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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **(Mark  One)** |
|-----------------|
| ** ****x** | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **      | ** ** | ** ** |
| ** **      | ** ** | **For the  fiscal year ended June 30, 2008** |
| ** **      | ** ** | ** ** |
| **OR**          |
| ** **      |
|  **o**     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|            | ** ** | ** ** |
| ** **      | ** ** | **For the  transition period from              to            ** |

 

**Commission File Number: 001-16159**

 

**WATSON WYATT WORLDWIDE, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**901 N. Glebe RoadArlington, VA  22203**(Address of principal executive offices, including zip code)

 

**(703) 258-8000**(Registrant’s telephone number, including area code)

 

**Securitiesregistered pursuant to Section 12(b) of the Act:**

 

| ** **                                     | ** ** | **Name of each exchange** |
|------------------------------------------------|------------|------------------------------------------|
| **Title of each class**         | ** ** | **on which registered**        |
| **Class A Common Stock, $0.01 par value** | ** ** | **New York Stock Exchange and NASDAQ**   |

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.   Yes  x  No  o

 

IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.  Yes  o  No  x

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes  x          No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)    Yes  o    No  x

 

The aggregate marketvalue of the registrant’s voting and non-voting common stock held bynon-affiliates of the registrant was approximately $1,960,695,847 based on theclosing price as of the last business day of the registrant’s most recentlycompleted second fiscal quarter, December 31, 2007.

 

**Documents Incorporated by Reference**

 

Portions of the Definitive Proxy Statement for the 2008Annual Meeting of Stockholders to be held on or about November 16, 2008are incorporated by reference into Part III of this Form 10-K.

 

As of July 31, 2008there were outstanding 43,255,561 shares of common stock par value $0.01 pershare.

 

 

 

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

 

For the FiscalYear Ended June 30, 2008

** **
| PART I.   |                                                                                                                |   |
|----------------|---------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                |   |
| Item 1.        | Business                                                                                                            | 1      |
| Item 1A.       | Risk Factors                                                                                                        | 15     |
| Item 1B.       | Unresolved SEC  Comments                                                                                            | 20     |
| Item 2.        | Properties                                                                                                          | 20     |
| Item 3.        | Legal Proceedings                                                                                                   | 20     |
| Item 4.        | Submission  of Matters to a Vote of Security Holders                                                                | 20     |
|           |                                                                                                                |   |
| PART II.  |                                                                                                                |   |
|           |                                                                                                                |   |
| Item 5.        | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 21     |
| Item 6.        | Selected  Consolidated Financial Data                                                                               | 23     |
| Item 7.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 26     |
| Item 7A.       | Quantitative and Qualitative Disclosures about Market  Risk                                                         | 46     |
| Item 8.        | Financial  Statements and Supplementary Data                                                                        | 47     |
| Item 9.        | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 47     |
| Item 9A.       | Controls and  Procedures                                                                                            | 47     |
|           |                                                                                                                |   |
| PART III. |                                                                                                                |   |
|           |                                                                                                                |   |
| Item 10.       | Directors,  Executive Officers, and Audit Committee of the Registrant                                               | 51     |
| Item 11.       | Executive  Compensation                                                                                             | 51     |
| Item 12.       | Security  Ownership of Certain Beneficial Owners and Management                                                     | 51     |
| Item 13.       | Certain  Relationships and Related Transactions                                                                     | 51     |
| Item 14.       | Principal  Auditor Fees and Services                                                                                | 51     |

 

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| PART IV.  |                                                                                                                       |   |
|----------------|----------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                       |   |
| Item 15.       | Exhibits  and Financial Statement Schedules                                                                                | 52     |
|           | Signatures                                                                                                                 | 53     |
|           | Report of  Independent Registered Public Accounting Firm                                                                   | 55     |
|           | Consolidated Financial  Statements                                                                                         | 57     |
|           | Consolidated  Statements of Operations—Fiscal year ended June 30, 2008, 2007, and 2006                           | 57     |
|           | Consolidated Balance Sheets—June 30, 2008 and  June 30, 2007                                                | 58     |
|           | Consolidated  Statements of Cash Flows—Fiscal year ended June 30, 2008, 2007, and 2006                           | 59     |
|           | Consolidated  Statement of Changes in Stockholders’ Equity—Fiscal year ended June 30,  2008, 2007, and 2006 | 60     |
|           | Notes to  the Consolidated Financial Statements                                                                            | 62     |
|           |                                                                                                                       |   |
| Certifications |                                                                                                                       |   |

 

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**PART I**

 

**Item 1.  Business.**

 

***The Company***

 

Watson Wyatt Worldwide, Inc.(referred herein as “Watson Wyatt”, “company”, “us”, “we”, or “Watson Wyatt &Company Holdings”) is a global consulting firm focusing on providing humancapital and financial management consulting services.  Including predecessors, we have been inbusiness since 1878. The Wyatt Company was incorporated in Delaware on February 17,1958.  We conducted business as The WyattCompany from 1958 until changing our name to Watson Wyatt & Company inconnection with the establishment of the Watson Wyatt Worldwide alliance in1995 with R. Watson & Sons (referred herein as “Watson Wyatt LLP” or “WWLLP”),a leading United Kingdom-based actuarial, benefits and human resourcesconsulting partnership founded in 1878. In 2000, we incorporated Watson Wyatt &Company Holdings to serve as a holding company with our operations conducted byour subsidiaries. To better serve the increasingly global needs of clients, on July 31,2005 we acquired substantiallyall of the assets and assumed most liabilities of WWLLP (the “WWLLP businesscombination”).  The company’s name waschanged to Watson Wyatt Worldwide, Inc. on January 1, 2006, toreflect the company’s global capabilities and identity in the marketplace.

 

We help our clientsenhance business performance by improving their ability to attract, retain, andmotivate qualified employees. We focus on delivering consulting services thathelp our clients anticipate, identify, and capitalize on emerging opportunitiesin human capital management.  We alsoprovide independent financial advice regarding all aspects of life assuranceand general insurance, as well as investment advice to assist our clients indeveloping disciplined and efficient investment strategies to meet theirinvestment goals.  Our target marketclients include those companies in the *FORTUNE* 1000,Pension & Investments (P&I) 1000, FTSE 100, and equivalentorganizations in markets around the world. As of June 30,2008, we provided these services through approximately 7,000 associates in 107offices located in 32 countries.

 

***Business Acquisitions***

 

***Dr. Dr. Heissmann GmbH***

 

On July 20, 2007,the company acquired the outstanding stock of Dr. Dr. Heissmann GmbH(“Heissmann”) for €99 million in cash. Heissmann was a leading actuarial, benefits, and human resourcesconsulting firm based in Germany with subsidiaries in Ireland, Netherlands,Austria, and France.  As of the date ofthe acquisition, Heissmann employed approximately 360 associates.  Annual revenue, including subsidiaries, wasapproximately $70 million (€52 million) for their fiscal year ended March 31,2007. Formore information regarding this business acquisition, see Note 2 of Notes tothe Consolidated Financial Statements included in Item 15 of this report.

 

***WisdomNet***

 

OnJuly 2, 2007, the company acquired the net assets of WisdomNet for $6.9million in cash and stock.  WisdomNet isa Denver-based talent management solution and consulting firm that was foundedin 2001.  WisdomNet offers a proprietaryline of business software products, including an end-to-end solution formanaging organizations’ talent management processes.  As of the date of the acquisition, WisdomNetemployed 15 associates. For more information regarding this businessacquisition, see Note 2 of Notes to the Consolidated Financial Statementsincluded in Item 15 of this report.

 

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***Marcu & Asociados S.A.***

 

OnJune 16, 2008, the company acquired the outstanding stock of Marcu &Asociados S.A. (Marcu) for $2.8 million in cash.  Marcu is a leading human resource, risk andfinancial management consulting firm based in Buenos Aires, Argentina.  As of the date of acquisition, Marcu employed37 associates and had annual revenues of approximately $2.5 million.

 

***Watson Wyatt Netherlands***

 

On February 1, 2007,the company acquired the net assets of Watson Wyatt Brans & Co. (“WatsonWyatt Netherlands” or “WWN”), its long-time alliance partner in theNetherlands.  As of the date of theacquisition, WWN employed approximately180 associates in five offices throughout the Netherlands.  Revenues generated in calendar year 2006 wereapproximately $37 million (€28 million). WWN was established in 1945 as an actuarial firm and has extendedits services from retirement consulting to incorporate legal aspects ofemployee benefits and investment consulting to a wide range of clients.  The company and WWN had jointly offeredservices since 1999 pursuant to alliance agreements and as a result, havebusiness segments that are very similar in nature.  For more information regarding this businessacquisition, see Note 2 of Notes to the Consolidated Financial Statementsincluded in Item 15 of this report.

 

***WatsonWyatt LLP***

 

OnJuly 31, 2005, the company consummated the WWLLP businesscombination.  The company and WWLLP hadjointly offered services since 1995 pursuant to alliance agreements and as aresult, have business segments that are very similar in nature.  The assets acquired from WWLLP are held bythe company’s principal U.K. subsidiary, Watson Wyatt Limited (“Watson WyattLimited” or the “European business”). Watson Wyatt Limited’s results of operations are included in theconsolidated financial statements beginning August 1, 2005.  Subsequent to the WWLLP business combination,the successor entity to WWLLP, Ringley House LLP (“Ringley House”) maintainsminimal business operations and assets. For more information regarding the WWLLP business combination, see Note2 of Notes to the Consolidated Financial Statements included in Item 15 of thisreport.

 

***Access to Public Filings, Code of Business Conductand Ethics and Board Committee Charters***

 

Ourannual report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and amendments to those reports are available, withoutcharge, on our web site (www.watsonwyatt.com) or the SEC web site(www.sec.gov), as soon as reasonably practicable after they are filedelectronically with the SEC.  We havealso adopted a Code of Business Conduct and Ethics applicable to allassociates, senior financial employees, the principal executive officer, otherofficers and members of senior management. The company also has a Code of Business Conduct and Ethics that appliesto all of the company’s directors.  Bothcodes are posted on our website.  WatsonWyatt’s Audit Committee, Compensation Committee and Nominating and GovernanceCommittee all operate pursuant to written charters adopted by the company’sboard of directors.  The company has alsoadopted a set of Corporate Governance Guidelines, copies of which are availableon the company’s website.  Copies of allthese documents are also available, without charge, from our Investor RelationsDepartment, located in our corporate headquarters at 901 N. Glebe Road,Arlington, VA 22203.

 

***Certifications***

 

InNovember 2007, the company submitted to the New York Stock Exchange (NYSE)the required annual certification that our chief executive officer is unawareof any violation by Watson Wyatt of the NYSE corporate governance standards undersection 303A.12(a) of the NYSE listed company manual.  The company also filed with the SEC the CEOand CFO certifications required under section 302 of Sarbanes-Oxley Act of 2002as an exhibit to this Form 10-K.

 

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***RecentDevelopment***

 

Asreported on Form 8-K filed July 21, 2008, Watson Wyatt named RogerMillay as the company’s chief financial officer effective August 18,2008.  The retirement of current chieffinancial officer Carl Mautz was previously announced in February 2008.

 

***Business Overview***

 

As leading economiesworldwide become more services-oriented, human capital and financial managementhave become increasingly important to companies and other organizations. Theheightened competition for skilled employees, unprecedented changes inworkforce demographics, regulatory changes related to compensation and retireebenefits and rising employee-related costs have increased the importance ofeffective human capital management. Insurance and investment decisions 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, includingretirement, health care, compensation, insurance and investment plans.

 

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

 

**BenefitsGroup**

 

·                  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

·                  Compliance and governance

 

**Technologyand Administration Solutions Group**

 

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

·                  Administration outsourcing solutions forhealth and welfare, pension and flexible benefits

·                  Call center strategy, design and tools

·                  Strategic human resources technology andservice delivery consulting

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

·                  Integrated talent management suite

 

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**Human Capital Group**

 

·                  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

·                  Data services

 

**Investment Consulting Group**

 

·                  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

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

 

**Insurance &Financial Services Group**

 

·                  Independent actuarial and strategic advice

·                  Assessment and advice regarding financialcondition and risk management

·                  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.

 

***Competitive Advantage***

 

Webelieve that our competitive advantages include our global reach, our strongclient relationships, the depth of our professional and technical associates,our thought leadership and our experienced management team.

 

Wehave long-lasting relationships with our clients, many of which have beenclients for decades and for whom our services have grown over time.  Expanding our relationships with existingclients and identifying new prospects are key to our growth strategy.

 

Wealso believe that we are at the forefront of many issues affecting humancapital through our research, surveys and participation in policy-making.  Our thought leaders are often called upon bythe media and government to express opinions on issues affecting health carebenefits, retirement plan design and executive compensation.

 

Webelieve our senior management team has strong experience, with an averagetenure of 17 years with the company and a reputation for transparency andaccountability.  We consider this groupto be a major asset to the company.

 

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**Human Resources Consulting Industry**

 

The growing demand foremployee benefits and human capital consulting services is directly related tothe increasing size and complexity of today’s human resources programs and thesocietal forces that are stimulating their rapid change.  In the United States alone, employers spent$7.4 trillion in 2006 in direct support of human capital programs, such ascompensation and benefits.  In 2006, U.S.employers contributed $363.3 billion to pension and profit-sharing plans, and$537.0 billion to group health insurance programs, while the assets ofemployer-sponsored defined benefit and defined contribution plans here in theUnited States were $6.4 trillion at the end of 2006 and private holdings inindividual retirement accounts were another $4.2 trillion, most of whichoriginated in an employer-sponsored retirement plan.

 

Employers,regardless of geography or industry, are facing challenges involving themanagement of their people. Changing technology, shifting economic conditions,critical skill shortages and an aging population in many developed countrieshave increased competition for talented employees.  At the same time, employees’ expectationsrelating to compensation, benefits and other human resource services aregrowing.  To remain competitive,employers must address these challenges effectively.

 

**Consulting Services**

 

Ourglobal operations include five segments: Benefits, Technology andAdministration Solutions, Human Capital, Investment Consulting, and Insurance &Financial Services.  The percentages ofrevenues generated in the various groups are as follows:

 
| ** **                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Benefits Group                                 |       | 60       | %          | 59       | %          | 61       | %          |
| Human Capital  Group                           |       | 12       |       | 12       |       | 12       |       |
| Technology and  Administration Solutions Group |       | 11       |       | 12       |       | 12       |       |
| Investment  Consulting Group                   |       | 10       |       | 9        |       | 7        |       |
| Insurance &  Financial Services Group |       | 7        |       | 8        |       | 8        |       |
| Total Segment  Revenues                        |       | 100      | %          | 100      | %          | 100      | %          |

 

Formore information about our operating segments, see Note 12 of Notes to theConsolidated Financial Statements included in Item 15 of this report.

 

***Benefits Group***

 

TheBenefits Group – our largest and most established practice with 3,240associates – consists primarily of consulting practices in retirement, groupand health care, and international.  Itssteady increase in revenues is a result of our business combinations and strongorganic growth.  This group assistsclients in creating and managing cost-effective benefits programs that help ourclients attract, retain and motivate a talented workforce. Our Benefits Groupaccounted for approximately 60 percent of our total segment revenues for thefiscal year that ended June 30, 2008.

 

*Retirement Consulting*

 

Weare one of the world’s leading advisers on retirement plans, providingactuarial and consulting services for large defined benefit and definedcontribution plans including design, funding and risk managementstrategies.  We also help our clientsassess the effect that changing workforce demographics have on their retirementplans, cash flow requirements, and retiree benefit adequacy and security.

 

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Ourconsultants are the named actuaries and provide actuarial services to many ofthe world’s largest retirement plan sponsors. We provide actuarial services to three of the four largest corporatepension plans in the United States and are adviser to 46 of the 100 largestcorporate pension funds in the United Kingdom. As a result of our integration with Watson Wyatt Netherlands and theHeissmann acquisition, we now have market-leading positions in Germany and theNetherlands.

 

Weoffer clients a full range of integrated and innovative retirement consultingservices to meet the needs of all types of employers – including those thatcontinue to offer defined benefit plans and those that are reexamining theirretirement benefits strategies.  Forthose clients who want to outsource some or all of their pension planmanagement, we offer integrated solutions that combine investment consulting,pension administration, core actuarial services and communication assistance.

 

Ourretirement consulting services include:

 

·                  Actuarial services

·                  Analysis and recommendations on fundingstrategy

·                  Development and implementation of riskmitigation and management strategies

·                  Strategic plan design

·                  Administrative services

·                  Workforce diagnostics, analysis and planning

·                  Defined contribution services includingnondiscrimination testing and vendor selection

·                  Financial reporting

·                  Stock option and share plan financialaccounting

·                  Executive retirement benefits and assistancewith enhanced U.S. proxy disclosures

·                  Retiree health care design and valuation

·                  Assistance with changes relating to mergers,acquisitions and divestitures

·                  Development of compliance and governancestrategies

 

Ourretirement consulting services are supported by a strong focus on research andadvocacy for sound public policy.  We areleaders in the development and support of hybrid pension designs like cashbalance plans in the United States which are widely seen as the future of thedefined benefit system.

 

Muchof our recent consulting with clients relates to various regulatory changes(global accounting reform, U.S. and European pension funding legislation andnew rules on deferred compensation design) and a broad-based desire on thepart of many employers to revisit their retirement design approach.  We use unique data and analyses to provideperspective on the overall environment and to help our clients with theirdesign decisions.  For example, ourrecent survey of 300 large U.S. companies provides a unique view into thedesign decisions (both defined benefit and defined contribution) companies havemade in the past decade and what they are likely to do in the future.  We have also tracked the retirement designs ofthe largest U.S. public companies over many years, providing clients with datato better understand the true magnitude of the movement from defined benefit todefined contribution designs.

 

Tofurther enhance our retirement consulting services, we dedicate significantresources to technology systems and tools to ensure the consistency andefficiency of service delivery in all our offices worldwide. We also maintainextensive proprietary databases, such as Watson Wyatt COMPARISONTM, that enableour clients to track and benchmark benefit plan provisions.  Our tools and technology solutions include:

 

·                  PensionPath®– Consultants in our retirement practice and our Technology and AdministrationSolutions Group partner to deliver this full-featured, Web-based solutiondesigned to meet the pension administration needs of plan sponsors

 

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·                  OnePlace– A Web portal that helps our clients with the day-to-day management andgovernance of their plans and links easily with our global tools, research anddata

 

·                  FASTool– An interactive tool that allows the immediate comparison of income statementand balance sheet information and assumptions related to pension, stock option,and retiree medical plans for large, publicly traded U.S. companies

 

·                  QuickPeek® Online – A Web-enabled tool that allows pension plan sponsors to quicklyand easily model a variety of financial and business situations, and projectretirement plan contributions, funded status and expense

 

·                  DesignIT–  A modeling tool for our Europeanclients that provides comparisons between a selection of alternative pensiondesigns

 

·                  LiabilityWatch – Enables our European clients to keep daily track of their fundingposition

 

*Group and Health Care Consulting*

 

Weadvise clients on the strategy, design, financing, delivery, communication, andongoing planning and management of all health and welfare programs. Clientsseek our evidence-based, practical solutions to improve employee health,satisfaction and productivity while minimizing costs. We work closely with ourclients — matching their resources and capabilities with our methodologies,technology, and total compensation and benefits perspective.

 

Globally,many health care systems are strained by shrinking resources and increasingdemand due to population aging and changes in workers’ health status.  Our group and health care consulting serviceshelp clients provide health and welfare benefits to attract and retainqualified workers and enhance the health and productivity of their workforce.

 

Inthe United States, more employees are adopting consumer-oriented health careapproaches that encourage employees and retirees to participate more activelyin health care buying decisions. These models put workers in charge of spendingtheir own health care dollars and provide them with appropriateincentives,  tools and information tomake wiser health purchasing decisions. One of these tools is BenefitConnectTM – acustomizable, Web-based application that combines self-service employee toolswith administrative and call center components to facilitate the administrationand management of health and welfare benefits.

 

Ourapproach to group and health care consulting emphasizes health andproductivity, pharmacy, provider quality, effective communication, and data andmetrics.  Our global services include:

 

·            Strategicplan design of health and welfare, paid time off and flexible benefit plans

·            Retireehealth programs

·            Healthand productivity management, including onsite clinics

·            Healthand welfare technology solutions

·            Totalprogram management

·            Vendornegotiations, audits and performance management

·            Measurementof program effectiveness

·            Assistancewith plan changes relating to mergers, acquisitions and divestitures

 

***International Consulting***

 

Tohelp multinational companies face the challenges of operating in the globalmarketplace, Watson Wyatt provides expertise in dealing with internationalhuman resources and related finance issues for corporate headquarters and theiroverseas subsidiaries.

 

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Throughour global specialists and in cooperation with our local offices worldwide, wehelp multinational companies on a range of issues, including:

 

·                  Resolution of people issues in mergers andacquisitions

·                  Compliance and competitiveness of humancapital practices at all stages of the off-shoring lifecycle or expansionprocess

·                  Management of financial exposures andinvestment risks in benefit plans and determination of pension funding

·                  Development and support of multinationalgovernance procedures for managing employee benefit and worldwide rewardprograms

·                  Development of an international transferpolicy that meets the organization’s current and projected mobility needs

 

Weoffer several tools and research resources to help deliver these services,including:

 

·                  BenTrack– a powerful Web-based tool that helps multinational organizations manage theirbenefit and compensation programs across multiple territories – at any time,from any location.

 

·                  FAStrack– To facilitate global coordination for the various global accounting standardsrequirements, including IFRS, FAS87, FAS106 and FAS132R, Watson Wyatt hasdeveloped FAStrack GlobalTM, a Web-based program designed for local planactuaries to enter IFRS/FAS results by business unit, plan and/or country.

 

·                  GlobalSurvey of Accounting Assumptions for Defined Benefit Plans – an annual surveyof the accounting assumptions applied by major corporations for their definedbenefit plans around the world.

 

***Technology and Administration Solutions Group***

 

WatsonWyatt’s Technology and Administration Solutions Group helps organizationsoptimize the delivery of their human resources and benefit services. We do thisthrough a unique blend of domain expertise and experience in human resourcesand benefits, strong process capability and a range of enabling technologyapplications. We understand the importance of being able to both provide adviceon the appropriate solutions to meet human resource needs and to implement anddeliver those solutions on an ongoing basis, whether through outsourcedservices, in-house capabilities or a combination of the two.

 

OurTechnology and Administration Solutions Group of 840 associates providesconsulting, administration, outsourcing and technology services across humanresources, but focusing in particular on:

 

*RetirementAdministration*

 

Weprovide retirement administration solutions in a number of geographic areas,tailored to the needs of each local market:

 

·                  In the United States, our technology solutionPensionPath® includes case management and administration tools to assist plansponsors in managing the entire life cycle of pension administration, from newhire to retirement, and employee self-service tools that enhance workers’understanding of their retirement benefits’ future value.  PensionPath is available whether or notWatson Wyatt provides outsourcing services.

 

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·                  In the United Kingdom, we are among theleaders in retirement administration outsourcing services to the privatesector, using highly automated processes and modern transactional Webtechnology to enable members to access their records and improve their understandingof their benefits. Our technology also provides trustees and human resourceswith timely management information and the means to monitor activity levels andreduce administration costs.

 

·                  In markets where defined contribution (DC)arrangements are more complex than 401(k)-style plans, we have deployedsophisticated DC technology, processes and controls. Our DC administrationmodel in Germany and the United Kingdom leverages Web technology and providesclients with “back office” reconciliation and investment manager interactionexpertise, while offering the option to “flex” the front-office operations tobe as comprehensive as required. Participants can access static and transactional data allowing them tobe self-sufficient in managing their portfolios.

 

*Health &Welfare/FlexibleBenefits Administration*

 

·                  Flexible benefit plans exist in differentforms in different geographies, and we provide Web-enabled flexible benefitsadministration solutions to support clients in a number of different parts ofthe world.

 

·                  In the United States, flexible benefits tendto be focused primarily around health and welfare arrangements. BenefitConnectTMis our flexible Web-based health and welfare technology that we use to providecomprehensive outsourced support to clients. New health care consumerismsupport tools give participants direct Web-based access to their benefitsinformation and enrollment tools and provide modeling on a choice of medicalspending and savings accounts, as well as life insurance. They also helpparticipants become smart consumers through access to information on the WorldWide Web via the Internet.

 

·                  In the United Kingdom, we provide flexiblebenefits administration services on a stand-alone basis or linked with definedcontribution administration and the provision of total compensation statements.

 

*CompensationAdministration*

 

·                  REWARDTM is our suite of Web-basedapplications that automate compensation administration and pay delivery. REWARDimproves compensation planning, budgeting and data management, allowingcompensation professionals to focus on strategic activities by freeing themfrom administrative work.  We recentlyintegrated our global grading system methodology into REWARD, enablingcompanies to band and grade jobs and then model pay ranges around local marketconditions.

 

*IntegratedTalent Management Suite*

 

·                  Our integrated talent management suitecombines easy-to-use process automation with powerful decision support forperformance management, strategic workforce planning, rewards, successionplanning, recruiting, learning and career development. The system accommodatesa wide range of client processes, terminology and workflow without programming.

 

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*OnlineCommunication*

 

·                  eStatements is our integrated, Web-basedsolution that helps employees understand the true value of their compensationand benefits package.  It aggregates datafrom a number of internal and/or external sources, and provides a current viewof an employee’s complete package.  Itshows the value of an organization’s human resource programs, fosters smarterplan participation and benefit consumerism, and offers organizations anothervehicle to promote plan features, provide support and deliver other focused information.

 

*CallCenter Support*

 

·                  AnswerKeyTM is our shared service centersolution. Our technology supports the business of service center operations byeffectively integrating data and critical tools. Using Web-based technology, itconsolidates data from multiple sources, offering employees and human resourceservice center staff a single point of contact, faster response times and moreaccurate information.  We recently addedthe Employee Inquiry module, which enables employees to open cases, check casestatus, access knowledge base information and request fulfillment items.

 

*Portals*

 

·                  By implementing our hosted portals, we canhelp to ensure a seamless experience for employees needing to use multiplehuman resource and benefits applications or multiple information sources. Ourhosted portals can be central reference points and knowledge bases for pensionand human resource managers, administrators and members.

 

Allof the above are point solutions: applications or services that meet particular demands once clients haveidentified and prioritized their needs. Very often our involvement starts at amuch earlier level. We provide clients with strategic, research-based humanresource technology and service delivery advisory services to help them developtheir strategy for delivering human resource services. We work with them toalign their human resources delivery strategy with their business goals. We usehuman resource and benefits technologies, those mentioned above and others, tohelp our clients improve satisfaction levels and have a sustainable return oninvestment. Our services in this area include human resource transformationconsulting, vendor management and service delivery model development, includingshared services strategy and design.

 

OurTechnology and Administration Solutions Group represented approximately 11percent of our total segment revenues for the fiscal year ended June 30,2008.

 

***Human Capital Group***

 

OurHuman Capital Group of 850 associates helps clients implement strategies thatachieve a competitive advantage by aligning their workforce with their businessstrategy. This includes helping clients develop and implement strategies forattracting, retaining and motivating their employees, resulting in a maximizedreturn on clients’ investment in human capital. The Human Capital Group also utilizes our Watson Wyatt Data Servicespractice, which is a group of 300 associates that provide data, services andanalysis regarding compensation and benefits around the world.  Our Human Capital Group representedapproximately 12 percent of our total segment revenues for the fiscal yearended June 30, 2008.

 

OurHuman Capital Group focuses in six principal areas: executive compensation,Strategic Rewards*®*, salesmanagement and rewards, organization effectiveness, talent management and dataservices.

 

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*Executive Compensation*

 

Weadvise our clients’ management and boards of directors on executive payprograms, including cash compensation, stock options and stock purchaseplans.  We also work with them to aligntheir pay-for-performance plans throughout the organization to improveshareholder value. We help clients understand and value all the components oftheir executives’ compensation, including base pay, bonus, incentives, options,and retirement and other executive perks. Our expertise in stock-based plan design and in valuation methodologiesand procedures allows us to help U.S. clients, for instance, comply withcomplex accounting standards such as FAS 123(R) and SEC rules regardingexecutive compensation disclosure.

 

*Strategic Rewards®*

 

Wehelp align an organization’s global rewards – including base compensation,incentives, stock programs, recognition programs and flexible work arrangements– with its business strategies, cultural values, work design and humanresources strategy.  Our Human CapitalGroup and Benefits Group work together to develop integrated reward and talentmanagement programs for our clients.

 

*Sales Effectiveness and Compensation*

 

Wehelp maximize the performance of our clients’ sales and services teams acrossthe globe by aligning their sales force’s behavior with their organization’sbusiness strategy and compensation philosophy. By considering the full spectrumof rewards, we help motivate our clients’ sales forces to maintain and expandcritical relationships while executing the organization’s go-to-marketstrategy.

 

*Organization Effectiveness*

 

Wehelp clients clarify and implement business strategy, recognizing the impact ofemployee attitudes, commitment, and effective team and leadership developmenton business success. We provide a wide array of services centered onorganization assessment, including organization measurement and surveys. Wealso provide consulting regarding organization design and the organization anddevelopment of the human resource function.

 

Wedeveloped the *Watson Wyatt Human Capital Index*â, a proprietary tool for demonstrating therelationship between the effectiveness of an organization’s human capitalpractices and the creation of superior returns to shareholders.

 

OurGlobal WorkAttitudes database includes the opinions of thousands of employeesworldwide, surveyed independently, reflecting a large cross-section ofjobs and industry types. Our clients compare their own employee survey resultsagainst these norms to identify workplace perceptions and satisfaction andcommitment levels.

 

*Talent Management*

 

Wehelp organizations bring the same clarity, discipline and objectivity tomanaging talent as they do to other critical business operations.  Our proven tools and methodologies helpcompanies maximize their return on people through outstanding performance management,strategic workforce planning, rewards, succession planning, recruiting,learning and career development.

 

*Watson Wyatt Data Services*

 

WatsonWyatt Data Services (WWDS) provides a wide range of employment practicesinformation to the global employer community. WWDS’s client base includeslocal and multi-national companies in more than 80 countries.

 

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Toserve the global marketplace, WWDS has begun a consolidation of eightstrategically located data centers around the globe into one business unit tofacilitate the solicitation, analysis and compilation of data on theremuneration and benefits paid to millions of employees. Our centers around theworld publish this data in dozens of annual compensation and benefit surveyreports on everything from local pay issues to the most complex of globalpay equity concerns. WWDS also publishes reference materials that helphuman resources practitioners attract, retain and reward exceptional employees.These guides cover a variety of subject areas, including variable pay,performance management and personnel policies on a local, regional and globalbasis.

 

***Investment Consulting Group***

 

OurInvestment Consulting Group, with approximately 450 associates, helps pensiontrusts and other institutional clients successfully meet their investmentgoals. This involves helping optimize risk-adjusted returns through developmentof appropriate governance, policies and strategies. Our work involves helpingour clients with the design and implementation of investment arrangements tomanage and decrease financial liabilities within a context of overallorganizational objectives. Our Investment Consulting Group representedapproximately 10 percent of our total segment revenues for the fiscal yearended June 30, 2008.

