Tableof 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  March 31, 2009**                                                                                                           |
|                                                                                                                                                              |                                                                                                         |
| **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 itscharter)

 

| **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 90days.    Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).    Yes o  No x

 

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 “largeaccelerated filer” and “accelerated filer,” and “smaller reporting company” in Rule 12b-2of 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 in Rule 12b-2of the Exchange Act). Yes o  No x

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of April 30, 2009.

 

| **Class**                                            | ** ** | **Outstanding  at April 30, 2009** |
|------------------------------------------------------|------------|-----------------------------------------|
| Class A Common Stock, $.01 par value  per share |       | 42,633,002 shares                       |

 

 

 

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

 

For the Three and Nine Months Ended March 31,2009

 
| PART I.   | FINANCIAL INFORMATION                                                                                                |   |
|----------------|----------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                 |   |
| Item 1.        | Financial Statements (Unaudited)                                                                                     |   |
|           | Condensed Consolidated Statements of Operations—Three and Nine Months  Ended March 31, 2009 and 2008       | 1      |
|           | Condensed Consolidated Balance Sheets—March 31, 2009 and  June 30, 2008                               | 2      |
|           | Condensed Consolidated Statements of Cash Flows—Nine Months Ended  March 31, 2009 and 2008                 | 3      |
|           | Condensed Consolidated Statement of Changes  in Stockholders’ Equity—Nine Months Ended March 31, 2009 | 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                                                          | 39     |
| Item 4.        | Controls and Procedures                                                                                              | 39     |
|           |                                                                                                                 |   |
| PART II.  | OTHER INFORMATION                                                                                                    |   |
|           |                                                                                                                 |   |
| Item 1.        | Legal Proceedings                                                                                                    | 40     |
| Item 1A.       | Risk Factors                                                                                                         | 40     |
| Item 2.        | Unregistered Sales of Equity Securities and  Use of Proceeds                                                         | 41     |
| Item 3.        | Defaults Upon Senior Securities                                                                                      | 41     |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                                                 | 41     |
| Item 5.        | Other Information                                                                                                    | 41     |
| Item 6.        | Exhibits                                                                                                             | 42     |
| Signatures     |                                                                                                                 | 43     |
| Certifications |                                                                                                                 | 48     |

 

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements (Unaudited)**

 

**WATSON WYATT WORLDWIDE, INC.**

**CondensedConsolidated Statements of Operations**

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

(Unaudited)

 
| ** **                                              | ** ** | **Three months ended March 31,** | ** ** | **Nine months ended March 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                              | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Revenue                                                 |       | $                                     | 416,994    |                                 | $          | 457,525 |   | $ | 1,279,509 |   | $ | 1,306,244 |   |
|                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Costs of providing services:                            |       |                                  |       |                                 |       |   |   |   |   |
| Salaries and employee benefits                          |       | 237,208                               |       | 254,147                              |       | 719,735 |   | 722,583 |   |
| Professional and subcontracted services                 |       | 23,835                                |       | 20,334                               |       | 75,714 |   | 75,154 |   |
| Occupancy, communications and other                     |       | 40,941                                |       | 54,955                               |       | 137,254 |   | 148,187 |   |
| General and administrative expenses                     |       | 45,689                                |       | 45,390                               |       | 132,782 |   | 131,486 |   |
| Depreciation and amortization                           |       | 17,531                                |       | 18,265                               |       | 55,265 |   | 53,225 |   |
|                                                    |       | 365,204                               |       | 393,091                              |       | 1,120,750 |   | 1,130,635 |   |
|                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Income from operations                                  |       | 51,790                                |       | 64,434                               |       | 158,759 |   | 175,609 |   |
|                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss) from affiliates                           |       | 3,201                                 |       | (29                                  | )          | 5,966 |   | (603 | ) |
| Interest expense                                        |       | (553                                  | )          | (1,353                               | )          | (2,181 | ) | (5,580 | ) |
| Interest income                                         |       | 294                                   |       | 1,585                                |       | 1,647 |   | 4,356 |   |
| Other non-operating income                              |       | 1,786                                 |       | 179                                  |       | 3,466 |   | 454 |   |
|                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Income before income taxes                              |       | 56,518                                |       | 64,816                               |       | 167,657 |   | 174,236 |   |
|                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Provision for income taxes                              |       | 15,927                                |       | 22,270                               |       | 52,355 |   | 60,465 |   |
|                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                              |       | $                                     | 40,591     |                                 | $          | 42,546 |   | $ | 115,302 |   | $ | 113,771 |   |
|                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Earnings per share:                                     |       |                                  |       |                                 |       |   |   |   |   |
| Net income - Basic                                      |       | $                                     | 0.95       |                                 | $          | 1.01 |   | $ | 2.70 |   | $ | 2.69 |   |
| Net income - Diluted                                    |       | $                                     | 0.95       |                                 | $          | 0.96 |   | $ | 2.69 |   | $ | 2.56 |   |
|                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average shares of common stock, basic  (000)   |       | 42,609                                |       | 42,064                               |       | 42,705 |   | 42,230 |   |
| Weighted average shares of common stock, diluted  (000) |       | 42,773                                |       | 44,333                               |       | 42,869 |   | 44,515 |   |

 

See accompanying notes to the

condensed consolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

**Condensed Consolidated Balance Sheets**

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

(Unaudited)

 
| ** **                                                                      | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **2009**           | ** ** | **2008**          | ** ** |
|                                                                            |       |               |       |              |       |
| **Assets**                                                                      | ** ** | ** **         | ** ** | ** **        | ** ** |
| Cash and cash equivalents                                                       |       | $                  | 118,292    |              | $          | 124,632 |   |
| Receivables from clients:                                                       |       |               |       |              |       |
| Billed, net of allowances of $7,045 and  $8,544                                 |       | 210,699            |       | 239,593           |       |
| Unbilled, at estimated net realizable value                                     |       | 116,097            |       | 126,163           |       |
|                                                                            |       | 326,796            |       | 365,756           |       |
| Deferred income taxes                                                           |       | 21,113             |       | 18,576            |       |
| Other current assets                                                            |       | 55,870             |       | 48,523            |       |
| Total current assets                                                            |       | 522,071            |       | 557,487           |       |
|                                                                            |       |               |       |              |       |
| Investment in affiliates                                                        |       | 20,488             |       | 8,526             |       |
| Fixed assets, net                                                               |       | 173,646            |       | 184,684           |       |
| Deferred income taxes                                                           |       | 62,589             |       | 72,572            |       |
| Goodwill                                                                        |       | 490,618            |       | 634,176           |       |
| Intangible assets, net                                                          |       | 169,195            |       | 236,767           |       |
| Other assets                                                                    |       | 14,972             |       | 21,764            |       |
|                                                                            |       |               |       |              |       |
| **Total Assets**                                                                |       | $                  | 1,453,579  |              | $          | 1,715,976 |   |
| ** **                                                                      | ** ** | ** **         | ** ** | ** **        | ** ** |
| **Liabilities**                                                                 | ** ** | ** **         | ** ** | ** **        | ** ** |
| Accounts payable and accrued liabilities,  including discretionary compensation |       | $                  | 307,028    |              | $          | 381,784 |   |
| Income taxes payable and deferred                                               |       | 929                |       | 3,462             |       |
| Total current liabilities                                                       |       | 307,957            |       | 385,246           |       |
| Revolving credit facility                                                       |       | 40,223             |       | —            |       |
| Accrued retirement benefits                                                     |       | 168,379            |       | 209,168           |       |
| Deferred rent and accrued lease losses                                          |       | 28,769             |       | 29,239            |       |
| Deferred income taxes and other long term  tax liabilities                      |       | 11,158             |       | 13,430            |       |
| Other noncurrent liabilities                                                    |       | 74,672             |       | 94,498            |       |
|                                                                            |       |               |       |              |       |
| **Total Liabilities**                                                           |       | 631,158            |       | 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                                            |       |               |       |              |       |
| 42,621,505 and 43,578,268 outstanding                                           |       | 438                |       | 438               |       |
| Additional paid-in capital                                                      |       | 452,887            |       | 456,681           |       |
| Treasury stock, at cost - 1,191,946 and  235,183 shares                         |       | (65,266            | )          | (13,222           | )          |
| Retained earnings                                                               |       | 580,677            |       | 474,961           |       |
| Accumulated other comprehensive  (loss)/income                                  |       | (146,315           | )          | 65,537            |       |
| **Total Stockholders’ Equity**                                             |       | 822,421            |       | 984,395           |       |
|                                                                            |       |               |       |              |       |
| **Total Liabilities and Stockholders’ Equity**                             |       | $                  | 1,453,579  |              | $          | 1,715,976 |   |

 

See accompanying notes to the

condensed consolidated financial statements

 

2

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**WATSONWYATT WORLDWIDE, INC.**

**CondensedConsolidated Statements of Cash Flows**

(Thousands of U.S. Dollars)

(Unaudited)

 
| ** **                                                                            | ** ** | **Nine months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                            | ** ** | **2009**                             | ** ** | **2008** | ** ** |
|                                                                                  |       |                                 |       |   |   |
| Cash flows from operating activities:                                                 |       |                                 |       |   |   |
| Net income                                                                            |       | 115,302                              |       | $ | 113,771 |   |
| Adjustments to reconcile net income to net  cash (used in)/from operating activities: |       |                                 |       |   |   |
| Provision for doubtful receivables from  clients                                      |       | 4,113                                |       | 11,295 |   |
| Depreciation                                                                          |       | 44,598                               |       | 40,943 |   |
| Amortization of intangible assets                                                     |       | 10,668                               |       | 12,282 |   |
| Provision for (benefit from) deferred  income taxes                                   |       | 7,446                                |       | 9,453 |   |
| (Income)/loss from affiliates                                                         |       | (5,966                               | )          | 603 |   |
| Other, net                                                                            |       | 710                                  |       | 6,729 |   |
| Changes in operating assets and  liabilities, net of business acquisitions            |       |                                 |       |   |   |
| Receivables from clients                                                              |       | 34,847                               |       | (43,785 | ) |
| Other current assets                                                                  |       | (7,348                               | )          | (19,818 | ) |
| Other assets                                                                          |       | 3,603                                |       | (3,689 | ) |
| Accounts payable and accrued liabilities                                              |       | (58,119                              | )          | 27,242 |   |
| Income taxes payable                                                                  |       | (2,397                               | )          | (478 | ) |
| Accrued retirement benefits                                                           |       | (40,789                              | )          | (8,118 | ) |
| Deferred rent and accrued lease losses                                                |       | (470                                 | )          | (3,379 | ) |
| Other noncurrent liabilities                                                          |       | (22,531                              | )          | (5,244 | ) |
| Cash flows from operating activities:                                                 |       | 83,667                               |       | 137,807 |   |
|                                                                                  |       |                                 |       |   |   |
| Cash flows used in investing activities:                                              |       |                                 |       |   |   |
| Business acquisitions and contingent  consideration payments                          |       | (518                                 | )          | (134,934 | ) |
| Purchases of fixed assets                                                             |       | (29,772                              | )          | (24,698 | ) |
| Capitalized software costs                                                            |       | (14,503                              | )          | (16,903 | ) |
| Investment in affiliates                                                              |       | (2,007                               | )          | (3,316 | ) |
| Distribution from affiliates                                                          |       | 227                                  |       | — |   |
| Increase in restriced cash                                                            |       | —                               |       | (2,265 | ) |
| Contingent proceeds from divestitures                                                 |       | 3,466                                |       | 454 |   |
| Cash flows used in investing activities:                                              |       | (43,107                              | )          | (181,662 | ) |
|                                                                                  |       |                                 |       |   |   |
| Cash flows used in financing activities:                                              |       |                                 |       |   |   |
| Borrowings under credit facility                                                      |       | 40,223                               |       | 5,500 |   |
| Dividends paid                                                                        |       | (9,586                               | )          | (9,498 | ) |
| Repurchases of common stock                                                           |       | (77,443                              | )          | (53,980 | ) |
| Issuances of common stock and excess tax  benefit                                     |       | 4,949                                |       | 9,445 |   |
| Cash flows used in financing activities:                                              |       | (41,857                              | )          | (48,533 | ) |
|                                                                                  |       |                                 |       |   |   |
| Effect of exchange rates on cash                                                      |       | (5,043                               | )          | 2,018 |   |
|                                                                                  |       |                                 |       |   |   |
| Decrease in cash and cash equivalents                                                 |       | (6,340                               | )          | (90,370 | ) |
|                                                                                  |       |                                 |       |   |   |
| Cash and cash equivalents at beginning of  period                                     |       | 124,632                              |       | 248,186 |   |
|                                                                                  |       |                                 |       |   |   |
| Cash and cash equivalents at end of period                                            |       | $                                    | 118,292    |   | $ | 157,816 |   |
|                                                                                  |       |                                 |       |   |   |
| Supplemental disclosures:                                                             |       |                                 |       |   |   |
| Cash paid for interest                                                                |       | $                                    | 2,091      |   | $ | 5,498 |   |
| Cash paid for income taxes, net of refunds                                            |       | $                                    | 46,889     |   | $ | 55,191 |   |

