Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **x**  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                   |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                      |
|   |       | **For the quarterly period ended September 30, 2008**                                                                                                |
|   |       |                                                                                                                                                      |
|   |       | **OR**                                                                                                                                                    |
|   |       |                                                                                                                                                      |
| **o**  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                  |
|   |       |                                                                                                                                                      |
|   |       | **For the transition period from             to         ** |

 

**Commission File Number: 001-16159**

 

**WATSONWYATT WORLDWIDE, INC.**(Exact name of Registrant as specified in its charter)

 

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

 

**(703) 258-8000**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes  x         No  o

 

Indicate by check mark whether the Registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer” and “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o                         | Smaller reporting company o |
|---------------------------|--------------------------|-------------------------------------------------|----------------------------------|
|                      |                     | (Do  not check if a smaller  reporting company) |                             |

 

Indicate bycheck mark whether the Registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

 

Yes  o         No  x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of October 31, 2008.

 

| **Class**                                           | ** ** | ** **        | ** ** | **Outstanding  at October 31, 2008** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|-------------------------------------------|------------|
|                                                |       |              |
| Class A Common Stock, $.01 par value per share |       | 42,559,215 shares |

 

 

 

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Tableof Contents

 

**WATSON WYATT WORLDWIDE, INC.INDEX TO FORM 10-Q**

 

For the Three Months Ended September 30,2008

 
| PART I.   | FINANCIAL INFORMATION                                                                                                      |   |
|----------------|----------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                       |   |
| Item 1.        | Financial Statements (Unaudited)                                                                                           |   |
|           |                                                                                                                       |   |
|           | Condensed  Consolidated Statements of Operations—Three Months Ended September 30,  2008 and 2007                 | 1      |
|           |                                                                                                                       |   |
|           | Condensed  Consolidated Balance Sheets—September 30, 2008 and June 30, 2008                                 | 2      |
|           |                                                                                                                       |   |
|           | Condensed  Consolidated Statements of Cash Flows—Three Months Ended September 30,  2008 and 2007                 | 3      |
|           |                                                                                                                       |   |
|           | Condensed  Consolidated Statement of Changes in Stockholders’ Equity—Three Months Ended  September 30, 2008 | 4      |
|           |                                                                                                                       |   |
|           | Notes to the Condensed Consolidated  Financial Statements                                                                  | 5      |
|           |                                                                                                                       |   |
| Item 2.        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                | 20     |
|           |                                                                                                                       |   |
| Item 3.        | Quantitative and Qualitative Disclosures  About Market Risk                                                                | 37     |
|           |                                                                                                                       |   |
| Item 4.        | Controls and Procedures                                                                                                    | 37     |
|           |                                                                                                                       |   |
| PART II.  | OTHER INFORMATION                                                                                                          |   |
|           |                                                                                                                       |   |
| Item 1.        | Legal Proceedings                                                                                                          | 38     |
|           |                                                                                                                       |   |
| Item 1A.       | Risk Factors                                                                                                               | 38     |
|           |                                                                                                                       |   |
| Item 2.        | Unregistered Sales of Equity Securities and  Use of Proceeds                                                               | 38     |
|           |                                                                                                                       |   |
| Item 3.        | Defaults Upon Senior Securities                                                                                            | 39     |
|           |                                                                                                                       |   |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                                                       | 39     |
|           |                                                                                                                       |   |
| Item 5.        | Other Information                                                                                                          | 39     |
|           |                                                                                                                       |   |
| Item 6.        | Exhibits                                                                                                                   | 40     |
|           |                                                                                                                       |   |
| Signatures     |                                                                                                                       | 41     |
|           |                                                                                                                       |   |
| Certifications |                                                                                                                       | 46     |

 

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Tableof Contents

 

**WATSON WYATT WORLDWIDE, INC.**

**CondensedConsolidated Statements of Operations**

(Thousands of U.S. Dollars, Except Per Share Data)

(Unaudited)

 
| ** **                                              | ** ** | **Three months ended September 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
|                                                    |       |                                                     |       |   |   |
| Revenue                                                 |       | $                                                        | 426,126    |   | $ | 401,687 |   |
|                                                    |       |                                                     |       |   |   |
| Costs of providing services:                            |       |                                                     |       |   |   |
| Salaries and employee benefits                          |       | 235,879                                                  |       | 219,363 |   |
| Professional and subcontracted services                 |       | 26,315                                                   |       | 25,527 |   |
| Occupancy, communications and other                     |       | 49,997                                                   |       | 43,925 |   |
| General and administrative expenses                     |       | 43,887                                                   |       | 44,305 |   |
| Depreciation and amortization                           |       | 18,864                                                   |       | 17,334 |   |
|                                                    |       | 374,942                                                  |       | 350,454 |   |
|                                                    |       |                                                     |       |   |   |
| Income from operations                                  |       | 51,184                                                   |       | 51,233 |   |
|                                                    |       |                                                     |       |   |   |
| Income from affiliates                                  |       | 1,695                                                    |       | 925 |   |
| Interest income                                         |       | 1,031                                                    |       | 1,844 |   |
| Interest expense                                        |       | (569                                                     | )          | (2,258 | ) |
| Other non-operating (expense) / income                  |       | (19                                                      | )          | 89 |   |
|                                                    |       |                                                     |       |   |   |
| Income before income taxes                              |       | 53,322                                                   |       | 51,833 |   |
|                                                    |       |                                                     |       |   |   |
| Provision for income taxes                              |       | 18,162                                                   |       | 17,389 |   |
|                                                    |       |                                                     |       |   |   |
| Net income                                              |       | $                                                        | 35,160     |   | $ | 34,444 |   |
|                                                    |       |                                                     |       |   |   |
| Earnings per share:                                     |       |                                                     |       |   |   |
| Net income - Basic                                      |       | $                                                        | 0.82       |   | $ | 0.81 |   |
| Net income - Diluted                                    |       | $                                                        | 0.82       |   | $ | 0.77 |   |
|                                                    |       |                                                     |       |   |   |
| Weighted average shares of common stock,  basic (000)   |       | 42,935                                                   |       | 42,288 |   |
| Weighted average shares of common stock,  diluted (000) |       | 43,085                                                   |       | 44,896 |   |

 

Seeaccompanying notes to the

condensed consolidated financial statements

 

1

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Tableof Contents

 

**WATSONWYATT WORLDWIDE, INC.**

**Condensed Consolidated Balance Sheets**

(Thousands of U.S. Dollars,Except Share Data)

(Unaudited)

 
| ** **                                                                                                           | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                           | ** ** | **2008**               | ** ** | **2008**          | ** ** |
|                                                                                                                 |       |                   |       |              |       |
| **Assets**                                                                                                           | ** ** | ** **             | ** ** | ** **        | ** ** |
| Cash and cash equivalents                                                                                            |       | $                      | 67,475     |              | $          | 124,632 |   |
| Receivables from clients:                                                                                            |       |                   |       |              |       |
| Billed, net of allowances of $10,408 and  $8,544                                                                     |       | 219,281                |       | 239,593           |       |
| Unbilled, at estimated net realizable value                                                                          |       | 141,369                |       | 126,163           |       |
|                                                                                                                 |       | 360,650                |       | 365,756           |       |
| Deferred income taxes                                                                                                |       | 16,666                 |       | 18,576            |       |
| Other current assets                                                                                                 |       | 57,936                 |       | 48,523            |       |
| Total current assets                                                                                                 |       | 502,727                |       | 557,487           |       |
| Investment in affiliates                                                                                             |       | 14,088                 |       | 8,526             |       |
| Fixed assets, net                                                                                                    |       | 180,410                |       | 184,684           |       |
| Deferred income taxes                                                                                                |       | 80,518                 |       | 72,572            |       |
| Goodwill                                                                                                             |       | 571,016                |       | 634,176           |       |
| Intangible assets, net                                                                                               |       | 208,466                |       | 236,767           |       |
| Other assets                                                                                                         |       | 15,649                 |       | 21,764            |       |
|                                                                                                                 |       |                   |       |              |       |
| **Total Assets**                                                                                                     |       | $                      | 1,572,874  |              | $          | 1,715,976 |   |
| ** **                                                                                                           | ** ** | ** **             | ** ** | ** **        | ** ** |
| **Liabilities**                                                                                                      | ** ** | ** **             | ** ** | ** **        | ** ** |
| Accounts payable and accrued liabilities,  including discretionary compensation                                      |       | $                      | 266,321    |              | $          | 381,784 |   |
| Income taxes payable and deferred                                                                                    |       | 146                    |       | 3,462             |       |
| Total current liabilities                                                                                            |       | 266,467                |       | 385,246           |       |
| Revolving credit facility                                                                                            |       | 105,000                |       | —            |       |
| Accrued retirement benefits                                                                                          |       | 206,759                |       | 209,168           |       |
| Deferred rent and accrued lease losses                                                                               |       | 28,271                 |       | 29,239            |       |
| Deferred income taxes and other long term  tax liabilities                                                           |       | 12,600                 |       | 13,430            |       |
| Other noncurrent liabilities                                                                                         |       | 83,046                 |       | 94,498            |       |
|                                                                                                                 |       |                   |       |              |       |
| **Total Liabilities**                                                                                                |       | 702,143                |       | 731,581           |       |
|                                                                                                                 |       |                   |       |              |       |
| 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;  43,813,451 and 43,813,451 issued and  42,610,373 and 43,578,268 outstanding |       | 438                    |       | 438               |       |
| Additional paid-in capital                                                                                           |       | 453,501                |       | 456,681           |       |
| Treasury stock, at cost - 1,203,078 and  235,183 shares                                                              |       | (66,270                | )          | (13,222           | )          |
| Retained earnings                                                                                                    |       | 506,926                |       | 474,961           |       |
| Accumulated other comprehensive (loss)/income                                                                        |       | (23,864                | )          | 65,537            |       |
| **Total Stockholders’ Equity**                                                                                  |       | 870,731                |       | 984,395           |       |
|                                                                                                                 |       |                   |       |              |       |
| **Total Liabilities and Stockholders’ Equity**                                                                  |       | $                      | 1,572,874  |              | $          | 1,715,976 |   |

 

Seeaccompanying notes to the

condensedconsolidated financial statements

 

2

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**WATSONWYATT WORLDWIDE, INC.**

**CondensedConsolidated Statements of Cash Flows**

(Thousands of U.S. Dollars)