 

Ourservices include:

 

·                  Asset/liabilitymodeling, risk budgeting and asset allocation studies

·                  Governanceconsulting and investment policy development

·                  Investmentpolicy implementation

·                  Analysisof structured products

·                  Investmentmanager selection and monitoring

·                  Performanceevaluation and monitoring

 

Weoffer the following integrated services for our clients:

 

·                  WatsonWyatt Pension Risk ManagementTM – an integrated methodology for determining theappropriate amount of investment risk for a pension plan and allocating that riskacross investment decisions

 

·                  WatsonWyatt Advanced Investment Solutions® – taking a more proactive responsibilityfor the investment arrangements of institutional funds, a service referred toin some markets as fiduciary outsourcing. We work with the plan sponsor to develop investment policy and help tomanage the implementation of that policy

 

***Insurance & Financial Services Group***

 

OurInsurance & Financial Services consulting team of approximately 420associates advises insurance companies and other financial institutions onstrategic and financial issues. Clients include major multinational financialgroups; life, non-life and health insurance companies; re-insurers; selfinsurers; captives; banks and regulators. Our Insurance & FinancialServices Group represented approximately 7 percent of our total segmentrevenues for the fiscal year ended June 30, 2008.

 

Our services include:

 

·                  Development and review of business strategy,including market-entry studies and business plan design

·                  Provision of strategic and actuarial adviceto buyers or sellers of financial institutions

·                  Advice on a wide range of financialmanagement issues, including risk and value management, asset liabilitymodeling, statutory reporting, embedded value and market-consistent valuations

 

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We have also developed arange of leading-edge actuarial modeling software products, including VIP*itech*, Pretium and Simulum. These are used internally forconsulting projects and licensed to clients around the world.

 

***Other Services***

 

*Communication Consulting*

 

Ourcommunication consulting practice helps clients produce financial resultsthrough strategies that align employee behavior with business success.  Our award-winning work and our six years ofground-breaking *Communication ROI*research provethat effective communication:

 

·                  Increases total returns to shareholders

·                  Improves service, quality and productivitylevels

·                  Helps fuel growth

·                  Enhances organizational ability to managechange successfully

·                  Builds employee community, trust andcommitment

·                  Educates, engages and motivates employees

 

Workingwith clients who have responsibility for employee communication in humanresources, corporate or line functions, our consultants combine strong creativeskills with technical excellence to create programs that range from high-levelstrategic planning to tactical implementation.

 

Wehelp clients develop and implement communication strategies for diverse issues,including:

 

·                  Clarifyingthe value and scope of employee compensation and benefits, and enhancingemployees’ appreciation of their total rewards opportunities

·                  Drawinga clear line of sight between employee performance and company objectivesthrough open communication and leadership communication training

·                  Optimizingthe use of technology in communication through audits and best-practice design

·                  Facilitatingorganizational change so that all stakeholders fully understand their role inbusiness success

·                  Maintainingemployee trust, confidence and commitment through all cycles of performance

·                  Demonstratingthe return on investment of employee communication in achieving businessobjectives

·                  Supportingmanagement in efforts to target, attract and hire the right talent to meetbusiness objectives through innovative communication programs

 

***Integrated Service Approach***

 

Whilewe focus our consulting services in the principal areas described above, wedraw upon consultants from across practices and geographies to deliver integratedservices to meet the needs of our clients. An example is our Total Rewardsapproach, which encompasses compensation, benefits, career growth and companyculture. We help clients around the world determine the correct mix of rewardprograms to attract and retain the right employees and to motivate them toproduce desired results.  We alsoassemble cross-practice teams to help clients through mergers and acquisitions.

 

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***Sales and Marketing***

 

Ourgrowth strategy is based on a commitment to ensuring client satisfactionthrough our account management program. Our account managers focus on effectively delivering services to clientsand on expanding our relationships across service lines, geographic boundariesand divisions within client organizations. A key element of this program is an approach we call ClientFirstTM.Using proprietary processes and tools, we work with clients to define theirneeds and expectations before an engagement begins, and then continuallymeasure our performance according to agreed-upon standards.

 

Wepursue new clients using cross-disciplinary teams of consultants, as well asdedicated client developers who initiate relationships with carefully selectedcompanies. Our efforts to expand our accounts and our client base are supportedby market research, comprehensive sales training programs and extensive marketingdatabases. Our sales efforts are also supported by a full array of marketingprograms designed to raise awareness of the Watson Wyatt Worldwide brand andour reputation within our target markets. These programs promote our thoughtleadership on key human resource issues, and establish us as a preferred humancapital and financial services consulting firm to many of the world’s largestcompanies.

 

**Clients**

 

Wework with major corporations, emerging growth companies, government agenciesand not-for-profit institutions in North America, Europe, Asia-Pacific, LatinAmerica, Africa and the Middle East across a wide variety of industries.  Our client base is broad and geographicallydiverse.  For the fiscal year ended June 30,2008, our 10 largest clients accounted for approximately 5 percent of ourconsolidated revenues, while no individual client represented more than 1percent of our consolidated revenues.

 

**Competition**

 

Thehuman capital consulting industry is highly competitive.  We believe there are several barriers toentry – such as the need to assemble specialized intellectual capital toprovide expertise on a global scale – and that we have developed competitiveadvantages in providing human resources consulting services. However, we faceintense competition from several different sources.

 

Ourcurrent and anticipated competitors include:

 

·             Majorhuman resources-focused consulting firms that compete in serving the largeemployer market worldwide, including Hewitt Associates, Mercer and TowersPerrin

 

·             Smallerbenefits and compensation consulting firms, including the Hay Group and TheSegal Company

 

·             Thehuman resources consulting and/or plan administration divisions of diversifiedprofessional services, financial services and insurance firms, including Aon,Deloitte & Touche, Ernst & Young, Fidelity, Citistreet,PricewaterhouseCoopers and The Vanguard Group

 

·             Informationtechnology services firms, including Accenture, ACS, ADP, BearingPoint,ExcellerateHRO and IBM, as well as Internet/intranet development firms

 

·             Boutiqueconsulting firms consisting primarily of professionals formerly associated withthe firms mentioned above

 

Themarket for our services is subject to change as a result of increasedregulatory, legislative, competitive and technological developments andcompetition from established and new competitors.  We believe the primary factors in selecting ahuman resources consulting firm include reputation, the ability to providemeasurable increases to shareholder value, global scale, service quality andthe ability to tailor services to a clients’ unique needs.  We believe we compete favorably with respectto these factors.

 

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**Employees**

 

Thecompany employed approximately 7,230 and 6,600 associates as of June 30,2008 and 2007 respectively, in the following practice areas:

 
| ** **                                     | ** ** | **As of June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| Benefits Group                                 |       | 3,240                             |       | 2,900 |   |
| Technology and  Administration Solutions Group |       | 840                               |       | 735 |   |
| Human Capital  Group                           |       | 850                               |       | 885 |   |
| Investment  Consulting Group                   |       | 450                               |       | 325 |   |
| Insurance &  Financial Services Group |       | 420                               |       | 390 |   |
| All Other  Segments                            |       | 810                               |       | 785 |   |
| Corporate                                      |       | 620                               |       | 580 |   |
| Total                                          |       | 7,230                             |       | 6,600 |   |

 

Theincrease in headcount is primarily due to the acquisition of Heissmann at thebeginning of fiscal year 2008 which accounts for 360 associates, all of whichwere in the Benefits group.  None of ourassociates are subject to collective bargaining agreements.  We believe relations between management andassociates are good.

 

**Item 1A – Risk Factors**

 

Inaddition to the factors discussed elsewhere in this report, the following aresome of the important factors that could cause our actual results to differmaterially from those projected in any forward-looking statements. These riskfactors should be carefully considered in evaluating our business.  The descriptions below are not the only risksand uncertainties that we face. Additional risks and uncertainties that are presently unknown to us, mayalso impair our business operations, financial condition or results. If any ofthe risks and uncertainties below or other risks were to occur, our businessoperations, financial condition or results of operations could be materiallyand adversely impacted.

 

***Watson Wyatt’s success willcontinue to depend on its ability to recruit and retain qualified consultants,including those employed in recently acquired businesses; our failure to do socould adversely affect our ability to continue to integrate acquired businessesand to compete successfully******.***

 

Watson Wyatt’s success depends on its ability toattract, retain and motivate qualified personnel generally, including executiveofficers, key management personnel and consultants. We cannot assure that wewill be able to attract and retain qualified consultants, management and otherpersonnel necessary for the delivery of our sophisticated and technicalservices to clients.

 

***The loss of key consultants and managers could damage or result in the loss of client relationships and adversely affect our business.***

 

Our success largelydepends upon the business generation capabilities and project execution skillsof our consultants. In particular, our consultants’ personal relationships withour clients are a critical element of obtaining and maintaining client engagements.Losing consultants and account managers who manage substantial clientrelationships or possess substantial experience or expertise could adverselyaffect our ability to secure and complete engagements, which would adverselyaffect our results of operations. In addition, if any of our key consultantswere to join an existing competitor or form a competing company, existing andpotential clients could choose to use the services of that competitor insteadof our services. There can be no assurance that confidentiality andnon-competition agreements signed by senior consultants will be effective inpreventing a loss of business.

 

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***The trend of employers shifting fromdefined benefit plans to defined contribution plans could adversely affect ourbusiness and our operating results.***

 

We currently provide clients with actuarial and consulting services relating to both defined benefit and defined contribution plans.  Defined benefit pension plans generally require more actuarial services than defined contribution plans because defined benefit plans typically involve large asset pools, complex calculations to determine employer costs, funding requirements and sophisticated analysis to match liabilities and assets over long periods of time.  If organizations shift to defined contribution plans more rapidly than we anticipate, our business operations and related operating results could be adversely affected.

 

***We are subject to risks of doing businessinternationally.***

 

Asa result of our international acquisitions over the past three fiscal years, anincreased portion of our business is located outside of the United States. As aresult, a significant portion of our business operations are subject to foreignfinancial and business risks, which could arise in the event of:

 

·                  currencyexchange rate fluctuations;

 

·                  unexpectedincreases in taxes;

 

·                  compliancewith a variety of international laws, as well as U.S. laws affecting theactivities of U.S. companies abroad ;

 

·                  newregulatory requirements and/or changes in policies and local laws thatmaterially affect the demand for our services or directly affect our foreignoperations;

 

·                  localeconomic and political conditions, including unusual, severe, or protractedrecessions in foreign economies;

 

·                  unusualand unexpected monetary exchange controls; or

 

·                  civildisturbance or other catastrophic events that reduce business activity in otherparts of the world.

 

Thesefactors may lead to decreased sales or profits and therefore may have amaterial adverse effect on our business, financial condition and operatingresults.

 

***Competition from firms with greater resources could result in loss of our market share and reduced profitability.***

 

The markets for our principal services are highly competitive. Our competitors currently include other human resources consulting and actuarial firms, as well as the human resources consulting divisions of diversified professional services and insurance firms and accounting firms. Several of our competitors have greater financial, technical and marketing resources than we have, which could enhance their ability to respond more quickly to technological changes, finance acquisitions and fund internal growth. Some competitors may have or may develop a lower cost structure. New competitors or alliances among competitors could emerge, creating additional competition and gaining significant market share.  In order to respond to increased competition and pricing pressure, we might have to lower our prices, which would have an adverse effect on our revenues and profit margin.

 

***Demand for our services may decrease for various reasons, including a general economic downturn, a decline in a client’s or an industry’s financial condition or prospects, or a decline in defined benefit pension plans that could adversely affect our operating results.***

 

We can give no assurance that the demand for our services will continue to grow or that we will compete successfully with our existing competitors, new competitors or our clients’ internal capabilities.  Our clients’ demand for our services may change based on their own needs and financial conditions.  

 

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Economic downturns or slowdowns in markets that we serve or affecting particular clients or industry groups that we serve, may reduce the use of outside consultants, which could reduce the demand for our services, increase price competition and adversely impact our growth and profit margins.

 

In addition, the demand for many of our core benefits services, including compliance-related services is affected by government regulation and taxation of employee benefits plans. Significant changes in tax or social welfare policy or regulations could lead some employers to discontinue their employee benefit plans, including defined benefit pension plans, thereby reducing the demand for our services. A simplification of regulations or tax policy also could reduce the need for our services.

 

***Our clients generally may terminate our services at any time, which could decrease associate utilization, adversely impacting our profitability and results of operation.***

 

Our clients generally may terminate our engagements at any time. If a client reduces the scope of, or terminates the use of our services with little or no notice, our associate utilization will decline. In such cases, we must rapidly re-deploy our associates to other engagements in order to minimize the potential negative impact on our financial performance.  In addition, because much of our work is project-based rather than recurring in nature, our associates’ utilization depends on our ability to continually secure additional engagements.

 

***Improper management of our fixed-fee engagements could hurt our financial results.***

 

We enter into some of our engagements on a negotiated fixed-fee basis. If we do not properly negotiate the price and manage the performance of these engagements, we might incur losses on individual engagements and experience lower profit margins, and our overall financial results could be adversely affected.

 

***We are subject to malpractice claims arising from our work, which could adversely affect our reputation and business, and we are subject to government inquiries and investigations.***

 

Professional services providers, including those in the human resources and financial services consulting industry, are subject to claims from their clients. Clients and third parties who are dissatisfied with our services or who claim to suffer damages caused by our services have brought and may bring lawsuits against us. The nature of our work, especially our actuarial services, involves assumptions and estimates concerning future events, the actual outcome of which we cannot know with certainty in advance. In addition, we could make computational, software programming or data management errors.

 

Clients have sought and may seek to hold us responsible for the financial consequences of these errors or variances.  Given that we frequently work with large pension funds and other large financial entities, such as insurance companies, relatively small percentage errors or variances could create significant dollar variances and claims for unfunded liabilities.  The risks from such variances could be aggravated in an environment of declining pension fund asset values. In most cases, our exposure to liability on a particular engagement is substantially greater than the profit opportunity that the engagement generates for us.  For example, claims could include:

 

·                  A client’s assertion that actuarial assumptions used in a pension plan were unreasonable, leading to plan underfunding;

 

·                  A claim arising out of the use of inaccurate data, which could lead to an underestimation of plan liabilities;

 

·                  A claim that employee benefit plan documents were misinterpreted or plan amendments were misstated in plan documents, leading to overpayments to beneficiaries; and

 

·                  A claim that reserves or premium requirements of insurance company clients were understated.

 

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Defending lawsuits arising out of any of our services has required and could require substantial amounts of management attention, which could affect management’s focus on operations, adversely affect our financial performance and result in increased insurance costs. In addition to defense costs and liability exposure, malpractice claims may produce negative publicity that could hurt our reputation and business.

 

We have been subject to inquiries and investigations by federal, state or other governmental agencies regarding aspects of our business, especially regulated businesses such as investment consulting or insurance consulting.  Such inquiries or investigations may consume significant management time and require additional expense. For a discussion of significant legal proceedings and investigations, please refer to Note 13 of Notes to the Consolidated Financial Statements.

 

***Insurance may become more difficult or expensive to obtain******.***

 

Insurance markets have hardened over recent yearsfor some classes of professional liability risk.  As the number of claims has increased againstprofessionals and against actuaries in particular, the cost of malpracticeinsurance has trended upward, deductibles or self-insured retentions have increasedand levels at which reinsurance will cover losses have risen; these adversetrends may continue.  Availability andprice of insurance are subject to many variables, including general marketconditions, loss experience in related industries and in the actuarial andbenefits consulting industry, and the specific claims experience of anindividual firm. Because we now provide services in a larger geographic marketas a result of our business combinations, we therefore may be exposed to agreater number of claims arising from our expanded operations.  In the future there can be no assurance thatwe will continue to be able to obtain insurance on comparable terms to what wehave obtained in the past. Increases in the cost of insurance could affect ourprofitability and the unavailability of insurance to cover certain levels ofrisk could have an adverse effect on our financial condition, particularly in aspecific period.

 

***We are engaged, through oursubsidiaries, in providing services outside of our core human resourcesconsulting business, which may carry greater risk of liability.***

 

We intend to continue to grow the business ofproviding consulting services to institutional investment and insurance andfinancial services companies. The risk of malpractice claims from these linesof business may be greater than from our core human resource consultingbusiness and claims may be for significant amounts. Contractual provisionsintended to mitigate risk may not be enforceable in litigation or in somejurisdictions or in connection with claims involving breaches of fiduciary dutyor other alleged errors or omissions.

 

***Our quarterly revenues may fluctuate while our expenses are relatively fixed.***

 

Quarterlyvariations in our revenues and operating results occur as a result of a numberof factors, such as:

 

·                  The significance of client engagements commenced and completed during a quarter;

 

·                  The seasonality of some specific types of services.  In particular, retirement revenues are more heavily weighted toward the second and third quarters of the fiscal year, when annual actuarial valuations are required to be completed for calendar year end companies and the related services are performed.  In the Technology and Administration Solutions Group, the distribution of work is concentrated at the end of the first fiscal quarter and through the second fiscal quarter, as there is demand from our clients for assistance in updating systems and programs used in the annual re-enrollment of employees in benefit plans, such as flex plans. Much of the remaining business is project-oriented and is thus influenced more by particular client needs and the availability of our workforce;

 

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·                  The number of business days in a quarter, associate hiring and utilization rates and clients’ ability to terminate engagements without penalty;

 

·                  The size and scope of assignments; and

 

·                  General economic conditions.

 

Approximately 70-75 percent of our total operating expenses are relatively fixed, encompassing the majority of administrative, occupancy, communications and other expenses, depreciation and amortization, and salaries and employee benefits excluding fiscal year end incentive bonuses.  Therefore, a variation in the number of client assignments or in the timing of the initiation or the completion of client assignments can cause significant variations in quarterly operating results and could result in losses.  Over the most recent eight fiscal quarters, net income from continuing operations has fluctuated from $24.8 million to $42.5 million.

 

***Our business faces rapid technological change and our failure to respond to this change quickly could adversely affect our business.***

 

Increasingly, to remain competitive in our practice areas, we must identify and offer the most current technologies and methodologies. This is particularly true of our Technology and Administration Solutions Group, in which our success largely depends upon our ability to quickly absorb and apply technological advances in both generic applications and, particularly, those that are specifically required to deliver employee benefits services. In some cases, significant technology choices and investments are required. If we do not respond correctly, quickly or in a cost-effective manner, our business and operating results might be harmed.

 

The effort to gain technological expertise and develop new technologies in our business may require us to incur significant expenses and, in some cases, to implement them globally. If we cannot offer new technologies as quickly or effectively as our competitors, we could lose market share. We also could lose market share if our competitors develop more cost-effective technologies than we offer or develop.

 

***Limited protection of our proprietary expertise, methodologies and software could harm our business.***

 

We cannot guarantee that trade secret, trademark and copyright law protections are adequate to deter misappropriation of our confidential information.  We may be unable to detect the unauthorized use of our intellectual property and take the necessary steps to enforce our rights.  Redressing infringements also may consume significant management time and financial resources.

 

***We have various mechanisms in place that may prevent a change in control that a stockholder might favor.***

 

Our certificate of incorporation and bylaws contain provisions that might discourage, delay or prevent a change in control that a stockholder might favor. Our certificate of incorporation and/or bylaws:

 

·                  Authorize the issuance of preferred stock without fixed characteristics that could be issued by our board of directors to increase the number of outstanding shares and deter a takeover attempt;

 

·                  Provide that only the President or our board of directors may call a special meeting of stockholders;

 

·                  Prohibit stockholder action by written consent, which requires all actions to be taken at a meeting of the stockholders;

 

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·                  Provide that vacancies on our board of directors, including new directorships, may be filled only by the directors then in office;

 

·                  Require super-majority voting for the stockholders to amend our bylaws and other provisions of our certificate of incorporation;

 

·                  Prohibit a stockholder from presenting a proposal or director nomination at an annual meeting unless the stockholder provides us with sufficient advance notice.

 

**Item 1B. Unresolved SEC Comments**

 

None.

 

**Item 2. ****Properties.**

 

Asof June 30, 2008, we operated in 107 offices in principal marketsthroughout the world.  Operations of eachof our segments are carried out in leased offices under operating leases thattypically do not exceed 10 years in length. We do not anticipate difficulty inmeeting our space needs at lease expiration.

 

Thefixed assets owned by Watson Wyatt represented approximately 11 percent oftotal assets at June 30, 2008, and consisted primarily of computerequipment and software, office furniture and leasehold improvements.

 

**Item 3. ****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 Item 3 regarding our legal proceedings isincorporated by reference herein from Note 13 “Commitments and ContingentLiabilities,” of the Notes to the Consolidated Financial Statements in this Form 10-Kfor the year ended June 30, 2008.

 

**Item 4.  Submission of Matters toa Vote of Security Holders.**

 

None.

 

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**Part II**

 

**Item 5. ****Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities.**

 

Inconjunction with our WWLLP business combination in the first quarter of fiscalyear 2006, we issued 9,090,571 Class A shares, 4,749,797 of which weresubject to sale restrictions.  Salerestrictions on 2,339,761 of these shares expired July 31, 2006.  Restrictions on the remaining 2,410,036shares expired July 31, 2007.

 

Anadditional 1,950,000 shares were paid to the former partners of WWLLP on April 15,2008, after the achievement by the acquired business of certain agreed-uponfinancial performance goals.  Sale ofthese shares will be restricted until July 31, 2009.  See Note 2 of Notes to the ConsolidatedFinancial Statements included in Item 15 of this report for further informationregarding the WWLLP business combination. The diluted earnings per sharecalculation assumes these shares had been issued since July 31, 2005.

 

In conjunction with itsacquisition of WWN on February 1, 2007, the company issued 252,285 Class Acommon shares which were subject to contractual transfer restrictions.  Transfer restrictions on 50% of these sharesexpired on February 1, 2008. Transfer restrictions on the remaining shares will expire on February 1,2009.  An additional 218,089 shares wereissued to the former partners of WWN on June 27, 2008 after achievement bythe acquired business of certain financial performance goals. Sale of theseshares will be subject to contractual transfer restrictions that will expire on50% of these shares on each of the first and second anniversaries of issuanceof the shares. The diluted earnings per share calculation assumes these shareshad been issued at the beginning of fiscal year 2008.

 

*Market Information*

 

WatsonWyatt Worldwide, Inc. Class A common stock is currently traded on theNew York Stock Exchange and NASDAQ under the symbol WW.  The following table sets forth the range ofhigh and low closing share prices for each quarter of fiscal years 2008 and2007, determined by the daily closing stock prices.

 
| ** **                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|                                                      |       |     |       |     |       |   |   |   |   |
| First quarter  (July 1 through September 30)    |       | $        | 51.19      |     | $          | 43.00 |   | $ | 41.60 |   | $ | 31.70 |   |
| Second quarter  (October 1 through December 31) |       | 49.82    |       | 43.90    |       | 48.00 |   | 39.98 |   |
| Third quarter  (January 1 through March 31)     |       | 58.40    |       | 43.10    |       | 50.69 |   | 40.92 |   |
| Fourth quarter  (April 1 through June 30)       |       | 60.22    |       | 52.89    |       | 53.84 |   | 47.01 |   |
|                                                           |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

*Holders*

 

Asof June 30, 2008, there were approximately 380 registered shareholders ofour Class A common stock.

 

*Dividends*

 

Theboard of directors of the company has approved the payment of a quarterly cashdividend in the amount of $0.075 per share. Total dividends paid in fiscal years 2008 and 2007 were $12.8 millionand $12.7 million, respectively.

 

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Thecontinued payment of cash dividends in the future is at the discretion of ourboard of directors and depends on numerous factors, including, withoutlimitation, our net earnings, financial condition, availability of capital,debt covenant limitations and our other business needs, including those of oursubsidiaries and affiliates. Additionally, our credit facility requires us toobserve certain covenants, including requirements for minimum net worth, whichpotentially act to restrict dividends.

 

##### *Securities Authorized for IssuanceUnder Equity Compensation Plans*

 

Ourequity compensation plans include the 2000 Long-Term Incentive Plan, whichprovides for the granting of nonqualified stock options and stock appreciationrights, the 2001 Employee Stock Purchase Plan, the 2001 Deferred Stock UnitPlan for Selected Employees and the Amended Compensation Plan for OutsideDirectors.  We grant deferred stock unitsto certain senior associates through the Watson Wyatt & CompanyPerformance Share Bonus Incentive Program as a part of their annualdiscretionary compensation and have discontinued the issuance of stockoptions.  All deferred stock units issuedin connection with the 2001 Deferred Stock Unit Plan were fully vested uponissuance.  All of our equity compensationplans have been approved by stockholders. See Note 9****of the Notes to the ConsolidatedFinancial Statements for the general terms of these plans.

 

Thefollowing chart gives aggregate information regarding grants under all of thecompany’s equity compensation plans through June 30, 2008:

 
| **Plan Category**                              | ** ** | **Number of shares to  be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options** | ** ** | **Number of shares  remaining available  for future issuance  under equity  compensation plans  (excluding shares  reflected in the first  column)** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                |       |                                                                                                                                         |       |                                                                        |       |                                                                                                                                                                                                        |       |
| Equity  compensation plans approved by stockholders |       | 7,676                                                                                                                                        |       | $                                                                           | 21.73      |                                                                                                                                                                                                        | 4,237,700  | (1) |
|                                                     |            |                                                                                                                                              |            |                                                                             |            |                                                                                                                                                                                                             |            |  |

 

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(1) Includes2,548,915 shares remaining available for future issuance under the 2000Long-Term Incentive Plan, 420,714 shares under the 2001 Employee Stock PurchasePlan, 1,191,026 shares under the 2001 Deferred Stock Unit Plan for SelectedEmployees, and 77,045 shares under the Amended Compensation Plan for OutsideDirectors.

 

InAugust 2001, the board of directors adopted the company’s 2001 EmployeeStock Purchase Plan (the “ESPP”), which subsequently was approved by thestockholders in November 2001.  TheESPP is intended to provide employees of the company with additional incentivesby permitting them to acquire a proprietary interest in the company through thepurchase of shares of the company’s common stock.  With regard to the Deferred Stock Unit Planfor Selected Employees, an additional 1,200,000 shares of common stock wereauthorized and reserved for issuance at the 2006 Annual Meeting of Stockholdersin November 2006.

 

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*PerformanceGraph*

 

Thisinformation is incorporated by reference to the definitive Watson WyattWorldwide, Inc. Proxy Statement to be filed with the Securities and ExchangeCommission not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K.

 

*IssuerPurchases of Equity Securities*

 

Thetable below presents specified information about the company’s stockrepurchases during the fourth quarter of fiscal year 2008 and the remainingnumber of shares that may be purchased under the plan:

 
| **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** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                           | ** ** | ** **                                       | ** ** | ** **                                                                                                                       | ** ** | ** **                                                                                                                      | ** ** |
| April 1,  2008, through April 30, 2008 |       | 110,000                                              |       | $                                                | 58.14      |                                                                                                                             | 110,000    |                                                                                                                            |       |   |
| May 1,  2008, through May 31, 2008     |       | 165,000                                              |       | 59.17                                            |       | 165,000                                                                                                                          |       |                                                                                                                            |       |
| June 1,  2008, through June 30, 2008   |       | 210,000                                              |       | 56.57                                            |       | 210,000                                                                                                                          |       |                                                                                                                            |       |
| Total                                            |       | 485,000                                              |       |                                             |       | 485,000                                                                                                                          |       | 1,854,370                                                                                                                       |       |
|                                                  |            |                                                      |            |                                                  |            |                                                                                                                                  |            |                                                                                                                                 |            |  |

 

On February 11,2008, the company’s Board of Directors approved the repurchase of up to $100million of the company’s Class A Common Stock.  The remaining number of shares that may bepurchased under this plan is approximately 1,071,322 shares, estimated by usingthe market closing price on June 30, 2008 of $52.89 per share.

 

During the firstquarter of fiscal year 2007, the company’s Board of Directors approved therepurchase of up to 1,500,000 shares of our Class A Common Stock.  The maximum number of shares remaining to berepurchased under this plan is 783,048.

 

**Item 6.  Selected ConsolidatedFinancial Data**

 

The table on the following page setsforth selected consolidated financial data of Watson Wyatt for each of theyears in the five-year period ended June 30, 2008.  The selected consolidated financial data asof June 30, 2008 and 2007, and for each of the three years in the periodended June 30, 2008, were derived from the audited consolidated financialstatements of Watson Wyatt included in this Form 10-K.  The selected consolidated financial data asof June 30, 2006, 2005 and 2004, and for each of the years ended June 30,2005 and 2004, were derived from audited consolidated financial statements ofWatson Wyatt not included in this Form 10-K.  The consolidated financial data should beread in conjunction with our Consolidated Financial Statements and notesthereto.