 

See accompanying notes to the

condensed consolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

**Condensed Consolidated Statement of Changes inStockholders’ 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                                           |       | —                  |       | —           |       | —         |       | —       |       | 115,302      |       | —            |       | 115,302    |       |
| Foreign currency  translation adjustment, net of tax |       | —                  |       | —           |       | —         |       | —       |       | —       |       | (211,852          | )          | (211,852   | )          |
| Total  comprehensive loss                            |       |                    |       |             |       |           |       |         |       |         |       |              |       | (96,550    | )          |
| Cash dividends  declared                             |       | —                  |       | —           |       | —         |       | —       |       | (9,586       | )          | —            |       | (9,586     | )          |
| Repurchases of  common stock                         |       | (1,418                  | )          | —           |       | —         |       | (77,443      | )          | —       |       | —            |       | (77,443    | )          |
| Issuances of  common stock and excess tax benefit    |       | 461                     |       | —           |       | (3,794         | )          | 25,399       |       | —       |       | —            |       | 21,605     |       |
|                                                 |       |                    |       |             |       |           |       |         |       |         |       |              |       |       |       |
| Balance at  March 31, 2009                      |       | 42,621                  |       | $                | 438        |           | $          | 452,887      |       | $            | (65,266    | )                 | $          | 580,677    |       | $ | (146,315 | ) | $ | 822,421 |   |

 

Seeaccompanying notes to the

condensedconsolidated financial statements

 

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**WATSONWYATT WORLDWIDE, INC.**

 

**Notes to the Condensed Consolidated FinancialStatements**

(Tabular amountsare in thousands, except per share data)

(Unaudited)

 

**Note 1 – Basis of Presentation.**

 

The accompanyingunaudited quarterly condensed consolidated financial statements of Watson WyattWorldwide, Inc. and our subsidiaries (collectively referred to as “we,” “WatsonWyatt,” “Watson Wyatt Worldwide” or the “company”) are presented in accordancewith the rules and regulations of the Securities and Exchange Commission (“SEC”)for quarterly reports on Form 10-Q and therefore do not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples. In the opinion of management, these condensed consolidatedfinancial statements reflect all adjustments, consisting only of normalrecurring adjustments, which are necessary for a fair presentation of thecondensed consolidated financial statements and results for the interimperiods.  All intercompany accounts andtransactions have been eliminated in consolidation. The condensed consolidatedfinancial statements should be read together with the audited 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 2009began July 1, 2008 and ends June 30, 2009.

 

The results of operationsfor the nine months ended March 31, 2009 are not necessarily indicative ofthe results that can be expected for the entire fiscal year ending June 30,2009.  The results reflect certainestimates and assumptions made by management including estimated bonuses andanticipated tax liabilities that affect the amounts reported in the condensedconsolidated financial statements and related notes.  Certain prior year amounts have beenreclassified to conform to the current year’s presentation.

 

**Note 2 – Business Acquisitions.**

 

The company’s acquisition strategy identifiespotential acquisitions that strengthen our geographic delivery of services toclients or enhance practices in various parts of the world. Acquisitioncandidates are evaluated on their cultural consistency with Watson Wyatt valueswithin the company’s strategy. When those conditions are met, the companyvalues potential acquisitions so as to be accretive to earnings.

 

Assets acquired and liabilities assumed as a result ofour acquisitions are recorded at their respective fair values as of thebusiness combination date.  Thedetermination of estimated fair value requires management to make significantestimates and assumptions.

 

Acquisitions that we have completed during the pasttwo fiscal years include the following:

 

*Dr. Dr. Heissmann GmbH*

 

On July 20, 2007,the company acquired the outstanding stock of Dr. Dr. Heissmann GmbH(“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. The financial results ofHeissmann have been consolidated into the company’s financial statements sincethe date of acquisition.

 

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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 ofbusiness software products, including an end-to-end solution for managingorganizations’ talent management processes. The acquisition of WisdomNet strengthens our existing talent managementbusiness and provides strategic software that is being used to service ourclients on an ongoing basis. As of the date of the acquisition, WisdomNetemployed 15 associates. The company recorded $2.6 million of goodwillassociated with this acquisition.

 

*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 revenue 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., anindirect wholly-owned subsidiary of the company, acquired the net assets ofWatson Wyatt Netherlands (“WWN”), its long-time alliance partner in theNetherlands.  The financial results ofWWN have been consolidated into the company’s financial statements since February 1,2007.

 

The contingencies associated with the payment of anadditional 218,089 Class A shares were met and the contingent shares wereissued to the former partners of WWN on June 27, 2008.

 

*Watson Wyatt LLP*

 

On July 31, 2005, the company acquiredsubstantially all of the assets and assumed most liabilities of Watson WyattLLP (“WWLLP”) (the “WWLLP business combination”), a leading UnitedKingdom-based actuarial, benefits and human resources consulting partnership.The financial results of WWLLP have been consolidated into the company’sfinancial statements since August 1, 2005.

 

In addition to theinitial purchase price, the terms of the purchase agreement called for anadditional 1,950,000 shares to be paid to the former partners of WWLLP,contingent upon the achievement by the acquired business of certain agreed-uponfinancial performance goals.  Theagreed-upon financial performance goals were met at the end of fiscal year 2007and the contingent shares were issued to the former partners of WWLLP on April 15,2008 for payment of $94.2 million.

 

**Note 3 – Segment Information.**

 

We have five reportableoperating segments or practice areas as follows:

 

(1)     Benefits Group

(2)     Human Capital Group

(3)     Technology and Administration SolutionsGroup

(4)     Investment Consulting Group

(5)     Insurance & Financial ServicesGroup

 

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Management evaluates theperformance of its segments and allocates resources to them based on netoperating income on a pre-bonus, pre-tax basis.

 

The table below presentsspecified information about reported segments as of and for the three monthsended March 31, 2009:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 248,051    |                      | $          | 36,844                                                |       | $                                 | 44,602     |                                           | $          | 39,214    |       | $ | 31,442 |   | $ | 400,153 |   |
| Net operating  income                   |       | 81,693              |       | (630                      | )          | 9,112                                                 |       | 10,648                            |       | 8,991                                          |       | 109,814   |       |
| Receivables                             |       | 236,208             |       | 36,568                    |       | 15,409                                                |       | 26,073                            |       | 25,123                                         |       | 339,381   |       |
|                                         |            |                     |            |                           |            |                                                       |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

The table below presentsspecified information about reported segments as of and for the three monthsended March 31, 2008:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 267,940    |                      | $          | 49,058                                                |       | $                                 | 45,008     |                                           | $          | 43,457    |       | $ | 30,799 |   | $ | 436,262 |   |
| Net operating  income                   |       | 89,135              |       | 9,460                     |       | 10,180                                                |       | 15,947                            |       | 1,411                                          |       | 126,133   |       |
| Receivables                             |       | 281,316             |       | 48,395                    |       | 17,072                                                |       | 29,829                            |       | 26,581                                         |       | 403,193   |       |
|                                         |            |                     |            |                           |            |                                                       |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

The table below presentsspecified information about reported segments as of and for the nine monthsended March 31, 2009:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 725,848    |                      | $          | 137,900                                               |       | $                                 | 143,503    |                                           | $          | 118,813   |       | $ | 93,735 |   | $ | 1,219,799 |   |
| Net operating  income                   |       | 216,489             |       | 16,321                    |       | 36,392                                                |       | 31,597                            |       | 19,890                                         |       | 320,689   |       |
| Receivables                             |       | 236,208             |       | 36,568                    |       | 15,409                                                |       | 26,073                            |       | 25,123                                         |       | 339,381   |       |
|                                         |            |                     |            |                           |            |                                                       |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

The table below presentsspecified information about reported segments as of and for the nine monthsended March 31, 2008:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 738,605    |                      | $          | 145,222                                               |       | $                                 | 135,055    |                                           | $          | 125,763   |       | $ | 89,131 |   | $ | 1,233,776 |   |
| Net operating  income                   |       | 210,068             |       | 27,585                    |       | 34,990                                                |       | 44,681                            |       | 2,565                                          |       | 319,889   |       |
| Receivables                             |       | 281,316             |       | 48,395                    |       | 17,072                                                |       | 29,829                            |       | 26,581                                         |       | 403,193   |       |
|                                         |            |                     |            |                           |            |                                                       |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

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Information aboutinterest income and tax expense is not presented as a segment expense becausesuch items are not considered a responsibility of the segments’ operatingmanagement.

 

Reconciliations of theinformation reported by segment to the historical consolidated amounts followfor the three and nine month periods ended March 31, 2009 and 2008:

 
| ** **                                                             | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Revenue:                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Total segment  revenue                                                 |       | $                                     | 400,153    |                                 | $          | 436,262 |   | $ | 1,219,799 |   | $ | 1,233,776 |   |
| Reimbursable  expenses and other not included in total segment revenue |       | 9,486                                 |       | 11,039                               |       | 29,881 |   | 39,286 |   |
| All other  segments                                                    |       | 7,355                                 |       | 10,224                               |       | 29,829 |   | 33,182 |   |
| Consolidated  revenue                                                  |       | $                                     | 416,994    |                                 | $          | 457,525 |   | $ | 1,279,509 |   | $ | 1,306,244 |   |
|                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Net Operating  Income:                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Total segment  net operating income                                    |       | $                                     | 109,814    |                                 | $          | 126,133 |   | $ | 320,689 |   | $ | 319,889 |   |
| Income from  affiliates                                                |       | 3,201                                 |       | (29                                  | )          | 5,966 |   | (603 | ) |
| Differences in  allocation methods(1)                                  |       | (5,144                                | )          | (3,930                               | )          | (11,590 | ) | (8,964 | ) |
| Discretionary  compensation                                            |       | (45,779                               | )          | (50,483                              | )          | (144,452 | ) | (144,363 | ) |
| All other  segments                                                    |       | (1,907                                | )          | (490                                 | )          | 2,729 |   | 6,121 |   |
| Other, net                                                             |       | (3,667                                | )          | (6,385                               | )          | (5,685 | ) | 2,156 |   |
| Consolidated  income before income taxes                               |       | $                                     | 56,518     |                                 | $          | 64,816 |   | $ | 167,657 |   | $ | 174,236 |   |
|                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Receivables:                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Total segment  receivables - billed and unbilled(2)                    |       | $                                     | 339,381    |                                 | $          | 403,193 |   | $ | 339,381 |   | $ | 403,193 |   |
| All other  segments                                                    |       | 4,470                                 |       | 6,434                                |       | 4,470 |   | 6,434 |   |
| Net valuation  differences                                             |       | (17,055                               | )          | (21,345                              | )          | (17,055 | ) | (21,345 | ) |
| Total billed and  unbilled receivables                                 |       | 326,796                               |       | 388,282                              |       | 326,796 |   | 388,282 |   |
| Assets not  reported by segment (3)                                    |       | 1,126,783                             |       | 1,417,342                            |       | 1,126,783 |   | 1,417,342 |   |
| Consolidated  total assets                                             |       | $                                     | 1,453,579  |                                 | $          | 1,805,624 |   | $ | 1,453,579 |   | $ | 1,805,624 |   |

 

----

(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 revenue – cash collections and invoices generated in excess ofrevenue recognized in the segment revenue.