(Unaudited)

 
| ** **                                                                  | ** ** | **Three months ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
|                                                                        |       |                                                     |       |   |   |
| Cash flows used in operating activities:                                    |       |                                                     |       |   |   |
| Net income                                                                  |       | $                                                        | 35,160     |   | $ | 34,444 |   |
| Adjustments to reconcile net income to net  cash from operating activities: |       |                                                     |       |   |   |
| Provision for doubtful receivables from  clients                            |       | 3,615                                                    |       | 4,124 |   |
| Depreciation                                                                |       | 14,827                                                   |       | 13,554 |   |
| Amortization of intangible assets                                           |       | 4,037                                                    |       | 3,780 |   |
| Provision for (benefit from) deferred  income taxes                         |       | (7,946                                                   | )          | 1,698 |   |
| Income from affiliates                                                      |       | (1,695                                                   | )          | (925 | ) |
| Other, net                                                                  |       | 1,663                                                    |       | — |   |
| Changes in operating assets and liabilities  (net of business acquisitions) |       |                                                     |       |   |   |
| Receivables from clients                                                    |       | 1,492                                                    |       | (20,836 | ) |
| Other current assets                                                        |       | (7,503                                                   | )          | (35,099 | ) |
| Other assets                                                                |       | 2,162                                                    |       | (793 | ) |
| Accounts payable and accrued liabilities                                    |       | (100,646                                                 | )          | (44,969 | ) |
| Income taxes payable and deferred                                           |       | (3,190                                                   | )          | 1,256 |   |
| Accrued retirement benefits                                                 |       | (2,409                                                   | )          | 2,341 |   |
| Deferred rent and accrued lease losses                                      |       | (968                                                     | )          | (1,441 | ) |
| Other noncurrent liabilities                                                |       | (12,328                                                  | )          | (5,872 | ) |
| Cash flows used in operating activities:                                    |       | (73,729                                                  | )          | (48,738 | ) |
|                                                                        |       |                                                     |       |   |   |
| Cash flows used in investing activities:                                    |       |                                                     |       |   |   |
| Business acquisitions and contingent  consideration payments                |       | (538                                                     | )          | (130,517 | ) |
| Purchases of fixed assets                                                   |       | (10,013                                                  | )          | (6,105 | ) |
| Capitalized software costs                                                  |       | (5,594                                                   | )          | (6,619 | ) |
| Investment in affiliates                                                    |       | —                                                   |       | (1,914 | ) |
| Distributions from affiliates                                               |       | 144                                                      |       | — |   |
| Contingent proceeds from divestitures                                       |       | (19                                                      | )          | 88 |   |
| Cash flows used in investing activities:                                    |       | (16,020                                                  | )          | (145,067 | ) |
|                                                                        |       |                                                     |       |   |   |
| Cash flows from financing activities                                        |       |                                                     |       |   |   |
| Borrowings (repayments) under Credit  Facility                              |       | 105,000                                                  |       | 36,400 |   |
| Dividends paid                                                              |       | (3,195                                                   | )          | (3,186 | ) |
| Repurchases of common stock                                                 |       | (73,613                                                  | )          | (14,114 | ) |
| Issuances of common stock and excess tax  benefit                           |       | 1,535                                                    |       | 3,612 |   |
| Cash flows from financing activities                                        |       | 29,727                                                   |       | 22,712 |   |
|                                                                        |       |                                                     |       |   |   |
| Effect of exchange rates on cash                                            |       | 2,865                                                    |       | (2,525 | ) |
|                                                                        |       |                                                     |       |   |   |
| Decrease in cash and cash equivalents                                       |       | (57,157                                                  | )          | (173,618 | ) |
|                                                                        |       |                                                     |       |   |   |
| Cash and cash equivalents at beginning of  period                           |       | 124,632                                                  |       | 248,186 |   |
|                                                                        |       |                                                     |       |   |   |
| Cash and cash equivalents at end of period                                  |       | $                                                        | 67,475     |   | $ | 74,568 |   |
|                                                                        |       |                                                     |       |   |   |
| Supplemental disclosures:                                                   |       |                                                     |       |   |   |
| Cash paid for interest                                                      |       | $                                                        | 395        |   | $ | 1,743 |   |
| Cash paid for income taxes, net of refunds                                  |       | $                                                        | 14,251     |   | $ | 27,300 |   |

 

Seeaccompanying notes to the

condensedconsolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

**Condensed Consolidated Statement of Changesin Stockholders’ Equity**

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

(Unaudited)

 
| ** **                                           | ** ** | **Class A**                 | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|----------------|------------|------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                           | ** ** | **Common**                       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Stock**                        | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Outstanding**                  | ** ** | **Class A** | ** ** | **Additional** | ** ** | **Treasury**     | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **(number of shares,** | ** ** | **Common**       | ** ** | **Paid-in**    | ** ** | **Stock,**       | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **in thousands)**           | ** ** | **Stock**        | ** ** | **Capital**    | ** ** | **at Cost** | ** ** | **Earnings** | ** ** | **Income/(Loss)** | ** ** | **Total**  | ** ** |
|                                                 |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Balance at June 30, 2008                        |       | 43,578                           |       | $                | 438        |           | $          | 456,681          |       | $            | (13,222    | )                 | $          | 474,961    |       | $ | 65,537 |   | $ | 984,395 |   |
| Comprehensive loss:                                  |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Net income                                           |       | —                           |       | —           |       | —         |       | —           |       | 35,160       |       | —            |       | 35,160     |       |
| Foreign currency translation adjustment,  net of tax |       | —                           |       | —           |       | —         |       | —           |       | —       |       | (89,401           | )          | (89,401    | )          |
| Total comprehensive loss                             |       |                             |       |             |       |           |       |             |       |         |       |              |       | (54,241    | )          |
| Cash dividends declared                              |       | —                           |       | —           |       | —         |       | —           |       | (3,195       | )          | —            |       | (3,195     | )          |
| Repurchases of common stock                          |       | (1,341                           | )          | —           |       | —         |       | (73,613          | )          | —       |       | —            |       | (73,613    | )          |
| Issuances of common stock and excess tax  benefit    |       | 373                              |       | —           |       | (3,180         | )          | 20,565           |       | —       |       | —            |       | 17,385     |       |
|                                                 |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Balance at September 30, 2008                   |       | 42,610                           |       | $                | 438        |           | $          | 453,501          |       | $            | (66,270    | )                 | $          | 506,926    |       | $ | (23,864 | ) | $ | 870,731 |   |

 

See accompanying notes to the

condensed consolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

 

**Notes tothe Condensed Consolidated Financial Statements**

(Tabular amounts are in thousands, except pershare data)

(Unaudited)

 

**Note 1 – Basis of Presentation.**

 

The accompanying unaudited quarterly condensed consolidated financialstatements of Watson Wyatt Worldwide, Inc. and our subsidiaries(collectively referred to as “we,” “Watson Wyatt,” “Watson Wyatt Worldwide” orthe “company”) are presented in accordance with the rules and regulationsof the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Qand therefore do not include all of the information and footnotes required byU.S. generally accepted accounting principles. In the opinion of management,these condensed consolidated financial statements reflect all adjustments,consisting only of normal recurring adjustments, which are necessary for a fairpresentation of the condensed consolidated financial statements and results forthe interim periods.  All intercompanyaccounts and transactions have been eliminated in consolidation. The condensedconsolidated financial statements should be read together with the audited consolidatedfinancial statements and notes thereto contained in the company’s Annual Reporton Form 10-K for the fiscal year ended June 30, 2008, which is filedwith 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 2009 began July 1, 2008 and ends June 30,2009.

 

The results of operations for the three months ended September 30,2008 are not necessarily indicative of the results that can be expected for theentire fiscal year ending June 30, 2009. The results reflect certain estimates and assumptions made by managementincluding estimated bonuses and anticipated tax liabilities that affect theamounts reported in the condensed consolidated financial statements and relatednotes.  Certain prior year amounts havebeen reclassified to conform to the current year’s presentation.

 

**Note 2 – Business Acquisitions.**

 

The company’sacquisition strategy identifies potential acquisitions that strengthen ourgeographic delivery of services to clients or enhance practices in variousparts of the world. Acquisition candidates are evaluated on their culturalconsistency with Watson Wyatt values within the company’s strategy. When thoseconditions are met, the company values potential acquisitions so as to beaccretive to earnings.

 

Assetsacquired and liabilities assumed as a result of our acquisitions are recordedat their respective fair values as of the business combination date.  The determination of estimated fair valuerequires management to make significant estimates and assumptions.

 

Acquisitionsthat we have completed include the following:

 

*Dr. Dr. Heissmann GmbH*

 

On July 20, 2007, the company acquired the outstanding stock of Dr. Dr. HeissmannGmbH (“Heissmann”) for approximately $136 million (€99 million) in cash plusapproximately $1.4 million in transaction costs.  Heissmann was an actuarial, benefits, andhuman resources consulting firm based in Germany with subsidiaries in Ireland,Netherlands, Austria, and France.  As of July 20,2007, Heissmann employed approximately 360 associates.  Annual revenue, including subsidiaries, wasapproximately $70 million (€52 million) for their fiscal year ended March 31,2007.  The financial results of Heissmannhave been consolidated into the company’s financial statements upon the date ofacquisition.

 

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*WisdomNet*

 

On July 2, 2007, thecompany acquired the net assets of WisdomNet for $6.9 million in cash andstock, including the payoff of $0.5 million of debt.  WisdomNet was a Denver-based talentmanagement software and consulting firm that was founded in 2001.  WisdomNet offered a proprietary line of businesssoftware products, including an end-to-end solution for managing organizations’talent management processes.  Theacquisition of WisdomNet strengthens our existing talent management businessand provides strategic software that will be used to service our clients on anongoing basis. As of the date of the acquisition, WisdomNet employed 15associates. The company recorded $2.6 million of goodwill associated with thisacquisition.

 

*Marcu & Asociados S.A.*

 

On June 16, 2008, thecompany acquired the outstanding stock of Marcu & Asociados S.A.(Marcu) for $2.8 million in cash.  Marcuis a human resource, risk and financial management consulting firm based inBuenos Aires, Argentina.  As of the dateof acquisition, Marcu employed 37 associates and had annual revenues ofapproximately $2.5 million.  Thefinancial results of Marcu are included in the company’s consolidated financialstatements effective July 1, 2008. The company recorded $1.6 million of goodwill associated with thisacquisition.

 

*WatsonWyatt Netherlands*

 

On February 1,2007, Watson Wyatt B.V., an indirect wholly-owned subsidiary of the company,acquired the net assets of Watson Wyatt Netherlands (“WWN”), its long-timealliance partner in the Netherlands.  Thefinancial results of WWN have been consolidated into the company’s financialstatements since February 1, 2007.

 

Thecontingencies associated with the payment of an additional 218,089 Class Ashares were met and the contingent shares were issued to the former partners ofWWN on June 27, 2008.

 

*WatsonWyatt LLP*

 

On July 31,2005, the company acquired substantially all of the assets and assumed mostliabilities of Watson Wyatt LLP (“WWLLP”) (the “WWLLP business combination”), aleading United Kingdom-based actuarial, benefits and human resources consultingpartnership. The financial results of WWLLP have been consolidated into thecompany’s financial statements since August 1, 2005.

 

In addition to the initial purchase price, the terms of the purchaseagreement called for an additional 1,950,000 shares to be paid to the formerpartners of WWLLP, contingent upon the achievement by the acquired business ofcertain agreed-upon financial performance goals.  The agreed-upon financial performance goalswere met at the end of fiscal year 2007 and the contingent shares were issuedto the former partners of WWLLP on April 15, 2008 for payment of $94.2million.