 

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| ** **                                              | ** ** | **Year Ended June 30** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Statement  of Operations Data:**                      |       |                                  |       |   |   |   |   |   |   |   |   |
| (amounts are in  thousands, except per share data)      |       |                                  |       |   |   |   |   |   |   |   |   |
| Revenue                                                 |       | $                                     | 1,760,055  |   | $ | 1,486,523 |   | $ | 1,271,811 |   | $ | 737,421 |   | $ | 702,005 |   |
| Costs of  providing services:                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Salaries and  employee benefits                         |       | 970,236                               |       | 805,571 |   | 699,049 |   | 397,252 |   | 396,775 |   |
| Professional and  subcontracted services                |       | 105,896                               |       | 99,943 |   | 84,165 |   | 57,810 |   | 49,159 |   |
| Occupancy,  communications and other                    |       | 208,058                               |       | 184,832 |   | 164,140 |   | 106,752 |   | 105,459 |   |
| General and  administrative expenses                    |       | 176,664                               |       | 159,637 |   | 147,122 |   | 74,612 |   | 63,631 |   |
| Depreciation and  amortization                          |       | 72,428                                |       | 57,235 |   | 44,918 |   | 20,210 |   | 18,511 |   |
|                                                    |       | 1,533,282                             |       | 1,307,218 |   | 1,139,394 |   | 656,636 |   | 633,535 |   |
|                                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Income from  operations                                 |       | 226,773                               |       | 179,305 |   | 132,417 |   | 80,785 |   | 68,470 |   |
|                                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Income/(loss)  from affiliates                          |       | 2,067                                 |       | (5,500 | ) | 1,135 |   | 7,146 |   | 7,109 |   |
| Interest income                                         |       | 5,584                                 |       | 4,066 |   | 4,325 |   | 2,833 |   | 1,636 |   |
| Interest expense                                        |       | (5,977                                | )          | (1,581 | ) | (4,093 | ) | (661 | ) | (893 | ) |
| Other  non-operating income/(loss)                      |       | 464                                   |       | 178 |   | (2,081 | ) | (7,404 | ) | 6,222 |   |
| Income from  continuing operations before income taxes  |       | 228,911                               |       | 176,468 |   | 131,703 |   | 82,699 |   | 82,544 |   |
| Provision for  income taxes                             |       | 73,470                                |       | 60,193 |   | 45,585 |   | 31,303 |   | 32,605 |   |
| Income from  continuing operations                      |       | 155,441                               |       | 116,275 |   | 86,118 |   | 51,396 |   | 49,939 |   |
| Discontinued  operations (a)                            |       | —                                |       | — |   | 1,073 |   | 766 |   | 654 |   |
| Net income                                              |       | $                                     | 155,441    |   | $ | 116,275 |   | $ | 87,191 |   | $ | 52,162 |   | $ | 50,593 |   |
| Earnings per  share, continuing operations, basic       |       | $                                     | 3.65       |   | $ | 2.74 |   | $ | 2.08 |   | $ | 1.58 |   | $ | 1.52 |   |
| Earnings per  share, continuing operations, diluted (b) |       | $                                     | 3.50       |   | $ | 2.60 |   | $ | 1.99 |   | $ | 1.56 |   | $ | 1.50 |   |
| Earnings per  share, discontinued operations, basic     |       | $                                     | —     |   | $ | — |   | $ | 0.03 |   | $ | 0.02 |   | $ | 0.02 |   |
| Earnings per  share, discontinued operations, diluted   |       | $                                     | —     |   | $ | — |   | $ | 0.02 |   | $ | 0.02 |   | $ | 0.02 |   |
| Earnings per  share, net income, basic (b)              |       | $                                     | 3.65       |   | $ | 2.74 |   | $ | 2.11 |   | $ | 1.60 |   | $ | 1.54 |   |
| Earnings per  share, net income, diluted (b)            |       | $                                     | 3.50       |   | $ | 2.60 |   | $ | 2.01 |   | $ | 1.58 |   | $ | 1.52 |   |
| Dividends  declared per share                           |       | $                                     | 0.30       |   | $ | 0.30 |   | $ | 0.30 |   | $ | 0.30 |   | $ | 0.07 |   |
| Weighted average  shares of common stock, basic         |       | 42,577                                |       | 42,413 |   | 41,393 |   | 32,541 |   | 32,866 |   |
| Weighted average  shares of common stock, diluted       |       | 44,374                                |       | 44,684 |   | 43,297 |   | 32,845 |   | 33,207 |   |

 

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| ** **                         | ** ** | **As of June 30** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Balance  Sheet and Other Data:** |       |                             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents         |       | $                                | 124,632    |   | $ | 248,186 |   | $ | 165,345 |   | $ | 168,076 |   | $ | 136,940 |   |
| Working capital                    |       | 172,241                          |       | 326,354 |   | 197,312 |   | 236,658 |   | 207,455 |   |
| Total assets                       |       | 1,715,976                        |       | 1,529,709 |   | 1,240,359 |   | 618,679 |   | 512,168 |   |
| Note payable                       |       | —                           |       | 105,000 |   | 30,000 |   | — |   | — |   |
| Dividends  declared                |       | 12,767                           |       | 12,717 |   | 12,667 |   | 9,756 |   | 2,441 |   |
| Stockholders’  equity         |       | 984,395                          |       | 787,519 |   | 648,761 |   | 234,203 |   | 245,184 |   |
| Shares  outstanding                |       | 43,578                           |       | 42,299 |   | 42,386 |   | 32,627 |   | 32,317 |   |
|                                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)          In fiscal year 2004, 2005 and 2006, we revised our estimates related tothe remaining future obligations and costs associated with the discontinuationof our benefits administration outsourcing business in 1998.  As a result, we reduced the amount of ourliability for losses from disposal by $1.0 million, less the associated incometax expense of $0.4 million, by $1.25 million, less the associated income taxexpense of $0.5 million, and by $1.75 million, less the associated income taxexpense of $0.7 million, respectively. In fiscal years 2004, 2005 and 2006, the company received subleaseincome of approximately $0.1 million each year in excess of lease paymentsrelated to this business.  These itemsresulted in a year-to-date income from discontinued operations of $1.1 million,$1.3 million, and $1.8 million, less the associated income tax expense of $0.4million, $0.5 million, and $0.7 million, respectively.

 

(b)         The diluted earnings per share calculation for fiscal years 2008, 2007and 2006 assume that 1,950,000 contingent shares related to the WWLLP businesscombination have been issued and outstanding since July 31, 2005.  The diluted earnings per share calculationfor 2008 also assumes that the  218,089WWN contingent shares were also outstanding at the beginning of the fiscalyear.  All of these shares were issuedduring the fourth quarter of fiscal year 2008.

 

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**Item 7.  Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

 

**Special Note RegardingForward-Looking Statements**

 

This filing contains certain statements that are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, including, but not limited to the following: Note 6 -  Retirement Benefits; Note 11 – Goodwill andIntangible Assets; Note 14 – Commitments and Contingent Liabilities; theExecutive Overview; Critical Accounting Policies and Estimates; the discussionof our capital expenditures; Off-Balance Sheet Arrangements and ContractualObligations; Risk Management; and Part II, Item 1 “Legal Proceedings”.  You can identify these statements and otherforward-looking statements in this filing by words such as “may”, “will”, “expect”,“anticipate”, “believe”, “estimate”, “plan”, “intend”, “continue”, or similarwords, expressions, or the negative of such terms or other comparableterminology. You should read these statements carefully because they containprojections of our future results of operations or financial condition, orstate other “forward-looking” information. A number of risks and uncertaintiesexist which could cause actual results to differ materially from the resultsreflected in these forward-looking statements. Such factors include but are not limited to:

 

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

·                  our continued ability to recruit and retainqualified associates;

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

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

·                  declines in demand for our services;

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

·                  ourability to obtain professional liability insurance;

·                  asignificant decrease in the demand for the consulting, actuarial and otherservices we offer as a result of changing economic conditions or other factors;

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

·                  ourability to achieve cost reductions after our recent acquisitions;

·                  foreigncurrency exchange and interest rate fluctuations;

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

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

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

·                  regulatorydevelopments abroad and domestically that impact our business practice;

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

 

and other factors discussed under “Risk Factors” in Item 1 of this Form 10-K.  These statements are based on assumptionsthat may not come true.  All forward-lookingdisclosure is speculative by its nature. The company undertakes no obligation to update any of theforward-looking information included in this report, whether as a result of newinformation, future events, changed expectations or otherwise.

 

**Executive Overview**

 

WatsonWyatt is a global consulting firm focusing on providing human capital andfinancial consulting services.  Weprovide services in five principal practice areas: Benefits, Technology andAdministration Solutions, Human Capital Consulting, Investment Consulting andInsurance and Financial Services, operating from 32 countries throughout NorthAmerica, Europe, Asia Pacific, Latin America, Africa and the Middle East.

 

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

 

Wedesign, develop and implement human resource strategies and programs throughthe following closely-interrelated practice areas:

 

*Benefits Group –*The Benefits Group, accounting for 60 percent of our total fiscal year 2008revenues, is the foundation of our business. Retirement, the core of our Benefits Group business, is less impacted bydiscretionary spending reductions than our other segments, mainly due to the recurringnature of client relationships.  Ourcorporate client retention rate within our target market has remained veryhigh. Revenue for our retirement practice is seasonal, with the second andthird quarters of each fiscal year being the busier periods.  Major revenue growth drivers in this practiceinclude changes in regulations, particularly those affecting pension plans inthe U.K., leverage from other practices, increased global demand and increasedmarket share.

 

*Technology and Administration Solutions Group –*Our Technology and Administration SolutionsGroup, accounting for 11 percent of our total fiscal year 2008 revenues,provides information technology services to our customers.

 

*Human Capital Group –*Our**Human Capital Group, accounting for 12percent of our total fiscal year 2008 revenues, generally encompassesshort-term projects. As a result, this segment is most sensitive tocyclical economic fluctuations.

 

*Investment Consulting Group -*Our Investment Consulting Group accounts for 10 percent of our totalfiscal year 2008 revenues.  Thisbusiness, although relationship based, can be affected by volatility ininvestment returns, particularly as clients look to us for assistance inmanaging that volatility.

 

*Insurance and Financial Services Group –*Our Insurance & Financial ServicesGroup accounts for 7 percent of our total fiscal year 2008 revenues. Thisbusiness is characterized by ongoing relationships with our clients who willtypically use our skills on a number of different projects.

 

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**Financial Statement Overview**

 

WatsonWyatt’s fiscal year ends June 30.

 

Thecompany has acquired many entities over the past three fiscal years including,WWLLP, WWN and Heissmann.  The WWLLPbusiness combination was completed July 31, 2005 and as a result, ourfinancial statements reflect the consolidation of the European operationsthrough Watson Wyatt Limited beginning August 1, 2005.  Prior to July 31, 2005, or for one monthof the first quarter of fiscal year 2006, the company recorded its share of theresults of WWLLP and WWHE using the equity method of accounting.  This income is reflected in the “Income fromaffiliates” line on our income statement. Our share of the results of our affiliated captive insurance company,Professional Consultants Insurance Company, Inc. (PCIC), continues to berecorded using the equity method of accounting, and is also reflected in the “Incomefrom affiliates” line.  WWN and Heissmannwere purchased on February 1, 2007 and July 20, 2007,respectively.  Our financial statementsreflect the consolidation of these two entities effective February 1, 2007and July 1, 2007, respectively.

 

Wederive substantially all of our revenue from fees for consulting services,which generally are billed based on time and materials or on a fixed-feebasis.  Clients are typically invoiced ona monthly basis with revenue generally recognized as services are performed.For fiscal years 2008, 2007, and 2006, no single client accounted for more than2 percent of our consolidated revenue for any of the most recent three fiscalyears.

 

Forthe fiscal years ended June 30, 2008, 2007, and 2006, the company’s topsix markets based on percentage of consolidated revenue were as follows:

 
| ** **                 | ** ** | **Fiscal Year** | ** ** |
|----------------------------|------------|----------------------|------------|
| **Geographic Region** | ** ** | **2008**             | ** ** | **2007** | ** ** | **2006** | ** ** |
| United States              |       | 41                   | %          | 44 | % | 44 | % |
| United Kingdom             |       | 32                   |       | 31 |   | 32 |   |
| Germany(1)                 |       | 5                    |       | 1 |   | 1 |   |
| Canada                     |       | 4                    |       | 4 |   | 5 |   |
| Netherlands                |       | 4                    |       | 1 |   | 1 |   |
| Greater China              |       | 2                    |       | 2 |   | 1 |   |

 

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(1) Germany includesthe revenue from Heissmann which was acquired by the company in fiscal year2008.

 

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

 

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

 

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

 

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

 

**Critical Accounting Policies and Estimates**

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosures of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Our estimates, judgments and assumptionsare continually evaluated based on available information and experience.Because of the use of estimates inherent in the financial reporting process,actual results could differ from those estimates. The areas that we believe arecritical accounting policies include revenue recognition, valuation of billedand unbilled receivables from clients, discretionary compensation, incometaxes, pension assumptions, incurred but not reported claims, and goodwill andintangible assets. The critical accounting policies discussed below involvesmaking difficult, subjective or complex accounting estimates that could have amaterial effect on our financial condition and results of operations. Thesecritical accounting policies require us to make assumptions about matters thatare highly uncertain at the time of the estimate or assumption and differentestimates that we could have used or changes in the estimate that arereasonably likely to occur may have a material impact on our financialstatements and results of operations.

 

***Revenue Recognition***

 

Revenue includes feesprimarily generated from consulting services provided.  We recognize revenue from these consultingengagements when hours are worked, either on a time-and-materials basis or on afixed-fee basis, depending on the terms and conditions defined at the inceptionof an engagement with a client.  The terms of our contracts with clients arefixed and determinable and may change based upon agreement by both parties.Individual consultants’ billing rates are principally based on a multiple ofsalary and compensation costs.

 

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

 

Our system projects aretypically found in our Technology and Administration Solutions Group.  They tend to be more complex projects thatare longer in duration and subject to more changes in scope as the projectprogresses than projects undertaken in other segments. We evaluate at leastquarterly, and more often as needed, project managers’ estimates-to-complete toassure that the projects’ current status is accounted for properly.  Our Technology and Administration SolutionsGroup contracts generallyprovide that if the client terminates a contract, the company is entitled topayment for services performed through termination.

 

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

 

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

 

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

 

***Valuation of Billed and UnbilledReceivables from Clients***

 

We maintain allowancesfor doubtful accounts to reflect estimated losses resulting from our clients’failure to pay for our services after the services have been rendered,including allowances when customer disputes may exist.  The related provision is generally recordedas a reduction 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***

 

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

 

An estimated annual bonusamount is initially developed at the beginning of each fiscal year inconjunction with our budgeting process. Quarterly, estimated annual operating performance is reviewed by thecompany and the discretionary annual bonus amount is then adjusted, ifnecessary, by management to reflect changes in the forecast of pre-bonusprofitability for the year. In those quarters where the estimated annual bonuslevel 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, “*Accountingfor Income Taxes*”, which prescribes the use of the asset andliability method whereby deferred tax asset or liability account balances arecalculated at the balance sheet date using current tax laws and rates ineffect. Valuation allowances are established , when necessary, to reducedeferred tax assets when it is more likely than not that a portion or all of agiven deferred tax asset will not be realized. In accordance with SFAS No. 109,income tax expense includes (i) deferred tax expense, which generallyrepresents the net change in the deferred tax asset or liability balance duringthe year plus any change in valuation allowances and (ii) current taxexpense, which represents the amount of tax currently payable to or receivablefrom a taxing authority plus amounts accrued for expected tax contingencies(including both tax and interest). Reserves for income tax-relateduncertainties are based on estimates of whether, and the extent to which,additional taxes will be due. These reserves are established when we believethat certain positions might be challenged despite our belief that our taxreturn positions are fully supportable. We adjust these reserves in light of changingfacts and circumstances, such as the outcome of tax audits. The provision forincome taxes includes the impact of reserve provisions and changes to reservesthat are considered appropriate. Accruals for tax contingencies are providedfor in accordance with the requirements of FIN 48.

 

***PensionAssumptions***

 

Wesponsor both qualified and non-qualified, non-contributory defined benefitpension plans in North America and the U.K. that cover approximately 85% of ourliability.  Under our plans in North America,benefits are based on the number of years of service and the associate’scompensation during the five highest paid consecutive years of service.  Beginning January 2008, we havemade 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, includedonly in North America, provides for pension benefits that would be coveredunder the qualified plan but are limited by the Internal Revenue Code.  The non-qualified plan has no assets andtherefore is an unfunded arrangement. The benefit liability is reflected on the balance sheet.  The measurement date for each of the plans isJune 30.

 

Determinationof our obligations and annual expense under the plans is based on a number ofassumptions that, given the longevity of the plans, are long-term infocus.  A change in one or a combinationof these assumptions could have a material impact on our pension benefitobligation and related expense.  For thisreason, management employs a long-term view so that assumptions do not changefrequently in response to short-term volatility in the economy.  Any difference between actual and assumedresults is amortized into our pension expense over the average remainingservice period of participating employees. We consider several factors prior to the start of each fiscal year whendetermining the appropriate annual assumptions, including economic forecasts,relevant benchmarks, historical trends, portfolio composition and peercomparisons.

 

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*NorthAmerica*

 

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

 
| ** **                                   | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Discount rate                                |       | 7.00                                  | %          | 6.25 | % | 6.25 | % |
| Expected  long-term rate of return on assets |       | 8.75                                  | %          | 8.75 | % | 8.75 | % |
| Rate of increase  in compensation levels     |       | 4.09                                  | %          | 3.84 | % | 3.84 | % |

 

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

 

The expected long-term rate of return on assets assumption remained at8.75 percent per annum, unchanged from fiscal years 2007 and 2006. Selection ofthe return assumption at 8.75 percent per annum was supported by an analysisperformed by the company of the weighted average yield expected to be achievedwith the anticipated makeup of investments. The investment makeup is heavily weighted towards equities.  The actual return on assets for fiscal year2008 was a loss of 10.1 percent, compared to a return of 17.3 percent forfiscal year 2007.

 

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

 
| **Change in Assumption**                    | ** ** | **Effect on FY2008  Pre-Tax Pension Expense** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                            | ** ** | ** **                                                        | ** ** |
| 25 basis point  decrease in discount rate             |       | +$3.3 million                                                     |       |
| 25 basis point  increase in discount rate             |       | -$3.1 million                                                     |       |
| 25 basis point  decrease in expected return on assets |       | +$1.4 million                                                     |       |
| 25 basis point  increase in expected return on assets |       | -$1.4 million                                                     |       |

 

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

 

*UnitedKingdom*

 

The followingassumptions were used at the end of the past three fiscal years in thevaluation of our U.K. plan:

 
| ** **                                   | ** ** | **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 yields betweenthese 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.  Theactual return on assets through fiscal year 2008 was a loss of 2.1 percentcompared to a gain of 16.4 percent for fiscal year 2007.

 

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

 
| **Change in Assumption**                    | ** ** | **Effect on FY2008  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 and compensationlevel assumption used for the North American and U.K. plans above can beattributed to the differing interest rate environments associated with thecurrencies 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 predominant investment for the U.K.plans.

 

***IncurredBut Not Reported Claims***

 

The company usesactuarial assumptions to estimate and record a liability for incurred but notreported (IBNR) professional liability claims. Our estimated IBNR liability is based on long-term trends and averages,and reflects consideration of a number of factors, including changes in claimreporting patterns, claim settlement patterns, judicial decisions, andlegislation and economic decisions, but excludes the effect of claims data forlarge cases due to the insufficiency of actual experience with such cases.  Management does not currently expectsignificant fluctuations in the IBNR liability, based on the company’shistorical claims experience.  However,our estimated IBNR liability will fluctuate if claims experience changes overtime.

 

***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 and whenever indicatorsof impairment exist. The evaluation is based upon a comparison of the estimatedfair value of the reporting unit to which the goodwill has been assigned to thesum of the carrying value of the net assets for that reporting unit. The fairvalues used in this evaluation are estimated based upon a multiple of revenuefor the reporting unit. This revenue multiple is based on our experience andknowledge of our own and other transactions in the marketplace. Intangibleassets with definite lives are amortized over their estimated useful lives andare reviewed for impairment if indicators of impairment arise.

 

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The evaluation of impairmentwould be based upon a comparison of the carrying amount of the intangible assetto the estimated future undiscounted net cash flows expected to be generated bythe asset. If estimated future undiscounted net cash flows are less than thecarrying amount of the asset, the asset would be considered impaired. Theimpairment expense would be determined by comparing the estimated fair value ofthe intangible asset to its carrying value, with any shortfall from fair valuerecognized as an expense in the current period.

 

**Results of Operations**

 

The following tablesets forth Consolidated Statement of Operations data as a percentage of revenuefor the periods indicated:

 
| ** **                                             | ** ** | **Year ended June 30** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |       |                                  |       |   |   |   |   |
| Revenue                                                |       | 100.0                                 | %          | 100.0 | % | 100.0 | % |
|                                                   |       |                                  |       |   |   |   |   |
| Costs of  providing services:                          |       |                                  |       |   |   |   |   |
| Salaries and  employee benefits                        |       | 55.2                                  |       | 54.2 |   | 55.0 |   |
| Professional and  subcontracted services               |       | 6.0                                   |       | 6.7 |   | 6.6 |   |
| Occupancy,  communications and other                   |       | 11.8                                  |       | 12.4 |   | 12.9 |   |
| General and  administrative expenses                   |       | 10.0                                  |       | 10.7 |   | 11.6 |   |
| Depreciation and  amortization                         |       | 4.1                                   |       | 3.9 |   | 3.5 |   |
|                                                   |       | 87.1                                  |       | 87.9 |   | 89.6 |   |
|                                                   |       |                                  |       |   |   |   |   |
| Income from  operations                                |       | 12.9                                  |       | 12.1 |   | 10.4 |   |
|                                                   |       |                                  |       |   |   |   |   |
| Income/(loss)  from affiliates                         |       | 0.1                                   |       | (0.4 | ) | 0.1 |   |
| Interest income                                        |       | 0.3                                   |       | 0.3 |   | 0.3 |   |
| Interest expense                                       |       | (0.3                                  | )          | (0.1 | ) | (0.3 | ) |
| Other  non-operating income/(loss)                     |       | 0.0                                   |       | 0.0 |   | (0.2 | ) |
|                                                   |       |                                  |       |   |   |   |   |
| Income from  continuing operations before income taxes |       | 13.0                                  |       | 11.9 |   | 10.3 |   |
|                                                   |       |                                  |       |   |   |   |   |
| Provision for  income taxes                            |       | 4.2                                   |       | 4.0 |   | 3.6 |   |
|                                                   |       |                                  |       |   |   |   |   |
| Income from  continuing operations                     |       | 8.8                                   | %          | 7.9 | % | 6.7 | % |

 

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**FiscalYear Ended June 30, 2008, Compared to Fiscal Year Ended June 30, 2007**

 

***Revenue***

 

Revenuesfor fiscal year 2008 were $1.76 billion, an increase of $274 million, or 18percent, from $1.49 billion in fiscal 2007. We acquired Watson Wyatt Netherlands in February 2007 andHeissmann, our German business, in July 2007.  Approximately $101 million of the increase inrevenues is due to the additional seven months of Watson Wyatt Netherlands and thefull year of Heissmann included in our fiscal 2008 results.  The remainder of the increase in revenues isdue to the growth of our business and the strengthening of currencies againstthe U.S. dollar.  Excluding the impact ofacquisitions and changes in foreign exchange rates, revenue growth was 8%.

 

Theaverage exchange rate used to translate our revenues earned in British poundssterling increased to 2.0114 for fiscal year 2008 from 1.9391 for fiscal year2007, and the average exchange rate used to translate our revenues earned inEuros increased to 1.4736 for fiscal year 2008 from 1.3113 for fiscal year2007.  The appreciation of the Britishpound and the Euro resulted in $34 million of the increase in revenues infiscal 2008.  Changes in the value ofother foreign currencies relative to the U.S. dollar resulted in $16 million ofthe increase in fiscal year 2008 revenues.

 

A comparison of segmentrevenues between fiscal year 2008 and fiscal year 2007 is provided below:

 

·                  TheBenefits Group increased revenues $172.6 million, or 21 percent, over fiscalyear 2007.  Approximately $97.7 millionof the increase is due to the acquisitions of Heissmann and Watson WyattNetherlands.  The remainder of theincrease is due to increased demand for our services, primarily in the U.S. andEurope, and changes in foreign exchange rates. The strengthening of the European and Canadian currencies accounted for3 percentage points of the increase. Excluding the impact of acquisitions and changes in foreign exchangerates, the Benefits Group revenue growth was 6%.

 

·                  TheTechnology and Administration Solutions Group increased revenues $25.4 million,or 16 percent, over fiscal year 2007, largely due to an increase inadministration services in both the U.S. and Europe as well as the result ofsystem modifications made to pension administration systems as companiesimplemented provisions of the Pension Protection Act in the U.S.  The number of projects in service delivery inthe U.S. was 142 at June 30, 2008, an increase from 84 at June 30,2007.  The number of projects inimplementation in the U.S. was 50 at June 30, 2008, a decrease from 67 at June 30,2007.  In accordance with EITF 00-3, “Applicationof AICPA Statement of Position 97-2 to Arrangements that Include the Right toUse Software Stored on Another Entity’s Hardware” (EITF 00-3), the Companybegins recognizing revenue after projects go into service.  No revenues are recognized during projectimplementation.  The strengthening of theEuropean and Canadian currencies accounted for 2 percentage points of theincrease.

 

·                  TheHuman Capital Group increased revenues $26.1 million, or 15 percent, overfiscal year 2007, primarily due to increased demand for our compensationconsulting and our data services.  Thestrengthening of the European and Canadian currencies accounted for 3percentage points of the increase.

 

·                  TheInvestment Consulting Group increased revenues $40.5 million, or 31 percent,over fiscal year 2007 due to an increase in demand for our services, especiallyinvestment strategy advice.  Thestrengthening of the European and Canadian currencies accounted for 4percentage points of the increase.

 

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·                  TheInsurance and Financial Services Group increased revenues $4.9 million, or 4percent, over fiscal year 2007 due to the strengthening of the Europeancurrencies.  Revenues were flat on aconstant currency basis.  The increase inrevenues in Asia Pacific was offset by a decline in revenues in Europe.

 

***Salaries and Employee Benefits***

 

Salariesand employee benefits expenses for fiscal year 2008 were $970.2 million,compared to $805.6 million in fiscal year 2007, an increase of $164.6 millionor 20.4 percent.  Of this increase, $68.5million, or 8.5 percentage points, was attributable to the inclusion ofrecently acquired entities in our consolidated financials.  An additional 3.0 percentage points wasattributable to the strengthening of foreign currencies.  The remaining increase, inclusive of theimpact of foreign currencies, was principally due to higher salaries of $60.8million, which is partially due to a 3.5 percent increase in headcount, a $33.4million increase in discretionary compensation and increased benefits expenseof $16.8 million.  The increase waspartially offset by a decrease in pension expense of $15.5 million.  As a percentage of revenue, salaries andemployee benefits increased to 55.2 percent from 54.2 percent.

 

*** Professional and SubcontractedServices***

 

Professional andsubcontracted services used in consulting operations for fiscal year 2008 were$105.9 million, compared to $99.9 million for fiscal year 2007, an increase of$6.0 million or 6.0 percent.  Thisincrease is primarily attributableto the strengthening of foreign currencies.  As a percentage of revenue, professional andsubcontracted services decreased to 6.0 percent from 6.7 percent.

 

***Occupancy, Communications and Other***

 

Occupancy, communicationsand other expenses for fiscal year 2008 were $208.1 million, compared to $184.8million for fiscal year 2007, an increase of $23.3 million or 12.6percent.  Of this increase, $10.0 million, or 5.4percentage points, was attributable to the inclusion of recently acquiredentities in our consolidated financials while 3.8 percentage points wasattributable to the strengthening of foreign currencies.  The remaining increase, inclusive ofthe impact on translation of foreign currencies, was attributable to anincrease in rent of $6.3 million, travel of $5.3 million, telephone of $4.4million and general increases in expenses such as promotion, business tax,office supplies, dues and development partially offset by recognized foreigncurrency gains of $13.3 million in fiscal year 2008 .  As a percentage of revenue, occupancy,communications and other expenses decreased to 11.8 percent from 12.4 percent.

 

***General and Administrative Expenses***

 

Generaland administrative expenses were $176.7 million for fiscal year 2008, comparedto $159.6 million for fiscal year 2007, an increase of $17.1 million or 10.7percent.  Of this increase, 2.1percentage points was attributable to the strengthening of foreign currencies.  Theincrease, inclusive of the impact of foreign currencies, was principally due toincreases in base salaries of $9.1 million, professional services expense of$7.9 million, insurance expense of $2.4 million and repairs and maintenanceexpenses of $3.7 million, partially offset by decreases in rent, telephone andgeneral office expenses. As a percentage of revenue, general and administrativeexpenses decreased to 10.0 percent from 10.7 percent.

 

***Depreciation and Amortization***

 

Depreciation andamortization for fiscal year 2008 was $72.4 million, compared to $57.2 millionfor fiscal year 2007, an increase of $15.2 million or 26.6 percent.  Of this increase, $3.7 million, or 6.5 percentage points, wasattributable to the inclusion of recently acquired entities in our consolidatedfinancials.  An additional 2.3 percentagepoints was attributed to the strengthening of foreign currencies.  

 

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The remaining increasewas due to $5.4 million of amortization on internally developed software usedto support our Benefits Group and Technology and Administration Solutions Groupand $6.2 million higher depreciation expense on capital assets and amortizationof intangibles.  As a percentage of revenue,depreciation and amortization increased to 4.1 percent from 3.9 percent.

 

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

 

Incomefrom affiliates was $2.1 million for fiscal year 2008, compared to a loss of$5.5 million for fiscal year 2007.  Theincome in fiscal year 2008 reflects our share of PCIC’s income compared to ourshare of  PCIC’s losses in fiscal year2007.  PCIC’s losses in fiscal year 2007are the result of a substantial increase in reserves in response to unusuallyrapid development of several claims against its three participating firms.

 

***Interest Income***

 

Interestincome was $5.6 million for fiscal year 2008, an increase of $1.5 million from$4.1 million during fiscal year 2007. The increase was mainly due to higher short-term interest rates inEurope as well as higher average cash balances.

 

***Interest Expense***

 

Interestexpense was $6.0 million for fiscal year 2008, an increase of $4.3 million from$1.7 million during fiscal year 2007. The increase was due to a higher average debt balance in fiscal year2008 resulting from borrowings required for the Heissmann acquisition in July 2007.

 

***Other Non-Operating Income/(Loss)***

 

Other non-operating incomewas $0.5 million for fiscal year 2008, an increase of $0.3 million from $0.2million during fiscal year 2007.  Theincrease was mainly due to additional payments on divestitures, includingpayments for the sales of $0.3 million of the financial planning practice inAustralia and $0.2 million of the company’s multi-employer retirementconsulting business.

 

***Income From Continuing Operations Before Income Taxes***

 

Incomefrom continuing operations before income taxes for fiscal year 2008 was $228.9million, an increase of 29.7 percent from $176.5 million during fiscal year2007.  As a percentage of revenue, incomefrom continuing operations for fiscal year 2008 increased to 13.0 percent from11.9 percent.

 

***Provision for Income Taxes***

 

Provision for incometaxes for fiscal year 2008 was $73.5 million, compared to $60.2 million forfiscal year 2007. Our effective tax rate was 32.1 percent for fiscal year 2008and 34.1 percent for fiscal year 2007. The tax rate decrease is due to the geographic mix of income and therelease of tax reserves.  The company hasnot provided U.S. deferred taxes on cumulative earnings of foreign subsidiariesthat have been reinvested indefinitely, which also includes foreignsubsidiaries affiliated with the WWLLP business combination.  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.

 

***Income From Continuing Operations***

 

Incomefrom continuing operations for fiscal year 2008 was $155.4 million, an increaseof 33.7 percent from $116.3 million during fiscal year 2007.  As a percentage of revenue, income fromcontinuing operations for fiscal year 2008 increased to 8.8 percent from 7.9percent.

 

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***Earnings Per Share, Income From ContinuingOperations***

 

Dilutedearnings per share, income from continuing operations was $3.50 for fiscal year2008, compared to $2.60 for fiscal year 2007. The diluted earnings per sharecalculations assume that the 1,950,000 contingent shares related to the WWLLPbusiness combination have been issued and outstanding since July 31, 2005.The diluted earnings per share calculation for 2008 also assumes that the218,089 WWN contingent shares were also outstanding at the beginning of thefiscal year.

 

*** Discontinued Operations***

 

During1998, the company exited from its benefits administration outsourcing business,Wellspring Resources, LLC (“Wellspring”). Discontinued operations for fiscal year 2006 reflects the reduction ofthe company’s accrual for the estimated remaining future obligations and costsrelated to the exit from Wellspring by $1.75 million less the associated incometax expenses.  Also, during fiscal year2006 the company received sublease income of approximately $64,000 in excess oflease payments related to Wellspring. See Note 15 of the Notes to the Consolidated Financial Statements formore information related to Wellspring.

 

**FiscalYear Ended June 30, 2007, Compared to Fiscal Year Ended June 30, 2006**

 

***Revenue***

 

Revenues for fiscal year2007 were $1.49 billion, an increase of $215 million, or 17 percent, from $1.27billion in fiscal year 2006.  The WWLLPbusiness combination was completed on July 31, 2005, and therefore, fiscalyear 2006 only includes eleven months of our European operations.  The overall increase in revenues is due to anincrease in demand for services in all of our segments, strengthening of theEuropean currencies and the additional month of European operations.