 

(3) Assetsnot reported by segment for management reporting purposes include goodwill andintangible assets of $660 million and $868 million, as of March 31, 2009and 2008, respectively.

 

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**Note 4 – Share-basedCompensation.**

 

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.

 

##### *2001 Deferred Stock UnitPlan for Selected Employees*

##### * *

DeferredStock Units - The2001 Deferred Stock Unit Plan for Selected Employees is intended to provideselected associates of the company with additional incentives by permitting thecompany to grant them an equity interest in the company in the form ofrestricted stock units, in lieu of a portion of their annual fiscal year endbonus.  Shares under this plan areawarded during the first quarter of each fiscal year.  During the first quarter of fiscal year 2009,295,775 shares of common stock were awarded at an average market price of$53.92 for a total fair value of $15.9 million. During the first quarter of fiscal year 2008, 349,118 shares of commonstock were awarded at an average market price of $47.63 for a total fair valueof $16.6 million.

 

SBIProgram - ThePerformance 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.  Participants may vest between zero and 170% of the targetnumber of deferred stock units or between zero and 100% based on the extent towhich financial and strategic performance metrics are achieved over a threefiscal year period.  The financial and strategic performance metrics areestablished at the beginning of each performance period. For theperformance periods covering fiscal years 2007 through 2009, 2008 through 2010,and 2009 through 2011, the vesting criteria are based upon growth specificmetrics such as earnings per share, NOI and revenue. During the first quarter offiscal year 2009, 44,061 shares were awarded to certain senior executiveofficers under the SBI 2006 plan, which represented vesting at 170% of thetarget number of deferred stock units.

 

Managementperiodically reviews the conditions that would affect the vesting ofperformance based awards and adjusts compensation expense, if necessary, basedon achievement of financial and strategic performance metrics.

 

Duringthe third quarter of fiscal year 2009, the deferred stock units expected tovest under the SBI plans decreased in conjunction with the forecasted financialand strategic performance metrics.   As aresult, compensation expense associated with these plans decreased byapproximately $0.5 million in the third quarter of fiscal year 2009 compared toan increase in expense of $1.2 million in the third quarter of fiscal year2008.

 

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##### *Table ofContents*

 

##### *Amended Compensation Planfor 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$0.7 million of compensation expense was recorded relative to this plan duringthe first nine months of fiscal year 2009 compared to $0.3 million in the firstnine months of fiscal year 2008.

 

*2001Employee Stock Purchase Plan*

 

The2001 Employee Stock Purchase Plan (the “Stock Purchase Plan”) enables employeesto purchase shares of the company’s stock at a 5 percent discount.  The Stock Purchase Plan is a non-compensatoryplan under FAS 123(R).  As a result, nocompensation expense was recognized during the first nine months of fiscalyears 2009 or 2008.

 

##### *2000 Long-Term IncentivePlan*

##### * *

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.**

 

*DefinedBenefit Plans*

 

Wesponsor both qualified and non-qualified, non-contributory defined benefitpension plans in North America and the U.K. that account for approximately 85% ofour pension liability.  Under our plansin North America, benefits are based on the number of years of service and theassociate’s compensation during the five highest paid consecutive years ofservice.  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.

 

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

 

The following table setsforth the components of net periodic benefit cost for the company’s definedbenefit pension plan for North America and the U.K. for the three and ninemonth periods ended March 31, 2009 and 2008:

 
| ** **                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **North**                             | ** ** | ** ** | ** ** | **North** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **America**                           | ** ** | **U.K.** | ** ** | **America** | ** ** | **U.K.** | ** ** |
| Service Cost                                 |       | $                                     | 5,315      |   | $ | 891 |   | $ | 7,451 |   | $ | 2,686 |   |
| Interest Cost                                |       | 12,118                                |       | 2,987 |   | 11,208 |   | 5,184 |   |
| Expected Return  on Plan Assets              |       | (12,397                               | )          | (3,042 | ) | (13,827 | ) | (5,821 | ) |
| Amortization of  Transition Obligation       |       | —                                |       | — |   | (17 | ) | — |   |
| Amortization of  Net Loss/(Gain)             |       | 2,533                                 |       | (48 | ) | 1,507 |   | (709 | ) |
| Amortization of  Prior Service (Credit)/Cost |       | (576                                  | )          | 6 |   | (649 | ) | 4 |   |
| Net Periodic  Benefit Cost                   |       | $                                     | 6,993      |   | $ | 794 |   | $ | 5,673 |   | $ | 1,344 |   |

 
| ** **                                   | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **North**                            | ** ** | ** ** | ** ** | **North** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **America**                          | ** ** | **U.K.** | ** ** | **America** | ** ** | **U.K.** | ** ** |
| Service Cost                                 |       | $                                    | 18,884     |   | $ | 4,593 |   | $ | 22,333 |   | $ | 8,170 |   |
| Interest Cost                                |       | 36,489                               |       | 15,387 |   | 33,600 |   | 15,765 |   |
| Expected Return  on Plan Assets              |       | (38,045                              | )          | (15,670 | ) | (41,456 | ) | (17,703 | ) |
| Amortization of  Transition Obligation       |       | —                               |       | — |   | (49 | ) | — |   |
| Amortization of  Net Loss/(Gain)             |       | 6,622                                |       | (248 | ) | 4,571 |   | (2,156 | ) |
| Amortization of  Prior Service (Credit)/Cost |       | (1,705                               | )          | 32 |   | (1,946 | ) | 12 |   |
| Net Periodic  Benefit Cost                   |       | $                                    | 22,245     |   | $ | 4,094 |   | $ | 17,053 |   | $ | 4,088 |   |

 

The fiscal year 2009 netperiodic benefit cost is based, in part, on the following rate assumptions asof 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     | %          |

 

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*Employer Contributions*

 

The company made $30.8million in contributions to North American plans during the first nine monthsof fiscal year 2009.  We anticipate that$0.5 million will be contributed by the company to the North American pensionplans over the remainder of the fiscal year.

 

The company made $14.4million in contributions to the U.K. plans during the first nine months offiscal year 2009 and anticipates making $2.4 million in contributions over theremainder of the fiscal year.

 

*Defined Contribution 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 dependent 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 dependent 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%.

 

*HealthCare Benefits*

 

In the U.S., we sponsor acontributory health care plan that provides hospitalization, medical and dentalbenefits to substantially all U.S. associates. We accrue a liability for estimated incurred but unreported claims basedon projected use of the plan as well as prior plan history.

 

*PostretirementBenefits*

 

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.

 

*Componentsof Net Periodic Benefit Cost for Other Postretirement Plans*

 

The following table setsforth the components of net periodic benefit cost for the company’s healthcareand post-retirement plans for the three and nine months ended March 31,2009 and 2008:

 
| ** **                                   | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                         |       |                                  |       |                                 |       |   |   |   |   |
| Service cost                                 |       | $                                     | 277        |                                 | $          | 386 |   | $ | 930 |   | $ | 1,156 |   |
| Interest cost                                |       | 580                                   |       | 683                                  |       | 1,991 |   | 2,046 |   |
| Expected return  on plan assets              |       | —                                |       | —                               |       | — |   | — |   |
| Amortization of  transition obligation       |       | —                                |       | —                               |       | — |   | — |   |
| Amortization of  net gain                    |       | (267                                  | )          | (112                                 | )          | (700 | ) | (338 | ) |
| Amortization of  prior service (credit)/cost |       | (164                                  | )          | (166                                 | )          | (496 | ) | (498 | ) |
| Net periodic  benefit cost                   |       | $                                     | 426        |                                 | $          | 791 |   | $ | 1,725 |   | $ | 2,366 |   |

 

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*EmployerContributions*

 

The company madecontributions in the form of premiums and medical claim payments to itshealthcare and post-retirement plans of $1.0 million in the three months ended March 31,2009 and 2008, and contributions of $3.1 million and $2.6 million in the ninemonths ended March 31, 2009 and 2008, respectively.  We plan to make additional payments ofapproximately $2.0 million through the remainder of the fiscal year.

 

**Note 6 –Goodwill and Intangible Assets.**

 

Goodwill andintangible assets are largely denominated in the British pound and Euro andhave declined in value in line with the strengthening of the U.S. dollar.  The components of goodwill and intangibleassets are outlined below for the nine months ended March 31, 2009:

 
| ** **                         | ** ** | **Benefits  Group** | ** ** | **Human  Capital Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **All Other  Segments** | ** ** | **Total**  | ** ** |
|------------------------------------|------------|---------------------|------------|--------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                         | ** ** | ** **          | ** ** | ** **               | ** ** | ** **                                            | ** ** | ** **                        | ** ** | ** **                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Balance as of  June 30, 2008  |       | $                   | 397,721    |                     | $          | 35,056                                                |       | $                                 | 61,709     |                                           | $          | 61,977                  |       | $          | 76,499     |   | $ | 1,214 |   | $ | 634,176 |   |
| Goodwill acquired                  |       | 176                 |       | 293                      |       | —                                                |       | —                            |       | 49                                             |       | —                  |       | 518        |       |
| Translation adjustment and  other  |       | (83,452             | )          | (8,245                   | )          | (15,934                                               | )          | (15,687                           | )          | (20,758                                        | )          | —                  |       | (144,076   | )          |
|                               |       |                |       |                     |       |                                                  |       |                              |       |                                           |       |                    |       |       |       |
| Balance as of  March 31, 2009 |       | $                   | 314,445    |                     | $          | 27,104                                                |       | $                                 | 45,775     |                                           | $          | 46,290                  |       | $          | 55,790     |   | $ | 1,214 |   | $ | 490,618 |   |

 

The followingtable reflects changes in the net carrying amount of the components ofintangible assets for the nine months ended March 31, 2009:

 
| ** **                                    | ** ** | **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 |       | —                           |       | —                            |       | —                         |       | —                      |       | —    |       |
| Amortization expense                          |       | (149                             | )          | (6,797                            | )          | (3,329                         | )          | (393                        | )          | (10,668   | )          |
| Translation adjustment                        |       | (34,054                          | )          | (20,739                           | )          | (2,032                         | )          | (79                         | )          | (56,904   | )          |
|                                          |       |                             |       |                              |       |                           |       |                        |       |      |       |
| Balance as of  March 31, 2009            |       | $                                | 87,682     |                              | $          | 74,056                         |       | $                           | 7,243      |      | $          | 214 |   | $ | 169,195 |   |

 

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The followingtable reflects the carrying value of intangible assets at March 31,2009 and June 30,2008:

 
| ** **                      | ** ** | **March 31, 2009** | ** ** | **June 30, 2008**        | ** ** |
|---------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **Gross**               | ** ** | ** **                    | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Carrying  Amount**    | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible assets:              |       |                    |       |                          |       |   |   |   |   |
| Trademark & trade name |       | $                       | 88,035     |                          | $          | 353 |   | $ | 122,089 |   | $ | 204 |   |
| Customer related intangibles    |       | 102,068                 |       | 28,012                        |       | 122,807 |   | 21,215 |   |
| Core/developed technology       |       | 22,933                  |       | 15,690                        |       | 24,965 |   | 12,361 |   |
| Non-compete agreements          |       | 1,237                   |       | 1,023                         |       | 1,316 |   | 630 |   |
| Total intangible assets         |       | $                       | 214,273    |                          | $          | 45,078 |   | $ | 271,177 |   | $ | 34,410 |   |

 

Acomponent of the change in the gross carrying amount of intangible assets reflectstranslation adjustments between June 30, 2008 and March 31,2009.  These intangible assets aredenominated in the currencies of our subsidiaries outside the United States,and are translated into our reporting currency, the U.S. dollar, based onexchange rates at the balance sheet date.

