |                                             |       |                                                                                                                             |       |
| February 1, 2007 through  February 28, 2007 |       | 66,700     |       | 46.58                                            |       | 66,700                                           |       | 1,262,834                                                                                                                        |       |
|                                        |       |       |       |                                             |       |                                             |       |                                                                                                                             |       |
| March 1, 2007 through  March 31, 2007       |       | 135,300    |       | 48.43                                            |       | 135,300                                          |       | 1,127,534                                                                                                                        |       |
|                                        |       |       |       |                                             |       |                                             |       |                                                                                                                             |       |
| Total                                       |       | 286,000    |       |                                             |       | 286,000                                          |       |                                                                                                                             |       |
|                                             |            |            |            |                                                  |            |                                                  |            |                                                                                                                                  |            |                                                                                                                                         |            |  |

 

During the firstquarter of fiscal year 2007, the company’s Board of Directors approved therepurchase of up to 1,500,000 shares of our Class A Common Stock. Shares thatthe company repurchases are primarily issued in connection with the company’semployee benefit plans.

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES.**

**None.**

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

None.

**ITEM 5.OTHER INFORMATION.**

Thecompany previously announced the dismissal of PricewaterhouseCoopers LLP (“PwC”)as the company’s independent registered public accounting firm on December 7,2006, and approved Deloitte & Touche LLP (“Deloitte”) as its newindependent registered public accounting firm, effective upon completion ofDeloitte’s customary client acceptance procedures which were completed onDecember 12, 2006.  Details of the eventwere filed under Item 4.01 of Form 8-K on December 13, 2006.

On February 1, 2007, thecompany issued 252,285 shares of the company’s Class A Common Stock underRegulation S and Section 4 (2) of the Securities Act of 1933 in connection withthe Brans acquisition.

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**ITEM 6. EXHIBITS.**
| 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(1)        |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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(1)        |
| 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(1) |

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(1)   Filed withthis Form 10-Q

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**Signatures**

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

Watson Wyatt Worldwide,Inc.(Registrant)
| /s/ John J. Haley    |                    | May 10, 2007 |   |   |
|----------------------|-------------------------|--------------|--------|--------|
| Name:                | John J. Haley           | Date         |   |   |
| Title:               | President and           |         |   |   |
|                 | Chief Executive Officer |         |   |   |
|                 |                    |         |   |   |
| /s/ Carl D.  Mautz   |                    | May 10, 2007 |   |   |
| Name:                | Carl D. Mautz           | Date         |   |   |
| Title:               | Vice President and      |         |   |   |
|                 | Chief Financial Officer |         |   |   |
|                 |                    |         |   |   |
| /s/ Peter L.  Childs |                    | May 10, 2007 |   |   |
| Name:                | Peter L. Childs         | Date         |   |   |
| Title:               | Controller              |         |   |   |
|                      |                         |              |        |        |  |  |

 

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