 

The average exchange rateused to translate our revenues earned in British pounds sterling increased to1.9391 for fiscal year 2007 from 1.7798 for the eleven months ended June 30,2006, and the average exchange rate used to translate our revenues earned inEuros increased to 1.3113 for fiscal year 2007 from 1.221 for the eleven monthsended June 30, 2006.  Theappreciation of these European currencies resulted in $42 million of theincrease in revenues in fiscal year 2007. Changes in the value of other foreign currencies relative to the U.S.dollar resulted in $4 million of the increase in fiscal year 2007 revenues.

 

A comparison of segmentrevenues between fiscal year 2007 and fiscal year 2006 is provided below.  A portion of each segment’s revenue growth isdue to the additional month of European operations included in fiscal year 2007compared to fiscal year 2006.

 

·                  Benefitsincreased revenues $95.2 million, or 13 percent, over fiscal year 2006 due toincreased demand for our services in both the U.S. and Europe.  The inclusion of an additional month ofEuropean revenues and the strengthening of the European currencies eachaccounted for 3 percentage points of the increase in fiscal year 2007.

 

·                  TechnologyandAdministrationSolutionsincreasedrevenues$24.7million,or19percent,overfiscalyear2006,largelyduetoanincreaseinthenumberofprojectsthatwentintoserviceintheU.S.duringthefiscalyear.  InaccordancewithEITF00-3,“ApplicationofAICPAStatementofPosition97-2toArrangementsthatIncludetheRighttoUseSoftwareStoredonAnotherEntity’sHardware”(EITF00-3),thecompanybeginsrecognizingrevenueafterprojectsgointoservice.  Norevenuesarerecognizedduringprojectimplementation.  AtJune30,2007,thecompanyhad84projectsinservicedeliveryand67projectsinimplementation.  AtJune30,2006,thecompanyhad51projectsinservicedeliveryand58projectsinimplementation.  TheinclusionofanadditionalmonthofEuropeanrevenuesandthestrengtheningoftheEuropeancurrencieseachaccountedfor4percentagepointsoftheincreaseinfiscalyear2007.

 

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·                  HumanCapital Group increased revenues $23.7 million, or 16 percent, over fiscal year2006 primarily due to increased demand for our compensation consulting and ourdata services.  The inclusion of anadditional month of European revenues and the strengthening of the Europeancurrencies each accounted for 2 percentage points of the increase in fiscalyear 2007.

 

·                  InvestmentConsulting increased revenues $42.3 million, or 49 percent, over fiscal year2006 due to an increase in demand for our services, especially investmentstrategy advice.  The inclusion of anadditional month of European revenues and the strengthening of the Europeancurrencies each accounted for 6 and 5 percentage points, respectively, of theincrease in fiscal year 2007.

 

·                  Insuranceand Financial Services increased revenues $21.7 million, or 24 percent, overfiscal year 2006 due to an increase in project work, including life insuranceconsulting projects.  The inclusion of anadditional month of European revenues and the strengthening of the Europeancurrencies accounted for 10 and 5 percentage points, respectively, of theincrease in fiscal year 2007.

 

***Salaries and Employee Benefits***

 

Salariesand employee benefits expenses for fiscal year 2007 were $805.6 million,compared to $699.0 million in fiscal year 2006, an increase of $106.6 millionor 15.3 percent.  Of this increase, $15.1million, or 2.2 percentage points, was attributable to the inclusion of anadditional month of European results while 4.1 percentage points wasattributable to the strengthening European currencies.  The remaining increase was principally due tohigher salaries of $69.0 million, partially due to a $4.2 million Long TermIncentive Plan accrual and a 5.9 percent increase in headcount, a $24.5 millionincrease in discretionary compensation, increased benefits expense of $3.5million, and less capitalization of $5.7 million of time spent customizingin-house administration systems, in accordance with AICPA’s Statement ofPosition 98-1, “Accounting for the Costs of Computer Software Developed orObtained for Internal Use”.  The increasewas partially offset by a decrease in pension expense of $11.2 million.  As a percentage of revenue, salaries andemployee benefits decreased to 54.2 percent from 55.0 percent.

 

***Professional and Subcontracted Services***

 

Professional andsubcontracted services used in consulting operations for fiscal year 2007 were$99.9 million, compared to $84.2 million for fiscal year 2006, an increase of$15.7 million or 18.7 percent.  Of this increase, $1.6 million, or 1.9percentage points, was attributable to the inclusion of an additional month ofEuropean results while 4.6 percentage points was attributable to thestrengthening European currencies.  Theremaining increase was principally due to higher reimbursable expenses incurredon behalf of clients. As a percentage of revenue, professional andsubcontracted services increased to 6.7 percent from 6.6 percent.

 

***Occupancy, Communications and Other***

 

Occupancy, communicationsand other expenses for fiscal year 2007 were $184.8 million, compared to $164.1million for fiscal year 2006, an increase of $20.7 million or 12.6percent.  Of this increase, $2.2 million, or 1.3percentage points, was attributable to the inclusion of an additional month ofEuropean results while 3.3 percentage points was attributable to thestrengthening European currencies.  Theremaining increase was attributable to general increases in expenses such asrent and utilities, travel, dues and entertainment, promotion, business tax,telephone, and repairs and maintenance, partially offset by decreases inexpenses such as general office, postage, and office supplies.  As a percentage of revenue, occupancy,communications and other expenses decreased to 12.4 percent from 12.9 percent.

 

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***General and Administrative Expenses***

 

Generaland administrative expenses were $159.6 million for fiscal year 2007, comparedto $147.1 million for fiscal year 2006, an increase of $12.5 million or 8.5percent.  Of this increase, $3.0 million,or 2.0 percentage points, was attributable to the inclusion of an additionalmonth of European results while 4.3 percentage points was attributable to thestrengthening European currencies.  Theremaining increase was principally due to higher base salaries of $9.3 million,higher professional services expense of $3.8 million and higher general officeexpenses of $4.1 million, partially offset by a decrease in insurance expenseof $7.8 million. As a percentage of revenue, general and administrativeexpenses decreased to 10.7 percent from 11.6 percent.

 

***Depreciation and Amortization***

 

Depreciation andamortization for fiscal year 2007 was $57.2 million, compared to $44.9 millionfor fiscal year 2006, an increase of $12.3 million or 27.4 percent.  Of this increase, $0.9 million, or 2.0 percentage points, wasattributable to the inclusion of an additional month of European results while4.0 percentage points, was attributable to the strengthening Europeancurrencies.  The remainingincrease was due to $7.8 million of amortization on internally developedsoftware used to support our Benefits Group and Technology and AdministrationSolutions Group and $3.6 million higher depreciation expense on capital assetsand amortization of intangibles.  As apercentage of revenue, depreciation and amortization increased to 3.9 percentfrom 3.5 percent.

 

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

 

Lossfrom affiliates was $5.5 million for fiscal year 2007 compared to income of$1.1 million for fiscal year 2006.  Theloss in fiscal year 2007 reflects our share of PCIC’s loss compared to ourshare of  PCIC’s earnings in fiscal year2006.  Our share of those losses are theresult of a substantial increase in PCIC’s reserves during the third quarter offiscal year 2007 in response to unusually rapid development of several claimsagainst its three participating firms. Fiscal year 2006 also includes our share of results from our Europeanaffiliates for the month of July 2005, after which time the WWLLP businesscombination was consummated.

 

***Interest Income***

 

Interestincome was $4.1 million for fiscal year 2007, a decrease of $0.2 million from$4.3 million during fiscal year 2006.

 

***  Interest Expense***

 

Interestexpense was $1.6 million for fiscal year 2007, a decrease of $2.5 million from$4.1 million during fiscal year 2006. The decrease was due to a lower average debt balance in fiscal year2007.  The $105 million of borrowings onthe balance sheet as of June 30, 2007 was borrowed on June 29, 2007in anticipation of closing the Heissmann acquisition in early July.

 

***Other Non-Operating Income/(Loss)***

 

Other non-operating income/(loss) in fiscalyear 2006 includes a $1.4 million gain recognized by the company on the sale ofits New Zealand operations, netted against a loss of $3.6 million on a foreignexchange forward contract entered into in conjunction with the WWLLP businesscombination.

 

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***Income From Continuing Operations Before IncomeTaxes***

 

Incomefrom continuing operations before income taxes for fiscal year 2007 was $176.5million, an increase of 34.0 percent from $131.7 million during fiscal year2006.  As a percentage of revenue, incomefrom continuing operations for fiscal year 2007 increased to 11.9 percent from10.3 percent.

 

***Provision for Income Taxes***

 

Provision for incometaxes for fiscal year 2007 was $60.2 million, compared to $45.6 million forfiscal year 2006. Our effective tax rate was 34.1 percent for fiscal year 2007and 34.6 percent for fiscal year 2006. The tax rate decrease is due to the geographic mix of income and therelease of tax reserves.  The company hasnot provided U.S. deferred taxes on cumulative earnings of foreign subsidiariesthat have been reinvested indefinitely, which also includes foreignsubsidiaries affiliated with the WWLLP business combination.  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.

 

***Income From Continuing Operations***

 

Incomefrom continuing operations for fiscal year 2007 was $116.3 million, an increaseof 35.1 percent from $86.1 million during fiscal year 2006.  As a percentage of revenue, income fromcontinuing operations for fiscal year 2007 increased to 7.9 percent from 6.7percent.

 

***Earnings Per Share, Income From ContinuingOperations***

 

Dilutedearnings per share, income from continuing operations was $2.60 for fiscal year2007, compared to $1.99 for fiscal year 2006. The diluted earnings per sharecalculation assumes that the 1,950,000 contingent shares related to the WWLLPbusiness combination have been issued and outstanding since July 31, 2005.

 

***Discontinued Operations***

 

During1998, the company exited from its benefits administration outsourcing business,Wellspring Resources, LLC (“Wellspring”). Discontinued operations for fiscal year 2006 reflects the reduction ofthe company’s accrual for the estimated remaining future obligations and costsrelated to the exit from Wellspring by $1.75 million less the associated incometax expenses.  Also, during fiscal year2006 the company received sublease income of approximately $64,000 in excess oflease payments related to Wellspring. See Note 15 of the Notes to the Consolidated Financial Statements formore information related to Wellspring.

 

**Liquidityand Capital Resources**

 

Ourcash and cash equivalents at June 30, 2008 totaled $124.6 million,compared to $248.2 million at June 30, 2007.  During fiscal year 2008, we paid $139 millionof previously accrued discretionary compensation, $138.8 million related toacquisitions, $76.3 million in corporate taxes, $82.0 million for stockrepurchases, $38.7 million in capital expenditures and $12.8 million individends.  These payments were funded bycash flow from current consulting operations, from existing cash balances andfrom borrowings under our revolving credit facility.  Consistent with the company’s liquidityposition, management considers various alternative strategic uses of cashreserves including acquisitions, stock buybacks, and dividends, or anycombination of these options. The company believes that it has sufficientresources to fund operations through the next twelve months.

 

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Our non U.S. operationsare substantially self-sufficient for their working capital needs.  At June 30, 2008, $92.6 million of thetotal cash balance of $124.6 million was held outside of North America, whichwe have the ability to utilize, if necessary. There are no significantrepatriation restrictions other than local or U.S. taxes associated withrepatriation.

 

Underthe terms of the WWLLP Business Combination, we are required under certaincircumstances to place funds into an insurance trust designed to satisfypotential litigation settlement related to the former partners of WWLLP.  If the assets of the trust are not used by2017, they will be returned to the company. As of June 30, 2008, wemaintained $6.6 million of restricted cash related to this obligation. Thisrestricted cash balance was included in Other Assets on our consolidatedbalance sheet.

 

***Cash From Operating Activities***

 

Cashfrom operating activities for fiscal year 2008 was $283.7 million, compared tocash from operating activities of $167.1 million for fiscal year 2007.  The increase is primarily attributable to $39.2million of additional net income and an increase in the discretionarycompensation accrual.

 

The allowance fordoubtful accounts increased $2.3 million from June 30, 2007 to June 30,2008.  The number of days of accountsreceivable and work in process outstanding decreased to 71 at June 30,2008 from 83 at June 30, 2007.

 

Cashfrom operating activities for fiscal year 2007 was $167.1 million, compared tocash from operating activities of $169.1 million for fiscal year 2006.

 

The allowance fordoubtful accounts increased $2.5 million from June 30, 2006 to June 30,2007.  As a result of the increase inaccounts receivable and work in process since June 30, 2006, the number ofdays of accounts receivable and work in process outstanding increased to 83 at June 30,2007 from 78 at June 30, 2006.

 

***Cash Used in Investing Activities***

 

Cash used in investingactivities for fiscal year 2008 was $204.6 million, compared to $114.2 millionfor fiscal year 2007.  The difference canbe primarily attributed to the Heissmann business combination and otheracquisition related payments totaling $138.8 million.

 

Cash used in investingactivities for fiscal year 2007 was $114.2 million, compared to $202.3 millionfor fiscal year 2006.  The difference canbe primarily attributed to a reduction in the amounts spent on acquisitions andcontingent consideration payments in fiscal year 2007.  Expenditures of capital funds were $44.0million for fiscal year 2007.

 

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

 

Cashused in financing activities was $188.8 million for fiscal year 2008, comparedto $27.2 million from financing activities during fiscal year 2007.  The difference was primarily attributable tonet debt repayments of $105.0 million in fiscal year 2008, compared to netborrowings of $75 million during fiscal year 2007 and higher stock repurchasesof $33.7 million.

 

Cashfrom financing activities was $27.2 million for fiscal year 2007, compared to$16.9 million from financing activities during fiscal year 2006.  The increase was primarily attributable tohigher net borrowings of $45 million in fiscal year 2007, net of an increase of$44 million of common stock repurchases. Fiscal year 2006 included a loss of $8.4 million on a forward lookingforeign currency contract.

 

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**CapitalCommitments**

 

Expendituresof capital funds were $38.7 million for fiscal year 2008.  Anticipated commitments of capital funds forWatson Wyatt are estimated at $44.0 million for fiscal year 2009. We expectcash from operations to adequately provide for these cash needs.

 

**Dividends**

 

Duringfiscal year 2008, the Board of Directors of the company approved the payment ofa quarterly cash dividend in the amount of $0.075 per share.  Total dividends paid in fiscal year 2008 were$12.8 million.

 

Underour credit facility in effect as of June 30, 2007 (see Note 9 of Notes tothe Consolidated Financial Statements included in Item 15 of this report), weare required to observe certain covenants (including requirements for a fixedcoverage charge, cash flow leverage ratio and asset coverage) that affect theamounts available for the declaration or payment of dividends.  The continued payment of cash dividends inthe future is at the discretion of our Board of Directors and depends onnumerous factors, including, without limitation, our net income, financialcondition, availability of capital, debt covenant limitations and our otherbusiness needs, including those of our subsidiaries and affiliates.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 
| ** **                                                      | ** ** | **Remaining payments by fiscal year due as of June 30, 2008** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| **Contractual Cash  Obligations (in thousands)** | ** ** | **Total**                                                                                                       | ** ** | **Less than  1  Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **More than  5 Years ****(1)** | ** ** |
| Lease  commitments                                              |       | $                                                                                                               | 372,095    |   | $ | 66,750 |   | $ | 114,244 |   | $ | 86,160 |   | $ | 104,941 |   |
| Pension  Contribution                                           |       | 182,876                                                                                                         |       | 33,096 |   | 71,239 |   | 78,540 |   | — |   |
| Total                                                           |       | $                                                                                                               | 554,971    |   | $ | 99,846 |   | $ | 185,483 |   | $ | 164,700 |   | $ | 104,941 |   |

 

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(1) PensionContributions for this category cannot be estimated.

 

***Operating Leases***.  We lease office space,furniture and selected computer equipment under operating lease agreements withterms ranging from one to ten years. Management has determined that there isnot a large concentration of leases that will expire in any one fiscalyear.  Consequently, managementanticipates that any increase in future rent expense will be mainly marketdriven.

 

***Pension Contributions. ***Contributions to our various pension plansfor fiscal year 2009 are projected to be approximately $38.0 million.

 

**CreditAgreement**

 

Thecompany has a credit facility provided by a syndicate of banks in an aggregateprincipal amount of $300 million.  Interest rates associated with thisfacility vary with LIBOR and/or the Prime Rate and are based on our leverageratio, as defined by the credit agreement.  We are charged a quarterlycommitment fee, currently 0.125 percent of the facility, which varies with ourfinancial leverage and is paid on the unused portion of the creditfacility.  The company had no borrowings under the credit facility as of June 30,2008 compared to $105.0 million of borrowings outstanding under the facility atJune 30, 2007.  Credit under thefacility is available upon demand, although the credit facility requires us toobserve certain covenants (including a cash flow leverage ratio and a fixedcoverage charge ratio) and is collateralized with a pledge of stock of materialsubsidiaries.  We were in compliance with both covenants under the creditfacility as of June 30, 2008. This facility is scheduled to mature on June 30,2010.

 

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Aportion of the revolving facility is used to support required letters of creditissued under the credit line.  As aresult, $10.6 million of the facility was unavailable for operating needs as ofJune 30, 2008.  We are charged a fee foroutstanding letters of credit that also fluctuates based on our leverage ratio.

 

Thecompany has also provided a $5.0 million Australian dollar-denominated letterof credit (US $4.8 million) to an Australian governmental agency as required bythe local regulations.  The estimatedfair market value of these letters of credit is immaterial because they havenever been used, and the company believes that future usage is remote.

 

**Risk Management**

 

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

 

Informulating its premium structure, PCIC estimates the amount it expects to payfor losses (and loss expenses) for all the members as a whole and thenallocates that amount to the member firms based on the individual member’sexpected losses.  PCIC bases premiumcalculations, which are determined annually based on experience through Marchof each year, on relative risk of the various lines of business performed byeach of the owner companies, past claim experience of each owner company,growth of each of those companies, industry risk profiles in general and theoverall insurance markets.  

 

Asof July 1, 2008, the captive insurance company carries reinsurance for lossesit insures above $25 million.  Sincelosses incurred by PCIC below this level are not covered by reinsurance, butare direct expenses of PCIC, reserve adjustments and actual outcomes ofspecific claims of any PCIC member firm carry through into Watson Wyatt’sfinancial 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. 

 

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 insurancecoverage, this insurance does not cover claims made after expiration of ourcurrent insurance contracts.  Generallyaccepted accounting principles require that we record a liability for incurredbut not reported (IBNR) professional liability claims if they are probable andreasonably estimable, and for which we have not yet contracted for insurancecoverage.  The company uses actuarial assumptionsto estimate and record its IBNR liability and has a $39.0 million IBNRliability recorded as of June 30, 2008.

 

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Insurancemarket conditions for our industry and the company include heightened overallpremium cost.  In addition, in 2005, PCICraised the reinsurance attachment point from $15 million to $25 million. Trendstoward higher self-insured retentions and constraints on aggregate excesscoverage for this class of insurance coverage are anticipated to continue or torecur periodically, and to be reflected in our future annual insurancerenewals.  As a result, we will continueto assess our ability to secure future insurance coverage and we cannot assurethat such coverage will continue to be available indefinitely in the event ofspecific adverse claims experience, adverse loss trends, market capacityconstraints or other factors.  

 

Inanticipation of the possibility of future reductions in risk transfer from PCICto re-insurers, as well as the hardening insurance market conditions in recentyears, the firms that own PCIC, including the company, have increased PCIC’scapital in the past and we will continue to re-assess capital requirements on aregular basis.

 

Inlight of increasing worldwide litigation, including litigation againstprofessionals, the company has 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 tomitigate risk may not be legally practical or enforceable in litigationinvolving breaches of fiduciary duty or certain other alleged errors oromissions, or in certain jurisdictions. We may incur significant legal expensesin defending against litigation. Nearly 100 percent of the company’s U.S. andU.K. corporate clients have signed engagement letters including some if not allof our preferred mitigation clauses, and initiatives to maintain that processin the United States and the United Kingdom and complete it elsewhere areunderway. 

 

**RecentAccounting Pronouncements**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) publishedStatement of Financial Accounting Standards No.157, “Fair Value Measurements”(“FAS 157”) which in most respects is effective beginning July 1, 2008.  FAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  The company has evaluated the new statementand has determined that the adoption of FAS 157 will not have a material impacton its consolidated financial statements.

 

InSeptember 2006, the FASB published Statement of Financial Accounting StandardsNo. 158, “Employers’ Accounting for Defined Benefit Pension Plans and OtherPostretirement Plans” (FAS 158).  Thecompany adopted the provisions of FAS 158 for the fiscal year ended June 30,2007.  FAS 158 requires companies torecognize the funded status of each of the defined benefit pension andpostretirement plans.  The impact of thestandard of $2.3 million and $1.4 million for the fiscal years ended June 30,2008 and 2007, respectively, are recognized as a component of accumulated othercomprehensive income.

 

InSeptember 2006, the SEC released Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements When QualifyingMisstatements in Current Year Financial Statement” (“SAB 108”) which providesguidance on how companies should quantify financial statementmisstatements.  SAB 108 permits companies,under certain circumstances, to adjust for the cumulative effect ofmisstatements relating to prior years in the carrying amount of assets andliabilities as of the beginning of the current fiscal year, with an offsettingadjustment to the opening balance of retained earnings in the year of adoption.The Company adopted SAB 108 in fiscal year 2007 and recorded an adjustment tobeginning retained earnings of $10.1 million.

 

InJune 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”(“FAS 109”), which clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FAS No.109, “Accounting for Income Taxes.”  FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This Interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition.  The companyadopted this standard on July 1, 2007. See Note 11 of this report for further information regarding thecompany’s adoption of FIN 48.  

 

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

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 141 (revised 2007), “Business Combinations” (FAS 141R) which is arevision of FAS 141, “Business Combinations”. FAS 141R changes the application of the acquisition method in a numberof significant aspects.  Acquisitioncosts will generally be expensed as incurred; noncontrolling interests will bevalued at fair value at the acquisition date; restructuring costs associatedwith a business combination will generally be expensed subsequent to theacquisition date; contingent consideration will be recognized at its fair valueon the acquisition date and, for certain arrangements, changes in fair valuewill be recognized in earnings until settled, and changes in deferred tax assetvaluation allowances and income tax uncertainties after the acquisition date generallywill affect income tax expense. We will be required to comply with theprovisions of FAS 141(R) for acquisitions that occur on or after July 1,2009. The Statement would apply prospectively to any future businesscombinations and therefore the impact would be determined when a businesscombination occurs.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo.160, “Noncontrolling Interests in Consolidated Financial Statements – anamendment of ARB No.51” (“FAS 160”). This statement is effective for fiscal years, and interim periods withinthose fiscal years, beginning on or after December 15, 2008, with earlieradoption prohibited.  This statementrequires the recognition of a noncontrolling interest (minority interest) as equityin the consolidated financial statements and separate from the parent’sequity.  The amount of net incomeattributable to the noncontrolling interest will be included in consolidatednet income.  It also amends certain ofARB No. 51’s consolidation procedures for consistency with therequirements of FAS 141(R).  Thisstatement also includes expanded disclosure requirements regarding theinterests of the parent and its noncontrolling interest.  The Company is currently evaluating theeffects, if any, that FAS 160 may have on its financial statements.

 

InApril2008,theFASBissuedFASBStaffPositonNo.142-3,“DeterminationoftheUsefulLifeofIntangibleAssets”(“FSP142-3”).  FSP142-3amendsthefactorsthatshouldbeconsideredindevelopingrenewalorextensionassumptionsusedtodeterminetheusefullifeofarecognizedintangibleassetsunderStatementofFinancialAccountingStandardsNo.142,“GoodwillandOtherIntangibleAssets.”  FSP142-3iseffectiveonaprospectivebasistoallintangibleassetsacquiredandfordisclosuresonallintangibleassetsrecognizedonorafterthebeginningofthefirstannualperiodsubsequenttoDecember15,2008.Earlyadoptionisprohibited.  TheeffectsofFSP142-3willdependonfutureacquisitionsofintangibleassets.

 

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

 

We are exposed to market risks in the ordinary course ofbusiness.  These risks include interestrate risk, foreign currency exchange and translation risk.

 

**Interest Rate Risk**

 

The primary objective of our investment activities is topreserve principal while at the same time maximize yields without significantlyincreasing risk. To achieve this objective, we maintain our portfolio in mainlyshort term securities that are recorded on the balance sheet at fair value.

 

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**ForeignCurrency Risk**

 

International revenues result from transactions by ourforeign operations and are typically denominated in the local currency of eachcountry. These operations also incur most of their expenses in the localcurrency. Accordingly, our foreign operations use the local currency, as theirfunctional currency.  Our primaryinternational operations use the British Pound, the Euro and the Canadiandollar. Our international operations are subject to risks typical ofinternational operations, including, but not limited to, differing economicconditions, changes in political climate, differing tax structures, otherregulations and restrictions, and foreign exchange rate volatility.Accordingly, our future results could be adversely impacted by changes in theseor other factors.

 

**TranslationExposure**

 

Foreign exchange rate fluctuations may adversely impactour consolidated financial position as well as our consolidated results ofoperations and may adversely impact our financial position as the assets andliabilities of our foreign operations are translated into U.S. dollars inpreparing our condensed consolidated balance sheet. Additionally, foreignexchange rate fluctuations may adversely impact our condensed consolidatedresults of operations as exchange rate fluctuations on transactions denominatedin currencies other than our functional currencies result in gains and lossesthat are reflected in our condensed consolidated statement of income.

 

We consolidate our international subsidiaries byconverting them into U.S. dollars in accordance with Statement of FinancialAccounting Standards No. 52, “Foreign Currency Translation” (“FAS 52”).The results of operations and our financial position will fluctuate when thereis a change in foreign currency exchange rates.

 

**Item 8.  Financial Statements andSupplementary Data.**

 

Ourconsolidated financial statements, together with the related notes and thereport of independent registered public accounting firm, are set forth on the pages indicatedin Item 15.

 

**Item 9.  Changes in andDisagreements with Accountants on Accounting and Financial Disclosure.**

 

Thereare no changes in accountants or disagreements with accountants on accountingprinciples and financial disclosures required to be disclosed in this Item 9.

 

**Item 9A.  Controls andProcedures.**

 

**Evaluation of Disclosure Controls and Procedures**

 

Anevaluation was performed under the supervision and with the participation ofour principal executive officer, principal financial officer and seniormanagement, of the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered by this report.Based upon that evaluation, our principal executive officer, principalfinancial officer, and senior management concluded that our disclosure controlsand procedures were effective in providing reasonable assurance that theinformation required to be disclosed in our periodic reports we file or submitunder the Exchange Act is (1) recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rules andforms, and (2) accumulated and communicated to our management to allowtheir timely decisions regarding required disclosure.

 

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**Changes in Internal Control Over Financial Reporting**

 

There were no changes in ourinternal control over financial reporting in the fourth quarter of 2008 thatmaterially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Management’s Report on Internal Control over Financial Reporting**

 

Internal control overfinancial reporting refers to the process designed by, or under the supervisionof, our Chief Executive Officer and Chief Financial Officer, and overseen byour Board of Directors, management and other personnel, to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles, and includes those policies and proceduresthat:

 

(1)          Pertain to the maintenance of records that in reasonable detailaccurately and fairly reflect the transactions and dispositions of the assetsof the company;

 

(2)          Provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and

 

(3)          Provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use or disposition of the company’s assets that couldhave a material effect on the financial statements.

 

Internal control overfinancial reporting cannot provide absolute assurance of achieving financialreporting objectives because of its inherent limitations. Internal control overfinancial reporting is a process that involves human diligence and complianceand is subject to lapses in judgment and breakdowns resulting from humanfailures. Internal control over financial reporting also can be circumvented bycollusion or improper management override. Because of such limitations, thereis a risk that material misstatements may not be prevented or detected on atimely basis by internal control over financial reporting. However, theseinherent limitations are known features of the financial reporting process.Therefore, it is possible to design into the process safeguards to reduce,though not eliminate, this risk.

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting for the company. Management has used the framework set forth in thereport entitled Internal Control-Integrated Framework published by theCommittee of Sponsoring Organizations (COSO) of the Treadway Commission toevaluate the effectiveness of the company’s internal control over financialreporting. Based on this evaluation, management has concluded that the company’sinternal control over financial reporting was effective as of June 30,2008.

 

Management has excludedHeissmann and Marcu from its assessment of internal control over financialreporting as of June 30, 2008 because both entities were acquired by thecompany during fiscal year 2008.

 

Our independent registeredpublic accounting firm, Deloitte & Touche LLP, has issued a report onmanagement’s assessment of our internal control over financial reporting.  This report is included below.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders ofWatson Wyatt Worldwide, Inc.Arlington, Virginia

 

We have audited the internal control over financialreporting of Watson Wyatt Worldwide, Inc. and subsidiaries (the “Company”)as of June 30, 2008, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting included in the accompanying Management’s Report on Internal Controlsover Financial Reporting.  Our responsibility is to express an opinion onthe Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects.  Our auditincluded obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control basedupon the assessed risk, and performing such other procedures as we considerednecessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financialreporting is a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performingsimilar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis.  Also,projections of any evaluation of the effectiveness of the internal control overfinancial reporting to future periods are subject to the risk that the controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of June 30,2008, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

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We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year ended June 30,2008 of the Company and our report dated August 15, 2008 expressed anunqualified opinion on those financial statements and financial statementschedule and included an explanatory paragraph regarding the Company’s adoptionof new accounting standards.

 

*DELOITTE & TOUCHE LLP*

 

McLean, VirginiaAugust 15, 2008

 

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**Part III**

 

**Item 10.  Directors, ExecutiveOfficers, and Audit Committee of the Registrant.**

 

Theresponse to this itemwill be included in a definitive proxy statement to be filed within 120 daysafter the end of the company’s fiscal year, and that information isincorporated herein by this reference.

 

**Item 11.  Executive Compensation.**

 

Theresponse to this item will be included in a definitive proxy statement to befiled within 120 days after the end of the company’s fiscal year, and thatinformation is incorporated herein by this reference.

 

**Item 12.  Security Ownership ofCertain Beneficial Owners and Management.**

 

Theresponse to this item will be included in a definitive proxy statement to befiled within 120 days after the end of the company’s fiscal year, and thatinformation is incorporated herein by this reference.

 

**Item 13.  Certain Relationshipsand Related Transactions.**

 

Theresponse to this item will be included in a definitive proxy statement to befiled within 120 days after the end of the company’s fiscal year, and thatinformation is incorporated herein by this reference.

 

**Item 14.  Principal Auditor Feesand Services.**

 

Theresponse to this item will be included in a definitive proxy statement to befiled within 120 days after the end of the company’s fiscal year, and thatinformation is incorporated herein by this reference.