 

The weightedaverage remaining life of amortizable intangible assets at March 31, 2009,was 8.6 years.  Estimated amortizationexpense for the remainder of fiscal year 2009 and subsequent fiscal years is asfollows:

 

| **Fiscal year ending June 30:** | ** ** | **Amount** | ** ** |
|--------------------------------------|------------|------------|------------|
| 2009                                 |       | $          | 3,144      |   |
| 2010                                 |       | 12,070     |       |
| 2011                                 |       | 9,347      |       |
| 2012                                 |       | 9,111      |       |
| 2013                                 |       | 8,047      |       |
| Thereafter                           |       | 39,366     |       |
| Total                                |       | $          | 81,085     |   |

 

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**Note 7 –Earnings Per Share.**

 

Basic earnings pershare are calculated on the basis of the weighted average number of commonshares outstanding during the three and nine month periods ended March 31,2009 and 2008.  Diluted earnings pershare is calculated by dividing net income by the weighted average number ofcommon shares outstanding, plus the dilutive effect of stock-based compensationplans and employee stock purchase plan shares using the “treasury stock” methodover the same measurement period.  Thecomponents of basic and diluted earnings per share are as follows:

 
| ** **                                                                                 | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                 | ** ** | **2009**                               | ** ** | **2008**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                       |       |                                   |       |                                  |       |   |   |   |   |
| Net income                                                                                 |       | $                                      | 40,591     |                                  | $          | 42,546 |   | $ | 115,302 |   | $ | 113,771 |   |
|                                                                                       |       |                                   |       |                                  |       |   |   |   |   |
| Weighted average  outstanding shares of common stock                                       |       | 42,609                                 |       | 42,064                                |       | 42,705 |   | 42,230 |   |
| Dilutive effect of  stock-based compensation plans and employee stock purchase plan shares |       | 164                                    |       | 2,269                                 |       | 164 |   | 2,285 |   |
|                                                                                       |       |                                   |       |                                  |       |   |   |   |   |
| Common stock and stock  equivalents                                                        |       | 42,773                                 |       | 44,333                                |       | 42,869 |   | 44,515 |   |
|                                                                                       |       |                                   |       |                                  |       |   |   |   |   |
| Earnings per share:                                                                        |       |                                   |       |                                  |       |   |   |   |   |
|                                                                                       |       |                                   |       |                                  |       |   |   |   |   |
| Net income-Basic                                                                           |       | $                                      | 0.95       |                                  | $          | 1.01 |   | $ | 2.70 |   | $ | 2.69 |   |
|                                                                                       |       |                                   |       |                                  |       |   |   |   |   |
| Net income- Diluted                                                                        |       | $                                      | 0.95       |                                  | $          | 0.96 |   | $ | 2.69 |   | $ | 2.56 |   |

 

**Note 8 –Investments in Affiliates.**

 

*PCIC:*

 

The company has anequity investment in Professional Consultants Insurance Company, Inc.(PCIC).  As defined by FASBInterpretation No. 46R, Consolidation of Variable Interest Entities, PCICis a variable interest entity.  Based onthe legal, financial and operating structure of PCIC, the company has concludedthat it is not the primary beneficiary of PCIC. Accordingly, the company does not consolidate the results of PCIC intoits consolidated financial statements.

 

PCIC was organized in 1987 as a captive insurance company under thelaws of the State of Vermont.  PCICprovides professional liability insurance on a claims-made basis to threeactuarial and management consulting firms, all of which participate in theprogram as both policyholders and stockholders.

 

Capital contributions to PCIC are required when approved by a majorityof its stockholders.  In July 2007,the shareholders of PCIC approved a requirement for an additional capitalcontribution.  As a result, the companycontributed an additional $1.9 million of capital to PCIC and increased theamount of the letter of credit provided to PCIC by $2.6 million in lieu of ahigher cash capital contribution.  Fromthe time PCIC was organized through March 31, 2009, we have providedcapital contributions to PCIC through cash contributions totaling $7.3 millionand through issuance of letters of credit totaling $10.6 million. Our ownershipinterest in PCIC as of March 31, 2009 and 2008 was 36.43 percent.

 

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Management believes that the company’s maximum financial statementexposure regarding its investment in PCIC as of March 31, 2009 is limitedto the carrying value of the company’s investment in PCIC of $12.2 million,combined with letters of credit totaling $10.6 million, for a total maximumexposure of $22.8 million.

 

*Fifth Quadrant:*

 

The company acquired a 20 percent investment in Fifth QuadrantActuaries & Consultants (Pty) Ltd (Fifth Quadrant) in June 2008.  Fifth Quadrant is an independent SouthAfrican firm of actuaries and employee benefits consultants established in1998.  Its core business is to provideindependent, high quality advice to institutional clients, which includeretirement funds, medical schemes, charitable trusts and corporate and publicsector clients.  The company has a $3.4million investment in Fifth Quadrant as of March 31, 2009.

 

*Dubai:*

 

The company established a partnership with the Knowledge and HumanDevelopment Authority in Dubai (Dubai) in January 2008. The partnership isaimed at supporting public and private sector organizations across the Gulf intheir pursuit for reaching international standards of excellence in humancapital strategies and programs. As of March 31, 2009, the company has a$2.6 million investment in Dubai.

 

*IFA:*

 

The company acquired a 20percent investment in Gesellschaft fur Finanz-und Aktuarwissenschaften mbH, orIFA, in the second quarter of fiscal year 2009. IFA is an insurance and financial services company based inGermany.  As of March 31, 2009, thecompany has a $2.3 million investment in IFA.

 

The companyapplies the equity method of accounting for all of its investments inaffiliates.

 

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

 

Comprehensiveincome includes net income and changes in the cumulative translation adjustmentgain or loss.  For the three months endedMarch 31, 2009, comprehensive income totaled $22.2 million compared withcomprehensive income of $63.8 million for the three months ended March 31,2008.  For the nine months ended March 31,2009, comprehensiveloss totaled $96.6 million, compared with comprehensive income of $143.0million for the nine months ended March 31, 2008. The large change is primarily attributable to fluctuations in exchangerates.

 

**Note 10 –Restricted Shares.**

 

In conjunctionwith our WWLLP 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.

 

In conjunctionwith our acquisition 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 expired 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 and secondanniversaries of issuance of the shares.

 

**Note 11 –Commitments and Contingent Liabilities.**

 

The company hashistorically provided guarantees on an infrequent basis to third parties in theordinary course of business.  Theguarantees described below are currently in effect and could require thecompany to make payments to third parties under certain circumstances.

 

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*Lettersof Credit*.  At March 31, 2009, the company has a letter ofcredit totaling $10.6 million under our existing credit facility to guaranteepayment to one beneficiary in the event that the company fails to meet itsfinancial obligations to that beneficiary. This letter of credit will remain outstanding as long as we retain anownership share of our affiliated captive insurance company, PCIC.  The company has also provided a $5.0 millionAustralian dollar-denominated letter of credit (U.S. $3.5 million) to anAustralian governmental agency as required by local regulations.  The estimated fair market value of theseletters of credit is immaterial because they have never been used, and thecompany believes that probability of future usage is remote.

 

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

 

*Legal Proceedings*:  From time to time,we are a party to various lawsuits, arbitrations or mediations that arise inthe ordinary course of business. We also have received a subpoena and requestsfor information in connection with government investigations.

 

We carry substantial professional liability insurancewith a self-insured retention of $1 million per occurrence, which providescoverage for professional liability claims including the cost of defending suchclaims. We reserve for contingent liabilities based on Statement of FinancialAccounting Standards No. 5, “Accounting for Contingencies” (FAS 5) when itis determined that a liability, inclusive of defense costs, is probable andreasonably estimable. Management believes, based on currently availableinformation including the existence of professional liability insurance, thatthe results of all pending matters against the company will not have a materialadverse effect on the results of operations, financial position, or statementof cash flows but litigation is subject to many factors which are difficult topredict so there can be no assurance that in the event of a material unfavorableresult in one or more of such matters, we will not incur material costs.

 

*Watson Wyatt v. SBC Holdings, Inc. (Stroh BreweryCompany): *  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.  Weanticipate arbitration hearings to be held in 2009.

 

*Government Subpoenas and Investigations:*We also have received a subpoena and requestsfor information in connection with the  Department of Labor. On November 17,2006, Watson Wyatt Investment Consulting Inc. (“WWIC”) received a subpoena fromthe United States Department of Labor (“DOL”) in connection with itsinvestigation into the compensation of consultants and other investmentadvisers.  WWIC has responded to the subpoena and continues to cooperatewith the DOL.

 

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**Note 12 – Recent Accounting Pronouncements**.

 

In September 2006, theFinancial Accounting Standards Board (“FASB”) published Statement of FinancialAccounting Standards No.157, “Fair Value Measurements” (“FAS 157”).  FAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  The company adopted FAS 157 for financialassets and liabilities on July 1, 2008 and determined the adoption did not havea material impact on its consolidated financial statements. We will adopt FAS157 for nonfinancial assets and liabilities on July 1, 2009. We do not expectthe adoption of the portion of the pronouncement over nonfinancial assets andliabilities to have a material impact on the company’s financial position orresults of operations.

 

In February 2007, the FASB published Statement of FinancialAccounting Standards No.159, “The Fair Value Option for Financial Assets andFinancial Liabilities - including an amendment of FASB Statement No. 115”(“FAS 159”).  FAS 159 allows entities tochoose to measure eligible financial assets and liabilities at fair value thatare not otherwise required to be measured at fair value. If a company electsthe fair value option for an eligible item, changes in that item’s fair valuein subsequent reporting periods must be recognized in current earnings. Thecompany adopted FAS 159 on July 1, 2008 and did not choose to elect thefair value option.

 

In December 2007, theFASB issued Statement of Financial Accounting Standards No. 141 (revised 2007),“Business Combinations” (“FAS 141(R)”) which is a revision of FAS 141,“Business Combinations”.  FAS 141(R)changes the application of the acquisition method in a number of significantaspects.  Acquisition costs willgenerally be expensed as incurred; noncontrolling interests will be valued atfair value at the acquisition date; restructuring costs associated with abusiness combination will generally be expensed subsequent to the acquisitiondate; contingent consideration will be recognized at its fair value on theacquisition date and, for certain arrangements, changes in fair value will berecognized in earnings until settled, and changes in deferred tax assetvaluation allowances and income tax uncertainties after the acquisition dategenerally will affect income tax expense. We will be required to comply withthe provisions of FAS 141(R) for acquisitions that occur on or after July 1,2009. In April 2008, the FASB issued FASB Staff Position No. 142-3,Determination of 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.”  The company adopted FSP FAS 142-3 on January1, 2009, it is applied prospectively to any future acquisitions. The companyexpects that the application of the provisions of FAS 141(R) and FSP FAS 142-3could be significant to the company’s financial position or results ofoperations depending on the nature of business acquisitions completed afterJuly 1, 2009.

 

In December 2007, the FASB issued Statement of FinancialAccounting Standards No.160, “Noncontrolling Interests in ConsolidatedFinancial Statements - an amendment of ARB No.51” (“FAS 160”).  This statement requires the recognition of anoncontrolling interest (minority interest) as equity in the consolidatedfinancial statements and separate from the parent’s equity.  The amount of net income attributable to thenoncontrolling interest will be included in consolidated net income.  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.  We will adoptFAS 160 on July 1, 2009. The company is currently evaluating the effects,if any, that FAS 160 may have on its financial statements.

 

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** **

**Note 13 - IncomeTaxes.**

** **

At March 31, 2009, the gross liability for income taxes associatedwith uncertain tax positions, determined in accordance with FASB InterpretationNo. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - aninterpretation of FASB Statement No. 109” (“FAS 109”),  was $8.8 million.  This liability can be reduced by $0.8 millionof offsetting deferred tax benefits associated with foreign tax credits and thefederal tax benefit of state income taxes. The net difference of $8.0 million, if recognized, would have a $7.7million favorable impact on the company’s effective tax rate and would increaseother comprehensive income by $0.3 million. The gross tax liability for uncertain tax positions decreased by $0.4million and $2.2 million for the three month and nine month periods ended March 31,2009, respectively.