 

**Note 3 – Segment Information.**

 

We have five reportable operating segments or practice areas asfollows:

 
| (1)    |   | Benefits Group                                |
|--------|--------|-----------------------------------------------|
|   |   |                                          |
| (2)    |   | Human Capital Group                           |
|   |   |                                          |
| (3)    |   | Technology and Administration Solutions Group |
|   |   |                                          |
| (4)    |   | Investment Consulting Group                   |
|   |   |                                          |
| (5)    |   | Insurance & Financial Services Group |

 

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

 

The table below presents specified information about reported segmentsas of and for the three months ended September 30, 2008:

 
| ** **                               | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  &  Financial  Services  Group** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Revenue   (net of reimbursable expenses) |       | $                   | 237,900    |                      | $          | 49,514                                                |       | $                                 | 47,910     |                                             | $          | 42,107    |       | $ | 27,807 |   | $ | 405,238 |   |
| Net operating income                     |       | 63,209              |       | 6,833                     |       | 12,860                                                |       | 12,519                            |       | 834                                              |       | 96,255    |       |
| Receivables                              |       | 243,394             |       | 45,170                    |       | 20,681                                                |       | 29,827                            |       | 27,355                                           |       | 366,427   |       |
|                                          |            |                     |            |                           |            |                                                       |            |                                   |            |                                                  |            |           |            |  |  |  |  |  |  |

 

The table below presents specified information about reported segmentsas of and for the three months ended September 30, 2007:

 
| ** **                               | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  &  Financial  Services  Group** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Revenue   (net of reimbursable expenses) |       | $                   | 226,569    |                      | $          | 42,714                                                |       | $                                 | 40,477     |                                             | $          | 39,944    |       | $ | 28,001 |   | $ | 377,705 |   |
| Net operating income                     |       | 57,050              |       | 5,587                     |       | 8,379                                                 |       | 14,121                            |       | 1,450                                            |       | 86,587    |       |
| Receivables                              |       | 258,383             |       | 43,384                    |       | 19,886                                                |       | 30,405                            |       | 27,282                                           |       | 379,340   |       |
|                                          |            |                     |            |                           |            |                                                       |            |                                   |            |                                                  |            |           |            |  |  |  |  |  |  |

 

Information about interest income and tax expense is not presented as asegment expense because such items are not considered a responsibility of thesegments’ operating management.

 

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Reconciliations of the information reported by segment to thehistorical consolidated amounts follow for the three month periods ended September 30,2008 and 2007:

 
| ** **                                                             | ** ** | **Three Months Ended September 30** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                                                   |       |                                                    |       |   |   |
| Revenue:                                                               |       |                                                    |       |   |   |
| Total segment revenue                                                  |       | $                                                       | 405,238    |   | $ | 377,705 |   |
| Reimbursable expenses and other not  included in total segment revenue |       | 9,242                                                   |       | 12,559 |   |
| All other segments                                                     |       | 11,646                                                  |       | 11,423 |   |
| Consolidated fees                                                      |       | $                                                       | 426,126    |   | $ | 401,687 |   |
|                                                                   |       |                                                    |       |   |   |
| Net Operating Income:                                                  |       |                                                    |       |   |   |
| Total segment net operating income                                     |       | $                                                       | 96,255     |   | $ | 86,587 |   |
| Income from affiliates                                                 |       | 1,695                                                   |       | 925 |   |
| Differences in allocation methods (1)                                  |       | (2,960                                                  | )          | (465 | ) |
| Discretionary compensation                                             |       | (42,258                                                 | )          | (41,390 | ) |
| All other segments                                                     |       | 3,288                                                   |       | 3,440 |   |
| Other, net                                                             |       | (2,698                                                  | )          | 2,736 |   |
| Consolidated pretax income                                             |       | $                                                       | 53,322     |   | $ | 51,833 |   |
|                                                                   |       |                                                    |       |   |   |
| Receivables:                                                           |       |                                                    |       |   |   |
| Total segment receivables - billed and  unbilled (2)                   |       | $                                                       | 366,427    |   | $ | 379,340 |   |
| All other segments                                                     |       | 7,985                                                   |       | 8,214 |   |
| Net valuation differences                                              |       | (13,762                                                 | )          | (15,550 | ) |
| Total billed and unbilled receivables                                  |       | 360,650                                                 |       | 372,004 |   |
| Assets not reported by segment (3)                                     |       | 1,212,224                                               |       | 1,339,867 |   |
| Consolidated assets                                                    |       | $                                                       | 1,572,874  |   | $ | 1,711,871 |   |

 

----

(1) Generaland administrative, pension, and medical costs are allocated to our segmentsbased on budgeted expenses determined at the beginning of the fiscal year asmanagement believes that these costs are largely uncontrollable to the segment.  To the extent that the actual expense baseupon which allocations are made differs from the forecast/budget amount, areconciling item will be created between internally allocated expenses and theactual expense that we report for U.S. 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 $779.5 million and $854.9 million, respectively.

 

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**Note 4 – Share-based Compensation.**

 

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

 

*2001Deferred Stock Unit Plan for Selected Employees*

 

DeferredStock Units - The 2001Deferred Stock Unit Plan for Selected Employees is intended to provide selectedassociates of the company with additional incentives by permitting the companyto grant them an equity interest in the company in the form of restricted stockunits, in lieu of a portion of their annual fiscal year end bonus.  Shares under this plan are awarded during thefirst quarter of each fiscal year. During the first quarter of fiscal year 2009, 295,775 shares of commonstock were awarded at an average market price of $53.92 for a total fair valueof $15.9 million.  During the firstquarter of fiscal year 2008, 349,118 shares of common stock were awarded at anaverage market price of $47.63 for a total fair value of $16.6 million.

 

SBIProgram  - The Performance Share Bonus Incentive Program (the “SBI Program”), as approved bythe company’s Board of Directors pursuant to the company’s 2001 Deferred StockUnit Plan for Selected Employees, is a long-term stock bonus arrangement forsenior executives of the company and its affiliates. The SBI program isdesigned to strengthen incentives and align behaviors to grow the business in away that is consistent with the strategic goals of the company.

 

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 either salary oron the value of the cash portion of the eligible participant’s fiscal year-endbonus target and a multiplier, which is then converted into a target number ofdeferred stock units based upon the company’s stock price as of the quarter endprior to grant.  Depending on the plan, participants may vest between zeroand 170% of the target number of deferred stock units or between zero and 100%based on the extent to which financial and strategic performance metrics areachieved over a three fiscal year period.  The financial and strategicperformance metrics are established at the beginning of each performance period. Forthe performance periods covering fiscal year 2007 through 2009 and 2008 through2010, the vesting criteria are based upon growth specific metrics such asearnings per share, NOI and revenue. During the first quarter of fiscal year2009, 44,061 shares were awarded to certain senior executive officers under theSBI 2006 plan, which represented vesting at 170% of the target number ofdeferred stock units.

 

Approximately$0.8 million of compensation expense was recorded relative to this plan duringthe first quarter of fiscal year 2009 compared to $0.3 million in the firstquarter of fiscal year 2008.

 

*AmendedCompensation Plan for Outside Directors*

 

InNovember 2001, the Board of Directors approved the Amended CompensationPlan for Outside Directors (the “Outside Director’s Plan”) which provides forthe cash and stock compensation of outside Directors.  Under the Outside Director’s Plan, outsideDirectors are initially paid in shares of the company’s common stock, or in acombination of cash and shares, quarterly, at the completed quarter-end shareprice (which approximates fair value), for services provided during thepreceding quarter.  The total number ofshares reserved for issuance under the Outside Director’s Plan is 150,000.

 

Approximately$0.3 million of compensation expense was recorded relative to this plan duringthe first quarter of fiscal year 2009 compared to $0.1 million in the firstquarter of fiscal year 2008.

 

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*2001Employee Stock Purchase Plan*

 

The2001 Employee Stock Purchase Plan (the “Stock Purchase Plan”) enables employeesto purchase shares of the company’s stock at a discount.  The Stock Purchase Plan is a non-compensatoryplan under FAS 123(R).  As a result, nocompensation expense was recognized during the first three months of fiscalyears 2009 or 2008.

 

*2000Long-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 March 2002 and the companydoes not currently intend to issue further stock options under the Stock OptionPlan.

 

**Note 5 – Retirement Benefits.**

 

*Defined Benefit Plans*

 

Wesponsor both qualified and non-qualified, non-contributory defined benefitpension plans in North America and the U.K. that account for approximately 85%of our pension liability.  Under ourplans in North America, benefits are based on the number of years of serviceand the associate’s compensation during the five highest paid consecutive yearsof service.  Beginning January 2008,we made changes to our plan in the U.K. related to years of service used incalculating benefits for associates. Benefits earned prior to January 2008 are based on the number ofyears of service and the associate’s compensation during the three years beforeleaving the plan and benefits earned after January 2008 are based on thenumber of years of service and the associate’s average compensation during theassociate’s term of service since that date. The non-qualified plan inNorth America provides for pension benefits that would be covered under thequalified plan but are limited by the Internal Revenue Code.  The non-qualified plan has no assets andtherefore is an unfunded arrangement, the liability for which is reflected inthe balance sheet.  The U.K. does nothave a non-qualified plan.  Themeasurement date for all plans is June 30.

 

*Components of Net Periodic Benefit Cost for Defined Benefit PensionPlans*

 

The following table sets forth the components of net periodic benefitcost for the company’s defined benefit pension plans for North America and theU.K. for the three month periods ended September 30, 2008 and 2007:

 
| ** **                                     | ** ** | **North America  September 30** | ** ** | **U.K.  September 30** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **2008**                                  | ** ** | **2007**                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                           |       |                                      |       |                        |       |   |   |   |   |
| Service Cost                                   |       | $                                         | 7,160      |                        | $          | 7,366 |   | $ | 1,851 |   | $ | 2,733 |   |
|                                           |       |                                      |       |                        |       |   |   |   |   |
| Interest Cost                                  |       | 12,066                                    |       | 11,122                      |       | 6,200 |   | 5,274 |   |
|                                           |       |                                      |       |                        |       |   |   |   |   |
| Expected return on plan assets                 |       | (12,826                                   | )          | (13,783                     | )          | (6,314 | ) | (5,923 | ) |
|                                           |       |                                      |       |                        |       |   |   |   |   |
| Amortization of transition  obligation/(asset) |       | —                                    |       | (16                         | )          | — |   | — |   |
|                                           |       |                                      |       |                        |       |   |   |   |   |
| Amortization of net unrecognized loss/(gain)   |       | 1,867                                     |       | 1,386                       |       | (100 | ) | (721 | ) |
|                                           |       |                                      |       |                        |       |   |   |   |   |
| Amortization of prior service (credit)/cost    |       | (565                                      | )          | (635                        | )          | 13 |   | 4 |   |
|                                           |       |                                      |       |                        |       |   |   |   |   |
| Net periodic benefit cost                      |       | $                                         | 7,702      |                        | $          | 5,440 |   | $ | 1,650 |   | $ | 1,367 |   |

 

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Thefiscal year 2009 net periodic benefit cost is based, in part, on the followingrate assumptions as of June 30, 2008 for the North America and U.K. plans:

 
| ** **                                  | ** ** | **North America** | ** ** | **U.K.** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------|------------|
| Discount rate                               |       | 7.00                   | %          | 6.50     | %          |
|                                        |       |                   |       |     |       |
| Expected long-term rate of return on assets |       | 8.75                   | %          | 6.46     | %          |
|                                        |       |                   |       |     |       |
| Rate of increase in compensation levels     |       | 4.09                   | %          | 5.65     | %          |

 

Thecompany made $300,000 in contributions to the North America plans during the firstquarter of fiscal year 2009 and anticipates making $16.0 million incontributions over the remainder of the fiscal year.

 

Thecompany made $3.8 million in contributions to the U.K. plans during the firstquarter of fiscal year 2009 and anticipates making $13.0 million incontributions over the remainder of the fiscal year.

 

*DefinedContribution Plans*

 

In the U.S., we sponsor asavings plan that provides benefits to substantially all U.S. associates. Thecompany matches employee contributions at a rate of 50% of the first 6% up to$60,000 of associates’ eligible compensation. The company will also make an annual profit sharing contribution to theplan in an amount that is dependant upon the company’s financial performanceduring the fiscal year.