 

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**Part IV**

 

**Item 15.  Exhibits and FinancialStatement Schedules**

 
| a)     | Financial Information                                                                                                                                |   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                 |   |
| (1)    | Consolidated  Financial Statements of Watson Wyatt Worldwide, Inc.                                                                              |   |
|   |                                                                                                                                                 |   |
|   | Report of  Independent Registered Public Accounting Firm                                                                                             |   |
|   |                                                                                                                                                 |   |
|   | Financial  Statements:                                                                                                                               |   |
|   | Consolidated  Statements of Operations for each of the three years in the period ended  June 30, 2008                                           |   |
|   | Consolidated  Balance Sheets at June 30, 2008 and 2007                                                                                          |   |
|   | Consolidated  Statements of Cash Flows for each of the three years in the period ended  June 30, 2008                                           |   |
|   | Consolidated  Statements of Changes in Stockholders’ Equity for each of the three years in  the period ended June 30, 2008                 |   |
|   | Notes to  the Consolidated Financial Statements                                                                                                      |   |
|   |                                                                                                                                                 |   |
| (2)    | Consolidated  Financial Statement Schedule for each of the three years in the period ended  June 30, 2008                                       |   |
|   |                                                                                                                                                 |   |
|   | Valuation  and Qualifying Accounts and Reserves (Schedule II)                                                                                        |   |
|   | All other schedules are omitted because they are  not applicable or the required information is shown in the financial  statements or notes thereto. |   |
|   |                                                                                                                                                 |   |
| (3)    | Exhibits                                                                                                                                             |   |
|   |                                                                                                                                                 |   |
|   | See  (b) below.                                                                                                                                 |   |
|   |                                                                                                                                                 |   |
| b)     | Exhibits                                                                                                                                             |   |
|   |                                                                                                                                                 |   |
|   | See  Exhibit Index on page 97.                                                                                                             |   |
|   |                                                                                                                                                 |   |
| c)     | Financial  Statement Schedules                                                                                                                       |   |
|   |                                                                                                                                                 |   |
|   | Not  applicable.                                                                                                                                     |   |

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                        | WATSON  WYATT WORLDWIDE, INC. |
|-----------------------------|-------------------------------|
|                        | (Registrant)                  |
|                        |                          |
| Date:  August 15, 2008 | By:                           |  /s/  John J. Haley |
|                        |                          |  John  J. Haley |
|                        |                          |  President  and Chief Executive   Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**                            | ** ** | **Title**                           | ** ** | **Date** |
|------------------------------------------|------------|-------------------------------------|------------|----------|
|                                     |       |                                |       |     |
|                                     |       |                                |       |     |
|   /s/ John J.  Haley           |       | President,  Chief Executive Officer |       | 8/15/08  |
|   John J. Haley                |       | and  Director                       |       |     |
|                                     |       |                                |       |     |
|                                     |       |                                |       |     |
|   /s/ Carl D.  Mautz           |       | Vice  President and Chief           |       | 8/15/08  |
|   Carl  D. Mautz               |       | Financial  Officer                  |       |     |
|                                     |       |                                |       |     |
|                                     |       |                                |       |     |
|   /s/ Peter L.  Childs         |       | Controller                          |       | 8/15/08  |
|   Peter L.  Childs             |       |                                |       |     |
|                                     |       |                                |       |     |
|                                     |       |                                |       |     |
|   /s/ John J.  Gabarro         |       | Director                            |       | 8/15/08  |
|   John J.  Gabarro             |       |                                |       |     |
|                                     |       |                                |       |     |
|                                     |       |                                |       |     |
|   /s/ Kevin  Meehan            |       | Director                            |       | 8/15/08  |
|   Kevin Meehan                 |       |                                |       |     |
|                                     |       |                                |       |     |
|                                     |       |                                |       |     |
|   /s/ R. Michael  McCullough   |       | Director                            |       | 8/15/08  |
|   R. Michael  McCullough       |       |                                |       |     |
|                                     |       |                                |       |     |
|                                     |       |                                |       |     |
|   /s/ Brendan  O’Neill    |       | Director                            |       | 8/15/08  |
|   Brendan  O’Neill        |       |                                |       |     |
|                                     |       |                                |       |     |
|                                     |       |                                |       |     |
|   /s/ Linda D.  Rabbitt        |       | Director                            |       | 8/15/08  |
|   Linda D.  Rabbitt            |       |                                |       |     |
|                                     |       |                                |       |     |
|                                     |       |                                |       |     |
|   /s/Chandrasekhar  Ramamurthy |       | Vice  President and Director        |       | 8/15/08  |
|   Chandrasekhar  Ramamurthy    |       |                                |       |     |

 

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|   /s/ Gilbert T.  Ray |   | Director |   | 8/15/08 |
|---------------------------------|--------|----------|--------|---------|
|   Gilbert T. Ray      |   |     |   |    |
|                            |   |     |   |    |
|   /s/ John C.  Wright |   | Director |   | 8/15/08 |
|   John C. Wright      |   |     |   |    |

 

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders Watson Wyatt Worldwide, Inc.Arlington, Virginia

 

We have audited the accompanying consolidatedbalance sheets of Watson Wyatt Worldwide, Inc. and subsidiaries (the “Company”)as of June 30, 2008 and 2007 and the related consolidated statements ofoperations, changes in stockholders’ equity, and cash flows for the years thenended.  Our audits also included the financial statement schedule listedin the Index at Item 15 for the years ended June 30, 2008 and 2007. These financial statements and financial statement schedule are theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements.  Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the consolidated financial statements present fairly,in all material respects, the financial position of Watson Wyatt Worldwide, Inc.and subsidiaries at June 30, 2008 and 2007, and the results of their operationsand their cash flows for the years then ended in conformity with accountingprinciples generally accepted in the United States of America.  Also, in our opinion, such financialstatement schedules for the years ended June 30, 2008 and 2007, when consideredin relation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 

As discussed in Note 1 to the consolidated financial statements,effective June 30, 2007, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 158 as well as SEC Staff Accounting Bulletin No.108.  Additionally, as discussed in Note1 and 11 of the notes to the consolidated financial statements, effective July1, 2007, the Company adopted FASB Interpretation (“FIN”) No. 48 *Accounting for Uncertainty in Income Taxes*, aninterpretation of FASB Statement No. 109.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the Company’s internalcontrol over financial reporting as of June 30, 2008, based on thecriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated August 15,2008, expressed an unqualified opinion on the Company’s internal control overfinancial reporting .

 

*DELOITTE & TOUCHE LLP*

* *

McLean, VirginiaAugust 15, 2008

 

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REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

ToBoard of Directors and Stockholders

WatsonWyatt Worldwide, Inc.

 

Inour opinion, the consolidated financial statements listed in the accompanyingindex present fairly, in all material respects, the results of operations andcash flows of Watson Wyatt Worldwide, Inc. and its subsidiaries for theyear ended June 30, 2006 in conformity with accounting principlesgenerally accepted in the United States of America.  In addition, in our opinion, the financialstatement schedule for the year ended June 30, 2006, listed in theaccompanying index presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements.  These financialstatements and the financial statement schedule are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these financial statements and financial statementschedule based on our audit.  Weconducted our audit of these statements in accordance with the standards of thePublic Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

PricewaterhouseCoopersLLP

 

McLean,Virginia

August 17,2006

 

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**WATSON WYATT WORLDWIDE, INC.**

**Consolidated Statements of Operations**

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

 
| ** **                                                                                                                                              | ** ** | **Year Ended June 30** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                              | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Revenue                                                                                                                                                 |       | $                                     | 1,760,055  |   | $ | 1,486,523 |   | $ | 1,271,811 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Costs of  providing services:                                                                                                                           |       |                                  |       |   |   |   |   |
| Salaries and  employee benefits                                                                                                                         |       | 970,236                               |       | 805,571 |   | 699,049 |   |
| Professional and  subcontracted services                                                                                                                |       | 105,896                               |       | 99,943 |   | 84,165 |   |
| Occupancy,  communications and other                                                                                                                    |       | 208,058                               |       | 184,832 |   | 164,140 |   |
| General and  administrative expenses                                                                                                                    |       | 176,664                               |       | 159,637 |   | 147,122 |   |
| Depreciation and  amortization                                                                                                                          |       | 72,428                                |       | 57,235 |   | 44,918 |   |
|                                                                                                                                                    |       | 1,533,282                             |       | 1,307,218 |   | 1,139,394 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Income from  operations                                                                                                                                 |       | 226,773                               |       | 179,305 |   | 132,417 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Income/(Loss)  from affiliates                                                                                                                          |       | 2,067                                 |       | (5,500 | ) | 1,135 |   |
| Interest income                                                                                                                                         |       | 5,584                                 |       | 4,066 |   | 4,325 |   |
| Interest expense                                                                                                                                        |       | (5,977                                | )          | (1,581 | ) | (4,093 | ) |
| Other non-operating  income/(loss)                                                                                                                      |       | 464                                   |       | 178 |   | (2,081 | ) |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Income from  continuing operations before income taxes                                                                                                  |       | 228,911                               |       | 176,468 |   | 131,703 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Provision for  income taxes                                                                                                                             |       | 73,470                                |       | 60,193 |   | 45,585 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Income from  continuing operations                                                                                                                      |       | 155,441                               |       | 116,275 |   | 86,118 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Discontinued  operations:                                                                                                                               |       |                                  |       |   |   |   |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Adjustment to  reduce estimated loss on disposal of discontinued operations (less applicable  income tax expense for the year ended June 30, 2006) |       | —                                |       | — |   | 1,028 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Sublease income  from discontinued operations, less applicable income tax expense for the year  ended June 30, 2006                                |       | —                                |       | — |   | 45 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Net income                                                                                                                                              |       | $                                     | 155,441    |   | $ | 116,275 |   | $ | 87,191 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Basic earnings  per share:                                                                                                                              |       |                                  |       |   |   |   |   |
| Income from  continuing operations                                                                                                                      |       | $                                     | 3.65       |   | $ | 2.74 |   | $ | 2.08 |   |
| Income from  discontinued operations                                                                                                                    |       | —                                |       | — |   | 0.03 |   |
| Net income                                                                                                                                              |       | $                                     | 3.65       |   | $ | 2.74 |   | $ | 2.11 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Diluted earnings  per share:                                                                                                                            |       |                                  |       |   |   |   |   |
| Income from  continuing operations                                                                                                                      |       | $                                     | 3.50       |   | $ | 2.60 |   | $ | 1.99 |   |
| Income from  discontinued operations                                                                                                                    |       | —                                |       | — |   | 0.02 |   |
| Net income                                                                                                                                              |       | $                                     | 3.50       |   | $ | 2.60 |   | $ | 2.01 |   |
|                                                                                                                                                    |       |                                  |       |   |   |   |   |
| Weighted average  shares of common stock, basic (000)                                                                                                   |       | 42,577                                |       | 42,413 |   | 41,393 |   |
| Weighted average  shares of common stock, diluted (000)                                                                                                 |       | 44,381                                |       | 44,684 |   | 43,297 |   |

 

See accompanyingnotes to the consolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                 | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                 | ** ** | **2008**          | ** ** | **2007**          | ** ** |
|                                                                                                       |       |              |       |              |       |
| **Assets**                                                                                                 | ** ** | ** **        | ** ** | ** **        | ** ** |
| Cash and cash  equivalents                                                                                 |       | $                 | 124,632    |              | $          | 248,186 |   |
| Receivables from  clients:                                                                                 |       |              |       |              |       |
| Billed, net of  allowances of $8,544 and $6,216                                                            |       | 239,593           |       | 227,130           |       |
| Unbilled, at  estimated net realizable value                                                               |       | 126,163           |       | 109,697           |       |
|                                                                                                       |       | 365,756           |       | 336,827           |       |
| Deferred income  taxes                                                                                     |       | 18,576            |       | 17,016            |       |
| Other current  assets                                                                                      |       | 48,523            |       | 34,733            |       |
| Total current  assets                                                                                      |       | 557,487           |       | 636,762           |       |
| Investment in  affiliate                                                                                   |       | 8,526             |       | 3,058             |       |
| Fixed assets,  net                                                                                         |       | 184,684           |       | 172,147           |       |
| Deferred income  taxes                                                                                     |       | 72,572            |       | 66,751            |       |
| Goodwill                                                                                                   |       | 634,176           |       | 382,936           |       |
| Intangible  assets, net                                                                                    |       | 236,767           |       | 211,715           |       |
| Other assets                                                                                               |       | 21,764            |       | 56,340            |       |
|                                                                                                       |       |              |       |              |       |
| **Total  Assets**                                                                                          |       | $                 | 1,715,976  |              | $          | 1,529,709 |   |
| ** **                                                                                                 | ** ** | ** **        | ** ** | ** **        | ** ** |
| **Liabilities**                                                                                            | ** ** | ** **        | ** ** | ** **        | ** ** |
| Accounts payable  and accrued liabilities, including discretionary compensation                            |       | $                 | 381,784    |              | $          | 303,346 |   |
| Income taxes  payable and deferred                                                                         |       | 3,462             |       | 7,062             |       |
| Total current  liabilities                                                                                 |       | 385,246           |       | 310,408           |       |
| Revolving credit  facility                                                                                 |       | —            |       | 105,000           |       |
| Accrued  retirement benefits                                                                               |       | 209,168           |       | 198,677           |       |
| Deferred rent  and accrued lease losses                                                                    |       | 29,239            |       | 32,686            |       |
| Deferred income  taxes and other long term tax liabilities                                                 |       | 13,430            |       | 2,663             |       |
| Other noncurrent  liabilities                                                                              |       | 94,498            |       | 92,756            |       |
|                                                                                                       |       |              |       |              |       |
| **Total  Liabilities**                                                                                     |       | 731,581           |       | 742,190           |       |
|                                                                                                       |       |              |       |              |       |
| Commitments and  contingencies (Note 13)                                                                   |       |              |       |              |       |
|                                                                                                       |       |              |       |              |       |
| **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 42,463,451 issued and 43,578,268 and  42,299,792 outstanding |       | 438               |       | 428               |       |
| Additional  paid-in capital                                                                                |       | 456,681           |       | 395,521           |       |
| Treasury stock,  at cost - 235,183 and 463,659 shares                                                      |       | (13,222           | )          | (22,251           | )          |
| Retained  earnings                                                                                         |       | 474,961           |       | 336,101           |       |
| Accumulated  other comprehensive income                                                                    |       | 65,537            |       | 77,720            |       |
| **Total  Stockholders’ Equity**                                                                       |       | 984,395           |       | 787,519           |       |
|                                                                                                       |       |              |       |              |       |
| **Total  Liabilities and Stockholders’ Equity**                                                       |       | $                 | 1,715,976  |              | $          | 1,529,709 |   |

 

See accompanyingnotes to the consolidated financial statements

 

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**WATSONWYATT WORLDWIDE, INC.**

**ConsolidatedStatements of Cash Flows**

(Thousands of U.S. Dollars)

 
| ** **                                                                                                | ** ** | **Year ended June 30** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                      |       |                                  |       |   |   |   |   |
| Cash flows from  operating activities:                                                                    |       |                                  |       |   |   |   |   |
| Net income                                                                                                |       | $                                     | 155,441    |   | $ | 116,275 |   | $ | 87,191 |   |
| Adjustments to  reconcile net income to net cash from operating activities:                               |       |                                  |       |   |   |   |   |
| Loss on foreign  currency forward contract                                                                |       | —                                |       | — |   | 3,602 |   |
| Income from  discontinued operations, net of income tax expense                                           |       | —                                |       | — |   | (1,028 | ) |
| Provision for  doubtful receivables from clients                                                          |       | 11,207                                |       | 8,551 |   | 5,687 |   |
| Depreciation                                                                                              |       | 56,281                                |       | 47,090 |   | 36,763 |   |
| Amortization of  intangible assets                                                                        |       | 16,397                                |       | 10,145 |   | 8,155 |   |
| Provision for  (benefit from) deferred income taxes                                                       |       | 8,468                                 |       | 8,418 |   | 9,545 |   |
| (Income)/Loss  from affiliates                                                                            |       | (2,066                                | )          | 5,500 |   | (1,136 | ) |
| Distributions  from affiliates                                                                            |       | —                                |       | — |   | 1,614 |   |
| Other, net                                                                                                |       | 8,640                                 |       | 977 |   | 449 |   |
| Changes in  operating assets and liabilities (net of business acquisitions and discontinued  operations): |       |                                  |       |   |   |   |   |
| Receivables from  clients                                                                                 |       | (22,057                               | )          | (43,464 | ) | (27,917 | ) |
| Other current  assets                                                                                     |       | (1,885                                | )          | (24,699 | ) | 32,212 |   |
| Other assets                                                                                              |       | 37,080                                |       | 1,324 |   | (2,000 | ) |
| Accounts payable  and accrued liabilities                                                                 |       | 79,646                                |       | 19,246 |   | 5,238 |   |
| Income taxes  payable                                                                                     |       | (2,080                                | )          | 4,407 |   | (235 | ) |
| Accrued  retirement benefits                                                                              |       | (61,682                               | )          | (2,831 | ) | 4,148 |   |
| Deferred rent  and accrued lease losses                                                                   |       | (3,447                                | )          | 54 |   | 1,561 |   |
| Other noncurrent  liabilities                                                                             |       | 3,788                                 |       | 16,119 |   | 5,274 |   |
| Cash flows from  operating activities:                                                                    |       | 283,731                               |       | 167,112 |   | 169,123 |   |
|                                                                                                      |       |                                  |       |   |   |   |   |
| Cash flows used  in investing activities:                                                                 |       |                                  |       |   |   |   |   |
| Business  acquisitions and contingent consideration payments                                              |       | (138,830                              | )          | (48,099 | ) | (137,784 | ) |
| Purchases of  fixed assets                                                                                |       | (38,694                               | )          | (43,989 | ) | (38,060 | ) |
| Capitalized  software costs                                                                               |       | (21,904                               | )          | (22,295 | ) | (27,743 | ) |
| Investment in  affiliates                                                                                 |       | (3,316                                | )          | — |   | — |   |
| Increase in  restricted cash                                                                              |       | (2,331                                | )          | — |   | — |   |
| Contingent  proceeds from divestitures                                                                    |       | 464                                   |       | 178 |   | 1,296 |   |
| Cash flows used  in investing activities:                                                                 |       | (204,611                              | )          | (114,205 | ) | (202,291 | ) |
|                                                                                                      |       |                                  |       |   |   |   |   |
| Cash flows (used  in)/from financing activities:                                                          |       |                                  |       |   |   |   |   |
| (Repayments)/borrowings  under Credit Facility                                                            |       | (105,000                              | )          | 75,000 |   | 30,000 |   |
| Foreign currency  forward contract                                                                        |       | —                                |       | — |   | (8,405 | ) |
| Dividends paid                                                                                            |       | (12,767                               | )          | (12,717 | ) | (12,667 | ) |
| Repurchases of  common stock                                                                              |       | (82,032                               | )          | (48,303 | ) | (4,272 | ) |
| Issuance of  common stock and excess tax benefit                                                          |       | 11,046                                |       | 13,245 |   | 12,200 |   |
| Cash flows (used  in)/from financing activities:                                                          |       | (188,753                              | )          | 27,225 |   | 16,856 |   |
|                                                                                                      |       |                                  |       |   |   |   |   |
| Effect of  exchange rates on cash                                                                         |       | (13,921                               | )          | 2,709 |   | 13,581 |   |
|                                                                                                      |       |                                  |       |   |   |   |   |
| (Decrease)/Increase  in cash and cash equivalents                                                         |       | (123,554                              | )          | 82,841 |   | (2,731 | ) |
|                                                                                                      |       |                                  |       |   |   |   |   |
| Cash and cash  equivalents at beginning of period                                                         |       | 248,186                               |       | 165,345 |   | 168,076 |   |
|                                                                                                      |       |                                  |       |   |   |   |   |
| Cash and cash  equivalents at end of period                                                               |       | $                                     | 124,632    |   | $ | 248,186 |   | $ | 165,345 |   |
|                                                                                                      |       |                                  |       |   |   |   |   |
| Supplemental  disclosures:                                                                                |       |                                  |       |   |   |   |   |
| Cash paid for  interest                                                                                   |       | $                                     | 5,951      |   | $ | 1,822 |   | $ | 3,822 |   |
| Cash paid for  income taxes, net of refunds                                                               |       | $                                     | 76,324     |   | $ | 68,893 |   | $ | 21,578 |   |

 

See accompanyingnotes to the consolidated financial statements

 

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**WATSONWYATT WORLDWIDE, INC.**

**Consolidated Statement of Changes inStockholders’ Equity**

(Thousands of U.S. Dollars)

 
| ** **                                                                      | ** ** | **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** | ** ** | **(Loss)/Income** | ** ** | **Total**  | ** ** |
|                                                                            |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Balance at  July 1, 2005                                                   |       | 32,627                           |       | 334              |       | 147,948        |       | (18,705          | )          | 168,075      |       | (63,449           | )          | 234,203    |       |
| Comprehensive  income:                                                          |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Net income                                                                      |       | —                           |       | —           |       | —         |       | —           |       | 87,191       |       | —            |       | 87,191     |       |
| Additional  minimum pension liability, net of tax                               |       | —                           |       | —           |       | —         |       | —           |       | —       |       | 61,662            |       | 61,662     |       |
| Foreign currency  translation adjustment, net of tax                            |       | —                           |       | —           |       | —         |       | —           |       | —       |       | 23,266            |       | 23,266     |       |
| Total  comprehensive income                                                     |       |                             |       |             |       |           |       |             |       |         |       |              |       | 172,119    |       |
| Cash dividends  declared                                                        |       | —                           |       | —           |       | —         |       | —           |       | (12,667      | )          | —            |       | (12,667    | )          |
| Repurchases of  common stock                                                    |       | (150                             | )          | —           |       | —         |       | (4,272           | )          | —       |       | —            |       | (4,272     | )          |
| Issuances of  common stock - acquisitions                                       |       | 9,184                            |       | 91               |       | 238,799        |       | 2,328            |       | —       |       | —            |       | 241,218    |       |
| Issuances of  common stock and excess tax benefit                               |       | 725                              |       | —           |       | (2,698         | )          | 18,515           |       | —       |       | —            |       | 15,817     |       |
| Non-qualified  stock option expense                                             |       | —                           |       | —           |       | 307            |       | —           |       | —       |       | —            |       | 307        |       |
| Tax benefit of  exercises of stock options                                      |       | —                           |       | —           |       | 2,036          |       | —           |       | —       |       | —            |       | 2,036      |       |
|                                                                            |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Balance at  June 30, 2006                                                  |       | 42,386                           |       | $                | 425        |           | $          | 386,392          |       | $            | (2,134     | )                 | $          | 242,599    |       | $ | 21,479 |   | $ | 648,761 |   |
| Cumulative  adjustment to retained earnings for adoption of SAB 108, net of tax |       | —                           |       | —           |       | —         |       | —           |       | (10,056      | )          | —            |       | (10,056    | )          |
| Adoption of FAS  158, net of tax                                                |       | —                           |       | —           |       | —         |       | —           |       | —       |       | (1,412            | )          | (1,412     | )          |
| Comprehensive  income:                                                          |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Net income                                                                      |       | —                           |       | —           |       | —         |       | —           |       | 116,275      |       | —            |       | 116,275    |       |
| Additional  minimum pension liability, net of tax                               |       | —                           |       | —           |       | —         |       | —           |       | —       |       | 6,716             |       | 6,716      |       |
| Foreign currency  translation adjustment, net of tax                            |       | —                           |       | —           |       | —         |       | —           |       | —       |       | 50,937            |       | 50,937     |       |
| Total  comprehensive income                                                     |       |                             |       |             |       |           |       |             |       |         |       |              |       | 173,928    |       |
| Cash dividends  declared                                                        |       | —                           |       | —           |       | —         |       | —           |       | (12,717      | )          | —            |       | (12,717    | )          |
| Repurchases of  common stock                                                    |       | (1,083                           | )          | —           |       | —         |       | (48,303          | )          | —       |       | —            |       | (48,303    | )          |
| Issuances of  common stock - acquisitions                                       |       | 252                              |       | 3                |       | 11,274         |       | 99               |       | —       |       | —            |       | 11,376     |       |
| Issuances of  common stock and excess tax benefit                               |       | 744                              |       | —           |       | (2,145         | )          | 28,087           |       | —       |       | —            |       | 25,942     |       |
|                                                                            |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Balance at  June 30, 2007                                                  |       | 42,299                           |       | $                | 428        |           | $          | 395,521          |       | $            | (22,251    | )                 | $          | 336,101    |       | $ | 77,720 |   | $ | 787,519 |   |

 

See accompanyingnotes to the consolidated financial statements

 

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**WATSONWYATT WORLDWIDE, INC.**

**ConsolidatedStatement of Changes in Stockholders’ Equity, continued**

(Thousands of U.S. Dollars)

 
| ** **                                                             | ** ** | **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** | ** ** | **(Loss)/Income** | ** ** | **Total**  | ** ** |
|                                                                   |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Adoption of FIN  48                                                    |       | —                           |       | —           |       | —         |       | —           |       | (3,813       | )          | —            |       | (3,813     | )          |
| Comprehensive  income:                                                 |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Net income                                                             |       | —                           |       | —           |       | —         |       | —           |       | 155,441      |       | —            |       | 155,441    |       |
| Additional  pension liability, net of tax                              |       | —                           |       | —           |       | —         |       | —           |       | —       |       | (32,368           | )          | (32,368    | )          |
| Foreign currency  translation adjustment, net of tax                   |       | —                           |       | —           |       | —         |       | —           |       | —       |       | 20,185            |       | 20,185     |       |
| Total  comprehensive income                                            |       |                             |       |             |       |           |       |             |       |         |       |              |       | 143,258    |       |
| Cash dividends  declared                                               |       | —                           |       | —           |       | —         |       | —           |       | (12,768      | )          | —            |       | (12,768    | )          |
| Repurchases of  common stock                                           |       | (1,586                           | )          | —           |       | —         |       | (82,031          | )          | —       |       | —            |       | (82,031    | )          |
| Issuances of  common stock - acquisitions and contingent consideration |       | 2,176                            |       | 10               |       | 52,694         |       | 57,999           |       | —       |       | —            |       | 110,703    |       |
| Issuances of  common stock and excess tax benefit                      |       | 689                              |       | —           |       | 8,466          |       | 33,061           |       | —       |       | —            |       | 41,527     |       |
|                                                                   |       |                             |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Balance at  June 30, 2008                                         |       | 43,578                           |       | $                | 438        |           | $          | 456,681          |       | $            | (13,222    | )                 | $          | 474,961    |       | $ | 65,537 |   | $ | 984,395 |   |
|                                                                        |            |                                  |            |                  |            |                |            |                  |            |              |            |                   |            |            |            |  |  |  |  |  |  |

 

See accompanyingnotes to the consolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

 

**Notes to the ConsolidatedFinancial Statements**

**(Tabular Amounts in Thousands of U.S. Dollars Except Share andPercentage Data)**

 

**Note 1- Summary of Significant Accounting Policies**

 

*Natureof the Business* -Watson Wyatt Worldwide, Inc. (collectively referred to as “we”, “WatsonWyatt” or the “company”), together with our subsidiaries, is an internationalcompany engaged in the business of providing professional consultative services on a fee basis, primarily in the humanresource areas of employee benefits and compensation, human capital consultingand human resource-related technology consulting, but also in other areas ofspecialization such as investment and financial advisory services.  The company’s fiscal year ends on June 30th.

 

*Principlesof Consolidation*- Our consolidated financial statements include the accounts of the company andour majority-owned and controlled subsidiaries after elimination ofintercompany accounts and transactions. Investments in affiliated companies over which we have the ability toexercise significant influence are accounted for using the equity method.

 

*Use ofEstimates* -Preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period.  Actualresults could differ from those estimates. Estimates are used when accounting for revenue, allowances foruncollectible receivables, investments in affiliates, depreciation andamortization, profits on long-term contracts, asset write-downs, employeebenefit plans, taxes, pension plan assumptions, accruals for estimated lossesrelated to reported and unreported professional liability claims anddiscontinued operations.

 

*Reclassifications* - Certain amounts previously presented havebeen reclassified to conform to the current presentation.

 

*Cashand Cash Equivalents*- We consider short-term, highly-liquid investments with original maturities of90 days or less to be cash equivalents. All of our cash and short term investments at June 30, 2008 weredeemed to be cash and cash equivalents.

 

*Receivablesfrom Clients* -Billed receivables from clients are presented at their billed amount less anallowance for doubtful accounts. Unbilled receivables are stated at netrealizable value less an allowance for unbillable amounts.

 

*RevenueRecognition* - 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.  The terms of our contracts with clients arefixed and determinable and may change based upon agreement by both parties.Individual consultants’ billing rates are principally based on a multiple ofsalary and compensation costs.

 

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

 

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

 

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

 

The company has developed various software programsand technologies that we provide to clients in connection with consultingservices.  In most instances, suchsoftware is hosted and maintained by the company and ownership of the technologyand rights to the related code remain with the company.  Software developed to be utilized inproviding services to a client, but for which the client does not have thecontractual right to take possession, is capitalized in accordance with the AICPA’sStatement of Position 98-1 “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.” Revenue associated with the related contract, together with amortizationof the related capitalized software, is recognized over the serviceperiod.  As a result, we do not recognizerevenue during the implementation phase of an engagement.

 

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

 

*Foreign Currency Translation* - Gains and losses on foreign currencytransactions, including settlement of intercompany receivables and payables,are recognized currently in the “Occupancy, communications and other” line ofour Consolidated Statements of Operations. Assets and liabilities of our subsidiaries outside the United States aretranslated into the reporting currency, the U.S. dollar, based on exchangerates at the balance sheet date.  Revenueand expenses of our subsidiaries outside the United States are translated intoU.S. dollars at the average exchange rates during the year.  Gains and losses on translation of our equityinterests in our subsidiaries outside the United States and on intercompanynotes are reported separately as accumulated other comprehensive income withinstockholders’ equity in the Consolidated Balance Sheets, since we do not planor anticipate settlement of such balances in the foreseeable future.

 

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*FairValue of Financial Instruments* - The carrying amount of our cash and cash equivalents, receivablesfrom clients and notes and accounts payable approximates fair value because ofthe short maturity and liquidity of those instruments.  There were no borrowings outstanding underour revolving credit agreement at June 30, 2008.

 

*Concentration of Credit Risk* - Financial instruments that potentiallysubject the company to concentrations of credit risk consist principally ofcertain cash and cash equivalents, and receivables from clients.  We invest our excess cash in financial instrumentsthat are rated in the highest short-term rating category by major ratingagencies such as Moody’s and Standard and Poor’s. Concentrations of credit riskwith respect to receivables from clients are limited due to our large number ofclients and their dispersion across many industries and geographic regions.

 

*IncurredBut Not Reported (IBNR) Claims**-*The companyaccrues for IBNR professional liability claims that are estimable and probable,and for which we have not yet contracted for insurance coverage.  This liability was $39.0 million and $35.5million at June 30, 2008 and 2007, respectively.

 

*Stock-based Compensation* - The company accounts for its share-based payment transactions inaccordance with FAS 123(R).

 

Duringfiscal years 2008, 2007 and 2006, the company recognized compensation expenseof $4.8 million or $.11 per diluted share, $4.1 million, or $.09 per dilutedshare and $2.1 million, or $.05 per diluted share, respectively, in connectionwith our share-based compensation plans. This does not include any expense related to the 2001 Deferred StockUnit Plan for Selected Employees, as expense related to shares awarded underthis plan is recorded as a component of the company’s accrual for discretionarycompensation.

 

Thetotal income tax benefit recognized in the income statement for the exercise ofnonqualified stock options and the award of stock purchase plan shares was $2.2million, $3.3 million and $2.0 million for fiscal years 2008, 2007 and 2006,respectively, which has been reported in the Consolidated Statements of CashFlows.

 

Thecompany repurchases shares of common stock to offset potential dilution fromshares issued in connection with the company’s share-based compensation plans.