 

Interest and penalties related to income tax liabilities are includedin income tax expense.  At March 31,2009 the company had accrued interest of $1.5 million and penalties of $0.4million, totaling $1.9 million.

 

The company believes it is reasonably possible that there will be a$2.2 million decrease in the gross tax liability for uncertain tax positionswithin the next 12 months based upon potential settlements and the expirationof statutes of limitations in various tax jurisdictions.

 

The company and its subsidiaries conduct business globally and aresubject to income tax in the US and in many states and foreignjurisdictions.  The company is currentlyunder examination in several tax jurisdictions. A summary of the tax years that remain subject to examination in thecompany’s major tax jurisdictions are:

 

| ** **                      | ** ** | **Open Tax Years  (fiscal year ending)** | ** ** |
|---------------------------------|------------|------------------------------------------|------------|
| United States - Federal         |       | 2006 and forward                         |       |
| United States - Various  States |       | 2004 and forward                         |       |
| Canada - Federal                |       | 2005 and forward                         |       |
| Germany                         |       | 2003 and forward                         |       |
| United Kingdom                  |       | 2005 and forward                         |       |

 

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** **

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

** **

**ExecutiveOverview**

** **

**General**

** **

WatsonWyatt is a global consulting firm focusing on providing human capital andfinancial consulting services. We provide services in five principal practiceareas: Benefits, Human Capital Consulting, Technology and AdministrationSolutions, Investment Consulting, and Insurance and Financial Servicesoperating from 107 offices in 33 countries throughout North America, Europe,Asia-Pacific and Latin America.  Thecompany employed approximately 7,685 and 7,510 associates as of March 31,2009 and June 30, 2008 respectively, in the following practice areas:

 

| ** **                                            | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                            | ** ** | **2009**           | ** ** | **2008**          | ** ** |
| Benefits Group                                        |       | 3,370              |       | 3,290             |       |
| Human Capital Group                                   |       | 865                |       | 900               |       |
| Technology and Administration Solutions Group         |       | 895                |       | 850               |       |
| Investment Consulting Group                           |       | 560                |       | 500               |       |
| Insurance & Financial Services Group         |       | 415                |       | 420               |       |
| Other (incl. Communication)                           |       | 460                |       | 450               |       |
| Business Services (incl. Corporate and field support) |       | 1,120              |       | 1,100             |       |
| Total associates                                      |       | 7,685              |       | 7,510             |       |

** **

Wehelp our clients enhance business performance by improving their ability toattract, retain, and motivate qualified employees. We focus on deliveringconsulting services that help our clients anticipate, identify and capitalizeon emerging opportunities in human capital management.  We also provide independent financial adviceregarding all aspects of life assurance and general insurance, as well asinvestment advice to assist our clients in developing disciplined and efficientinvestment strategies to meet their investment goals.  Our target market clients include thosecompanies 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 and investment decisions becomeincreasingly complex and important in the face of changing economies anddynamic financial markets.  We help ourclients address these issues by combining our expertise in human capital andfinancial management with consulting and technology, to improve the design andimplementation of various human resources and financial programs, includingcompensation, retirement, health care, insurance and investment plans.

 

Thehuman resources consulting industry, although highly fragmented, is highlycompetitive and is comprised of major human capital consulting firms,specialist firms, consulting arms of accounting firms and informationtechnology consulting firms.

 

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Inthe short term, our revenue are driven by many factors including the generalstate of the global economy and the resulting level of discretionary spending,the continuing regulatory compliance requirements of our clients, changes ininvestment markets, the ability of our consultants to attract new clients orprovide additional services to existing clients, and the impact of newregulations in the legal and accounting fields. In the long term, we expect that the company’s financial results willdepend in large part upon how well we succeed in deepening our existing clientrelationships through thought leadership and focus on cross-practice solutions,actively pursuing new clients in our target markets, cross selling andstrategic acquisitions.  We believe thatthe highly fragmented industry in which we operate represents tremendous growthopportunities for us, because we offer a unique business combination ofbenefits and human capital consulting as well as strategic technologysolutions.

 

**PrincipalServices**

** **

Wedesign, develop and implement human resource and risk management strategies andprograms through the following closely-interrelated practice areas:

 

**BenefitsGroup****-**The Benefits Group, accounting for 57 percent of ourtotal revenue for the first nine months of fiscal 2009, is the foundation ofour business.  Approximately 50 percentof its revenue originates from outside of the United States and is thus subjectto translation exposure resulting from foreign exchange rate fluctuations.  Retirement, the core of our Benefits Groupbusiness, typically lags reduction in discretionary spending compared to ourother 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, economic uncertainty, leverage from other practices, increasedglobal demand and increased market share.  Services provided through the Benefits Group include the following:

* *

·                  Design and management of benefit programs ;

·                  Actuarial services including development offunding and risk management strategies;

·                  Expatriate and international human resourcestrategies;

·                  Mergers and acquisitions;

·                  Strategic workforce planning; and

·                  Compliance and governance

 

**HumanCapital Group** - Our**Human CapitalGroup (HCG), accounting for 11 percent of our total revenue for the firstnine months of fiscal 2009, generally encompasses short-termprojects.  Approximately 60 percent of its revenue originatesfrom outside of the United States and is thus subject to translation exposureresulting from foreign exchange rate fluctuations.  Discretionary project workassociated with this segment could be affected by the strength of theeconomy.  As a result, this segment tendsto be more sensitive to cyclical economic fluctuations than othersegments.  Services provided through HCGinclude the following:

** **

·                  Advice concerning compensation plans,including broad-based and executive compensation, stock and other long-termincentive programs;

·                  Strategies to align workforce performancewith business objectives;

·                  Organization effectiveness consulting,including talent management;

·                  Strategies for attracting, retaining andmotivating employees; and

·                  Data services

 

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**Technologyand Administration Solutions Group****-**Our Technology andAdministration Solutions Group (TAS), accounting for 11 percent of our totalrevenue for the first nine months of fiscal 2009, provides informationtechnology services to our clients. Revenue for TAS is relatively stable, compared to what it hadhistorically experienced in an economic downturn, because of its long termcontracts associated with the administration business.  However, TAS remains partially subject to theimpact of the economy on discretionary spending.  Income in this segment is slightly greater inthe first half of the fiscal year because of the timing of the typicalenrollment season for benefits. Approximately 40 percent of its revenue originates fromoutside of the United States and is thus subject to translation exposureresulting from foreign exchange rate fluctuations.  Services provided through the TAS Groupinclude the following:

 

·                  Web-based applications for health andwelfare, pension and compensation administration;

·                  Administration outsourcing solutions forhealth and welfare and pension benefits;

·                  Call center strategy, design and tools;

·                  Strategic human resource technology andservice delivery consulting;

·                  Targeted online compensation and benefitsstatements, content management and call center case management solutions; and

·                  Integrated talent management suite

 

**InvestmentConsulting Group****-**Our InvestmentConsulting Group accounts for 9 percent of our total revenue for the first ninemonths of fiscal 2009.  Approximately 85percent of its revenue originates from outside of the United States and is thussubject to translation exposure resulting from foreign exchange ratefluctuations.  Thisbusiness, although relationship based, can be affected by an increasinglycomplex investment landscape as well as by volatility in investment returns,particularly as clients look to us for assistance in managing thatvolatility.  Services provided throughour Investment Consulting Group include the following:

** **

·                  Investment consulting services to pensionplans and other institutional funds;

·                  Input on governance and regulatory issues;

·                  Analysis of asset allocation and investmentstrategies;

·                  Investment structure analysis, selection andevaluation of managers and performance monitoring; and

·                  Implementation/fiduciary services for definedbenefit and defined contribution investment programs via our AdvancedInvestment Solutions (AIS) services

 

**Insurance &Financial Services Group** - Our Insurance &Financial Services Group (I&FS) accounts for 7 percent of our totalrevenue for the first nine months of fiscal 2009. Approximately 90 percent of its revenueoriginates from outside of the United States and is thus subject to translationexposure resulting from foreign exchange rate fluctuations.  This business is largely aproject-based business and therefore could be cyclical.  Services provided through I&FS includethe following:

** **

·                  Independent actuarial and strategic advice;

·                  Assessment and advice regarding financialcondition and risk management; and

·                  Financial modeling software tools for productdesign and pricing, planning and projections, reporting, valuations and riskmanagement

 

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.

 

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**FinancialStatement Overview**

** **

WatsonWyatt’s fiscal year ends June 30. The financial statements contained inthis quarterly report reflect Condensed Consolidated Balance Sheets as of theend of the third quarter of fiscal year 2009 (March 31, 2009) and as ofthe end of fiscal year 2008 (June 30, 2008), Condensed ConsolidatedStatements of Operations for the three and nine month periods ended March 31,2009 and 2008, Condensed Consolidated Statements of Cash Flows for the ninemonth periods ended March 31, 2009 and 2008 and a Condensed ConsolidatedStatement of Changes in Stockholders’ Equity for the nine month period ended March 31,2009.

 

Wederive the majority of our revenue from fees for consulting services, whichgenerally are billed based on time and materials or on a fixed-fee basis.  Clients are typically invoiced on a monthlybasis with revenue generally recognized as services are performed.  No single client accounted for more than 1percent of our consolidated revenue for any of the most recent three fiscalyears.

 

Forthe nine months ended March 31, 2009 and fiscal years ended June 30,2008 and 2007, the company’s top six markets based on percentage ofconsolidated revenue were as follows:

 

| ** **                 | ** ** | **Nine Months** | ** ** | **Fiscal Year** | ** ** |
|----------------------------|------------|-----------------|------------|-----------------|------------|
| **Geographic Region** | ** ** | **2009**        | ** ** | **2008**        | ** ** | **2007** | ** ** |
| United States              |       | 43              | %          | 41              | %          | 44 | % |
| United Kingdom             |       | 28              |       | 32              |       | 31 |   |
| Germany                    |       | 4               |       | 5               |       | 1 |   |
| Canada                     |       | 3               |       | 4               |       | 4 |   |
| Netherlands                |       | 3               |       | 4               |       | 1 |   |
| Greater China              |       | 3               |       | 2               |       | 2 |   |

 

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

 

Professionaland subcontracted services represent fees paid to external service providersfor employment, 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 thirdquarter of fiscal year 2009, approximately 59 percent of professional andsubcontracted services represent these reimbursable services.

 

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

 

Generaland administrative expenses include the operational costs, professional feesand insurance paid by corporate management, general counsel, marketing, humanresources, finance, research and technology support.

 

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**Critical AccountingPolicies 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 involve making difficult, subjective or complex accounting estimates thatcould have a material effect on our financial condition and results ofoperations. These critical accounting policies require us to make assumptionsabout matters that are highly uncertain at the time of the estimate orassumption. Different estimates that we could have used, or changes in anestimate that are reasonably likely to occur, may have a material impact on ourfinancial statements and results of operations.

 

***Revenue Recognition***

* *

Revenueincludes fees primarily 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 bothparties. Individual consultants’ billing rates are principally based on amultiple of salary and compensation costs.

 

Revenuefor fixed-fee arrangements, which span multiple months, is based upon thepercentage of completion method.* *The company typically has threetypes of fixed-fee arrangements:  annualrecurring projects, projects of a short duration, and non-recurring systemprojects.  Annual recurring projects andthe projects of short duration are typically straightforward and highlypredictable in nature.  As a result, theproject manager and financial staff are able to identify, as the project statusis reviewed and bills are prepared monthly, the occasions when cost overrunscould lead to the recording of a loss accrual.