 

The U.K. pension plan has a money purchase section to which the companymakes core contributions plus additional contributions matching those of theparticipating employees up to a maximum rate. Contribution rates are dependant upon the age of the participant and onwhether or not they arise from salary sacrifice arrangements through which anindividual has taken a reduction in salary and the company has paid anequivalent amount as pension contributions. Core contributions amount to 2-6% of pensionable salary with additionalmatching contributions of a further 2-6%.

 

*Health Care Benefits*

 

In the U.S., we sponsor a contributory health care plan that provideshospitalization, medical and dental benefits to substantially all U.S.associates.  We accrue a liability forestimated incurred but unreported claims based on projected use of the plan aswell as prior plan history.

 

*Postretirement Benefits*

 

We provide certain health care and life insurance benefits for retiredassociates.  The principal plans coverassociates in the U.S. and Canada who have met certain eligibilityrequirements. Our principal post-retirement benefit plans are unfunded.  We accrue a liability for these benefits.

 

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*Components of Net Periodic Benefit Cost for Other Postretirement Plans*

 

The following table sets forth the components of net periodic benefitcost for the company’s post-retirement plans for the three months ended September 30,2008 and 2007:

 
| ** **                            | ** ** | **Three Months Ended September 30** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                  |       |                                                    |       |   |   |
| Service cost                          |       | $                                                       | 329        |   | $ | 400 |   |
| Interest cost                         |       | 724                                                     |       | 709 |   |
| Expected return on plan assets        |       | —                                                  |       | — |   |
| Amortization of transition obligation |       | —                                                  |       | — |   |
| Amortization of unrecognized net gain |       | (201                                                    | )          | (78 | ) |
| Amortization of prior service credit  |       | (166                                                    | )          | (166 | ) |
| Net periodic benefit cost             |       | $                                                       | 686        |   | $ | 865 |   |

 

*Employer contributions*

 

Thecompany made contributions in the form of premiums and medical claim paymentsto its healthcare and post-retirement plans of $950,000 and $700,000 in thethree months ended September 30, 2008 and 2007, respectively.  We plan to make additional payments estimatedto total $4.1 million through the end of June 30, 2009.

 

**Note 6 – Goodwill & IntangibleAssets.**

 

The components of goodwill and intangible assets are outlined below forthe three months ended September 30, 2008:

 
| ** **                                                        | ** ** | **Benefits  Group** | ** ** | **Technology and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance &  Financial  Services  Group** | ** ** | **All Other  Segments** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|------------------------------|------------|-----------|------------|
|                                                              |       |                |       |                                                 |       |                      |       |                              |       |                                                 |       |                         |       |      |       |
| Balance as of June 30, 2008                                  |       | $                   | 397,721    |                                                 | $          | 61,709                    |       | $                                 | 35,056     |                                                 | $          | 61,977                       |       | $         | 76,499     |   | $ | 1,214 |   | $ | 634,176 |   |
| Goodwill acquired and contingent payments  made during the period |       | —              |       | —                                               |       | 337                       |       | —                            |       | 72                                                   |       | —                       |       | 409       |       |
| Translation adjustment                                            |       | (39,404             | )          | (6,162                                               | )          | (3,498                    | )          | (6,477                            | )          | (8,028                                               | )          | —                       |       | (63,569   | )          |
| Balance as of September 30, 2008                             |       | $                   | 358,317    |                                                 | $          | 55,547                    |       | $                                 | 31,895     |                                                 | $          | 55,500                       |       | $         | 68,543     |   | $ | 1,214 |   | $ | 571,016 |   |

 

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The following tablereflects changes in the net carrying amount of the components of intangibleassets for the three months ended September 30, 2008:

 
| ** **                                    | ** ** | **Trademark  & trade  name** | ** ** | **Customer  related  intangible** | ** ** | **Core/developed  technology** | ** ** | **Non-compete  agreements** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|-----------------------------|------------|-----------|------------|
| Balance as of  June 30, 2008             |       | $                                     | 121,885    |                              | $          | 101,592                        |       | $                           | 12,604     |      | $          | 686 |   | $ | 236,767 |   |
| Intangible  assets acquired during the period |       | —                                |       | 125                               |       | —                         |       | —                      |       | 125       |       |
| Amortization  expense                         |       | (58                                   | )          | (2,526                            | )          | (1,308                         | )          | (145                        | )          | (4,037    | )          |
| Translation  adjustment                       |       | (13,081                               | )          | (10,372                           | )          | (897                           | )          | (39                         | )          | (24,389   | )          |
| Balance as of  September 30, 2008        |       | $                                     | 108,746    |                              | $          | 88,819                         |       | $                           | 10,399     |      | $          | 502 |   | $ | 208,466 |   |

 

The following tablereflects the carrying value of intangible assets at September 30, 2008 andJune 30, 2008:

 
| ** **                       | ** ** | **September 30, 2008** | ** ** | **June 30, 2008** | ** ** |
|----------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **Gross**                        | ** ** | ** **                  | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Carrying**                     | ** ** | **Accumulated**             | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                       | ** ** | **Amount**                       | ** ** | **Amortization**            | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Intangible assets:               |       |                             |       |                        |       |   |   |   |   |
| Trademark &  trade name |       | $                                | 109,008    |                        | $          | 262 |   | $ | 122,089 |   | $ | 204 |   |
| Customer related  intangibles    |       | 112,560                          |       | 23,741                      |       | 122,807 |   | 21,215 |   |
| Core/developed  technology       |       | 24,068                           |       | 13,669                      |       | 24,965 |   | 12,361 |   |
| Non-compete  agreements          |       | 1,277                            |       | 775                         |       | 1,316 |   | 630 |   |
| Total intangible  assets         |       | $                                | 246,913    |                        | $          | 38,447 |   | $ | 271,177 |   | $ | 34,410 |   |

 

A component of the changein the gross carrying amount of intangible assets reflects translationadjustments between June 30, 2008 and September 30, 2008.  These intangible assets are denominated inthe currencies of our subsidiaries outside the United States, and aretranslated into our reporting currency, the U.S. dollar, based on exchangerates at the balance sheet date.

 

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The weighted averageremaining life of amortizable intangible assets at September 30, 2008, was8.9 years.  Future estimated amortizationexpense is as follows:

 

| **Fiscal year ending  June 30:** | ** ** | **Amount** | ** ** |
|---------------------------------------|------------|------------|------------|
| 2009                                  |       | $          | 10,925     |   |
| 2010                                  |       | 13,878     |       |
| 2011                                  |       | 10,587     |       |
| 2012                                  |       | 10,299     |       |
| 2013                                  |       | 9,218      |       |
| Thereafter                            |       | 44,461     |       |
| Total                                 |       | $          | 99,368     |   |

 

**Note 7 – Earnings Per Share.**

** **

Basic earnings per shareis calculated on the basis of the weighted average number of common sharesoutstanding during the three months ended September 30, 2008 and2007.  Diluted earnings per share iscalculated by dividing net income by the weighted average number of commonshares outstanding, plus the dilutive effect of outstanding stock options andemployee stock purchase plan shares using the “treasury stock” method over thesame measurement period and contingent shares associated with ouracquisitions.  The components of basicand diluted earnings per share are as follows:

 
| ** **                                                                                              | ** ** | **Three Months Ended September 30** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                                                                                    |       |                                                    |       |   |   |
| Net income                                                                                              |       | $                                                       | 35,160     |   | $ | 34,444 |   |
|                                                                                                    |       |                                                    |       |   |   |
| Weighted average  outstanding shares of common stock                                                    |       | 42,935                                                  |       | 42,288 |   |
| Dilutive effect  of employee stock options, employee stock purchase plan shares, and  contingent shares |       | 150                                                     |       | 2,608 |   |
|                                                                                                    |       |                                                    |       |   |   |
| Common stock and  stock equivalents                                                                     |       | 43,085                                                  |       | 44,896 |   |
|                                                                                                    |       |                                                    |       |   |   |
| Earnings per  share:                                                                                    |       |                                                    |       |   |   |
| Net income-Basic                                                                                        |       | $                                                       | 0.82       |   | $ | 0.81 |   |
| Net  income-Diluted                                                                                     |       | $                                                       | 0.82       |   | $ | 0.77 |   |

 

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** **

**Note 8 –Investment in Affiliates.**

** **

The company has an equityinvestment in Professional Consultants Insurance Company, Inc. (PCIC).  As defined by FASB Interpretation No. 46R,Consolidation of Variable Interest Entities, PCIC is a variable interestentity.  Based on the legal, financialand operating structure of PCIC, the company has concluded that it is not theprimary beneficiary of PCIC. Accordingly, the company does not consolidate the results of PCIC intoits consolidated financial statements.

 

PCICwas organized in 1987 as a captive insurance company under the laws of theState of Vermont.  PCIC providesprofessional liability insurance on a claims-made basis to three actuarial andmanagement consulting firms, all of which participate in the program as bothpolicyholders and stockholders.

 

Capitalcontributions to PCIC are required when approved by a majority of its stockholders.  In July 2007, the Shareholders of PCICapproved a requirement for an additional capital contribution.  As a result, the company contributed anadditional $1.9 million of capital to PCIC and increased the amount of theletter of credit provided to PCIC by $2.6 million in lieu of a higher cashcapital contribution.  From the time PCICwas organized through September 30, 2008, we have provided capitalcontributions to PCIC through cash contributions totaling $7.3 million andthrough issuance of letters of credit totaling $10.6 million. Our ownershipinterest in PCIC as of September 30, 2008 and 2007 was 36.43 percent.

 

Managementbelieves that the company’s maximum financial statement exposure regarding itsinvestment in PCIC as of September 30, 2008 is limited to the carryingvalue of the company’s investment in PCIC of $8.5 million, combined withletters of credit totaling $10.6 million, for a total maximum exposure of $19.1million.

 

Thecompany acquired a 20 percent investment in Fifth Quadrant Actuaries &Consultants (Pty) Ltd (Fifth Quadrant) in June 2008. Fifth Quadrant is anindependent South African firm of actuaries and employee benefits consultantsestablished in 1998. Its core business is to provide independent, high qualityadvice to institutional clients, which include retirement funds, medicalschemes, charitable trusts and corporate and public sector clients. The companyhas a $3.7 million investment in Fifth Quadrant as of September 30, 2008.

 

Thecompany opened a partnership with the Knowledge and Human Development Authorityin Dubai in January 2008. The partnership is aimed at supporting publicand private sector organizations across the Gulf in their pursuit for reachinginternational standards of excellence in human capital strategies and programs.As of September 30, 2008, the company has a $1.8 million investment inDubai.

 

The company applies theequity method of accounting for all of its investment in affiliates.

 

**Note 9 – Comprehensive(Loss)/Income.**

** **

Comprehensive incomeincludes net income and changes in the cumulative translation adjustment gainor loss.  For the three months ended September 30,2008, comprehensive loss totaled $54.2 million, compared with comprehensiveincome of $55.3 million for the three months ended September 30, 2007.

 

**Note 10 – Restricted Shares.**

** **

In conjunction with ourWWLLP business combination on July 31, 2005, we issued 9,090,571 Class Acommon shares, 4,749,797 of which were subject to contractual transferrestrictions.  Transfer restrictionsexpired on 2,339,761 of these shares on July 31, 2006 and expired on theremaining 2,410,036 shares on July 31, 2007.  The contingencies associated with the paymentof an additional 1,950,000 Class A shares were met and the contingentshares were issued to the former partners of WWLLP on April 15, 2008.