 

*Earnings per Share* - The computation of basic earnings pershare is based upon the weighted average number of common sharesoutstanding.  Diluted earnings per shareis calculated on the basis of the weighted average number of common sharesoutstanding plus the effect of outstanding stock options, stock basedcompensation plan shares and employee stock purchase plan shares using the “treasurystock” method.  See Note 14 foridentification of the components of basic and diluted earnings per share.  The diluted earnings per share calculationfor fiscal year 2008, 2007 and 2006 assume that 1,950,000 contingent sharesrelated to the R. Watson & Sons (referred herein as “WatsonWyatt LLP” or “WWLLP”) businesscombination had been issued as of July 31, 2005.  The calculation also assumes that anadditional 218,089 shares were issued during fiscal year 2008 relative to theacquisition of Watson Wyatt Brans & Co. (“Watson Wyatt Netherlands” or“WWN”).

 

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*Goodwilland Intangible Assets* - Goodwill is not amortized but isreviewed for impairment during the fourth quarter of each fiscal year or morefrequently if indicators arise. The evaluation is based upon a comparison ofthe estimated fair value of the reporting unit to which the goodwill has beenassigned to the sum of the carrying value of the assets and liabilities forthat reporting unit. The fair values used in this evaluation are estimatedbased upon a multiple of revenue for the reporting unit. Intangible assets withdefinite lives are amortized over their estimated useful lives and are reviewedfor impairment if indicators of impairment arise. The evaluation of impairmentwould be based upon a comparison of the carrying amount of the intangible assetto the estimated future undiscounted net cash flows expected to be generated bythe asset. If estimated future undiscounted net cash flows are less than thecarrying amount of the asset, the asset would be considered impaired. Theimpairment expense would be determined by comparing the estimated fair value ofthe intangible asset to its carrying value, with any shortfall from fair valuerecognized as an expense in the current period.    

 

*Recent Accounting Pronouncements*- In September 2006, the Financial Accounting Standards Board (“FASB”)published Statement of Financial Accounting Standards No.157, “Fair ValueMeasurements” (“FAS 157”) which in most respects is effective beginning July 1,2008.  FAS 157 defines fair value, establishesa framework for measuring fair value in generally accepted accountingprinciples and expands disclosures about fair value measurements.  The company has evaluated the new statementand has determined that the adoption of FAS 157 will not have a material impacton its consolidated financial statements.

 

In September 2006, the FASB published Statement of Financial AccountingStandards No. 158, “Employers’ Accounting for Defined Benefit Pension Plans andOther Postretirement Plans” (FAS 158). The company adopted the provisions of FAS 158 for the fiscal year endedJune 30, 2007.  FAS 158 requirescompanies to recognize the funded status of each of the defined benefit pensionand postretirement plans.  The impact ofthe standard of $2.3 million and $1.4 million for the fiscal years ended June30, 2008 and 2007, respectively, are recognized as a component of accumulatedother comprehensive income.

 

In September 2006, the SEC released Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements When QualifyingMisstatements in Current Year Financial Statement” (“SAB 108”) which providesguidance on how companies should quantify financial statementmisstatements.  SAB 108 permitscompanies, under certain circumstances, to adjust for the cumulative effect ofmisstatements relating to prior years in the carrying amount of assets andliabilities as of the beginning of the current fiscal year, with an offsettingadjustment to the opening balance of retained earnings in the year of adoption.The Company adopted SAB 108 in fiscal year 2007 and recorded an adjustment tobeginning retained earnings of $10.1 million

 

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”),“Accounting for Uncertainty in Income Taxes - an interpretation of FASBStatement No. 109” (“FAS 109”), which clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements inaccordance with FAS No. 109, “Accounting for Income Taxes.”  FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition.  The company adopted this standard onJuly 1, 2007.  See Note 11 of this report for further informationregarding the company’s adoption of FIN 48.

 

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In February 2007, the FASB published Statement of Financial AccountingStandards No.159, “The Fair Value Option for Financial Assets and FinancialLiabilities—including an amendment of FASB Statement No. 115” (“FAS 159”).  FAS 159 allows entities to choose to measureeligible financial assets and liabilities at fair value that are not otherwiserequired to be measured at fair value. If a company elects the fair valueoption for an eligible item, changes in that item’s fair value in subsequentreporting periods must be recognized in current earnings. FAS 159 is effectivefor fiscal years beginning after November 15, 2007,provided the entityalso elects to apply the provisions of FAS 157, “Fair Value Measurements”. Thecompany does not believe the adoption of FAS 159 will have a material impact onits consolidated financial statements.

                                                      

In December 2007, the FASB issued Statement of FinancialAccounting Standards No. 141 (revised 2007), “Business Combinations” (FAS141R) which is a revision of FAS 141, “Business Combinations”.  FAS 141R changes the application of theacquisition method in a number of significant aspects.  Acquisition costs will generally be expensedas incurred; noncontrolling interests will be valued at fair value at theacquisition date; restructuring costs associated with a business combinationwill generally be expensed subsequent to the acquisition date; contingentconsideration will be recognized at its fair value on the acquisition date and,for certain arrangements, changes in fair value will be recognized in earningsuntil settled, and changes in deferred tax asset valuation allowances andincome tax uncertainties after the acquisition date generally will affectincome tax expense. We will be required to comply with the provisions of FAS141(R) for acquisitions that occur on or after July 1, 2009. The Statementwould apply prospectively to any future business combinations and therefore theimpact would be determined when a business combination occurs.

 

In December 2007, the FASB issued Statement of Financial AccountingStandards No.160, “Noncontrolling Interests in Consolidated FinancialStatements – an amendment of ARB No.51” (“FAS 160”).  This statement is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December15, 2008, with earlier adoption prohibited. This statement requires the recognition of a noncontrolling interest(minority interest) as equity in the consolidated financial statements andseparate from the parent’s equity.  Theamount of net income attributable to the noncontrolling interest will beincluded in consolidated net income.  Italso amends certain of ARB No. 51’s consolidation procedures for consistencywith the requirements of FAS 141(R). This statement also includes expanded disclosure requirements regardingthe interests of the parent and its noncontrolling interest.  The Company is currently evaluating theeffects, if any, that FAS 160 may have on its financial statements.

 

In April 2008, the FASB issued FASB Staff Positon 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 a recognized intangible assets under Statement of FinancialAccounting Standards No.142, “Goodwill and Other Intangible Assets.”  FSP 142-3 is effective on a prospective basisto all intangible assets acquired and for disclosures on all intangible assetsrecognized on or after the beginning of the first annual period subsequent toDecember 15, 2008. Early adoption is prohibited.  The effects of  FSP 142-3 will depend on future acquisitionsof intangible assets.

** **

**Note 2 - Acquisitions**

 

*Fiscal Year 2008 Acquisitions*

 

Heissmann - On July 20, 2007, the company acquiredthe outstanding stock of Dr. Dr. Heissmann GmbH (“Heissmann”) for approximately$136 million (€99 million in cash plus approximately $1.4 million intransaction costs).  Heissmann was anactuarial, benefits, and human resources consulting firm based in Germany withsubsidiaries in Ireland, Netherlands, Austria, and France.  As of July 20, 2007, Heissmann employedapproximately 360 associates.  Annualrevenue, including subsidiaries, was approximately $70 million (€52 million)for their fiscal year ended March 31, 2007. The financial results of Heissmann have been consolidated into thecompany’s financial statements upon the date of acquisition.

 

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The company has determined the following preliminaryfair values for the assets purchased and liabilities assumed in the Heissmannacquisition:

 
| ** **                               | ** ** | **July 1, 2007  (in thousands)** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| Total purchase  price                    |       |                                            |       | $ | 135,807 |   |
| Less net assets  acquired:               |       |                                            |       |   |   |
| Customer related  intangibles            |       | $                                               | 27,070     |   |   |   |
| Non-compete  agreements                  |       | 541                                             |       |   |   |
| Trade-name  intangible                   |       | 271                                             |       |   |   |
| Core/developed  technology intangibles   |       | 1,218                                           |       |   |   |
| Cash                                     |       | 12,824                                          |       |   |   |
| Client  receivables and unbilled revenue |       | 17,754                                          |       |   |   |
| Fixed assets                             |       | 4,607                                           |       |   |   |
| Other assets                             |       | 6,879                                           |       |   |   |
| Liabilities                              |       | (46,093                                         | )          |   |   |
|                                     |       |                                            |       |   |   |
| Net assets  acquired                     |       |                                            |       | 25,071 |   |
| Goodwill                                 |       |                                            |       | $ | 110,736 |   |
|                                          |            |                                                 |            |  |  |  |  |

 

The allocation of the purchase price resulted in theallocation of $110.7 million to goodwill, which has been assigned to oursegments as follows:

 
| ** **                                   | ** ** | **Goodwill** | ** ** |
|----------------------------------------------|------------|--------------|------------|
| Benefits Group                               |       | $            | 106,306    |   |
| Human Capital  Group                         |       | 2,215        |       |
| Investment Consulting  Group                 |       | 2,215        |       |
| Allocation of  goodwill to business segments |       | $            | 110,736    |   |

 

Goodwill associated with this transaction is notdeductible for tax purposes.

 

WisdomNet - On July 2, 2007, the company acquiredthe net assets of WisdomNet for $6.9 million in cash and stock, including thepayoff of $0.5 million of debt. WisdomNet was a Denver-based talent management software and consultingfirm that was founded in 2001.  WisdomNetoffered a proprietary line of business software products, including an end-to-endsolution for managing organizations’ talent management processes.  The acquisition of WisdomNet strengthens ourexisting talent management business and provides strategic software that willbe used to service our clients on an ongoing basis. As of the date of theacquisition, WisdomNet employed 15 associates. The company recorded $2.2million goodwill associated with this acquisition.

 

Marcu & AsociadosS.A. - On June 16,2008, the company acquired the outstanding stock of Marcu & AsociadosS.A. (Marcu) for $2.8 million in cash. Marcu is a human resource, risk and financial management consulting firmbased in Buenos Aires, Argentina.  As ofthe date of acquisition, Marcu employed 37 associates and had annual revenuesof approximately $2.5 million. The financial results of Marcu will be included in the company’sconsolidated financial statements effective July 1, 2008. The company recorded $1.6 million goodwillassociated with this acquisition.

 

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*Fiscal Year 2007 Acquisitions*

 

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.

 

*Fiscal Year 2006 Acquisitions*

 

On July 31, 2005, the company acquiredsubstantially all of the assets and assumed most liabilities of Watson Wyatt LLP(“WWLLP”) (the “WWLLP business combination”), a leading United Kingdom-basedactuarial, benefits and human resources consulting partnership. The financialresults of WWLLP have been consolidated into the company’s financial statementssince August 1, 2005.

 

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

 

**Note 3- Investments in Affiliates**

 

The company has an equityinvestment 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. The company applies the equity method of accounting for its investmentin PCIC.

 

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

 

Capitalcontributions to PCIC are required when approved by a majority of itsstockholders.  In July 2007, theShareholders 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 on behalf of PCIC by $2.6 million inlieu of a higher cash capital contribution. From the time PCIC was organized through June 30, 2008, we haveprovided capital contributions to PCIC through cash contributions totaling $7.3million and through the issuance of letters of credit totaling $10.6million.  Our ownership interest in PCIC asof June 30, 2008 and 2007 was 36.43 percent and 34.15 percent,respectively.

 

Managementbelieves that the company’s maximum financial statement exposure regarding itsinvestment in PCIC as of June 30, 2008 is limited to the carrying value ofthe company’s investment in PCIC of $7.1 million, combined with letters ofcredit totaling $10.6 million, for a total maximum exposure of $17.7 million.

 

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Combinedsummarized operating results (prior to distribution of profits) reported by theaffiliates for the years ended June 30 are as follows:

 

| ** **           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenue              |       | $        | 44,032     |     | $          | 36,394   |       | $ | 33,313 |   |
| Operating Expenses   |       | 64,667   |       | 44,630   |       | 26,391   |       |
|                 |       |     |       |     |       |     |       |
| Income before  taxes |       | (20,635  | )          | (8,236   | )          | 6,922    |       |
|                 |       |     |       |     |       |     |       |
| Net  (loss)/income   |       | $        | (13,620    | )        | $          | (5,436   | )          | $ | 4,568 |   |

 

Summarizedbalance sheet information for PCIC, whose year end is December 31, is asfollows:

 

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Current assets                                   |       | $                     | 172,639    |   | $ | 135,754 |   |
| Noncurrent  assets                               |       | 64,552                |       | 100,689 |   |
|                                             |       |                  |       |   |   |
| Total assets                                     |       | $                     | 237,191    |   | $ | 236,443 |   |
|                                             |       |                  |       |   |   |
| Current  liabilities                             |       | $                     | 28,751     |   | $ | 24,323 |   |
| Noncurrent  liabilities                          |       | 198,584               |       | 193,513 |   |
| Stockholders’  equity                       |       | 9,856                 |       | 18,607 |   |
|                                             |       |                  |       |   |   |
| Total  liabilities and stockholders’ equity |       | $                     | 237,191    |   | $ | 236,443 |   |

 

**Note 4 - Fixed Assets**

 

Furniture,fixtures, equipment and leasehold improvements are recorded at cost andpresented net of accumulated depreciation or amortization.  Furniture, fixtures and equipment aredepreciated using straight-line and accelerated methods over lives ranging fromthree to seven years.  Leaseholdimprovements are amortized on a straight-line basis over the shorter of thelease terms or the asset lives.

 

Thecomponents of fixed assets are as follows:

 
| ** **                                       | ** ** | **June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|
| ** **                                       | ** ** | **2008**          | ** ** | **2007** | ** ** |
|                                             |       |              |       |   |   |
| Furniture,  fixtures and equipment               |       | $                 | 193,554    |   | $ | 182,591 |   |
| Computer  software                               |       | 184,517           |       | 144,427 |   |
| Leasehold  improvements                          |       | 79,250            |       | 73,738 |   |
|                                             |       | 457,321           |       | 400,756 |   |
| Less:  accumulated depreciation and amortization |       | (272,637          | )          | (228,609 | ) |
|                                             |       |              |       |   |   |
| Fixed assets,  net                               |       | $                 | 184,684    |   | $ | 172,147 |   |

 

Totalunamortized computer software costs were $106.4 million, $94.7 million and$76.7 million for fiscal years 2008, 2007 and 2006, respectively.  Total amortization expense for computersoftware was $26.5 million, $21.0 million and $12.9 million for fiscal years2008, 2007 and 2006, respectively.

 

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**Note 5 -Retirement Benefits**

 

*DefinedBenefit Plans*

 

Wesponsor both qualified and non-qualified, non-contributory defined benefitpension plans in North America and the UK that cover approximately 85% of our liability.  Under our plans in North America, benefitsare based on the number of years of service and the associate’s compensationduring the five highest paid consecutive years of service.  Beginning January 2008, we have made changes toour plan in the U.K. related to years of service used in calculating benefitsfor associates.  Benefits earned prior toJanuary 2008 are based on the number of years of service and the associate’scompensation during the three years before leaving the plan and benefits earnedafter January 2008 are based on the number of years of service and theassociate’s average compensation during the associate’s term of service sincethat date. The non-qualified plan in North America provides for pension benefitsthat would be covered under the qualified plan but are limited by the InternalRevenue Code.  The non-qualified plan hasno assets and therefore is an unfunded arrangement, the liability for which isreflected in the balance sheet.  The UKdoes not have a non-qualified plan.  Themeasurement date for all plans is June 30.

 

Thedisclosures for the UK plan are shown separately because the amounts arematerial relative to North America plans and the assumptions used in the planare significantly different than those used in the North America plans.

 

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,historical trends, portfolio composition and peer comparisons.

 

Fundingis based on actuarially determined contributions and is limited to amounts thatare currently deductible for tax purposes. Since funding calculations are basedon different measurements than those used for accounting purposes, pensioncontributions are not equal to net periodic pension cost.  The excess of net periodic pension cost oversuch contributions and direct benefit payments under non-qualified planprovisions is accrued by the company. The following table sets forth our projected pension contributions forfiscal year 2009, as well as the pension contributions to our various plans infiscal years 2008 and 2007:

 
| ** ** | ** ** | **2009  (Projected)** | ** ** | **2008  (Actual)** | ** ** | **2007  (Actual)** | ** ** |
|------------|------------|-----------------------|------------|--------------------|------------|--------------------|------------|
| U.S.       |       | $                     | 15,000     |               | $          | 15,130             |       | $ | 15,000 |   |
| Canada     |       | 1,300                 |       | 1,535              |       | 2,488              |       |
| U.K.       |       | 16,900                |       | 19,577             |       | 12,036             |       |
|            |            |                       |            |                    |            |                    |            |  |  |  |

 

Thefair value of plan assets is based on the market value of domestic equity,international equity and fixed income securities that are in the pensionportfolio, which vary by country.  To theextent the expected return on the pension portfolio varies from the actualreturn, there is an unrecognized gain or loss.

 

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Theassumptions used in the valuation for the North America plans, included thefollowing at the end of the past three fiscal years:

 
| ** **                                                      | ** ** | **Year Ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                            |       |                                   |       |   |   |   |   |
| Discount rate,  Projected Benefit Obligation                    |       | 7.00                                   | %          | 6.25 | % | 6.25 | % |
| Discount rate,  Net Periodic Benefit Cost                       |       | 6.25                                   | %          | 6.25 | % | 5.25 | % |
| Expected  long-term rate of return on assets                    |       | 8.75                                   | %          | 8.75 | % | 8.75 | % |
| Rate of increase  in compensation, Projected Benefit Obligation |       | 4.09                                   | %          | 3.84 | % | 3.84 | % |
| Rate of increase  in compensation, Net Periodic Benefit Cost    |       | 3.84                                   | %          | 3.84 | % | 3.34 | % |

 

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 actual return on assets for fiscal year2008 was a loss of 6.2 percent, compared to a return of 17.3 percent for fiscalyear 2007.

 

The followingassumptions were used at the end of the past three fiscal years in thevaluation of our U.K. plan:

 
| ** **                                                      | ** ** | **Year Ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                            |       |                                   |       |   |   |   |   |
| Discount rate, Projected  Benefit Obligation                    |       | 6.50                                   | %          | 5.80 | % | 5.10 | % |
| Discount rate,  Net Periodic Benefit Cost                       |       | 5.80                                   | %          | 5.10 | % | 5.30 | % |
| Expected  long-term rate of return on assets                    |       | 6.46                                   | %          | 5.69 | % | 5.63 | % |
| Rate of increase  in compensation, Projected Benefit Obligation |       | 5.65                                   | %          | 4.95 | % | 4.75 | % |
| Rate of increase  in compensation, Net Periodic Benefit Cost    |       | 4.95                                   | %          | 4.75 | % | 4.75 | % |

 

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 fiscalyear 2007 and an 140 basis point increase over the discount rate at fiscal year2006. 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 average returnexpected to be achieved with the anticipated makeup of investments which isheavily weighted towards bonds.   Theactual return on assets through fiscal year 2008 was a loss of 2.1 percentcompared to a gain of 16.4 percent for fiscal year 2007.

 

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Netperiodic pension cost consists of the following components reflected as expensein the company’s Consolidated Statements of Operations:

 
| ** **                                       | ** ** | **Year Ended June 30, 2008** | ** ** | **Year Ended June 30, 2007** | ** ** | **Year Ended June 30, 2006** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **North  America**                               | ** ** | **U.K.**                                         | ** ** | **North  America**                               | ** ** | **U.K.** | ** ** | **North  America** | ** ** | **U.K.** | ** ** |
|                                             |       |                                             |       |                                             |       |                                             |       |   |   |   |   |   |   |
| Service cost                                     |       | $                                                | 30,592     |                                             | $          | 9,023                                            |       | $ | 26,275 |   | $ | 13,461 |   | $ | 29,423 |   | $ | 11,007 |   |
| Interest cost                                    |       | 44,918                                           |       | 20,929                                           |       | 40,159                                           |       | 18,061 |   | 36,811 |   | 14,319 |   |
| Expected return  on plan assets                  |       | (55,622                                          | )          | (23,328                                          | )          | (46,845                                          | )          | (18,123 | ) | (43,824 | ) | (13,717 | ) |
| Amortization of  transition obligation           |       | (65                                              | )          | —                                           |       | (39                                              | )          | — |   | (38 | ) | — |   |
| Amortization of  net unrecognized losses/(gains) |       | 6,222                                            |       | 22                                               |       | 8,594                                            |       | (555 | ) | 16,155 |   | 294 |   |
| Amortization of  prior service cost              |       | (2,594                                           | )          | (2,806                                           | )          | (2,934                                           | )          | 754 |   | (1,718 | ) | 11 |   |
| Net periodic pension cost                        |       | $                                                | 23,451     |                                             | $          | 3,840                                            |       | $ | 25,210 |   | $ | 13,598 |   | $ | 36,809 |   | $ | 11,914 |   |

 

InMarch 2006, the company amended its U.S. pension plan to remove long-termdisability benefits from the plan effective July 1, 2006.  Since that time, these benefits have beenprovided through an insurance provider. Given the significance of this amendment, the company remeasured thepension plan effective March 31, 2006. The remeasurement caused pension expense to decrease by $4.0 millionduring the fourth quarter of fiscal year 2006.

 

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Thefollowing table provides a reconciliation of the changes in the qualified plansprojected benefit obligations and fair value of assets for the years ended June 30,2008 and 2007, and a statement of funded status as of June 30, 2008 and2007.

 
| ** **                                    | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **North  America**          | ** ** | **U.K.**                    | ** ** | **North  America** | ** ** | **U.K.** | ** ** |
| **Change  in Benefit Obligation**             |       |                        |       |                        |       |   |   |   |   |
| Benefit  obligation at beginning of year      |       | $                           | 632,038    |                        | $          | 363,203 |   | $ | 561,566 |   | $ | 340,608 |   |
| Service cost                                  |       | 23,781                      |       | 9,023                       |       | 20,995 |   | 13,461 |   |
| Interest cost                                 |       | 39,065                      |       | 20,929                      |       | 35,076 |   | 18,061 |   |
| Actuarial  (gains)/losses                     |       | (64,630                     | )          | (1,414                      | )          | 27,004 |   | (33,756 | ) |
| Benefit payments                              |       | (20,802                     | )          | (6,314                      | )          | (20,154 | ) | (5,862 | ) |
| Change in  assumptions                        |       | —                      |       | —                      |       | 4,302 |   | — |   |
| Settlements                                   |       | —                      |       | —                      |       | 305 |   | — |   |
| Plan  amendments & other             |       | —                      |       | 2,645                       |       | — |   | 1,731 |   |
| Foreign currency  adjustment                  |       | 3,166                       |       | (3,171                      | )          | 2,944 |   | 28,960 |   |
| Benefit  obligation at end of year            |       | $                           | 612,618    |                        | $          | 384,901 |   | $ | 632,038 |   | $ | 363,203 |   |
| ** **                                    |       |                        |       |                        |       |   |   |   |   |
| **Change  in Plan Assets**                    |       |                        |       |                        |       |   |   |   |   |
| Fair value of  plan assets, beginning of year |       | $                           | 639,378    |                        | $          | 354,410 |   | $ | 541,237 |   | $ | 294,153 |   |
| Actual return on  plan assets                 |       | (39,718                     | )          | (1,575                      | )          | 98,988 |   | 14,646 |   |
| Company  contributions                        |       | 16,665                      |       | 19,577                      |       | 16,273 |   | 23,339 |   |
| Benefit payments                              |       | (20,802                     | )          | (6,314                      | )          | (20,154 | ) | (5,862 | ) |
| Participant  contributions                    |       | —                      |       | 1,760                       |       | — |   | 1,672 |   |
| Foreign currency  adjustment                  |       | 2,940                       |       | (2,990                      | )          | 3,034 |   | 26,462 |   |
| Fair value of  plan assets, end of year       |       | $                           | 598,463    |                        | $          | 364,868 |   | $ | 639,378 |   | $ | 354,410 |   |
| **Funded  status at end of year**             |       | $                           | (14,156    | )                           | $          | (20,033 | ) | $ | 7,340 |   | $ | (8,793 | ) |

 
| ** **                                                               | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                               | ** ** | **North  America**          | ** ** | **U.K.**                    | ** ** | **North  America** | ** ** | **U.K.** | ** ** |
| **Amounts  recognized in Consolidated Balance Sheets consist of :**      |       |                        |       |                        |       |   |   |   |   |
| Noncurrent  assets                                                       |       | $                           | 326        |                        | $          | — |   | $ | 11,439 |   | $ | — |   |
| Current liabilities                                                      |       | —                      |       | —                      |       | — |   | — |   |
| Noncurrent liabilities                                                   |       | (14,482                     | )          | (20,033                     | )          | (4,099 | ) | (8,793 | ) |
| **Net  Amount Recognized**                                               |       | $                           | (14,156    | )                           | $          | (20,033 | ) | $ | 7,340 |   | $ | (8,793 | ) |
| **Amounts  recognized in Accumulated Comprehensive Income consist of :** |       |                        |       |                        |       |   |   |   |   |
| Net actuarial loss/(gain)                                                |       | 81,833                      |       | (6,083                      | )          | 56,277 |   | (32,373 | ) |
| Net prior service  cost/(credit)                                         |       | (13,105                     | )          | 866                         |       | (15,504 | ) | — |   |
| Net transition obligation/(asset)                                        |       | —                      |       | —                      |       | (112 | ) | — |   |
| **Accumulated  Other Comprehensive Income**                              |       | $                           | 68,728     |                        | $          | (5,217 | ) | $ | 40,661 |   | $ | (32,373 | ) |

 

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Thefollowing table provides a reconciliation of the changes in the North Americannon-qualified plans projected benefit obligations for the years ended June 30,2008 and 2007, and a statement of funded status as of June 30, 2008 and2007:

 
| ** **                                    | ** ** | **June 30,**   | ** ** |
|-----------------------------------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **2008**            | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | **Non-  Qualified** | ** ** | **Non-  Qualified** | ** ** |
| **Change  in Benefit Obligation**             |       |                |       |   |   |
| Benefit  obligation, beginning of year        |       | $                   | 99,959     |   | $ | 96,789 |   |
| Service cost                                  |       | 6,811               |       | 5,280 |   |
| Interest cost                                 |       | 5,853               |       | 5,084 |   |
| Actuarial (gains)/losses                      |       | (4,254              | )          | 166 |   |
| Benefit payments                              |       | (8,349              | )          | (1,350 | ) |
| Change in  assumptions                        |       | —              |       | 613 |   |
| Settlements                                   |       | —              |       | (11,015 | ) |
| Plan amendments                               |       | —              |       | 3,748 |   |
| Foreign currency  adjustment                  |       | 662                 |       | 644 |   |
| Benefit  obligation, end of year              |       | $                   | 100,682    |   | $ | 99,959 |   |
| ** **                                    |       |                |       |   |   |
| **Change  in Plan Assets**                    |       |                |       |   |   |
| Fair value of  plan assets, beginning of year |       | $                   | —     |   | $ | — |   |
| Actual return on  plan assets                 |       | —              |       | — |   |
| Company  contributions                        |       | 8,349               |       | 12,364 |   |
| Benefit payments                              |       | (8,349              | )          | (12,364 | ) |
| Participant  contributions                    |       | —              |       | — |   |
| Foreign currency  adjustment                  |       | —              |       | — |   |
| Fair value of  plan assets, end of year       |       | $                   | —     |   | $ | — |   |
| **Funded  status at end of year**             |       | $                   | (100,682   | ) | $ | (99,959 | ) |

 
| ** **                                                              | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Amounts  recognized in Consolidated Balance Sheets consist of:**      |       |                        |       |                        |       |
| Noncurrent  assets                                                      |       | $                           | —     |                        | $          | — |   |
| Current liabilities                                                     |       | (8,470                      | )          | (6,135                      | )          |
| Noncurrent liabilities                                                  |       | (92,212                     | )          | (93,824                     | )          |
| **Net  Amount Recognized**                                              |       | $                           | (100,682   | )                           | $          | (99,959 | ) |
| **Amounts  recognized in Accumulated Comprehensive Income consist of:** |       |                        |       |                        |       |
| Net actuarial loss/(gain)                                               |       | 4,782                       |       | 10,124                      |       |
| Net prior service  cost/(credit)                                        |       | (1,304                      | )          | (1,523                      | )          |
| Net transition obligation/(asset)                                       |       | —                      |       | 50                          |       |
| **Accumulated  Other Comprehensive Income**                             |       | $                           | 3,478      |                        | $          | 8,651 |   |

 

Thecompany adopted SFAS 158 for fiscal year ending 2007 which required therecognition of the funded status of each of the defined benefit pension planstherefore eliminating unrecognized differences.

 

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Thequalified plans in North America and the U.K. each had assets greater than theaccumulated benefit obligation.  Thenon-qualified amounts reflect only the U.S. and Canadian plans and areunfunded.

 
| ** **                      | ** ** | **June 30,**   | ** ** |
|---------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **2008**            | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **Non-  Qualified** | ** ** | **Non-  Qualified** | ** ** |
| Projected Benefit Obligation    |       | $                   | 100,682    |   | $ | 99,959 |   |
| Accumulated  Benefit Obligation |       | 81,427              |       | 79,099 |   |
| Fair value of  plan assets      |       | —              |       | — |   |
|                                 |            |                     |            |  |  |  |  |

 

Thefollowing table, and the narrative that follows, provide information relatingto the weighted-average asset allocations at June 30, 2008 and 2007 andthe investment strategy for the company’s U.S. and U.K. defined benefit pensionplans, which comprises the majority of our defined benefit pension plans:

 
| ** **         | ** ** | **U.S. Plan Assets at  June 30,** | ** ** | **U.K. Plan Assets at  June 30,** | ** ** |
|--------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **         | ** ** | **2008**                                              | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Asset Category     |       |                                                  |       |                                                  |       |   |   |   |   |
| Equity  securities |       | 61.0                                                  | %          | 64.9                                                  | %          | 32.4 | % | 33.0 | % |
| Debt securities    |       | 35.8                                                  | %          | 33.8                                                  | %          | 58.0 | % | 57.0 | % |
| Real estate        |       | 0.0                                                   | %          | 0.0                                                   | %          | 5.9 | % | 9.0 | % |
| Other              |       | 3.2                                                   | %          | 1.3                                                   | %          | 3.7 | % | 1.0 | % |
| Total              |       | 100.0                                                 | %          | 100.0                                                 | %          | 100.0 | % | 100.0 | % |

 

Theinvestment objectives of the company’s qualified pension plan are designed togenerate returns that will enable the plan to meet its future obligations. Theprecise amount for which these obligations will be settled depends on futureevents, including the life expectancy of the plan’s members and salaryinflation. The obligations are estimated using actuarial assumptions, based onthe current economic environment.

 

Thepension plan seeks to achieve total returns both sufficient to meet expectedfuture obligations as well as returns greater than its policy benchmarkreflecting the target weights of the asset classes used in its targetedstrategic asset allocation.  The plan’stargeted strategic allocation to each asset class was determined through anAsset-Liability Modeling study to evaluate long-term asset-allocationstrategy.  This comprehensive studyprovides an evaluation of the projected status of asset and liability measuresfor the plan under a range of both positive and negative environments.  The study includes a number of differentasset mixes, spanning a range of diversification and potential equityexposures.