 

Ournon-recurring system projects are typically found in our Technology andAdministration Solutions Group.  Theytend to be projects that are longer in duration and subject to more changes inscope as the project progresses than projects undertaken in other segments. Weevaluate at least quarterly, and more often as needed, project managers’estimates-to-complete to assure that the projects’ current status is accountedfor properly.  Our Technology andAdministration Solutions Group contracts generally providethat if the client terminates a contract, the company is entitled to paymentfor services performed through termination.

 

Revenuerecognition for fixed-fee engagements is affected by a number of factors thatchange the estimated amount of work required to complete the project such aschanges in scope, 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 experienced certain costs in excess of estimatesfrom time to time.  Management believesthat it is rare, however, for these excess costs to result in overall projectlosses.

 

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The company has developedvarious software programs and technologies that we provide to clients inconnection with consulting services.  Inmost instances, such software is hosted and maintained by the company andownership of the technology and rights to the related code remain with thecompany.  Software developed to beutilized in providing services to a client, but for which the client does nothave the contractual right to take possession, is capitalized in accordancewith the AICPA’s Statement of Position 98-1 “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use.”  Revenue associated with the related contract,together with amortization of the related capitalized software, is recognizedover the service period.  As a result, wedo not recognize revenue during the implementation phase of an engagement.

 

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

 

***Valuation of Billed andUnbilled Receivables from Clients***

*** ***

Wemaintain allowances for doubtful accounts to reflect estimated losses resultingfrom our clients’ failure to pay for our services after the services have beenrendered, 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.

 

***Discretionary Compensation***

*** ***

Thecompany’s compensation program includes a discretionary annual bonus that isdetermined by management and paid once per fiscal year in the form of cashand/or deferred stock units after the company’s annual operating results arefinalized.

 

Anestimated annual bonus amount is initially developed at the beginning of eachfiscal year in conjunction with our budgeting process.  Quarterly, estimated annual operatingperformance is reviewed by the company and the discretionary annual bonusamount is then adjusted, if necessary, by management to reflect changes in theforecast of pre-bonus profitability for the year.  In those quarters where the estimated annualbonus level changes, the remaining estimated annual bonus is accrued over theremaining quarters as a constant percentage of estimated future netincome.  Annual bonus levels may varyfrom current expectations as a result of changes in the company’s forecast ofnet income and competitive employment market conditions.

 

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***Income Taxes***

*** ***

The company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes”, which prescribes the use of the asset and liability method wherebydeferred tax asset or liability account balances are calculated at the balancesheet date using current tax laws and rates in effect. Valuation allowances areestablished, when necessary, to reduce deferred tax assets when it is more likelythan 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). FIN48 prescribes a recognition threshold of more-likely-than-not, and ameasurement attribute for all tax positions taken or expected to be taken on atax return, in order for those positions to be recognized in the financialstatements.  The Company continuallyreviews tax laws, regulations and related guidance in order to properly recordany uncertain tax liabilities.  We adjustthese 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.

 

***Pension Assumptions***

*** ***

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 theassociate’s compensation during the five highest paid consecutive years ofservice.  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, 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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*North America*

* *

The following assumptions were used in the valuation of our NorthAmerican plans at June 30, 2008, 2007 and 2006:

 
| ** **                                  | ** ** | **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 thesensitivity to 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.

 

*United Kingdom*

* *

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.

 

***Incurred But 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.

 

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***Goodwill and Intangible Assets***

*** ***

In applying the purchasemethod of accounting for our business combinations, amounts assigned toidentifiable assets and liabilities acquired have been based on estimated fairvalues as of the date of the acquisitions, with the remainder recorded asgoodwill. Intangible assets are initially valued at fair market value usinggenerally accepted valuation methods appropriate for the type of intangibleasset. We evaluate our goodwill for impairment annually as of June 30, andwhenever indicators of impairment exist. The evaluation is based upon acomparison of the estimated fair value of the reporting unit to which thegoodwill has been assigned to the sum of the carrying value of the net assetsfor that reporting unit. The fair values used in this evaluation are estimatedbased upon a multiple of revenue for the reporting unit. This revenue multipleis based on our experience and knowledge of our own and other transactions inthe marketplace. Intangible assets with definite lives are amortized over theirestimated useful lives and are reviewed for impairment if indicators ofimpairment arise. The evaluation of impairment would be based upon a comparisonof the carrying amount of the intangible asset to the estimated futureundiscounted net cash flows expected to be generated by the asset. If estimatedfuture undiscounted net cash flows are less than the carrying amount of theasset, the asset would be considered impaired. The impairment expense would bedetermined by comparing the estimated fair value of the intangible asset to itscarrying value, with any shortfall from fair value recognized as an expense inthe current period.

 

**Resultsof Operations**

 

Thetable below sets forth our historical Condensed Consolidated Statements ofOperations data as a percentage of change between periods indicated:

 

**Condensed Consolidated Statementsof Operations**

(in thousands)

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | ** **                            | ** ** | ** **                           | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **%** | ** ** |
| ** **                              | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **Change** | ** ** |
| ** **                              | ** ** | **(Unaudited)**                       | ** ** | ** **                           | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
|                                    |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Revenue                                 |       | $                                     | 416,994    |                                 | $          | 457,525 |   | (8.9 | )% | $ | 1,279,509 |   | $ | 1,306,244 |   | (2.1 | )% |
|                                    |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Costs of providing services:            |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits          |       | 237,208                               |       | 254,147                              |       | (6.7 | ) | 719,735 |   | 722,583 |   | (0.4 | ) |
| Professional and subcontracted services |       | 23,835                                |       | 20,334                               |       | 17.2 |   | 75,714 |   | 75,154 |   | 0.7 |   |
| Occupancy, communications and other     |       | 40,941                                |       | 54,955                               |       | (25.5 | ) | 137,254 |   | 148,187 |   | (7.4 | ) |
| General and administrative expenses     |       | 45,689                                |       | 45,390                               |       | 0.7 |   | 132,782 |   | 131,486 |   | 1.0 |   |
| Depreciation and amortization           |       | 17,531                                |       | 18,265                               |       | (4.0 | ) | 55,265 |   | 53,225 |   | 3.8 |   |
|                                    |       | 365,204                               |       | 393,091                              |       | (7.1 | ) | 1,120,750 |   | 1,130,635 |   | (0.9 | ) |
|                                    |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Income from operations                  |       | 51,790                                |       | 64,434                               |       | (19.6 | ) | 158,759 |   | 175,609 |   | (9.6 | ) |
|                                    |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Income (loss) from affiliates           |       | 3,201                                 |       | (29                                  | )          | n.m. |   | 5,966 |   | (603 | ) | n.m. |   |
| Interest expense                        |       | (553                                  | )          | (1,353                               | )          | 59.1 |   | (2,181 | ) | (5,580 | ) | 60.9 |   |
| Interest income                         |       | 294                                   |       | 1,585                                |       | (81.5 | ) | 1,647 |   | 4,356 |   | (62.2 | ) |
| Other non-operating income              |       | 1,786                                 |       | 179                                  |       | n.m. |   | 3,466 |   | 454 |   | n.m. |   |
|                                    |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Income before income taxes              |       | 56,518                                |       | 64,816                               |       | (12.8 | ) | 167,657 |   | 174,236 |   | (3.8 | ) |
|                                    |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Provision for income taxes              |       | 15,927                                |       | 22,270                               |       | (28.5 | ) | 52,355 |   | 60,465 |   | (13.4 | ) |
|                                    |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Net Income                              |       | $                                     | 40,591     |                                 | $          | 42,546 |   | (4.6 | )% | $ | 115,302 |   | $ | 113,771 |   | 1.4 | % |

 

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**Threeand Nine Months Ended March 31, 2009 Compared to the Three and Nine MonthsEnded March 31, 2008**

** **

***Revenue.***

** **

Revenuefor the third quarter of fiscal year 2009 was $416.9 million, a decrease of$40.6 million, or 9 percent, from $457.5 million in the third quarter of fiscalyear 2008.  The overall decrease inrevenue is due to the strengthening of the U.S. dollar.  On a constant currency basis, revenueincreased 3% over the third quarter of fiscal year 2008.

 

Theaverage exchange rate used to translate our revenue earned in British poundssterling decreased to 1.4437 for the third quarter of fiscal year 2009 from1.9868 for the third quarter of fiscal year 2008, and the average exchange rateused to translate our revenue earned in Euros decreased to 1.3184 for the thirdquarter of fiscal year 2009 from 1.5108 for the third quarter of fiscal year2008.  The depreciation of the Britishpound and the Euro resulted in a $44 million decrease in revenue in the thirdquarter of fiscal year 2009 as compared to the third quarter of fiscal year2008.  Changes in the value of otherforeign currencies relative to the U.S. dollar resulted in a $7 milliondecrease in revenue in the third quarter of fiscal year 2009 as compared to thethird quarter of fiscal year 2008.

 

Theincreases in our segment revenue based on constant currency for the thirdquarter of fiscal year 2009 as compared to third quarter fiscal year 2008 areas follows.  Constant currency iscalculated by translating prior year revenue at the current year averageexchange rate.

 

·                  Benefits revenue decreased $19.9 million, or7 percent, over third quarter fiscal year 2008 due to the strengthening of theU.S. dollar.  On a constant currencybasis, revenue increased 3 percent over the third quarter of fiscal year 2008due to increased demand for our core retirement consulting services.

 

·                  Technology and Administration Solutionsrevenue decreased $0.4 million, or 1 percent, over the third quarter of fiscalyear 2008, due to the strengthening of the U.S. dollar.  On a constant currency basis, Technology andAdministration Solutions revenue increased 13 percent over the third quarter offiscal year 2008.  In Europe, revenue increaseddue primarily to new clients.  In NorthAmerica, revenue increased due to additional project work at existing clientsas well as an increase in the number of projects in on-going service delivery.

 

·                  Human Capital Group revenue decreased $12.2million, or 25 percent, over the third quarter of fiscal year 2008 due to adecrease in demand in all geographic regions as well as the strengthening ofthe U.S. dollar.  On a constant currencybasis, revenue decreased 18 percent over the third quarter of fiscal year 2008.

 

·                  Investment Consulting revenue decreased $4.2million, or 10 percent, over the third quarter of fiscal year 2008 due to thestrengthening of the U.S. dollar.  On aconstant currency basis, revenue increased 12 percent over the third quarter offiscal year 2008 due primarily to increased demand for implemented consultingservices and investment strategy advice.

 

·                  Insurance and Financial Services revenueincreased $0.6 million, or 2 percent, over third quarter fiscal year 2008.  On a constant currency basis, revenueincreased 23 percent over the third quarter of fiscal year 2008 due toincreases in all geographic regions primarily from additional project work.

 

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Revenuefor the nine months ended March 31, 2009 was $1.28 billion, a decrease of$26.7 million, or 2 percent, from $1.31 billion in the nine months ended March 31,2008.

 

Theaverage exchange rate used to translate our revenue earned in British poundssterling decreased to 1.6479 for the nine months ended March 31, 2009 from2.0188 for the nine months ended March 31, 2008, and the average exchangerate used to translate our revenue earned in Euros decreased to 1.3821 for thenine months ended March 31, 2009 from 1.4465 for the nine months ended March 31,2008.  The impact of the depreciation ofthe British pound and the Euro was an $81 million decrease in revenue in thenine months ended March 31, 2009 as compared to the nine months ended March 31,2008.  Changes in the value of otherforeign currencies relative to the U.S. dollar resulted in a $11 milliondecrease in revenue in the nine months ended March 31, 2009 as compared tothe nine months ended March 31, 2008.

 

Theincreases in our segment revenue based on constant currency for the nine monthsended March 31, 2009 as compared to the nine months ended March 31,2008 are as follows.  Constant currencyis calculated by translating prior year revenue at the current year averageexchange rate.

 

·                  Benefits revenue decreased $12.8 million, or2 percent, over the nine months ended March 31, 2008.  On a constant currency basis, revenueincreased 5 percent over the nine months ended March 31, 2008 due toincreased demand for our services.