 

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In conjunction with ouracquisition of WWN on February 1, 2007, we issued 252,285 Class Acommon shares which were subject to contractual transfer restrictions.  Transfer restrictions on 50% of these sharesexpired on February 1, 2008. Transfer restrictions on the remaining shares will expire on February 1,2009.  The contingencies associated withthe payment of an additional 218,089 Class A shares were met and thecontingent shares were issued to the former partners of WWN on June 27,2008. Sale of these shares, are also subject to contractual transferrestrictions that will expire on 50% of these shares on each of the first andsecond anniversaries of issuance of the shares.

 

**Note 11 – Commitments andContingent Liabilities.**

** **

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.

 

*Letters of Credit*.  At September 30, 2008, the company has letters of credit totaling$10.6 million under our existing credit facility to guarantee payment tobeneficiaries in the event that the company fails to meet its financialobligations to these beneficiaries. These letters of credit will remain outstanding as long as we retain anownership share of our affiliated captive insurance company, PCIC.

 

Thecompany has also provided a $5.0 million Australian dollar-denominated letterof credit (US $4.0 million) to an Australian governmental agency as required bylocal regulations.  The estimated fairmarket value of these letters of credit is immaterial because they have neverbeen used, and the company believes that probability of future usage is remote.

 

*Indemnification Agreements*.  The company has various agreements thatprovide that it may be obligated to indemnify the other party with respect tocertain matters.  Generally, theseindemnification clauses are included in contracts arising in the normal courseof business and in connection with the purchase and sale of certain businesses.  Although it is not possible to predict themaximum potential amount of future payments under these indemnificationagreements due to the conditional nature of the company’s obligations and theunique facts of each particular agreement, the company does not believe thatany potential liability that might arise from such indemnity provisions isprobable or material.  There are noprovisions for recourse to third parties, nor are any assets held by any thirdparties that any guarantor can liquidate to recover amounts paid under suchindemnities.

 

*Legal Proceedings*:  From time to time, we are a party to various lawsuits,arbitrations or mediations that arise in the ordinary course of business. Thematters reported on below involve the most significant pending or potentialclaims against us.  We also have received subpoenas and requests forinformation in connection with government investigations.

 

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, financial position, or statement of cashflows but litigation is subject to many factors which are difficult to predictso there can be no assurance that in the event of a material unfavorable resultin one or more of such matters, we will not incur material costs.

 

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* *

*WatsonWyatt v. SBC Holdings, Inc. (Stroh Brewery Company): *  On July 23,2004, we received a demand letter from Stroh’s counsel alleging that errors invaluations 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 petitionin federal court to compel arbitration of the matter. Subsequently, Stroh filedan answer and counterclaim, alleging damages in excess of $46 million.  InJanuary 2008, the Sixth Circuit Court of Appeals held that the entireclaim is subject to arbitration.  Strohhas filed a demand for arbitration on April 16, 2008 and Watson Wyattfiled a response.  We anticipatearbitration hearings to be held in 2009.

 

*GovernmentSubpoenas and Investigations:* We also have received subpoenas and requests forinformation in connection with the following government investigation:

* *

*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 12 – Recent Accounting Pronouncements.**

** **

InSeptember 2006, the Financial Accounting Standards Board (“FASB”)published Statement of Financial Accounting Standards No.157, “Fair ValueMeasurements” (“FAS 157”).  FAS 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements.  The company adoptedFAS 157 on July 1, 2008 and determined that the adoption of FAS 157 doesnot have a material impact on its consolidated financial statements.

 

InJune 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”(“FAS 109”), which clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FAS 109, “Accountingfor Income Taxes.”  FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position 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.  The company adopted this standard on July 1, 2007.

 

InFebruary 2007, the FASB published Statement of Financial AccountingStandards No.159, “The Fair Value Option for Financial Assets and FinancialLiabilities—including an amendment of FASB Statement No. 115” (“FAS 159”).  FAS 159 allows entities to choose to measureeligible financial assets and liabilities at fair value that are not otherwiserequired to be measured at fair value. If a company elects the fair valueoption for an eligible item, changes in that item’s fair value in subsequentreporting periods must be recognized in current earnings. FAS 159 is effectivefor fiscal years beginning after November 15, 2007,provided the entity also elects to apply theprovisions of FAS 157, “Fair Value Measurements”. The company adopted FAS 159on July 1, 2008 and did not choose to elect the fair value option.

 

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InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 141 (revised 2007), “Business Combinations” (“FAS 141(R)”) which is arevision of FAS 141, “Business Combinations”. FAS 141(R) changes the application of the acquisition method in anumber of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrollinginterests will be valued at fair value at the acquisition date; restructuringcosts associated with a business combination will generally be expensedsubsequent to the acquisition date; contingent consideration will be recognizedat its fair value on the acquisition date and, for certain arrangements,changes in fair value will be recognized in earnings until settled, and changesin deferred tax asset valuation allowances and income tax uncertainties afterthe acquisition date generally will affect income tax expense. We will berequired to comply with the provisions of FAS 141(R) for acquisitions thatoccur on or after July 1, 2009. The Statement would apply prospectively toany future business combinations and therefore the impact would be determinedwhen a business combination occurs.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo.160, “Noncontrolling Interests in Consolidated Financial Statements – anamendment of ARB No.51” (“FAS 160”). This statement is effective for fiscal years, and interim periods withinthose fiscal years, beginning on or after December 15, 2008, with earlieradoption prohibited.  This statementrequires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financial statements and separate from the parent’sequity.  The amount of net income attributableto the noncontrolling interest will be included in consolidated netincome.  It also amends certain of ARB No. 51’sconsolidation procedures for consistency with the requirements of FAS141(R).  This statement also includesexpanded disclosure requirements regarding the interests of the parent and itsnoncontrolling interest.  The company iscurrently evaluating the effects, if any, that FAS 160 may have on itsfinancial statements.

 

InApril 2008, the FASB issued FASB Staff Position No. 142-3, “Determinationof the Useful Life of Intangible Assets” (“FSP 142-3”).  FSP 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of recognized intangible assets under Statement of FinancialAccounting Standards No.142, “Goodwill and Other Intangible Assets.”  FSP 142-3 is effective on a prospective basisto all intangible assets acquired and for disclosures on all intangible assetsrecognized on or after the beginning of the first annual period subsequent to December 15,2008. Early adoption is prohibited.  Theeffects of  FSP 142-3 will depend onfuture acquisitions of intangible assets.

 

**Note 13 – Income Taxes.**

** **

AtSeptember 30, 2008, the gross liability for income taxes associated withuncertain tax positions, determined in accordance with FASB Interpretation No. 48(“FIN 48”), “Accounting for Uncertainty in Income Taxes - an interpretation ofFASB Statement No. 109” (“FAS 109”), was $10.2 million.  This liabilitycan be reduced by $1.9 million of offsetting deferred tax benefits associatedwith foreign tax credits and the federal tax benefit of state incometaxes.  The net difference of $8.3million, if recognized, would have an $8.0 million favorable impact on thecompany’s effective tax rate and would increase other comprehensive income by$0.3 million.

 

Interestand penalties related to income tax liabilities are included in income taxexpense.  At September 30, 2008 thecompany had accrued interest of $1.8 million and penalties of $0.3 million,totaling $2.1 million.

 

Duringthe three months ended September 30, 2008, the gross tax liability foruncertain tax positions decreased by $1.1 million during the year.  Of the total decrease, $0.9 million relatedto a deferred tax item which did not impact the company’s effective tax rateand the remaining $0.2 million resulted in a tax benefit in the current period.

 

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Thecompany believes it is reasonably possible that there will be a $2.1 milliondecrease in the gross tax liability for uncertain tax positions within the next12 months based upon potential settlements and the expiration of statutes oflimitations in various tax jurisdictions.

 

Thecompany and its subsidiaries conduct business globally and are subject toincome tax in the US and in many states and foreign jurisdictions.  The company is currently under examination inseveral tax jurisdictions.  A summary ofthe tax years that remain subject to examination in the company’s major taxjurisdictions are:

 
| ** **                           | ** ** | **Open Tax Years  (fiscal year ending)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------|------------|
| United States -  Federal             |       | 2005 and forward                                             |       |
| United States –  Various States |       | 2003 and forward                                             |       |
| Canada - Federal                     |       | 2004 and forward                                             |       |
| Germany                              |       | 2003 and forward                                             |       |
| United Kingdom                       |       | 2005 and forward                                             |       |

 

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

** **

**Executive Overview**

** **

**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, InvestmentConsulting, and Insurance and Financial Services, operating from 106 offices in32 countries throughout North America, Europe, Asia-Pacific and Latin America.The company employed approximately 7,670 and 7,510 associates as of September 30,2008 and June 30, 2008 respectively, in the following practice areas:

 
| ** **                                             | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **2008**               | ** ** | **2008**          | ** ** |
| Benefits Group                                         |       | 3,340                  |       | 3,290             |       |
| Technology and  Administration Solutions Group         |       | 875                    |       | 850               |       |
| Human Capital  Group                                   |       | 930                    |       | 900               |       |
| Investment  Consulting Group                           |       | 555                    |       | 500               |       |
| Insurance &  Financial Services Group         |       | 415                    |       | 420               |       |
| Other (incl.  Communication)                           |       | 455                    |       | 450               |       |
| Business  Services (incl. Corporate and field support) |       | 1,100                  |       | 1,100             |       |
| Total                                                  |       | 7,670                  |       | 7,510             |       |

** **

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, FTSE 100, and equivalentorganizations in markets around the world. As leading economies worldwide become more services-oriented, humancapital and financial management has become increasingly important to companiesand other organizations. The heightened competition for skilled employees,unprecedented changes in workforce demographics, regulatory changes related tocompensation and retiree benefits and rising employee-related costs haveincreased the importance of effective human capital management. Insurance andinvestment decisions become increasingly complex and important in the face ofchanging economies and dynamic financial markets.  We help our clients address these issues bycombining our expertise in human capital and financial management withconsulting and technology, to improve the design and implementation of varioushuman resources and financial programs, including compensation, retirement,health care, insurance and investment plans.

 

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.

 

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In the short term, ourrevenues are driven by many factors including the continuing regulatorycompliance requirements of our clients, the general state of the global economyand the resulting level of discretionary spending, the ability of ourconsultants to attract new clients or provide additional services 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.