 

Inevaluating the strategic asset allocation choices, an emphasis is placed on thelong-term characteristics of each individual asset class, and the benefits ofdiversification among multiple asset classes. Consideration is also given tothe proper long-term level of risk for the plan, particularly with respect tothe long-term nature of the plan’s liabilities, the impact of asset allocationon investment results, and the corresponding impact on the volatility andmagnitude of plan contributions and expense and the impact certain actuarialtechniques may have on the plan’s recognition of investment experience.  The currently adopted strategic assetallocation targets for each of the plans is displayed above.

 

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Thecompany monitors investment performance and portfolio characteristics on aquarterly basis to ensure that managers are meeting expectations with respectto their investment approach.  With theexception of securities issued by the U.S. Government and its agencies, nosingle issue is to comprise more than 5 percent of the portfolio’s valuealthough index fund managers are exempt from the security weightingconstraints. There are also various restrictions and controls placed onmanagers including prohibition from investing in company stock.

 

Theexpected return on assets assumption is developed in conjunction with advisorsand using the company’s asset model that reflects a combination of rigoroushistorical analysis and the forward looking views of the financial markets asrevealed through the yield on long-term bonds, the price earnings ratios of themajor stock market indices and long-term inflation. Amounts are tested forreasonableness against their historical averages.

 

Benefitpayments for our defined benefit pension plan, which reflect expected futureservice, as appropriate, are expected to be paid as follows:

 
| ** **           | ** ** | **Benefit Payments** | ** ** |
|----------------------|------------|---------------------------|------------|
| **Fiscal Year** | ** ** | **North America**    | ** ** | **U.K.** | ** ** | **Total** | ** ** |
| 2009                 |       | $                         | 30,697     |   | $ | 6,772 |   | $ | 37,469 |   |
| 2010                 |       | 32,637                    |       | 7,171 |   | 39,808 |   |
| 2011                 |       | 34,706                    |       | 7,768 |   | 42,474 |   |
| 2012                 |       | 36,886                    |       | 8,167 |   | 45,053 |   |
| 2013                 |       | 39,874                    |       | 9,163 |   | 49,037 |   |
| Years 2014-2018      |       | 242,756                   |       | 57,765 |   | 300,521 |   |
|                 |       | $                         | 417,556    |   | $ | 96,806 |   | $ | 514,362 |   |

 

*DefinedContribution Plans*

 

Wesponsor a savings plan that provides benefits to substantially all U.S.associates.  The company provides a matchto employee contributions at a rate of 50% of the first 6% up to $60,000 ofassociates’ eligible compensation.  Thecompany will also make an annual profit sharing contribution to the plan in anamount that is dependant upon the company’s financial performance during thefiscal year.  The company contributed$3.7 million, $3.5 million, and $3.4 million to the plan in fiscal years 2008,2007, and 2006 respectively.

 

The UK pension plan has amoney purchase section to which the company makes core contributions plus additionalcontributions matching those of the participating employees up to a maximumrate.  Contribution rates are dependantupon the age of the participant and on whether or not they arise from salarysacrifice arrangements through which an individual has taken a reduction insalary and the company has paid an equivalent amount as pensioncontributions.  Core contributions amountto 2-6% of pensionable salary with additional matching contributions of afurther 2-6%.  Company contributions tothe plan amounted to $6.9 million, $5.3 million, and $3.0 million in fiscalyears 2008, 2007 and 2006, respectively.

 

*HealthCare Benefits*

 

Wesponsor a contributory health care plan that provides hospitalization, medicaland dental benefits to substantially all U.S. associates.  We accrue a liability for estimated incurredbut unreported claims based on projected use of the plan as well as prior planhistory.  The liability totaled $1.8million at June 30, 2008 and 2007, and is included in accounts payable andaccrued liabilities in the Consolidated Balance Sheets.

 

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*PostretirementBenefits*

 

Weprovide 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 plans are unfunded.

 

Assumptionsused in the valuation for the U.S. plan, which comprises the majority of theprincipal postretirement plans, included the following over the past threefiscal years:

 
| ** **                                                            | ** ** | **Year Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                  |       |                                   |       |   |   |   |   |
| Health care cost  trend, accumulated benefit obligation:              |       |                                   |       |   |   |   |   |
| Pre-65 benefits  (decreasing to 5.00% for 2010 and thereafter)        |       | 10.00                                  | %          | 8.00 | % | 9.00 | % |
| Post-65 benefits  (decreasing to 5.00% for 2010 and thereafter)       |       | 10.00                                  | %          | 9.00 | % | 9.00 | % |
| Discount rate,  accumulated benefit obligation postretirement benefit |       | 7.00                                   | %          | 6.25 | % | 6.25 | % |

 

Actuarialgains and losses associated with changing any of the assumptions areaccumulated as part of the unrecognized net gain balance which is amortized andincluded in the net periodic postretirement costs over the average remainingservice period of participating employees, which is approximately 16 years.

 

Aone percentage point change in the assumed health care cost trend rates wouldhave the following effect:

 
| ** **                                                                        | ** ** | **1%  Increase** | ** ** | **1%  Decrease** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
|                                                                              |       |             |       |             |       |
| Effect on net  periodic postretirement benefit cost in fiscal year 2008           |       | $                | 406        |             | $          | (185 | ) |
| Effect on  accumulated postretirement benefit obligation as of June 30, 2008 |       | 2,371            |       | (1,954           | )          |
|                                                                                   |            |                  |            |                  |            |  |  |

 

Netperiodic postretirement benefit cost consists of the following componentsreflected as expense in the company’s Consolidated Statements of Operations:

 
| ** **                                       | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                       | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                             |       |                                   |       |   |   |   |   |
| Service cost                                     |       | $                                      | 1,543      |   | $ | 1,423 |   | $ | 1,703 |   |
| Interest cost                                    |       | 2,724                                  |       | 2,646 |   | 2,334 |   |
| Amortization of  transition obligation           |       | —                                 |       | — |   | — |   |
| Amortization of  net unrecognized losses/(gains) |       | (478                                   | )          | (395 | ) | 5 |   |
| Amortization of  prior service cost              |       | (664                                   | )          | (661 | ) | (660 | ) |
| Net periodic  postretirement benefit cost        |       | $                                      | 3,125      |   | $ | 3,013 |   | $ | 3,382 |   |

 

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Thefollowing table provides a reconciliation of the changes in the postretirementplan projected benefit obligations and fair value of assets for the years endedJune 30, 2008 and 2007 and a statement of funded status as of June 30,2008 and 2007:

 
| ** **                                    | ** ** | **June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|
| ** **                                    | ** ** | **2008**          | ** ** | **2007** | ** ** |
| **Change  in Benefit Obligation**             |       |              |       |   |   |
| Benefit  obligation, beginning of year        |       | $                 | 48,212     |   | $ | 43,596 |   |
| Service cost                                  |       | 1,543             |       | 1,423 |   |
| Interest cost                                 |       | 2,724             |       | 2,646 |   |
| Participant  contributions                    |       | 2,020             |       | 1,887 |   |
| Actuarial  (gains)/losses                     |       | (7,406            | )          | 38 |   |
| Benefit payments                              |       | (3,559            | )          | (3,551 | ) |
| Other                                         |       | —            |       | 1,535 |   |
| Foreign currency  adjustment                  |       | 622               |       | 638 |   |
| Benefit  obligation, end of year              |       | $                 | 44,156     |   | $ | 48,212 |   |
|                                          |       |              |       |   |   |   |   |
| **Change  in Plan Assets**                    |       |              |       |   |   |
| Fair value of  plan assets, beginning of year |       | $                 | —     |   | $ | — |   |
| Company  contributions                        |       | 1,539             |       | 1,664 |   |
| Participant  contributions                    |       | 2,020             |       | 1,887 |   |
| Benefit payments                              |       | (3,559            | )          | (3,551 | ) |
| Fair value of  plan assets, end of year       |       | $                 | —     |   | $ | — |   |
| **Funded  status at end of year**             |       | $                 | (44,156    | ) | $ | (48,212 | ) |

 
| ** **                                                             | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                             | ** ** | **2008**          | ** ** | **2007** | ** ** |
| **Amounts  recognized in Consolidated Balance Sheets consist of**      |       |              |       |   |   |
| Noncurrent  assets                                                     |       | $                 | —     |   | $ | — |   |
| Current  liabilities                                                   |       | (4,933            | )          | (2,871 | ) |
| Noncurrent  liabilities                                                |       | (39,223           | )          | (45,341 | ) |
| **Net  Amount Recognized**                                             |       | $                 | (44,156    | ) | $ | (48,212 | ) |
| **Amounts  recognized in Accumulated Comprehensive Income consist of** |       |              |       |   |   |
| Net actuarial loss/(gain)                                              |       | (12,535           | )          | (5,757 | ) |
| Net prior service  cost/(credit)                                       |       | (4,208            | )          | (4,865 | ) |
| Net transition obligation/(asset)                                      |       | —            |       | — |   |
| **Accumulated  Other Comprehensive Income**                            |       | $                 | (16,743    | ) | $ | (10,622 | ) |

 

Thecompany adopted SFAS 158 for fiscal year ending 2007 which required therecognition of the funded status of each of the defined benefit pension planstherefore eliminating unrecognized differences.

 

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Thefollowing benefit payments for our postretirement plan, which reflect expectedfuture service, as appropriate, are expected to be paid:

 
| **Fiscal  Year** | ** ** | **Benefit  Payments** | ** ** |
|------------------|------------|-----------------------|------------|
|             |       |                  |       |
| 2009             |       | $                     | 5,101      |   |
| 2010             |       | 5,625                 |       |
| 2011             |       | 6,263                 |       |
| 2012             |       | 6,990                 |       |
| 2013             |       | 7,676                 |       |
| Years 2014-2018  |       | 50,240                |       |
|             |       | $                     | 81,895     |   |

 

**Note 6 -Accounts Payable and Accrued Liabilities, Including Discretionary Compensation**

 

Accountspayable and accrued liabilities consist of:

 
| ** **                                                                                           | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                           | ** ** | **2008**          | ** ** | **2007** | ** ** |
|                                                                                                 |       |              |       |   |   |
| Accounts payable and accrued liabilities                                                             |       | $                 | 81,874     |   | $ | 63,052 |   |
| Accrued salaries and bonuses                                                                         |       | 188,763           |       | 149,424 |   |
| Current portion of defined benefit retirement plans and postretirement  benefits other than pensions |       | 16,492            |       | 9,826 |   |
| Accrued vacation                                                                                     |       | 34,043            |       | 28,147 |   |
| Advance billings deferred revenue                                                                    |       | 57,413            |       | 49,754 |   |
| Dividends payable                                                                                    |       | 3,199             |       | 3,143 |   |
| Total accounts payable and accrued liabilities                                                       |       | $                 | 381,784    |   | $ | 303,346 |   |

 

**Note 7 - Leases**

 

Welease office space, furniture and selected computer equipment under operatinglease agreements with terms generally ranging from one to ten years.  Rental expense was $90.1 million, $81.8million, and $74.8 million for fiscal years 2008, 2007 and 2006, respectively,inclusive of operating expenses related to such space and equipment.  We have entered into sublease agreements forsome of our excess leased space. Sublease income was $0.6 million, $1.1 million and $0.7 million forfiscal years 2008, 2007 and 2006, respectively.

 

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Futureminimum lease payments for Watson Wyatt’s operating lease commitments net ofanticipated cash inflows for sublease income are:

 
| **Fiscal** | ** ** | **Lease**       | ** ** |
|------------|------------|-----------------|------------|
| **Year**   | ** ** | **Commitments** | ** ** |
|       |       |            |       |
| 2009       |       | $               | 66,750     |   |
| 2010       |       | 61,040          |       |
| 2011       |       | 53,204          |       |
| 2012       |       | 45,053          |       |
| 2013       |       | 41,108          |       |
| Thereafter |       | 104,940         |       |
| Total      |       | $               | 372,095    |   |

 

Weevaluate office capacity on an ongoing basis to meet changing needs in ourmarkets with a goal of minimizing our occupancy expense.

 

**Note 8 - Line of Credit**

 

Thecompany has a credit facility provided by a syndicate of banks in an aggregateprincipal amount of $300 million.  Interest rates associated with thisfacility vary with LIBOR and/or the Prime Rate and are based on our leverageratio, as defined by the credit agreement.  We are charged a quarterlycommitment fee, currently 0.125 percent of the facility, which varies with ourfinancial leverage and is paid on the unused portion of the creditfacility.  The Company had no borrowings under its credit facility as of June 30,2008 compared to $105.0 million outstanding under the facility as of June 30,2007.  Credit under the facility isavailable upon demand, although the credit facility requires us to observecertain covenants (including a cash flow leverage ratio and a fixed coveragecharge ratio) and is collateralized with a pledge of stock of materialsubsidiaries.  We were in compliance with both covenants under the creditfacility as of June 30, 2008. This facility is scheduled to mature on June 30,2010.

 

Aportion of the revolving facility is used to support required letters of creditissued under the credit line.  As a result, $10.6 million of the facilitywas unavailable for operating needs as of June 30, 2008.  We are charged a fee for outstanding lettersof credit that also fluctuates based on our leverage ratio.

 

Thecompany has also provided a $5.0 million Australian dollar-denominated letterof credit (US $4.8 million) to an Australian governmental agency as required bythe local regulations.  The estimated fair market value of these lettersof credit is immaterial because they have never been used, and the companybelieves that future usage is remote.

 

**Note 9 - Share-based Compensation**

 

*Share-basedCompensation Plans*

 

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 CompensationPlan for Outside Directors and the 2000 Long-Term Incentive Plan.  All four plans have been approved bystockholders.

 

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*2001 Employee Stock Purchase Plan*

 

The2001 Employee Stock Purchase Plan (the “Stock Purchase Plan”) enables employeesto purchase shares of the company’s stock at a discount.  The Stock Purchase Plan is a non-compensatoryplan under FAS 123(R).  As a result, nocompensation expense was recognized during fiscal year 2008, 2007 and2006.  Approximately 125,000 shares,150,000 shares and 200,000 shares were issued under this plan during fiscalyear 2008, 2007 and 2006 respectively.

 

##### *2001 Deferred Stock Unit Plan forSelected Employees*

##### * *

Deferred Stock Units - The 2001 Deferred StockUnit Plan for Selected Employees (the “Stock Unit Plan”) was approved at theannual meeting of stockholders.  TheStock Unit Plan is intended to provide senior associates of the company withadditional incentives by permitting the company to grant them an equityinterest in the company in the form of deferred stock units, in lieu of aportion of their annual fiscal year end bonus, typically paid in September ofeach year. Each stock unit represents one share of common stock at the marketprice on the date of grant.  The totalnumber of shares authorized for issuance in payment of deferred stock unitsunder the Stock Unit Plan is 2,700,000 shares.

 

Deferredstock units have been granted annually since September 2002 and havevested immediately in each year.  Vestingof future awards is at the discretion of the company, with such determinationbeing made prior to issuance of the deferred stock units.

 

Duringfiscal year 2008, 349,118 shares of common stock, at an average market price of$47.63, were awarded for a total fair value of $16.6 million.  During fiscal year 2007, 300,552 shares ofcommon stock, at an average market price of $40.48, were awarded for a totalfair value of $12.4 million. During fiscal year 2006, approximately 181,000shares of common stock, at a market price of $29.14 were awarded for a totalfair value of $5.3 million.

 

SBI Program - On November 19,2004, the company’s Board of Directors approved a long-term bonus arrangementpursuant to the company’s 2001 Deferred Stock Unit Plan for SelectedEmployees.  The arrangement, called the Performance Share Bonus IncentiveProgram (the “SBI Program”), is a long-term stock bonus arrangement for seniorexecutives and key associates of the company and its affiliates that isdesigned to strengthen incentives and align behaviors to grow the business in away that is consistent with the strategic goals of the company.

 

Incentives under the SBI Program are providedthrough grants of deferred stock units pursuant to the company’s 2001 DeferredStock Unit Plan for Selected Employees.  Grants of deferred stock unitsare based on either salary or on the value of the cash portion of the eligibleparticipant’s fiscal year-end bonus target and a multiplier, which is thenconverted into a target number of deferred stock units based upon the company’sstock price as of the quarter end prior to grant.  Depending on the plan,participants may vest between zero and 170% of the target number of deferredstock units or between zero and 100% based on the extent to which financial andstrategic performance metrics are achieved over a three fiscal yearperiod.  The financial and strategic performance metrics are establishedat the beginning of each performance period. For the performance periodscovering fiscal year 2006 through 2008, 2007 through 2009, 2008 through 2010and calendar year 2008 through 2010, the vesting criteria are based upon growthspecific metrics such as earnings per share, NOI and revenue.

 

Compensationexpense of $4.6 million , $3.8 million, and $1.4 million was recorded pursuantto this plan during fiscal year 2008, 2007 and 2006, respectively.  Expenses for this plan are recognized whenawards are both probable and reasonably estimable.  The compensation expense associated withthese plans is recognized as a component of salaries and employee benefits.

 

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Thetable below presents share activity and weighted average fair values for fiscalyear 2008:

 
| ** **                       | ** ** | **Number of**       | ** ** | **Weighted Average** | ** ** |
|----------------------------------|------------|--------------------------|------------|---------------------------|------------|
| ** **                       | ** ** | **Shares**               | ** ** | **Fair Value**       | ** ** |
| ** **                       | ** ** | **(in 000’s)** | ** ** | ** **                | ** ** |
|                             |       |                     |       |                      |       |
| Nonvested at  June 30, 2007 |       | 278                      |       | $                         | 29.64      |   |
| Granted                          |       | 235                      |       | 56.62                     |       |
| Vested                           |       | (161                     | )          | 25.63                     |       |
| Forfeited                        |       | —                   |       |                      |       |
|                             |       |                     |       |                      |       |
| Nonvested at  June 30, 2008 |       | 352                      |       | $                         | 49.48      |   |

##### * *

##### *The weighted average grant date fair value of shares granted duringfiscal year 2008, 2007 and 2006 were $13.3 million, $4.1 million and $4.1million, respectively.*

##### * *

##### *Amended Compensation Plan forOutside 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.

 

Duringfiscal year 2008, 5,000 shares of common stock were awarded for a total fairvalue of $0.2 million.  During fiscalyear 2007, 10,000 shares of common stock were awarded for a total fair value of$0.3 million. During fiscal year 2006, 14,000 shares of common stock wereawarded for a total fair value of $0.4 million.

 

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

##### * *

InJune 2000, the company adopted the Watson Wyatt & CompanyHoldings 2000 Long-Term Incentive Plan (the “Stock Option Plan”), whichprovides for the granting of non-qualified stock options and stock appreciationrights (collectively referred to as “awards”) to full-time associates of thecompany and to non-associate members of the Board of Directors.  The total number of shares of common stockawards that may be granted under the Stock Option Plan is 4,500,000 shares.

 

Thestock option agreements have a seven-year life and vest 20 percent at eachoption anniversary date over a five-year period.  All options under the Stock Option Plan weregranted with an exercise price equal to the stock’s fair market value on thedate of grant. Generally, the number of options granted to associates was basedon a percentage of annual compensation.  The company does not currently intend to issuefurther stock options under the Stock Option Plan.

 

Compensationexpense of $0.1 million and $0.3 million was recorded pursuant to the StockOption Plan for fiscal year 2007 and 2006, respectively.  No compensation expense was recorded pursuantto the stock option plan in fiscal year 2008.

 

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Thetable below presents stock option activity and weighted average exercise pricesfor fiscal year 2008:

 
| ** **                                 | ** ** | ** **               | ** ** | **Weighted** | ** ** | **Average**           | ** ** |
|--------------------------------------------|------------|--------------------------|------------|--------------|------------|-----------------------|------------|
| ** **                                 | ** ** | ** **               | ** ** | **Average**  | ** ** | **Remaining**         | ** ** |
| ** **                                 | ** ** | **Number of**       | ** ** | **Exercise** | ** ** | **Contractual**       | ** ** |
| ** **                                 | ** ** | **Shares**               | ** ** | **Price**    | ** ** | **Life (years)** | ** ** |
| ** **                                 | ** ** | **(in 000’s)** | ** ** | ** **   | ** ** | ** **            | ** ** |
|                                       |       |                     |       |         |       |                  |       |
| Outstanding at  June 30, 2007         |       | 227                      |       | $            | 14.14      |                  |       |   |
| Granted                                    |       | —                   |       | —       |       |                  |       |
| Exercised                                  |       | (190                     | )          | 13.78        |       |                  |       |
| Forfeited                                  |       | —                   |       | —       |       |                  |       |
| Expired                                    |       | (29                      | )          | —       |       |                  |       |
|                                       |       |                     |       |         |       |                  |       |
| Outstanding at  June 30, 2008         |       | 8                        |       | $            | 21.73      |                  | 0.1        |   |
| Exercisable  Options at June 30, 2008 |       | 8                        |       | $            | 21.73      |                  | 0.1        |   |
|                                            |            |                          |            |              |            |                       |            |  |  |

 

Thetotal fair value of options vested during fiscal year 2008 and 2007 was lessthan $100,000 in fiscal year 2008 and fiscal year 2007. Cash received from theexercise of nonqualifed stock options for fiscal year 2008 and 2007 was $2.6million and $3.7 million, respectively.

 

**Note 10 - Goodwill and Intangible Assets**

 

Theincreases in goodwill and intangible assets outlined below for the fiscal yearended June 30, 2008 are principally attributable to the Heissmanacquisition, the issuance of contingent shares for the WWLLP and Watson WyattNetherlands acquisitions, and foreign currency translation on goodwill andintangible assets.  See Note 2 forfurther details regarding our business combinations.  The carrying amount of goodwill for thefiscal years ended June 30, 2008 and 2007, are as follows:

 
| ** **                                                 | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  & Financial  Services  Group** | ** ** | **All Other** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                                 | ** ** | ** **          | ** ** | ** **                                            | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **                                           | ** ** | ** **         | ** ** | ** ** | ** ** |
| Balance as of  June 30, 2007                          |       | $                   | 208,453    |                                                  | $          | 46,662                    |       | $                                 | 22,805     |                                                 | $          | 44,897             |       | $          | 58,905     |   | $ | 1,214 |   | $ | 382,936 |   |
| Goodwill  acquired during the year and contingent payments |       | 168,845             |       | 15,519                                                |       | 11,364                    |       | 16,274                            |       | 18,209                                               |       | —             |       | 230,211    |       |
| Translation  adjustment                                    |       | 20,423              |       | (472                                                  | )          | 887                       |       | 806                               |       | (615                                                 | )          | —             |       | 21,029     |       |
| Balance as of  June 30, 2008                          |       | $                   | 397,721    |                                                  | $          | 61,709                    |       | $                                 | 35,056     |                                                 | $          | 61,977             |       | $          | 76,499     |   | $ | 1,214 |   | $ | 634,176 |   |

 

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Thefollowing table reflects changes in the net carrying amount of the componentsof intangible assets for the fiscal years ended June 30, 2008 and 2007:

 

 
| ** **                                  | ** ** | **Trademark  & trade  name** | ** ** | **Customer  related  intangible** | ** ** | **Core/developed  technology** | ** ** | **Non-compete  agreements** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|-----------------------------|------------|-----------|------------|
| Balance as of  June 30, 2007           |       | $                                     | 122,666    |                              | $          | 76,270                         |       | $                           | 12,256     |      | $          | 523 |   | $ | 211,715 |   |
| Intangible  assets acquired during the year |       | 391                                   |       | 29,021                            |       | 5,548                          |       | 611                         |       | 35,571    |       |
| Amortization  expense                       |       | (204                                  | )          | (10,359                           | )          | (5,289                         | )          | (545                        | )          | (16,397   | )          |
| Translation  adjustment                     |       | (968                                  | )          | 6,660                             |       | 89                             |       | 97                          |       | 5,878     |       |
| Balance as of  June 30, 2008           |       | $                                     | 121,885    |                              | $          | 101,592                        |       | $                           | 12,604     |      | $          | 686 |   | $ | 236,767 |   |

 

Thefollowing table reflects the carrying value of intangible assets at June 30,2008 and 2007:

 
| ** **                    | ** ** | **Fiscal year 2008** | ** ** | **Fiscal year 2007** | ** ** |
|-------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **Gross  Carrying  Amount**    | ** ** | **Accumulated  Amortization**  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible  assets:           |       |                           |       |                           |       |   |   |   |   |
| Trademark and trade name |       | $                              | 122,089    |                           | $          | 204 |   | $ | 122,666 |   | $ | — |   |
| Customer related intangibles  |       | 122,807                        |       | 21,215                         |       | 85,064 |   | 8,794 |   |
| Core/developed technology     |       | 24,965                         |       | 12,361                         |       | 17,935 |   | 5,679 |   |
| Non-compete agreements        |       | 1,316                          |       | 630                            |       | 1,028 |   | 505 |   |
| Total intangible assets       |       | $                              | 271,177    |                           | $          | 34,410 |   | $ | 226,693 |   | $ | 14,978 |   |

 

A component of the changein the gross carrying amount of trademark and trade name, customer relatedintangibles and core/developed technology reflects foreign currency translationadjustments between June 30, 2007 and June 30, 2008.  These intangible assets are denominated inthe currencies of our subsidiaries outside the United States, and aretranslated into our reporting currency, the U.S. dollar, based on exchangerates at the balance sheet date.

 

Certain trade-mark and trade-name intangibles purchased as part of theWWLLP combination in fiscal year 2005 have indefinite useful livesand are not amortized.

 

The weighted average remaining life of amortizable intangible assets atJune 30, 2008, was 9 years.  Futureestimated amortization expense is as follows:

 
| **Fiscal year ending June 30** | ** ** | **Amount** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| 2009                                               |       | $          | 16,655     |   |
| 2010                                               |       | 15,422     |       |
| 2011                                               |       | 11,727     |       |
| 2012                                               |       | 11,403     |       |
| 2013                                               |       | 10,277     |       |
| Thereafter                                         |       | 49,604     |       |
| Total estimated amortization expense               |       | $          | 115,088    |   |

 

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**Note 11 - Income Taxes**

 

Thecomponents of the income tax provision for continuing operations include:

 
| ** **                       | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                             |       |                                  |       |   |   |   |   |
| Current tax (benefit) expense:   |       |                                  |       |   |   |   |   |
| U.S.                             |       | $                                     | 29,278     |   | $ | 40,485 |   | $ | (1,112 | ) |
| State and local                  |       | 6,781                                 |       | 5,439 |   | 1,402 |   |
| Foreign                          |       | 25,861                                |       | 17,352 |   | 12,371 |   |
|                             |       | 61,920                                |       | 63,276 |   | 12,661 |   |
| Deferred tax (benefit) expense:  |       |                                  |       |   |   |   |   |
| U.S.                             |       | 6,031                                 |       | (10,585 | ) | 23,297 |   |
| State and local                  |       | 1,397                                 |       | (835 | ) | 5,166 |   |
| Foreign                          |       | 4,122                                 |       | 8,337 |   | 4,461 |   |
|                             |       | 11,550                                |       | (3,083 | ) | 32,924 |   |
| Total provision for income taxes |       | $                                     | 73,470     |   | $ | 60,193 |   | $ | 45,585 |   |

 

Deferredincome tax assets and liabilities reflect the effect of temporary differencesbetween the assets and liabilities recognized for financial reporting purposesand the amounts recognized for income tax purposes.  The company recognizes deferred tax assets ifit is more likely than not that a benefit will be realized.

 

Deferredincome tax assets (liabilities) included in the Consolidated Balance Sheets at June 30,2008, and June 30, 2007, are comprised of the following:

 
| ** **                              | ** ** | **June 30** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **2008**         | ** ** | **2007** | ** ** |
|                                    |       |             |       |   |   |
| Prepaid                                 |       | $                | (1,589     | ) | $ | (1,422 | ) |
| Depreciation and amortization           |       | (37,706          | )          | (31,103 | ) |
| Goodwill                                |       | (10,830          | )          | (6,926 | ) |
| Other                                   |       | (10,792          | )          | (4,905 | ) |
| Gross deferred tax liabilities          |       | (60,917          | )          | (44,356 | ) |
|                                    |       |             |       |   |   |
| Accrued retirement benefits             |       | 72,558           |       | 61,098 |   |
| Deferred rent                           |       | 5,697            |       | 6,924 |   |
| Other                                   |       | 8,724            |       | 7,762 |   |
| Net operating loss carryforwards        |       | 12,212           |       | 9,084 |   |
| Share based compensation                |       | 3,010            |       | 1,433 |   |
| Accrued liability                       |       | 15,910           |       | 20,135 |   |
| Capitalized expenditure                 |       | 803              |       | 866 |   |
| Accrued compensation                    |       | 12,162           |       | 7,966 |   |
| Deferred revenue                        |       | 30,972           |       | 17,046 |   |
| Foreign tax credit                      |       | 1,199            |       | — |   |
| Gross deferred tax assets               |       | 163,247          |       | 132,314 |   |
| Deferred tax assets valuation allowance |       | (12,524          | )          | (9,826 | ) |
| Net deferred tax asset                  |       | $                | 89,806     |   | $ | 78,132 |   |

 

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AtJune 30, 2008, we had unused loss carryforwards for tax purposes invarious jurisdictions outside the U.S. amounting to $58.8 million of which$37.5 million can be indefinitely carried forward under local statutes.  The remaining loss carryforwards will expire,if unused, in varying amounts from 2009 through 2015.  The valuation allowance includes the taxeffect of foreign net operating loss carryforwards of $11.1 million and the taxeffect of certain foreign temporary expenses of $1.4 million.

 

Thecompany maintains a valuation allowance of $12.5 million and $9.8 million at June 30,2008 and 2007, respectively, against certain of its deferred tax assets, as itis more likely than not that they will not be fully realized. The principalcomponents of the deferred tax assets for which a valuation allowance has beenestablished include certain foreign country net operating loss carry-forwardsand deferred foreign expenses.

 

Thenet change in the valuation allowance of $2.7 million in fiscal year 2008 and$14.0 million in fiscal year 2007  is dueto the release of valuation allowance in various jurisdictions, and the taxeffect of the change in net operating losses and deferred foreign expense.

 

Thedomestic and foreign components of income from continuing operations beforeincome taxes for each of the three years ended June 30 are as follows:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 111,586    |     | $          | 97,241   |       | $ | 73,672 |   |
| Foreign    |       | 117,324  |       | 79,229   |       | 58,031   |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 228,910    |     | $          | 176,470  |       | $ | 131,703 |   |

 

Thecompany has not provided U.S. deferred taxes on cumulative earnings of foreignsubsidiaries that have been reinvested indefinitely.  These earnings relate to ongoing operationsand at June 30, 2008 were approximately $318 million.  Due to the availability of U.S. foreign taxcredits, it is not practicable to estimate the U.S. federal income taxliability that might be payable if such earnings were not reinvested indefinitely.  If future events, including material changesin estimates of cash, working capital and long-term investment requirements,necessitate that these earnings be distributed, an additional provision forwithholding taxes may apply, which could materially affect our future effectivetax rate.