 

·                  Technology and Administration Solutionsrevenue increased $8.4 million, or 6 percent, over the nine months ended March 31,2008, due to increases in both North America and Europe.  On a constant currency basis, Technology andAdministration Solutions revenue increased 16 percent over the nine monthsended March 31, 2008.  In Europe,revenue increased due primarily to new clients. In North America, revenue increased due to additional project work atexisting clients as well as an increase in the number of projects in on-goingservice delivery.

 

·                  Human Capital Group revenue decreased $7.3million, or 5 percent, over the nine months ended March 31, 2008.  On a constant currency basis, revenuedecreased 1 percent over the nine months ended March 31, 2008 dueprimarily to decreases in demand in all geographic regions.

 

·                  Investment Consulting revenue decreased $7.0million, or 6 percent, over the nine months ended March 31, 2008 due tothe strengthening of the U.S. dollar.  Ona constant currency basis, revenue increased 9 percent over the nine monthsended March 31, 2008 due primarily to increased demand for investmentstrategy advice and implemented consulting services.

 

·                  Insurance and Financial Services revenueincreased $4.6 million, or 5 percent, over the nine months ended March 31,2008.  On a constant currency basis,revenue increased 19 percent over the nine months ended March 31, 2008 dueprimarily to additional project work.

 

***Salaries and Employee Benefits*****.**

** **

Salariesand employee benefit expenses for the third quarter of fiscal year 2009 were$237.2 million compared to $254.1 million for the third quarter of fiscal year2008, a decrease of $16.9 million or 6.7 percent. The decrease resultsprimarily from the change in the average exchange rates used to translate ourexpenses incurred in British pounds and the Euro.  The change in exchange rates has affectedeach expense category in a similar fashion. On a constant currency basis,salaries and employee benefits increased 3 percent, principally due to increasesin pension expense and other employee benefits. As a percentage of revenue, salaries and employee benefits increased to56.9 percent from 55.5 percent.

 

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Salariesand employee benefit expenses for the first nine months of fiscal year 2009were $719.7 million compared to $722.6 million for the first nine months offiscal year 2008, a decrease of $2.9 million or 0.4 percent.  On a constant currency basis, salaries andemployee benefits increased 10 percent, principally due to increases in salary,pension and discretionary compensation expenses.  As a percentage of revenue, salaries andemployee benefits increased to 56.3 percent from 55.3 percent.

 

***Professional and Subcontracted Services*****.**

** **

Professionaland subcontracted services expenses for the third quarter of fiscal year 2009were $23.8 million compared to $20.3 million for the third quarter of fiscalyear 2008, an increase of $3.5 million or 17.2 percent. On a constant currencybasis, professional and subcontracted services increased 36 percent,principally due to an increase in professional services related to independentcontractors and legal expense. As a percentage of revenue, professional and subcontractedservices increased to 5.7 percent from 4.4 percent.

 

Professionaland subcontracted services used in consulting operations for the first ninemonths of fiscal year 2009 were $75.7 million, compared to $75.2 million forthe first nine months of fiscal year 2008, an increase of $0.5 million or 0.7percent.  On a constant currency basis,professional and subcontracted services increased 12 percent, principally dueto an increase in professional services related to independent contractors andlegal expense.  As a percentage ofrevenue, professional and subcontracted services increased to 5.9 percent from5.8 percent.

 

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

*** ***

Occupancy,communications and other expenses for the third quarter of fiscal year 2009were $40.9 million compared to $55.0 million for the third quarter of fiscalyear 2008, a decrease of $14.1 million or 25.5 percent.  On a constant currency basis, occupancy,communications and other decreased 18 percent, principally due to decreases intravel, general office, and repairs and maintenance expense, partially offsetby recognized foreign exchange losses. As a percentage of revenue, occupancy, communications and otherdecreased to 9.8 percent from 12.0 percent.

 

Occupancy,communications and other expenses for the first nine months of fiscal year 2009were $137.3 million compared to $148.2 million for the first nine months offiscal year 2008, a decrease of $10.9 million or 7.4 percent.  On a constant currency basis, occupancy,communications and other increased 2 percent, principally due to recognizedforeign exchange losses, net of decreases in travel and office suppliesexpenses.  As a percentage of revenue,occupancy, communications and other decreased to 10.7 percent from 11.3percent.

 

***General and Administrative Expenses.***

** **

Generaland administrative expenses for the third quarter of fiscal year 2009 were$45.7 million, compared to $45.4 million for the third quarter of fiscal year2008, an increase of $0.3 million or 0.7 percent.  On a constant currency basis, general andadministrative expenses increased 9 percent, principally due to increases insalary, employee benefits and general office expenses.  General and administrative expenses duringthe third quarter of fiscal year 2009 include $2.5 million of general andadministrative expenses from our Heissman operation.  These expenses had been classified amongstthe remaining line items under the “costs of providing services” section of theincome statement for fiscal year 2008. As a percentage of revenue, general and administrative expense increasedto 11.0 percent from 9.9 percent.

 

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Generaland administrative expenses for the first nine months of fiscal year 2009 were$132.8 million, compared to $131.5 million for the first nine months of fiscalyear 2008, an increase of $1.3 million or 1.0 percent.  On a constant currency basis, general andadministrative expenses increased 10 percent, principally due to increases insalary, employee benefits and general office expenses.  General and administrative expenses duringthe nine months of fiscal year 2009 include $6.9 million of general andadministrative expenses from our Heissman operation.  These expenses had been classified amongstthe remaining line items under the “costs of providing services” section of theincome statement for fiscal year 2008. As a percentage of revenue, general and administrative expense increasedto 10.4 percent from 10.1 percent.

 

***Depreciation and Amortization.***

** **

Depreciationand amortization for the third quarter of fiscal year 2009 was $17.5 million,compared to $18.3 million for the third quarter of fiscal year 2008, a decreaseof $0.8 million or 4.0 percent.  On aconstant currency basis, depreciation and amortization increased 4 percent,principally due to increases in depreciation of internally developed softwareused to support our Benefits and Technology and Administration SolutionsGroups.  As a percentage of revenue,depreciation and amortization increased to 4.2 percent from 4.0 percent.

 

Depreciationand amortization for the first nine months of fiscal year 2009 was $55.3million, compared to $53.2 million for the first nine months of fiscal year2008, an increase of $2.1 million or 3.8 percent.  On a constant currency basis, depreciationand amortization increased 13 percent, principally due to increases indepreciation of internally developed software used to support our Benefits andTechnology and Administration Solutions Groups. As a percentage of revenue, depreciation and amortization increased to4.3 percent from 4.1 percent.

 

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

** **

Incomefrom affiliates for the third quarter of fiscal year 2009 was $3.2 millioncompared to a loss of $29 thousand for the third quarter of fiscal year 2008,an increase of $3.2 million.  Theseamounts reflect our portion of PCIC’s, Fifth Quadrant’s, Dubai’s and IFA’soperating results for the third quarter of fiscal year 2009 while the thirdquarter of fiscal year 2008 only included our share of PCIC’s operatingresults.

 

Incomefrom affiliates for the first nine months of fiscal year 2009 was $6.0 millioncompared to a loss of $0.6 million for the first nine months of fiscal year2008, an increase of $6.6 million.  Theseamounts reflect our portion of PCIC’s, Fifth Quadrant’s, Dubai’s and IFA’soperating results for the first nine months of fiscal year 2009 while the thirdquarter of fiscal year 2008 only included our share of PCIC’s operatingresults.  Additionally, affiliate lossduring the three and nine months ended March 31, 2008 includes our shareof PCIC’s losses resulting from a substantial increase in PCIC’s reserves.

 

***Interest Expense.***

** **

Interestexpense for the third quarter of fiscal year 2009 was $0.6 million, compared to$1.4 million for the third quarter of fiscal year 2008.  Interest expense for the first nine months offiscal year 2009 was $2.2 million, compared to $5.6 million for the first ninemonths of fiscal year 2008.  The decreasein both periods was principally due to a lower average debt balance in thecurrent period compared to the prior period.

 

***Interest Income.***

*** ***

Interestincome for the third quarter of fiscal year 2009 was $0.3 million, compared to$1.6 million for the third quarter of fiscal year 2008. Interest income for thefirst nine months of fiscal year 2009 was $1.6 million, compared to $4.4million for the first nine months of fiscal year 2008.  The decrease is mainly due to a lower averagecash balance in the current period compared to the prior period, combined withlower short-term interest rates in the United States and Europe.

 

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***Provision for Income Taxes.***

** **

Provisionfor income taxes for the first nine months of fiscal year 2009 was $52.4million, compared to $60.5 million for the first nine months of fiscal year2008. Our effective tax rate was 31.2 percent for the first nine months offiscal year 2009 and 34.7 percent for the first nine months of fiscal year2008.  The decrease in the tax rate isdue to the geographic mix of income.  Thecompany has not provided U.S. deferred taxes on cumulative earnings of foreignsubsidiaries that have been reinvested indefinitely, which also includesforeign subsidiaries affiliated with our recent acquisitions.  We record a tax benefit on foreign netoperating loss carryovers and foreign deferred expenses only if it is morelikely than not that a benefit will be realized.

 

***Net Income.***

** **

Netincome for the third quarter of fiscal year 2009 was $40.6 million, compared to$42.5 million for the third quarter of fiscal year 2008.  As a percentage of revenue, net incomeincreased to 9.7 percent from 9.3 percent. Net income for the first nine monthsof fiscal year 2009 was $115.3 million, compared to $113.8 million for thefirst nine months of fiscal year 2008. As a percentage of revenue, net income increased to 9.0 percent from 8.7percent.

 

***Earnings Per Share.***

*** ***

Dilutedearnings per share, income from operations for the third quarter of fiscal year2009 was $0.95, compared to $0.96 for the third quarter of fiscal year2008.  Diluted earnings per share, incomefrom operations for the first nine months of fiscal year 2009 was $2.69,compared to $2.56 for the first nine months of fiscal year 2008.

 

**Liquidity and Capital Resources**

** **

Ourcash and cash equivalents at March 31, 2009 totaled $118.3 million,compared to $124.6 million at June 30, 2008.  The decrease in cash from June 30, 2008to March 31, 2009 was principally attributable to the payment during thefirst three quarters of fiscal year 2009 of $166 million of previously accrueddiscretionary compensation, $46.9 million in corporate taxes, $29.8 million incapital expenditures and $9.6 million in dividends.  These cash outflows were funded by cash fromoperations, from existing cash balances and from borrowings under our revolvingcredit facility.  Consistent with thecompany’s liquidity position, management considers various alternativestrategic uses of cash reserves including acquisitions, dividends and stockbuybacks, or any combination of these options. The company believes that it hassufficient resources to fund operations beyond the next twelve months.

 

Ournon-U.S. operations are substantially self-sufficient for their working capitalneeds.  As of March 31, 2009, $103.1million of the total cash balance of $118.3 million was held outside of NorthAmerica, which we have the ability to utilize, if necessary. There are nosignificant repatriation restrictions other than local or U.S. taxes associatedwith repatriation.

 

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 March 31, 2009, wemaintained $4.9 million of restricted cash related to this obligation. This restrictedcash balance was included in Other Assets on our consolidated balance sheet.

 

Assetsand liabilities associated with non-U.S. entities have been translated intoU.S. dollars as of March 31, 2009, at appreciated U.S. dollar ratescompared to historical periods.  As aresult, cash flows derived from changes in the Company’s consolidated balancesheets include the impact of the change in foreign exchange translation rates.

 

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***Cash From Operating Activities.***

*** ***

Cashfrom operating activities for the first nine months of fiscal year 2009 was$83.7 million, compared to cash from operating activities of $137.8 million forthe first nine months of fiscal year 2008. The difference is primarily attributable to a decrease in billed andunbilled receivables primarily due to exchange rates, as well as to therelative size of accruals and payments associated with discretionarycompensation in the periods presented.

 

Theallowance for doubtful accounts decreased $1.5 million from June 30, 2008to March 31, 2009. The number of days of accounts receivable and work inprocess outstanding also benefited from exchange rates and decreased to 66 at March 31,2009 compared to 71 at June 30, 2008.