 

**Principal Services**

** **

We design, developand implement human resource and risk management strategies and programsthrough the following closely-interrelated practice areas:

 

**Benefits Group**- The Benefits Group, accounting for 56percent of our total first quarter fiscal year 2009 revenues, is the foundationof our business.  Retirement, the core ofour Benefits Group business, lags reduction in discretionary spending comparedto our other segments, mainly due to the recurring nature of clientrelationships.  Our corporate clientretention rate within our target market has remained very high. Revenue for ourretirement practice is seasonal, with the second and third quarters of eachfiscal year being the busier periods. Major revenue growth drivers in this practice include changes inregulations, leverage from other practices, increased global demand andincreased market share.   Servicesprovided through the Benefits Group include the following:

* *

·                  Designand management of benefit programs

·                  Actuarialservices including development of funding and risk management strategies

·                  Expatriateand international human resource strategies

·                  Mergersand acquisitions

·                  Strategicworkforce planning

·                  Complianceand governance

 

**Human Capital Group** - The**Human Capital Group (HCG), accounting for 12 percent of ourtotal first quarter fiscal year 2009 revenues, generally encompasses short-termprojects, although the percentage of recurring projects has grown in the U.S.as a result of new regulations in the legal and accounting field.  As a result, sensitivity of this segment tocyclical economic fluctuations may diminish. Services provided through HCG include the following:

** **

·                  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

·                  Data Services

 

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** **

**Technologyand Administration Solutions Group -**The Technology andAdministration Solutions Group (TAS), accounting for 11 percent of our totalfirst quarter fiscal year 2009 revenues, provides information technologyservices to our clients.  Revenue for TASis relatively stable, compared to what it had historically experienced in aneconomic downturn, because of its long term contracts associated with theadministration business.  Income in thissegment is slightly greater in the first half of the fiscal year because of thetiming of the typical enrollment season for benefits.  Services provided through the TAS Groupinclude 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 resources technology and service delivery consulting

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

·                  Integratedtalent management suite

 

**InvestmentConsulting Group -**The Investment Consulting Groupaccounts for 10 percent of our total first quarter fiscal year 2009revenues.  This business, althoughrelationship based, can be affected by an increasingly complex investmentlandscape as well as by volatility in investment returns, particularly asclients look to us for assistance in managing that volatility.  Services provided through our Investment ConsultingGroup 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

·                  Implementation/fiduciaryservices for defined benefit and defined contribution investment programs viaour Advanced Investment Solutions (AIS) services

 

**Insurance &Financial Services Group** - The Insurance &Financial Services Group (I&FS) accounts for 7 percent of our total firstquarter fiscal year 2009 revenues. This business is largely a project-basedbusiness and therefore could be cyclical. Services provided through I&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

 

Whilewe focus our consulting services in the areas described above, managementbelieves that one of our primary strengths is our ability to draw uponconsultants from our different practices to deliver integrated services to meetthe needs of our clients.  Thiscapability includes communication and change management implementation supportservices.

 

**Financial Statement Overview**

** **

Watson Wyatt’s fiscalyear ends June 30. The financial statements contained in this quarterlyreport reflect Condensed Consolidated Balance Sheets as of the end of the firstquarter of fiscal year 2009 (September 30, 2008) and as of the end offiscal year 2008 (June 30, 2008), Condensed Consolidated Statements ofOperations for the three month periods ended September 30, 2008 and 2007,Condensed Consolidated Statements of Cash Flows for the three month periodsended September 30, 2008 and 2007 and a Condensed Consolidated Statementof Changes in Stockholders’ Equity for the three month period ended September 30,2008.

 

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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 areperformed.  No single client accountedfor more than 2 percent of our consolidated revenue for any of the most recentthree fiscal years.

 

Forthe quarter ended September 30, 2008 and fiscal years ended June 30,2008 and 2007, the company’s top six markets based on percentage ofconsolidated revenue were as follows:

 

| ** **                 | ** ** | **Fiscal Year** | ** ** |
|----------------------------|------------|----------------------|------------|
| **Geographic Region** | ** ** | **2009**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                       |       |                 |       |   |   |   |   |
| United States              |       | 43                   | %          | 41 | % | 44 | % |
| United Kingdom             |       | 32                   |       | 32 |   | 31 |   |
| Germany                    |       | 4                    |       | 5 |   | 1 |   |
| Canada                     |       | 4                    |       | 4 |   | 4 |   |
| Netherlands                |       | 3                    |       | 4 |   | 1 |   |
| Greater China              |       | 2                    |       | 2 |   | 2 |   |

 

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 costsand fiscal year-end incentive bonuses.

 

Professional andsubcontracted services represent fees paid to external service providers foremployment, marketing and other services. For the most recent three fiscal years, approximately 50 to 60 percentof these professional and subcontracted services were directly incurred onbehalf of our clients and were reimbursed by them, with such reimbursementsbeing included in revenue.  For the firstquarter of fiscal year 2009, approximately 50 percent of professional andsubcontracted services represent these reimbursable services.

 

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 paid by corporate management, general counsel, marketing, humanresources, 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 affect 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.  We haveengagement letters with our clients that specify the terms and conditions uponwhich our engagements are based.  Theseterms and conditions can only be changed upon agreement by both parties. Individual consultants’ billing ratesare principally based on a multiple of salary 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-completeto assure that the projects’ current status is accounted for properly.  Our Technology and Administration SolutionsGroup contracts generallyprovide that if the client terminates a contract, the company is entitled topayment 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 allowancesfor doubtful accounts to reflect estimated losses resulting from our clients’failure to pay for our services after the services have been rendered,including allowances when customer disputes may exist.  The related provision is recorded as areduction to revenue.  Our allowancepolicy is based on the aging of our billed and unbilled client receivables andhas been developed based on our write-off history.  Facts and circumstances such as the averagelength of time the receivables are past due, general market conditions, currenteconomic trends and our clients’ ability to pay may cause fluctuations in ourvaluation of billed and unbilled receivables.

 

***DiscretionaryCompensation***

 

The company’scompensation program includes a discretionary annual bonus that is determinedby management and paid once per fiscal year in the form of cash and/or deferredstock units after the company’s annual operating results are finalized.

 

An estimated annual bonusamount is initially developed at the beginning of each fiscal year inconjunction with our budgeting process. Quarterly, estimated annual operating performance is reviewed by thecompany and the discretionary annual bonus amount is then adjusted, if necessary,by management to reflect changes in the forecast of pre-bonus profitability forthe year. In those quarters where the estimated annual bonus level changes, theremaining estimated annual bonus is accrued over the remaining quarters as aconstant percentage of estimated future net income.  Annual bonus levels may vary from currentexpectations as a result of changes in the company’s forecast of net income andcompetitive employment market conditions.

 

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***IncomeTaxes***

 

The company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”,which prescribes the use of the asset and liability method whereby deferred taxasset or liability account balances are calculated at the balance sheet dateusing current tax laws and rates in effect. Valuation allowances areestablished, when necessary, to reduce deferred tax assets when it is morelikely than not that a portion or all of a given deferred tax asset will not berealized. In accordance with SFAS No. 109, income tax expense includes (i) deferredtax expense, which generally represents the net change in the deferred taxasset or liability balance during the year plus any change in valuationallowances and (ii) current tax expense, which represents the amount oftax currently payable to or receivable from a taxing authority plus amountsaccrued for expected tax contingencies (including both tax and interest).Reserves for income tax-related uncertainties are based on estimates ofwhether, and the extent to which, additional taxes will be due. These reservesare established when we believe that certain positions might be challengeddespite our belief that our tax return positions are fully supportable. Weadjust these reserves in light of changing facts and circumstances, such as theoutcome of tax audits. The provision for income taxes includes the impact ofreserve provisions and changes to reserves that are considered appropriate.Accruals for tax contingencies are provided for in accordance with therequirements of FIN 48.

 

***PensionAssumptions***

 

Wesponsor both qualified and non-qualified, non-contributory defined benefitpension plans in North America and the U.K. that cover approximately 85% of ourliability.  Under our plans in NorthAmerica, benefits are based on the number of years of service and the associate’scompensation during the five highest paid consecutive years of service.  Beginning January 2008, we madechanges to our plan in the U.K. related to years of service used in calculatingbenefits for associates.  Benefits earnedprior to January 2008 are based on the number of years of service and theassociate’s compensation during the three years before leaving the plan andbenefits earned after January 2008 are based on the number of years ofservice and the associate’s average compensation during the associate’s term ofservice since that date.  The non-qualified plan, included only in NorthAmerica, provides for pension benefits that would be covered under thequalified plan but are limited by the Internal Revenue Code.  The non-qualified plan has no assets andtherefore is an unfunded arrangement. The benefit liability is reflected on the balance sheet.  The measurement date for each of the plans isJune 30.

 

Determinationof our obligations 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,relevant benchmarks, historical trends, portfolio composition and peercomparisons.

 

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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** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Discount rate                                |       | 7.00                                  | %          | 6.25 | % | 6.25 | % |
| Expected  long-term rate of return on assets |       | 8.75                                  | %          | 8.75 | % | 8.75 | % |
| Rate of increase  in compensation levels     |       | 4.09                                  | %          | 3.84 | % | 3.84 | % |

 

The 7.00 percent discount rate assumption used at the end of fiscalyear 2008 represents a 75 basis point increase from the 6.25 percent discountrate used at the end of fiscal year 2007 and fiscal year 2006.  The company’s discount rate assumptions weredetermined by matching future pension benefit payments with expected futureU.S. AA corporate bond yields for the same periods.

 

The expected long-term rate of return on assets assumption remained at8.75 percent per annum, unchanged from fiscal years 2007 and 2006. Selection ofthe return assumption at 8.75 percent per annum was supported by an analysisperformed by the company of the weighted average yield expected to be achievedwith the anticipated makeup of investments. The investment makeup is heavily weighted towards equities.

 

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

 
| **Change in Assumption**                    | ** ** | **Effect on FY2009  Pre-Tax Pension Expense** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
|                                                  |       |                                                              |       |
| 25 basis point  decrease in discount rate             |       | +$3.3 million                                                     |       |
| 25 basis point  increase in discount rate             |       | -$3.1 million                                                     |       |
| 25 basis point  decrease in expected return on assets |       | +$1.4 million                                                     |       |
| 25 basis point  increase in expected return on assets |       | -$1.4 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.

 

*UnitedKingdom*

 

The following assumptions were used in the valuation of our U.K. planat June 30, 2008, 2007 and 2006:

 
| ** **                                   | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Discount rate                                |       | 6.50                                  | %          | 5.80 | % | 5.10 | % |
| Expected  long-term rate of return on assets |       | 6.46                                  | %          | 5.69 | % | 5.63 | % |
| Rate of increase  in compensation levels     |       | 5.65                                  | %          | 4.95 | % | 4.75 | % |

 

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The 6.50 percent discount rate assumption used at the end of fiscalyear 2008 represents a 70 basis point increase over the rate used at June 30,2007 and a 140 basis point increase over the discount rate at June 30,2006. The discount rate is set having regard to yields on European AA corporatebonds at the measurement date and this increase reflects the change in yieldsbetween these dates.

 

The expected long-term rate of return on assets assumption increased to6.46 percent per annum for fiscal year 2008 from 5.69 percent per annum forfiscal year 2007.  The rate of return wassupported by an analysis performed by the company of the weighted averagereturn expected to be achieved with the anticipated makeup of investments whichis heavily weighted towards bonds.

 

The following information illustrates the sensitivity to a change incertain assumptions for the U.K. pension plans:

 
| **Change in Assumption**                    | ** ** | **Effect on FY2009  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                                               |       |

 

The differences in the discount rate andcompensation level assumption used for the North American and U.K. plans abovecan be attributed to the differing interest rate environments associated withthe currencies and economies to which the plans are subject.  The differences in the expected return onassets are primarily driven by the respective asset allocation in each plan,coupled with the return expectations for assets in the respectivecurrencies.  The North American plans areapproximately 60 percent invested in equities, which on average provide ahigher return than bonds, which is the favored investment for the U.K. plans.

 

***IncurredBut Not Reported Claims***

 

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

 

***Goodwill and Intangible Assets***

 

In applying the purchasemethod of accounting for our business combinations, amounts assigned to identifiableassets and liabilities acquired have been based on estimated fair values as ofthe date of the acquisitions, with the remainder recorded as goodwill.Intangible assets are initially valued at fair market value using generallyaccepted valuation methods appropriate for the type of intangible asset. Weevaluate our goodwill for impairment annually and whenever indicators ofimpairment 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 transactions in the marketplace. Intangibleassets with definite lives are amortized over their estimated useful lives andare reviewed for impairment if indicators of impairment arise.

 

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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.