 

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Thereported income tax provision differs from the amounts that would have resultedhad the reported income before income taxes been taxed at the U.S. federalstatutory rate.  The principal reasonsfor the differences between the amounts provided and those that would have resultedfrom the application of the U.S. federal statutory tax rate are as follows:

 
| ** **                                                     | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                           |       |                                  |       |   |   |   |   |
| Tax provision at U.S. federal statutory tax rate of 35 percent |       | $                                     | 80,119     |   | $ | 61,764 |   | $ | 46,096 |   |
| Increase (reduction) resulting from:                           |       |                                  |       |   |   |   |   |
| Foreign income tax rate differential, net                      |       | (10,955                               | )          | (5,678 | ) | (5,974 | ) |
| State income taxes, net of federal tax effect                  |       | 4,030                                 |       | 4,604 |   | 4,720 |   |
| Non-deductible expenses and foreign dividend                   |       | 8,670                                 |       | 5,999 |   | 6,205 |   |
| Tax credits                                                    |       | (11,484                               | )          | (8,338 | ) | (2,812 | ) |
| Other                                                          |       | 3,090                                 |       | 1,842 |   | (2,650 | ) |
|                                                           |       |                                  |       |   |   |   |   |
| Income tax provision                                           |       | $                                     | 73,470     |   | $ | 60,193 |   | $ | 45,585 |   |

 

Thecompany adopted the provisions of FIN 48 on July 1, 2007.  The cumulative effect of adopting FIN 48 wasa $13.0 million increase in the liability for uncertain tax positions, a $9.1million increase to deferred tax assets, a $0.1 million decrease to othercomprehensive income and a $3.8 million decrease to retained earnings at July 1,2007.

 

Uponadoption, the gross liability for income taxes associated with uncertain taxpositions at July 1, 2007 was $16.3 million.  This liability could be reduced by $8.4million of offsetting deferred tax benefits associated with timing differences,foreign tax credits and the federal tax benefit of state income taxes.  The net difference of $7.9 million, ifrecognized, would have a $7.5 million favorable impact on the company’seffective tax rate and would increase other comprehensive income by $0.4million.   At June 30, 2008, thegross liability for income taxes associated with uncertain tax positions was$11.0 million.  This liability can bereduced by $2.8 million of offsetting deferred tax benefits associated withtiming differences, foreign tax credits, and the federal tax benefit of stateincome taxes.  The net difference of $8.2million, if recognized, would have a $7.9 million favorable impact on thecompany’s effective tax rate and would increase other comprehensive income by$0.3 million.

 

Areconciliation of the beginning and ending balances of the total amounts of grossunrecognized tax liability is as follows:

 

| ** **                                             | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|-----------|------------|
|                                                   |       |      |       |
| Gross  unrecognized tax liability at July 1, 2007 |       | $16,300   |       |
| Increases  related to tax positions in prior years     |       | 400       |       |
| Decreases  related to tax positions in prior years     |       | (6,400    | )          |
| Decreases related  to settlements                      |       | (700      | )          |
| Decreases  related to lapse in statute of limitations  |       | (600      | )          |
| Increases  related to current year tax positions       |       | 2,000     |       |
|                                                   |       |      |       |
| Balances at  June 30, 2008                        |       | $11,000   |       |

 

Interestand penalties related to income tax liabilities are included in income taxexpense.  The company had accruedinterest of $1.8 million and penalties of $1.4 million, totaling $3.2 millionat July 1, 2007.  At June 30,2008 the company had accrued interest of $1.6 million and penalties of $0.4million, totaling $2.0 million.   Taxexpense for the year ended June 30, 2008 includes an interest benefit of$0.1 million and a penalty benefit of $1.1 million, totaling a $1.2 millionbenefit.

 

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Thegross tax liability for uncertain tax positions decreased by $5.3 millionduring the year.  This decrease wasprimarily related to a $5.9 million decrease due to a change in accountingmethod which the company filed with the Internal Revenue Service (“IRS”) in October 2007to change the method of accounting for accrued expenses owed to foreignaffiliates.  Since the accounting methodchange was filed voluntarily, the IRS will not assess tax, interest orpenalties related to the position claimed in prior tax returns.  The $5.9 million decrease in the gross taxliability relates to a deferred tax item and did not impact the company’seffective tax rate.  Gross accruedinterest and penalties related to this tax position decreased $1.3 million,which net of federal tax benefits, resulted in a $1.2 million impact on theeffective tax rate.

 

Thecompany believes it is reasonably possible that there will be a $3.2 milliondecrease in the gross tax liability for uncertain tax positions within the next12 months based upon potential settlements and the expiration of statutes oflimitations in various tax jurisdictions.

 

Thecompany and its subsidiaries conduct business globally and are subject to incometax in the US and in many states and foreign jurisdictions.  The company is currently under examination inseveral tax jurisdictions.  The last taxyear examined and settled with the IRS was fiscal year ending June 30,2003.  A summary of the tax years thatremain subject to examination in the company’s major tax jurisdictions are:

** **

| ** **                           | ** ** | **Open Tax Years**               | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **(fiscal year ending in)** | ** ** |
| ** **                           | ** ** | ** **                                 | ** ** |
| United States –  federal        |       | 2005 and forward                           |       |
| United States –  various states |       | 2003 and forward                           |       |
| Canada – federal                |       | 2004 and forward                           |       |
| Germany                              |       | 2003 and forward                           |       |
| United Kingdom                       |       | 2005 and forward                           |       |

 

**Note 12 - Segment Information**

 

We have five reportableoperating segments or practice areas as follows:

 

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

 

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

 

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The table below presentsspecified information about reported segments as of and for the year ended June 30,2008:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance &  Financial  Services Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 993,371    |                          | $          | 195,925                                               |       | $                                 | 182,953    |                                                     | $          | 169,173   |       | $ | 118,603 |   | $ | 1,660,025 |   |
| Net operating  income                   |       | 285,610             |       | 35,067                        |       | 47,246                                                |       | 59,918                            |       | 2,381                                                    |       | 430,222   |       |
| Interest expense                        |       | 2,979               |       | 859                           |       | 369                                                   |       | 305                               |       | 307                                                      |       | 4,819     |       |
| Depreciation &  Amortization   |       | 16,811              |       | 2,189                         |       | 18,500                                                |       | 736                               |       | 4,253                                                    |       | 42,489    |       |
| Receivables                             |       | 248,375             |       | 46,526                        |       | 16,075                                                |       | 34,545                            |       | 33,140                                                   |       | 378,661   |       |
|                                         |            |                     |            |                               |            |                                                       |            |                                   |            |                                                          |            |           |            |  |  |  |  |  |  |

 

The table below presentsspecified information about reported segments as of and for the year ended June 30,2007:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance &  Financial  Services Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 820,806    |                          | $          | 169,845                                               |       | $                                 | 157,516    |                                                     | $          | 128,720   |       | $ | 113,676 |   | $ | 1,390,563 |   |
| Net operating  income                   |       | 222,021             |       | 24,052                        |       | 36,663                                                |       | 39,269                            |       | 18,985                                                   |       | 340,990   |       |
| Interest expense                        |       | 3,352               |       | 506                           |       | 425                                                   |       | 369                               |       | 555                                                      |       | 5,207     |       |
| Depreciation &  Amortization   |       | 11,118              |       | 2,695                         |       | 14,108                                                |       | 830                               |       | 796                                                      |       | 29,547    |       |
| Receivables                             |       | 228,284             |       | 40,516                        |       | 15,616                                                |       | 27,427                            |       | 31,959                                                   |       | 343,802   |       |
|                                         |            |                     |            |                               |            |                                                       |            |                                   |            |                                                          |            |           |            |  |  |  |  |  |  |

 

The table below presentsspecified information about reported segments as of and for the year ended June 30,2006:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance &  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 725,630    |                          | $          | 146,111                                               |       | $                                 | 132,805    |                                                 | $          | 86,462    |       | $ | 91,987 |   | $ | 1,182,995 |   |
| Net operating  income                   |       | 186,463             |       | 12,796                        |       | 31,539                                                |       | 12,622                            |       | 18,161                                               |       | 261,581   |       |
| Interest expense                        |       | 2,618               |       | 559                           |       | 321                                                   |       | 198                               |       | 252                                                  |       | 3,948     |       |
| Depreciation &  Amortization   |       | 13,267              |       | 2,848                         |       | 9,615                                                 |       | 1,578                             |       | 1,413                                                |       | 28,721    |       |
| Receivables                             |       | 194,014             |       | 37,355                        |       | 16,709                                                |       | 19,088                            |       | 26,992                                               |       | 294,158   |       |
|                                         |            |                     |            |                               |            |                                                       |            |                                   |            |                                                      |            |           |            |  |  |  |  |  |  |

 

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A reconciliation of the information reported by segmentto the consolidated amounts follows for the years ended June 30 (inthousands):

 
| ** **                                                                                  | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                  | ** ** | **2008**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Revenue:*                                                                                  |       |                         |       |   |   |   |   |
| Total segment revenue                                                                       |       | $                            | 1,660,025  |   | $ | 1,390,563 |   | $ | 1,182,995 |   |
| Reimbursable expenses not included in segment revenue                                       |       | 62,014                       |       | 58,164 |   | 51,925 |   |
| All other segments                                                                          |       | 43,922                       |       | 41,104 |   | 40,431 |   |
| Other, net                                                                                  |       | (5,906                       | )          | (3,308 | ) | (3,540 | ) |
| Consolidated revenue                                                                        |       | $                            | 1,760,055  |   | $ | 1,486,523 |   | $ | 1,271,811 |   |
|                                                                                        |       |                         |       |   |   |   |   |
| *Net Operating Income:*                                                                     |       |                         |       |   |   |   |   |
|                                                                                        |       |                         |       |   |   |   |   |
| Total segment income                                                                        |       | $                            | 430,222    |   | $ | 340,990 |   | $ | 261,581 |   |
| Income/(loss) from affiliates                                                               |       | 2,067                        |       | (5,500 | ) | 1,135 |   |
| Differences in allocation methods for depreciation, G&A, pension  and medical costs (1) |       | (17,675                      | )          | (9,422 | ) | (4,694 | ) |
| Interest Expense                                                                            |       | (5,977                       | )          | (1,581 | ) | (4,093 | ) |
| Loss on hedge                                                                               |       | —                       |       | — |   | (3,602 | ) |
| Other non-operating income                                                                  |       | 464                          |       | 178 |   | 1,521 |   |
| Discretionary bonuses                                                                       |       | (184,980                     | )          | (139,433 | ) | (108,671 | ) |
| All other segments                                                                          |       | 4,670                        |       | (6,108 | ) | (5,321 | ) |
| Other, net                                                                                  |       | 120                          |       | (2,656 | ) | (6,153 | ) |
|                                                                                        |       |                         |       |   |   |   |   |
| Income from continuing operations before income taxes                                       |       | $                            | 228,911    |   | $ | 176,468 |   | $ | 131,703 |   |
|                                                                                        |       |                         |       |   |   |   |   |
| *Interest Expense:*                                                                         |       |                         |       |   |   |   |   |
| Total segment expense                                                                       |       | $                            | 4,819      |   | $ | 5,207 |   | $ | 3,948 |   |
| All other segments                                                                          |       | 142                          |       | 138 |   | 104 |   |
| Differences in allocation method                                                            |       | 1,016                        |       | (3,764 | ) | 41 |   |
| Consolidated interest expense                                                               |       | $                            | 5,977      |   | $ | 1,581 |   | $ | 4,093 |   |
|                                                                                        |       |                         |       |   |   |   |   |
| *Depreciation & Amortization:*                                                     |       |                         |       |   |   |   |   |
| Total segment expense                                                                       |       | $                            | 42,489     |   | $ | 29,547 |   | $ | 28,721 |   |
| All other segments                                                                          |       | 5,616                        |       | 8,757 |   | 2,631 |   |
| Intangible asset amortization, not allocated to segments                                    |       | 16,397                       |       | 10,145 |   | 8,155 |   |
| Differences in allocation method and other                                                  |       | 7,926                        |       | 8,786 |   | 5,411 |   |
| Consolidated depreciation and amortization expense                                          |       | $                            | 72,428     |   | $ | 57,235 |   | $ | 44,918 |   |
|                                                                                        |       |                         |       |   |   |   |   |
| *Receivables:*                                                                              |       |                         |       |   |   |   |   |
| Total segment receivables                                                                   |       | $                            | 378,661    |   | $ | 343,802 |   | $ | 294,158 |   |
| All other segments                                                                          |       | 4,773                        |       | 6,689 |   | 5,030 |   |
|                                                                                        |       |                         |       |   |   |   |   |
| Net valuation differences (2)                                                               |       | (16,353                      | )          | (13,664 | ) | 4,389 |   |
| Total billed and unbilled receivables                                                       |       | 367,081                      |       | 336,827 |   | 303,577 |   |
| Assets not reported by segment                                                              |       | 1,348,895                    |       | 1,192,882 |   | 936,782 |   |
| Consolidated assets                                                                         |       | $                            | 1,715,976  |   | $ | 1,529,709 |   | $ | 1,240,359 |   |

 

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

 

(2) Totalsegment receivables, which reflect the receivable balances used by managementto make business decisions, are included for management reporting purposes netof deferred revenues.

 

The following represents total revenue and long-livedassets information by geographic area as of and for the years ended June 30:

 
| ** **     | ** ** | **Revenue** | ** ** | **Long-lived Assets** | ** ** |
|----------------|------------|-------------|------------|----------------------------|------------|
| ** **     | ** ** | **2008**    | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|           |       |        |       |                       |       |   |   |   |   |   |   |   |   |
| United States  |       | $           | 761,584    |                       | $          | 707,784 |   | $ | 649,109 |   | $ | 137,120 |   | $ | 174,369 |   | $ | 153,278 |   |
| United Kingdom |       | 531,444     |       | 468,142                    |       | 345,732 |   | 862,555 |   | 617,816 |   | 493,942 |   |
| Rest of World  |       | 467,027     |       | 310,597                    |       | 276,970 |   | 86,242 |   | 34,011 |   | 29,075 |   |
|           |       | $           | 1,760,055  |                       | $          | 1,486,523 |   | $ | 1,271,811 |   | $ | 1,085,917 |   | $ | 826,196 |   | $ | 676,295 |   |

 

Revenueis based on the country of domicile for the legal entity that originated therevenue.  Exclusive of the United Statesand the U.K., revenue from no single country constituted more than 10 percentof consolidated revenues.  Revenue fromno single customer constituted more than one percent of consolidated revenues.

 

**Note 13 - Commitments and Contingent Liabilities**

 

Thecompany historically has provided guarantees on an infrequent basis to thirdparties in the ordinary course of business. The guarantees described below are currently in effect and could requirethe company to make payments to third parties under certain circumstances.

 

*Letters of Credit*.  At June 30,2008, the company has letters of credit totaling $10.6 million under ourexisting credit facility to guarantee payment to beneficiaries in the eventthat the company fails to meet its financial obligations to thesebeneficiaries.  These letters of creditwill remain outstanding as long as we retain an ownership share of ouraffiliated captive insurance company, PCIC.

 

Thecompany has also provided a $5.0 million Australian dollar-denominated letterof credit (US $4.8 million) to an Australian governmental agency as required bylocal regulations.  The estimated fairmarket value of these letters of credit is immaterial because they have neverbeen used, and the company believes that probability of future usage is remote.

 

*Indemnification Agreements*.  The company has various agreements thatprovide that it may be obligated to indemnify the other party with respect tocertain matters.  Generally, theseindemnification clauses are included in contracts arising in the normal courseof business and in connection with the purchase and sale of 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 variouslawsuits, arbitrations or mediations that arise in the ordinary course ofbusiness. The matters reported on below involve the most significant pending orpotential claims against us.  We also have received subpoenas and requestsfor information in connection with government investigations.

 

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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 claims against the company will not have a materialadverse effect on the results of operations, but litigation is subject to manyfactors which are difficult to predict so there can be no assurance that in theevent of a material unfavorable result in one or more of such matters, we willnot 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 entire claim issubject to arbitration.  Stroh has fileda demand for arbitration on April 16, 2008 and Watson Wyatt filed aresponse.  We expect the arbitrators toset a hearing schedule in late 2008.

 

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

 

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**Note 14 - Earnings Per Share**

 

Basicearnings per share is calculated on the basis of the weighted average number ofcommon shares outstanding during the year. Diluted earnings per share is calculated on the basis of the weightedaverage number of common shares outstanding plus the effect of outstandingstock options, stock-based compensation plan shares and employee stock purchaseplan shares using the “treasury stock” method. The components of basic and diluted earnings per share are as follows:

 
| ** **                                                                         | ** ** | **Year Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                               |       |                                   |       |   |   |   |   |
| Income from  continuing operations                                                 |       | $                                      | 155,441    |   | $ | 116,275 |   | $ | 86,118 |   |
| Income from  discontinued operations                                               |       | —                                 |       | — |   | 1,073 |   |
| Net income                                                                         |       | $                                      | 155,441    |   | $ | 116,275 |   | $ | 87,191 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| Weighted average  outstanding shares of common stock                               |       | 42,577                                 |       | 42,413 |   | 41,393 |   |
| Contingency  Stock                                                                 |       | —                                 |       | 1,950 |   | 1,787 |   |
| Dilutive effect  of employee stock options and employee stock purchase plan shares |       | 1,804                                  |       | 321 |   | 117 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| Common stock and  stock equivalents                                                |       | 44,381                                 |       | 44,684 |   | 43,297 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| Basic earnings  per share                                                          |       |                                   |       |   |   |   |   |
| Income from  continuing operations                                                 |       | $                                      | 3.65       |   | $ | 2.74 |   | $ | 2.08 |   |
| Income from  discontinued operations                                               |       | —                                 |       | — |   | 0.03 |   |
| Basic earnings  per share, net income                                              |       | $                                      | 3.65       |   | $ | 2.74 |   | $ | 2.11 |   |
|                                                                               |       |                                   |       |   |   |   |   |
| Diluted earnings  per share                                                        |       |                                   |       |   |   |   |   |
| Income from  continuing operations                                                 |       | $                                      | 3.50       |   | $ | 2.60 |   | $ | 1.99 |   |
| Income from  discontinued operations                                               |       | —                                 |       | — |   | 0.02 |   |
| Diluted earnings  per share, net income                                            |       | $                                      | 3.50       |   | $ | 2.60 |   | $ | 2.01 |   |

 

Thediluted earnings per share calculation for fiscal years 2008, 2007 and 2006assume that 1,950,000 contingent shares related to the WWLLP businesscombination have been issued and outstanding since July 31, 2005.  The diluted earnings per share calculationfor 2008 also assumes that the 218,089 WWN contingent shares were alsooutstanding at the beginning of the fiscal year.  All of these shares were issued during thefourth quarter of fiscal year 2008.

 

**Note 15 - Discontinued Operations**

 

Duringthe fiscal year 2006, the company evaluated its accrual for the estimatedremaining future obligations and costs related to the exit fromWellspring.  As a result of the analysis,the company released the remainder of its accrual of $1.75 million, less theassociated income tax expenses.  Theadjustment is reflected in the Consolidated Statement of Operations for fiscalyear 2006 in the line “Adjustment to reduce estimated loss on disposal ofdiscontinued operations.”

 

WellspringResources, LLC (“Wellspring”), the benefits administration outsourcing businessthat we exited from in fiscal year 1998.

 

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**Note 16 – Restricted Shares**

 

In conjunction with ourWWLLP business combination on July 31, 2005, we issued 9,090,571 Class Acommon shares, 4,749,797 of which were subject to contractual transfer restrictions.  Transfer restrictions expired on 2,339,761 ofthese shares on July 31, 2006 and expired on the remaining 2,410,036shares on July 31, 2007.  Thecontingencies associated with the payment of an additional 1,950,000 Class Ashares were met and the the contigent shares were issued to the former partnersof WWLLP on April 15, 2008.

 

In conjunction with ouracquisition of WWN on February 1, 2007, we issued 252,285 Class Acommon shares which were subject to contractual transfer restrictions.  Transfer restrictions on 50% of these sharesexpired on February 1, 2008. Transfer restrictions on the remaining shares will expire on February 1,2009.  The contingencies associated withthe payment of an additional 218,089 Class A shares were met and thecontingent shares were issued to the former partners of WWN on June 27,2008. Sale of these shares, are also subject to contractual transferrestrictions that will expire on 50% of these shares on each of the first andsecond anniversaries of issuance of the shares. See Note 2 of this report for further information regarding theseacquisitions.

 

**Note 17 – Exit From Multi-employer Retirement Consulting Business**

 

*Exit fromMutli-employer Retirement Consulting Business*- On February 1, 2008, the company exited its U.S. “Taft-Hartley”retirement consulting business and its Canadian private sector, negotiatedcosts, trusteed plan business.  Theaffected approximately 70 retirement clients, accounting for approximately $15million in annual revenue.  Two newlycreated companies, which are owned and operated by individuals who wereformerly Watson Wyatt associates, service these clients in the U.S. and Canada,respectively. These associates, who focus on multi-employer retirement plans,moved to the new companies on February 1, 2008.  Watson Wyatt has no ownership in these newcompanies, but is compensated for release of certain non-compete obligationsthrough receipt of approximately 30% of the new companies’ revenues fromclients that transfer from the company for the next five years.

 

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**Note 18- Unaudited Quarterly Financial Data**

 

Summarizedquarterly financial data for the years ended June 30, 2008 and 2007 are asfollows (in thousands, except per share amounts):

 
| ** **                 | ** ** | **2008 Quarter Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **September 30**            | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
|                       |       |                             |       |   |   |   |   |   |   |
| Revenue                    |       | $                                | 401,687    |   | $ | 447,032 |   | $ | 457,525 |   | $ | 453,811 |   |
| Income from operations     |       | 51,233                           |       | 59,942 |   | 64,434 |   | 51,164 |   |
| Income before income taxes |       | 51,833                           |       | 57,587 |   | 64,816 |   | 54,675 |   |
| Net income                 |       | 34,444                           |       | 36,781 |   | 42,546 |   | 41,670 |   |
| Earnings per share: (a)    |       |                             |       |   |   |   |   |   |   |
| Net income, basic          |       | 0.81                             |       | 0.87 |   | 1.01 |   | 0.96 |   |
| Net income, diluted        |       | 0.77                             |       | 0.82 |   | 0.96 |   | 0.95 |   |
|                            |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                 | ** ** | **2007 Quarter Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **September 30**            | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
|                       |       |                             |       |   |   |   |   |   |   |
| Revenue                    |       | $                                | 336,004    |   | $ | 366,425 |   | $ | 395,598 |   | $ | 388,496 |   |
| Income from operations     |       | 38,573                           |       | 40,184 |   | 52,354 |   | 48,194 |   |
| Income before income taxes |       | 39,387                           |       | 39,787 |   | 48,486 |   | 48,808 |   |
| Net income                 |       | 24,814                           |       | 25,994 |   | 33,834 |   | 31,633 |   |
| Earnings per share: (a)    |       |                             |       |   |   |   |   |   |   |
| Net income, basic          |       | 0.59                             |       | 0.61 |   | 0.80 |   | 0.71 |   |
| Net income, diluted        |       | 0.56                             |       | 0.58 |   | 0.76 |   | 0.71 |   |
|                            |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

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(a)          The diluted earnings per share calculation for fiscal year 2008 and 2007assume that the 1,950,000 contingent shares related to the WWLLP businesscombination have been issued and outstanding since July 31, 2005.  The diluted earnings per share calculationfor 2008 also assumes that the 218,089 WWN contingent shares were also outstandingat the beginning of the fiscal year.  Allof these shares were issued during fourth quarter of fiscal year 2008.

 

Theaccompanying unaudited quarterly financial data has been prepared in accordancewith generally accepted accounting principles in the United States for interimfinancial information and with Item 302 of Regulation S-K.  In our opinion, all adjustments considerednecessary for a fair statement have been made and were of a normal recurringnature.

 

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**WATSON WYATT WORLDWIDE, INC.**

**Schedule II**

**Valuation and Qualifying Accountsand Reserves**

(Thousands of U.S. Dollars)

 
| **Description**                                  | ** ** | **Balance  at  Beginning  of  Year** | ** ** | **Additions  Charged  Against  (Credited  to)  Revenue** | ** ** | **Additions  Charged  to  Other  Accounts** | ** ** | **Additions  Resulting  From  Acquisitions** | ** ** | **Deductions** | ** ** | **Balance  at  End of  Year** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|----------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | ** **                           | ** ** | ** **                                               | ** ** | ** **                                  | ** ** | ** **                                   | ** ** |
| **Year Ended June 30, 2008** | ** ** |
| Allowance for  uncollectible accounts            |       | $                                    | 6,216      |                                                     | $          | 14,309                                      |       | $                                            | —     |           | $          | —                             |       | $ | (11,981 | ) | $ | 8,544 |   |
|                                             |       |                                 |       |                                                     |       |                                        |       |                                         |       |           |       |                               |       |
| Allowance for  unbillable accounts               |       | 7,683                                |       | 4,017                                                    |       | —                                      |       | —                                       |       | —         |       | 11,700                             |       |
|                                             |       |                                 |       |                                                     |       |                                        |       |                                         |       |           |       |                               |       |
| Valuation  allowance for deferred tax assets     |       | 9,826                                |       | —                                                   |       | 2,698                                       |       | —                                       |       | —         |       | 12,524                             |       |
|                                                  |            |                                      |            |                                                          |            |                                             |            |                                              |            |                |            |                                    |            |  |  |  |  |  |  |

 
| **Year Ended June 30, 2007** | ** ** |
|--------------------------------------------------|------------|
|                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for  uncollectible accounts            |       | $ | 3,678 |   | $ | 11,109 |   | $ | — |   | $ | — |   | $ | (8,571 | ) | $ | 6,216 |   |
|                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for  unbillable accounts               |       | 5,348 |   | 2,335 |   | — |   | — |   | — |   | 7,683 |   |
|                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Valuation  allowance for deferred tax assets     |       | 23,841 |   | — |   | (9,777 | )(1) | — |   | (4,238 | ) | 9,826 |   |
|                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Year Ended June 30, 2006** | ** ** |
|--------------------------------------------------|------------|
|                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for  uncollectible accounts            |       | $ | 2,114 |   | $ | 7,774 |   | $ | — |   | $ | 1,574 |   | $ | (7,784 | ) | $ | 3,678 |   |
|                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for  unbillable accounts               |       | 700 |   | (942 | ) | — |   | 5,590 |   | — |   | 5,348 |   |
|                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Valuation  allowance for deferred tax assets     |       | 13,549 |   | — |   | — |   | 11,386 |   | (1,094 | ) | 23,841 |   |
|                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           The decrease is due to reclassification of thedeferred tax assets for foreign branches.

 

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**ITEM 6. EXHIBITS.**

 
| 3.1   |   | Amended and Restated  Certificate of Incorporation of Watson Wyatt Worldwide, Inc.(1)                                                                                                        |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   |   | Amended and Restated  Bylaws of Watson Wyatt Worldwide, Inc.(2)                                                                                                                              |
| 4     |   | Form of  Certificate Representing Common Stock(3)                                                                                                                                            |
| 10.1  |   | Amended and Restated  Revolving Credit Agreement (Credit Agreement) Among Suntrust Bank and Others  dated July 11, 2005(4)                                                                   |
| 10.2  |   | Amendment to the Credit  Agreement Among Suntrust Bank and Others dated September 30, 2005(5)                                                                                                |
| 10.3  |   | Amendment to the Credit  Agreement Among Suntrust Bank and Others dated June 21, 2007 (6)                                                                                                    |
| 10.4  |   | Third Amendment to  Amended and Restated Revolving Credit Agreement dated September 14, 2007  (7)                                                                                            |
| 10.5  |   | FY06 Performance Share  Bonus Incentive Program (8)                                                                                                                                               |
| 10.6  |   | FY07 Performance Share  Bonus Incentive Program (1)                                                                                                                                               |
| 10.7  |   | FY08 Performance Share  Bonus Incentive Program (9)                                                                                                                                               |
| 10.8  |   | Trust Deed and  Rules of the Watson Wyatt Share Incentive Plan 2005 (U.K.) (10)                                                                                                              |
| 10.9  |   | Watson Wyatt Share  Incentive Plan 2005 Deed of Amendment (U.K.) (10)                                                                                                                             |
| 10.10 |   | Amended and Restated  Senior Officer Deferred Compensation Plan (2)                                                                                                                               |
| 10.11 |   | Amended 2001 Deferred  Stock Unit Plan for Selected Employees(2)                                                                                                                                  |
| 10.12 |   | Amended Voluntary  Deferred Compensation Plan for Non-Employee Directors (2)                                                                                                                      |
| 10.13 |   | Amended Compensation  Plan for Outside Directors(7)                                                                                                                                               |
| 10.14 |   | Form of Employment  Agreement between Watson Wyatt Limited and each of Chandrasekhar Ramamurthy,  Paul N. Thornton and Roger C. Urwin(11)                                                    |
| 10.15 |   | Deed of Lease between  Watson Wyatt & Company and Arlington Office, LLC, dated  April 27, 2004(12)                                                                                  |
| 10.16 |   | First Amendment to Deed  of Lease between Watson Wyatt & Company and Arlington Office L.L.C.,  dated April 22, 2005(13)                                                             |
| 10.17 |   | First Amendment to  Lease Between Watson Wyatt & Company and Arlington Office LLC  dated November 14, 2005 (14)                                                                |
| 10.18 |   | Form of  Indemnification Agreement among Watson Wyatt & Company Holdings and  each of its directors and Section 16 officers(15)                                                |
| 16    |   | Letter re change in  certifying accountant (16)                                                                                                                                                   |
| 21    |   | Subsidiaries of Watson  Wyatt Worldwide, Inc.(2)                                                                                                                                             |
| 23    |   | Consent of the  Company’s Independent Registered Public Accounting Firm — Deloitte &  Touche LLP(2)                                                                            |
| 23.1  |   | Consent of the  Company’s Independent Registered Public Accounting Firm —  PricewaterhouseCoopers(2)                                                                                    |
| 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(2)        |
| 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(2)        |
| 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(2) |

 

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(1)             Incorporatedby reference from Registrant’s Form 10-Q, filed on February 9, 2007

(2)             Filed with this Form 10-K

(3)             Incorporated by reference from Registrant’s Form 8-K,filed on January 3, 2006

(4)             Incorporated by reference from Registrant’s Form 8-K,filed on July 14, 2005

(5)             Incorporated by reference from Registrant’sForm 10-Q, filed on November 9, 2005

(6)             Incorporated by reference from Registrant’s Form 10-K,filed on August 24, 2007

(7)             Incorporated by reference from Registrant’s Form 10-Q,filed on November 9, 2007

(8)             Incorporated by reference from Registrant’sForm 8-K, filed on May 16, 2006.

(9)             Incorporated by reference from Registrant’s Form 10-Q,filed on May 8, 2008

(10)       Incorporated by reference from Registrant’s Form 10-K,filed on September 1, 2006

(11)       Incorporated by reference from Registrant’s Form S-4(File No. 33-3124629), filed on May 4, 2005

(12)       Incorporated by reference from Registrant’s Form 10-Q,filed on May 7, 2004

(13)       Incorporated by reference from Registrant’s Form 10-Q,filed on May 10, 2005

(14)       Incorporated by reference from Registrant’s Form 10-Q,filed on February 9, 2006

(15)       Incorporated by reference from Registrant’s Form 8-K,filed on October 4, 2005

(16)       Incorporated by reference from Registrant’s Form 8-K,filed on December 13, 2006

 

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