 

***Cash Used in Investing Activities.***

*** ***

Cashused in investing activities for the first nine months of fiscal year 2009 was $43.1million, compared to $181.7 million used in investing activities for the firstnine months of fiscal year 2008.  Thedifference can be attributed to acquisition and contingent considerationpayments of $134.9 million in the first nine months of fiscal year 2008, whichwas primarily attributable to the Heissmann acquisition.

 

Expendituresof capital funds were $29.8 million for the first nine months of fiscal year2009.  Anticipated commitments of capitalfunds are estimated at $14.5 million for the remainder of fiscal year 2009. Weexpect cash from operations to adequately provide for these cash needs.

 

***Cash Used in Financing Activities.***

*** ***

Cashused in financing activities for the first nine months of fiscal year 2009 was$41.9 million, compared to cash used in financing activities of $48.5 millionfor the first nine months of fiscal year 2008. This change is primarily attributable to activity under our creditfacility which included net borrowings of $40.2 million in the first ninemonths of fiscal year 2009 compared to $5.5 million in the first nine months offiscal year 2008.  This is offset by thecompany repurchase of $77.4 million of common stock in the first nine months offiscal year 2009, compared to $54.0 million of common stock during the sameperiod in fiscal year 2008.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 
| ** **                                       | ** ** | **Remaining payments due by fiscal year as of March 31, 2009** | ** **        |
|--------------------------------------------------|------------|---------------------------------------------------------------------|-------------------|
| **Contractual Cash  Obligations (in thousands)** | ** ** | **Total**                                                           | ** **        | **Remaining  2009** | ** ** | **2010 through  2011** | ** ** | **2012  through  2013** | ** ** | **Thereafter** | ** ** |
| Lease Commitments                                |       | $                                                                   |  298,633,673 |   | 14,977,972 |   | 104,274,081 |   | 78,345,053 |   | 101,036,567 |   |
| Revolving Credit Facility                        |       | 41,208,587                                                          |              | 40,403,315 |   | 805,272 |   | — |   | — |   |
| Total                                            |       | $                                                                   |  339,842,260 |   | 55,381,287 |   | 105,079,353 |   | 78,345,053 |   | 101,036,567 |   |

*** ***

***Operating Leases.***  We lease office space, furniture and selectedcomputer equipment under operating lease agreements with terms ranging from oneto ten years. Management has determined that there is not a large concentrationof leases that will expire in any one fiscal year.  Consequently, management anticipates that anyincrease in future rent expense will be mainly market driven.

 

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***Credit Agreement. ***The company hasa credit facility provided by a syndicate of banks in an aggregate principalamount of $300 million.  Interest ratesassociated with this facility vary with LIBOR and/or the Prime Rate and arebased on our leverage ratio, as defined by the credit agreement.  We are charged a quarterly commitment fee,currently 0.125 percent of the facility, which varies with our financialleverage and is paid on the unused portion of the credit facility.  Borrowings under this facility were $40.2million as of March 31, 2009 and $0 as of June 30, 2008.  Credit under the facility is available upondemand, although the credit facility requires us to observe certain covenants(including requirements relating to our leverage ratio and fixed coveragecharge ratio) and is collateralized with a pledge of stock of materialsubsidiaries.  We were in compliance withall covenants under the credit facility as of March 31, 2009. Thisfacility is scheduled to mature on June 30, 2010.

 

A portion of the revolvingfacility is used to support a required letter of credit.  As a result, $10.6 million of the facilitywas unavailable for operating needs as of March 31, 2009.  We are also charged a fee for the outstandingletter of credit that also fluctuates based on our leverage ratio.

 

The company has alsoprovided a $5.0 million Australian dollar-denominated letter of credit (US $3.5million) to an Australian governmental agency as required by the localregulations.  The estimated fair market value of these letters of creditis immaterial because they have never been used, and the company believes thatfuture usage is remote.

 

***Pension Contributions.***  Remaining contributions to our variouspension plans for fiscal year 2009 are projected to be approximately $2.9million.

 

**RiskManagement**

** **

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 $34 millionIBNR liability recorded as of March 31, 2009.

 

Insurancemarket conditions for our industry and the company include heightened overallpremium cost.  Trends toward higherself-insured retentions, constraints on aggregate excess coverage for thisclass of insurance coverage and financial difficulties which are presentlyfaced by several longstanding E&O carriers are anticipated to continue orto recur periodically, and to be reflected in our future annual insurancerenewals.  As a result, we will continueto assess our ability to secure future insurance coverage and we cannot assurethat such coverage will continue to be available indefinitely in the event ofspecific adverse claims experience, adverse loss trends, market capacityconstraints or other factors. In anticipation of the possibility of future reductionsin risk transfer from PCIC to re-insurers, as well as the hardening insurancemarket conditions in recent years, the firms that own PCIC, including thecompany, 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 processes to maintain that protocol in theUnited States and the United Kingdom and complete it elsewhere are underway.

 

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**Disclaimer RegardingForward-looking Statements**

** **

This filing contains a number of “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995, including, but not limited to thefollowing: Note 5 -  Retirement Benefits;Note 6 — Goodwill and Intangible Assets; Note 10 — Restricted Shares; Note 11 —Commitments and Contingent Liabilities; Note 13 — Income Taxes; the ExecutiveOverview; Critical Accounting Policies and Estimates; the discussion of ourcapital expenditures; Off-Balance Sheet Arrangements and ContractualObligations; 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 tointegrate acquired businesses into our own business, processes and systems, andachieve the anticipated results;

·                  foreigncurrency exchange and interest rate fluctuations;

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

·                  our continuedability to recruit and retain qualified associates;

·                  the success ofour marketing, client development and sales programs after our acquisitions;

·                  our ability tomaintain client relationships and to attract new clients after ouracquisitions;

·                  declines indemand for our services;

·                  outcomes ofpending or future professional liability cases and the availability andcapacity of professional liability insurance to fund the outcome of pendingcases or future judgments or settlements;

·                  our ability toobtain professional liability insurance;

·                  a significantdecrease in the demand for the consulting, actuarial and other services weoffer as a result of changing economic conditions or other factors;

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

·                  our ability toachieve cost reductions after our recent acquisitions;

·                  exposure toliabilities that have not been expressly assumed in our acquisitiontransactions;

·                  the level ofcapital resources required for future acquisitions and business opportunities;

·                  regulatorydevelopments abroad and domestically that impact our business practice;

·                  legislative andtechnological developments that may affect the demand for or costs of ourservices;

 

and other factors discussed under “Risk Factors” in the company’s 2008Annual Report on Form 10-K filed with the SEC on August 15,2008.  These statements are based onassumptions that may not come true.  Allforward-looking disclosure is speculative by its nature.  The company undertakes no obligation toupdate any of the forward-looking information included in this report, whetheras a result of new information, future events, changed expectations orotherwise.

 

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

 

We areexposed to market risks in the ordinary course of business.  These risks include interest rate risk,foreign currency exchange and translation risk.

 

**Interest Rate Risk**

 

Theprimary objective of our investment activities is to preserve principal whileat the same time maximizing yields without significantly increasing risk. Toachieve this objective, we maintain our portfolio in mainly short termsecurities that are recorded on the balance sheet at fair value.

 

**ForeignCurrency Risk**

 

Internationalnet revenue result from transactions by our foreign operations and aretypically denominated in the local currency of each country. These operationsalso incur most of their expenses in the local currency. Accordingly, ourforeign operations use the local currency as their functional currency and ourprimary international operations use the British Pound, and to a lesser extent,the Euro. Our international operations are subject to risks typical ofinternational operations, including, but not limited to, differing economicconditions, changes in political climate, differing tax structures, other regulationsand restrictions, and foreign exchange rate volatility.  Accordingly, our future results could beadversely impacted by changes in these or other factors.

 

**TranslationExposure**

 

Foreignexchange rate fluctuations may adversely impact our consolidated financialposition as well as our consolidated results of operations and may adverselyimpact our financial position as the assets and liabilities of our foreignoperations are translated into U.S. dollars in preparing our condensedconsolidated balance sheet. Additionally, foreign exchange rate fluctuationsmay adversely impact our condensed consolidated results of operations asexchange rate fluctuations on transactions denominated in currencies other thanour functional currencies result in gains and losses that are reflected in ourcondensed consolidated statement of income.

 

Theforeign currency and translation exposure risks have been heightened as aresult of the current global economic environment.

 

Weconsolidate our international subsidiaries by converting them into U.S. dollarsin accordance with Statement of Financial Accounting Standards No. 52,“Foreign Currency Translation” (“FAS 52”). The results of operations and ourfinancial position will fluctuate when there is a change in foreign currencyexchange rates.

 

**ITEM 4.  CONTROLS AND PROCEDURES.**

 

**Evaluation of DisclosureControls and Procedures**

 

Anevaluation was performed under the supervision and with the participation ofour management, including the chief executive officer, or CEO, and chieffinancial officer, or CFO, of the effectiveness of the design and operation ofour disclosure controls and procedures. Based on that evaluation, ourmanagement, including the CEO and CFO, concluded that our disclosure controlsand procedures were effective as of March 31, 2009.

 

**Changesin Internal Control Over Financial Reporting**

 

Therewere no significant changes in our internal control over financial reporting inthe quarter ended March 31, 2009 that materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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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**

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

Fromtime to time, we are a party to various lawsuits, arbitrations or mediationsthat arise in the ordinary course of business. The disclosure called for by Part II,Item 1, regarding our legal proceedings is incorporated by reference hereinfrom Note 11 “Commitments and Contingent Liabilities,” of the Notes to theCondensed Consolidated Financial Statements in this Form 10-Q for thequarter ended March 31, 2009.

 

**ITEM 1A.  RISK FACTORS.**

 

Thereare no material changes from risk factors as previously disclosed in our 2008Annual Report on Form 10-K (File No. 001-16159) filed on August 15,2008.

 

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**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS.**

 

**Issuer Purchases of Equity Securities**

 

The company periodically repurchases shares ofcommon stock, one purpose of which is to offset potential dilution from sharesissued in connection with the company’s benefit plans. The table below presentsspecified information about the company’s stock repurchases and repurchaseplans:

 
| **Period**                                           | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number of  Shares that May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| January 1, 2009 through January 31, 2009   |       | —                                 |       | —                            |       | —                                                                                        |       | —                                                                                     |       |
| February 1, 2009 through February 28, 2009 |       | —                                 |       | —                            |       | —                                                                                        |       | —                                                                                     |       |
| March 1, 2009 through March 31, 2009       |       | —                                 |       | —                            |       | —                                                                                        |       | —                                                                                     |       |
|                                                 |       |                                   |       |                              |       |                                                                                          |       |                                                                                       |       |
| Total                                                |       | —                                 |       | —                            |       | —                                                                                        |       | 468,023                                                                                    |       |

 

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.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES.**

 

None.

 

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

 

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) |
|   |   |                                                                                                                                                                                              |

 

----

| (1) |   | Filed with this  Form 10-Q |
|-----|--------|---------------------------------|

 

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**Signatures**

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
| Watson  Wyatt Worldwide, Inc. |                     |              |
|------------------------------------|--------------------------|-------------------|
| (Registrant)                       |                     |              |
|                               |                     |              |
|                               |                     |              |
| /s/  John J. Haley                 |                     | May 7,  2009 |
| Name:                              | John  J. Haley           |              | Date |
| Title:                             | President  and           |              |   |
|                               | Chief  Executive Officer |              |   |
|                               |                     |              |
|                               |                     |              |
| /s/  Roger F. Millay               |                     | May 7,  2009 |
| Name:                              | Roger  F. Millay         |              | Date |
| Title:                             | Vice  President and      |              |   |
|                               | Chief  Financial Officer |              |   |
|                               |                     |              |
| /s/  Peter L. Childs               |                     | May 7,  2009 |
| Name:                              | Peter  L. Childs         |              | Date |
| Title:                             | Controller               |              |   |

 

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