 

**Results of Operations**

 

The table below setsforth our historical Condensed Consolidated Statements of Operations data forcontinuing operations as a percentage of revenue for the periods indicated:

** **

**CondensedConsolidated Statements of Operations**

** **
| ** **                               | ** ** | **Three months ended September 30** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                                                    |       |   |   |   |   |   |   |
| Revenue                                  |       | $                                                       | 426,126    |   | $ | 401,687 |   | 100 | % | 100 | % |
|                                     |       |                                                    |       |   |   |   |   |   |   |
| Costs of  providing services:            |       |                                                    |       |   |   |   |   |   |   |
| Salaries and  employee benefits          |       | 235,879                                                 |       | 219,363 |   | 55.4 |   | 54.6 |   |
| Professional and  subcontracted services |       | 26,315                                                  |       | 25,527 |   | 6.2 |   | 6.4 |   |
| Occupancy,  communications and other     |       | 49,997                                                  |       | 43,925 |   | 11.7 |   | 10.9 |   |
| General and  administrative expenses     |       | 43,887                                                  |       | 44,305 |   | 10.3 |   | 11.0 |   |
| Depreciation and  amortization           |       | 18,864                                                  |       | 17,334 |   | 4.4 |   | 4.3 |   |
|                                     |       | 374,942                                                 |       | 350,454 |   | 88.0 |   | 87.2 |   |
|                                     |       |                                                    |       |   |   |   |   |   |   |
| Income from  operations                  |       | 51,184                                                  |       | 51,233 |   | 12.0 |   | 12.8 |   |
|                                     |       |                                                    |       |   |   |   |   |   |   |
| Income from  affiliates                  |       | 1,695                                                   |       | 925 |   | 0.4 |   | 0.2 |   |
| Interest income                          |       | 1,031                                                   |       | 1,844 |   | 0.2 |   | 0.5 |   |
| Interest expense                         |       | (569                                                    | )          | (2,258 | ) | (0.1 | ) | (0.5 | ) |
| Other  non-operating income              |       | (19                                                     | )          | 89 |   | — |   | — |   |
|                                     |       |                                                    |       |   |   |   |   |   |   |
| Income from  operations before taxes     |       | 53,322                                                  |       | 51,833 |   | 12.5 |   | 13.0 |   |
|                                     |       |                                                    |       |   |   |   |   |   |   |
| Provision for  income taxes              |       | 18,162                                                  |       | 17,389 |   | 4.2 |   | 4.3 |   |
|                                     |       |                                                    |       |   |   |   |   |   |   |
| Net Income                               |       | $                                                       | 35,160     |   | $ | 34,444 |   | 8.3 | % | 8.6 | % |

 

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**Three Months Ended September 30,2008 Compared to the Three Months Ended September 30, 2007**

 

***Revenue***

 

Revenuesfor the first quarter of fiscal year 2009 were $426.1 million, an increase of$24.4 million, or 6 percent, from $401.7 million in the first quarter of fiscalyear 2008.

 

Theaverage exchange rate used to translate our revenues earned in British poundssterling decreased to 1.8885 for the first quarter of fiscal year 2009 from2.0262 for the first quarter of fiscal year 2008, and the average exchange rateused to translate our revenues earned in Euros increased to 1.5006 for thefirst quarter of fiscal year 2009 from 1.3775 for the first quarter of fiscal2008.  The net impact of the depreciationof the British pound and the appreciation of the Euro resulted in a $5 milliondecrease in revenues in the first quarter of fiscal year 2009 as compared tothe first quarter of fiscal year 2008. Changes in the value of other foreign currencies relative to the U.S.dollar resulted in a $1 million increase in revenues in the first quarter offiscal year 2009 as compared to the first quarter of fiscal year 2008.Excluding the changes in foreign currency exchange rates, total companyrevenues increased 7 percent in the first quarter of fiscal year 2009.

 

Theincreases in our segment revenue for the first quarter of fiscal year 2009 ascompared to the first quarter of fiscal year 2008 are as follows (constantcurrency referenced throughout the MD&A is calculated by translating prioryear revenues at the current year average exchange rate):

 

·                  Benefits increased revenues $11.3 million, or5 percent, over the first quarter of fiscal year 2008 due to increased demandfor our services, particularly in North America.  On a constant currency basis, Benefitsrevenues increased 6 percent over the first quarter of fiscal year 2008.

 

·                  Technology and Administration Solutionsincreased revenues $7.4 million, or 18 percent, over the first quarter offiscal year 2008 due to increases in both North America and Europe.  In both geographic regions, the revenueincrease resulted from new clients as well as additional work for some existingclients.  In North America, revenue isnot recognized during project implementation. The company begins recognizingrevenue after projects go into service delivery. At September 30, 2008,the company had 164 projects in on-going service delivery and 59 projects inimplementation.  At September 30,2007, the company had 95 projects in on-going service delivery and 72 projectsin implementation.  On a constantcurrency basis, Technology and Administration Solutions revenues increased 21percent over the first quarter of fiscal year 2008.

 

·                  Human Capital Group increased revenues $6.8 million,or 16 percent, over the first quarter of fiscal year 2008, primarily due toincreased demand in all geographic regions. On a constant currency basis, Human Capital Group revenues increased 15percent over the first quarter of fiscal year 2008.

 

·                  Investment Consulting increased revenues $2.2million, or 5 percent, over the first quarter of fiscal year 2008, primarily asa result of increased demand for our investment strategy advice. On a constantcurrency basis, Investment Consulting revenues increased 10 percent over thefirst quarter of fiscal year 2008.

 

·                  Insurance and Financial Services decreasedrevenues $0.2 million, or 1 percent, over the first quarter of fiscal year2008.  On a constant currency basis,Insurance and Financial Services revenues increased 2 percent over the firstquarter of fiscal year 2008.

 

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***Salariesand Employee Benefits*.**

 

Salaries and employeebenefit expenses for the first quarter of fiscal year 2009 were $235.9 millioncompared to $219.4 million for the first quarter of fiscal year 2008, anincrease of $16.5 million or 8 percent. The increase, including the impact offoreign exchange, is mainly due to salary increases of $10.2 million, increasedpension, benefits and bonus expense of $4.1 million. These increases wereprimarily attributable to a 7 percent increase in headcount since the end ofthe first quarter of fiscal year 2008. As a percentage of revenue, salaries andemployee benefits increased to 55.4 percent from 54.6 percent. On a constantcurrency basis, salaries and employee benefits increased 11 percent.

 

***Professionaland Subcontracted Services*.**

 

Professional andsubcontracted services expense for the first quarter of fiscal year 2009 were$26.3 million compared to $25.5 million for the first quarter of fiscal year2008, an increase of $0.8 million or 3 percent. The increase is mainly due tohigher reimbursable expenses incurred on behalf of clients. As a percentage ofrevenue, professional and subcontracted services decreased to 6.2 percent from6.4 percent.  On a constant currencybasis, professional and subcontracted services increased 4 percent.

 

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

 

Occupancy, communicationsand other expenses for the first quarter of fiscal year 2009 were $50.0 millioncompared to $43.9 million for the first quarter of fiscal year 2008, anincrease of $6.1 million or 14 percent. The increase is mainly due to general office expenses such asprofessional development costs, repairs and maintenance, travel and businesstaxes as well as a $3.1 million foreign exchange loss on interest fromintercompany loans.  As a percentage ofrevenue, occupancy, communications and other increased to 11.7 percent from10.9 percent. On a constant currency basis, occupancy, communications and otherincreased 17 percent.

 

***Generaland Administrative Expenses.***

 

General andadministrative expenses for the first quarter of fiscal year 2009 were $43.9million compared to $44.3 million for the first quarter of fiscal year 2008, adecrease of $0.4 million or 1 percent. As a percentage of revenue, general and administrative expensesdecreased to 10.3 percent from 11.0 percent. On a constant currency basis,general and administrative expenses increased 2 percent.

 

***Depreciationand Amortization.***

 

Depreciation andamortization for the first quarter of fiscal year 2009 was $18.9 millioncompared to $17.3 million for the first quarter of fiscal year 2008, anincrease of $1.6 million or 9 percent. The increase is primarily attributableto increases in amortization of intangible assets and of internally developedsoftware used to support our Technology and Administration Solutions Group. Asa percentage of revenue, depreciation and amortization increased to 4.4 percentfrom 4.3 percent.  On a constant currencybasis, depreciation and amortization increased 12 percent.

 

***IncomeFrom Affiliates.***

 

Income from affiliatesfor the first quarter of fiscal year 2009 was $1.7 million compared to $0.9million for the first quarter of fiscal year 2008, an increase of $0.8million.  These amounts reflect ourportion of PCIC’s, Fifth Quadrant’s and Dubai’s operating results for the firstquarter of fiscal year 2009 while the first quarter fiscal year 2008 onlyincluded PCIC’s operating results.

 

***InterestExpense.***

 

Interest expense for thefirst quarter of fiscal year 2009 was $0.6 million compared to $2.3 million forthe first quarter of fiscal year 2008. The decrease in the current period reflects a lower average debtbalance.

 

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***InterestIncome.***

 

Interest income for thefirst quarter of fiscal year 2009 was $1.0 million compared to $1.8 million forthe first quarter of fiscal year 2008. The decrease is mainly due to a loweraverage cash balance in the current period compared to the prior period.

 

***Provisionfor Income Taxes.***

 

Provision for incometaxes for the first quarter of fiscal year 2009 was $18.2 million compared to$17.4 million for the first quarter of fiscal year 2008. Our effective tax ratewas 34.06 percent for the first quarter of fiscal year 2009 and 33.6 percentfor the first three months of fiscal year 2008. The tax rate increase is due primarily to the geographic mix ofincome.  The company has not providedU.S. deferred taxes on cumulative earnings of foreign subsidiaries that havebeen reinvested indefinitely. 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.

 

***NetIncome.***

 

Net income for the firstquarter of fiscal year 2009 was $35.2 million compared to $34.4 million for thefirst quarter of fiscal year 2008.  As apercentage of revenue, income from continuing operations decreased to 8.3percent from 8.6 percent.

 

***EarningsPer Share.***

 

Diluted earnings pershare, income from continuing operations for the first quarter of fiscal year2009 was $0.82, compared to $0.77 for the first quarter of fiscal year 2008.

 

**Liquidity and Capital Resources**

 

Our cash and cashequivalents at September 30, 2008 totaled $67.5 million compared to $124.6million at June 30, 2008.  Thedecrease in cash from June 30, 2008 to September 30, 2008 wasprincipally attributable to payment during the first quarter of fiscal year2009 of previously accrued discretionary compensation of $166 million, paymentof $14.3 million in corporate taxes, $10.0 million in capital expenditures and $3.2million in dividends during the quarter. These outflows of cash were funded by cash flow from current operations,from existing cash balances and from borrowings under our revolving creditfacility.  Consistent with the company’sliquidity position, management considers various alternative strategic uses ofcash reserves including acquisitions, dividends and stock buybacks, or anycombination of these options. The company believes that it has sufficientresources to fund operations beyond the next twelve months.

 

Our non U.S. operationsare substantially self-sufficient for their working capital needs.  At September 30, 2008, $64.2 million ofthe total cash balance of $67.5 million was held outside of North America,which we have the ability to utilize, if necessary. There are no significantrepatriation restrictions other than local or U.S. taxes associated withrepatriation.

 

Underthe terms of the WWLLP Business Combination, we are required under certaincircumstances to place funds into an insurance trust designed to satisfypotential litigation settlement related to the former partners of WWLLP.  If the assets of the trust are not used by2017, they will be returned to the company. As of September 30, 2008, wemaintained $6.0 million of restricted cash related to this obligation. Thisrestricted cash balance was included in Other Assets on our consolidatedbalance sheet.

 

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***CashUsed in Operating Activities.***

 

Cash used in operating activities for the first quarter of fiscal year2009 was $73.7 million compared to cash used in operating activities of $48.7million for the first quarter of fiscal year 2008.  The difference is primarily attributable topayment for discretionary compensation during the quarter.

 

The allowance fordoubtful accounts increased $1.9 million from June 30, 2008 to September 30,2008. The number of days of accounts receivable and work in process outstandingwas 73 at September 30, 2008, compared to 71 at June 30, 2008.

 

***CashUsed in Investing Activities.***

 

Cash used in investingactivities for the first quarter of fiscal year 2009 was $16.0 million comparedto $145.1 million used in investing activities for the first quarter of fiscalyear 2008.  The difference can beprimarily attributed to acquisition and contingent consideration payments of$130.5 million in the first quarter of fiscal year 2008.

 

Expenditures of capitalfunds were $10.0 million for the first quarter of fiscal year 2009.  Anticipated commitments of capital funds areestimated at $34.3 million for the remainder of fiscal year 2009. We expect cashfrom operations to adequately provide for these capital commitments.

 

***CashFrom Financing Activities.***

 

Cash from financingactivities for the first quarter of fiscal year 2009 was $29.7 million comparedto cash from financing activities of $22.7 million for the first quarter offiscal year 2008.  This change isprimarily attributable to activity under our credit facility which included netborrowings of $105 million in the first quarter of fiscal year 2009 compared tonet borrowings of $36.4 million in the first quarter of fiscal year 2008.  Additionally, during the first quarter offiscal year 2009, the company repurchased $73.6 million of common stockcompared to $14.1 million of stock repurchases during the same period in fiscalyear 2008.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 
| ** **                                                      | ** ** | **Remaining payments due by fiscal year as of September 30, 2008** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| **Contractual Cash  Obligations (in thousands)** | ** ** | **Total**                                                                                                            | ** ** | **Remaining  2009** | ** ** | **2010 through  2011** | ** ** | **2012  through  2013** | ** ** | **Thereafter** | ** ** |
| Lease commitments                                               |       | $                                                                                                                    | 334,525    |   | $ | 47,685 |   | $ | 108,297 |   | $ | 81,702 |   | $ | 96,841 |   |
| Revolving Credit  Facility                                      |       | 111,751                                                                                                              |       | 107,987 |   | 3,764 |   | — |   | — |   |
| Total                                                           |       | $                                                                                                                    | 446,276    |   | $ | 155,672 |   | $ | 112,061 |   | $ | 81,702 |   | $ | 96,841 |   |

 

***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.

 

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***Credit Agreement. ***The company has a credit facility provided by asyndicate 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.  Borrowings underthis facility were $105.0 and $141.4 million as of September 30, 2008 and2007, respectively.  Credit under thefacility is available upon demand, although the credit facility requires us toobserve certain covenants (including requirements relating to our leverageratio and fixed coverage charge ratio)****andis collateralized with a pledge of stock of material subsidiaries.  We were in compliance with both covenantsunder the credit facility as of September 30, 2008. This facility isscheduled to mature on June 30, 2010.

 

A portion of the revolving facility is used to supporta required letter of credit.  As aresult, $10.6 million of the facility was unavailable for operating needs as ofSeptember 30, 2008.  We are charged a feefor the outstanding letter of credit that also fluctuates based on our leverageratio.

 

The company has also provided a $5.0 millionAustralian dollar-denominated letter of credit (US $4.0 million) to anAustralian governmental agency as required by the local regulations.  The estimated fair market value of theseletters of credit is immaterial because they have never been used, and thecompany believes that future usage is remote.

 

***PensionContributions.*** Remaining contributions to our various pension plans for fiscal year2009 are projected to be approximately $29.0 million.

 

**Risk Management**

 

Asa part of our overall risk management program, we carry customary commercialinsurance policies, including commercial general liability and claims-madeprofessional liability insurance with a self-insured retention of $1 millionper claim, which provides coverage for professional liability claims of thecompany and its subsidiaries, including the cost of defending such claims.  Our professional liability insurance coveragebeyond our self-insured retention amount is written by an affiliated captiveinsurance company (PCIC) owned by us and two other professional services firms,and by various commercial insurance carriers.

 

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 March ofeach year, on relative risk of the various lines of business performed by eachof the owner companies, past claim experience of each owner company, growth ofeach of those companies, industry risk profiles in general and the overallinsurance markets.

 

Asof July 1, 2008, the captive insurance company carries reinsurance forlosses it insures above $25 million. Since losses incurred by PCIC below this level are not covered byreinsurance, but are direct expenses of PCIC, reserve adjustments and actualoutcomes of specific claims of any PCIC member firm carry through into WatsonWyatt’s financial results as income or loss from affiliates through our 36.43%ownership of PCIC.  Thus, from time totime, the impacts of PCIC’s reserve development may result in fluctuations inWatson Wyatt’s earnings.

 

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.

 

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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. Although the company maintains professional liability insurance coverage,this insurance does not cover claims made after expiration of our currentinsurance contracts.  Generally acceptedaccounting principles require that we record a liability for incurred but notreported (IBNR) professional liability claims if they are probable andreasonably estimable, and for which we have not yet contracted for insurancecoverage.  The company uses actuarialassumptions to estimate and record its IBNR liability and has a $37.0 millionIBNR liability recorded as of September 30, 2008.

 

Insurancemarket conditions for our industry and the company include heightened overallpremium cost.  In addition, in 2005, PCICraised the reinsurance attachment point from $15 million to $25 million. Trendstoward higher self-insured retentions and constraints on aggregate excesscoverage for this class of insurance coverage are anticipated to continue or torecur 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. In anticipation of the possibility of futurereductions in risk transfer from PCIC to re-insurers, as well as the hardeninginsurance market conditions in recent years, the firms that own PCIC, includingthe company, have increased PCIC’s capital in the past and we will continue tore-assess capital requirements on a regular basis.

 

Inlight of increasing worldwide litigation, including litigation againstprofessionals, the company has a policy that all client relationships bedocumented by engagement letters containing specific risk mitigation clausesthat were not included in all historical client agreements.  Certain contractual provisions designed to mitigate risk may not be legallypractical or enforceable in litigation involving breaches of fiduciary duty orcertain other alleged errors or omissions, or in certain jurisdictions. Wemay incur significant legal expenses in defending against litigation. Nearly100 percent of the company’s U.S.****and U.K.****corporateclients have signed engagement letters including some if not all of ourpreferred mitigation clauses, and initiatives to maintain that process in theUnited States and the United Kingdom and complete it elsewhere are underway.

 

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**Special Note RegardingForward-looking Statements**

 

This filingcontains a number of  “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, including, but not limited to the following: Note 5 -  Retirement Benefits; Note 6 – Goodwill andIntangible Assets; Note 11 – Commitment and Contingent Liabilities; Note 13 –Income Taxes; the Executive Overview; Critical Accounting Policies andEstimates; the discussion of our capital expenditures; Off-Balance Sheet Arrangementsand Contractual 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:

 

·                  our ability to integrate acquired businessesinto our own business, processes and systems, and achieve the anticipatedresults;

·                  foreigncurrency exchange and interest rate fluctuations;

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

·                  our continued ability to recruit and retainqualified associates;

·                  the success of our marketing, clientdevelopment and sales programs after our acquisitions;

·                  our ability to maintain client relationshipsand to attract new clients after our acquisitions;

·                  declines in demand for our services;

·                  outcomes of pending or future professionalliability cases and the availability and capacity of professional liabilityinsurance to fund the outcome of pending cases or future judgments orsettlements;

·                  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;

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

·                  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 2008 Annual Report on Form 10-Kfiled with the SEC on August 15, 2008. 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 foreign operationsuse the local currency, as their functional currency.  Our primary international operations use theBritish Pound, and to a lesser extent, the Euro. 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.

 

The foreign currency andtranslation exposure risks have been heightened, particularly in the financialservices sector, as a result of the current economic crisis.

 

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. Based on that evaluation, our management, including the CEO andCFO, concluded that our disclosure controls and procedures were effective as ofSeptember 30, 2008.

 

**Changes in Internal Control OverFinancial Reporting**

 

There were no significantchanges in our internal control over financial reporting in the quarter ended September 30,2008 that materially affected, or are reasonably likely to materially affect,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.

 

**PART II.  OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS.**

 

From time to time,we are a party to various lawsuits, arbitrations or mediations that arise inthe ordinary course of business. The disclosure called for by Part II, Item 1,regarding our legal proceedings is incorporated by reference herein from Note11 “Commitments and Contingent Liabilities,” of the Notes to the CondensedConsolidated Financial Statements in this Form 10-Q for the quarter endingSeptember 30, 2008.

 

**ITEM1A.  RISK FACTORS.**

 

There are nomaterial changes from risk factors as previously disclosed in our 2008 AnnualReport on Form 10-K (File No. 001-16159) filed on August 15, 2008.

 

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

 

**None.**

 

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**IssuerPurchases of Equity Securities**

 

The table below presents specified information about the company’sstock repurchases and repurchase 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** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1,  2008 through July 31, 2008           |       | 336,603                                          |       | $                                                | 54.31      |                                                                                                                             | 336,603    |                                                                                                                                    |       |   |
| August 1,  2008 through August 31, 2008       |       | 326,344                                          |       | 57.92                                            |       | 326,344                                                                                                                          |       |                                                                                                                                    |       |
| September 1,  2008 through September 30, 2008 |       | 678,264                                          |       | 55.56                                            |       | 678,264                                                                                                                          |       |                                                                                                                                    |       |
| Total                                                   |       | 1,341,211                                        |       |                                             |       | 1,341,211                                                                                                                        |       | 545,041                                                                                                                                 |       |
|                                                         |            |                                                  |            |                                                  |            |                                                                                                                                  |            |                                                                                                                                         |            |  |

 

On February 11, 2008, the company’s Board of Directors approvedthe repurchase of up to $100 million of the company’s Class A CommonStock.  The remaining number of sharesthat may be purchased under this plan is approximately 77,018 shares, estimatedby using the market closing price on September 30, 2008 of $49.73 pershare.

 

Duringthe first quarter of fiscal year 2007, the company’s Board of Directorsapproved the repurchase of up to 1,500,000 shares of our Class A CommonStock.  The maximum number of sharesremaining to be repurchased under this plan is 468,023.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES.**

 

**None.**

** **

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

** **

None.

 

**ITEM 5.OTHER INFORMATION.**

 

None.

 

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**ITEM 6.EXHIBITS.**

** **
| 21   |   | Subsidiaries of Watson  Wyatt Worldwide, Inc. (1)                                                                                                                                            |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 with this Form 10-Q |
|-----|--------------------------------|

 

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**1.****              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   |                    | November 7, 2008 |
|---------------------|-------------------------|-----------------------|
| Name:               | John J. Haley           |                  | Date |
| Title:              | President and           |                  |   |
|                | Chief Executive Officer |                  |   |
|                |                    |                  |   |
| /s/ Roger F. Millay |                    | November 7, 2008 |
| Name:               | Roger F. Millay         |                  | Date |
| Title:              | Vice President and      |                  |   |
|                | Chief Financial Officer |                  |   |
|                |                    |                  |   |
| /s/ Peter L. Childs |                    | November 7, 2008 |
| Name:               | Peter L. Childs         |                  | Date |
| Title:              | Controller              |                  |   |

 

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