**UNITED STATESSECURITIES 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, 2007** |
| ** **     |   | ** ** |
| ** **     |   | **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  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**901 N. Glebe Road**

**Arlington, VA 22203**

(Address of principal executive offices, including zipcode)

**(703) 258-8000**

(Registrant’s telephone number, including area code)

**Securities registered pursuant toSection 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** |

 

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

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.        Yes   o    No   x

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes x          Noo

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer

 Large accelerated filer x                   Accelerated Filer o             Non-accelerated Filer o

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

Theaggregate market value of the registrant’s voting and non-voting common stockheld by non-affiliates of the registrant was approximately $1,912,392,860 basedon the closing price as of the last business day of the registrant’s mostrecently completed second fiscal quarter, December 29, 2006.

**Documents Incorporated by Reference**

Portions of theDefinitive Proxy Statement for the 2007 Annual Meeting of Stockholders to beheld on or about November 16, 2007 are incorporated by reference intoPart III of this Form 10-K.

As ofJuly 31, 2007 there were outstanding 42,224,619 shares of common stock parvalue $0.01 per share.

 

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

For the FiscalYear Ended June 30, 2007
| PART I.   |   |                                                                                                                |   |   |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------|--------|--------|
|      |   |                                                                                                                |   |   |
| Item  1.  |   | Business                                                                                                            |   | 1      |
| Item  1A. |   | Risk  Factors                                                                                                       |   | 15     |
| Item 1B.  |   | Unresolved SEC  Comments                                                                                            |   | 21     |
| Item  2.  |   | Properties                                                                                                          |   | 21     |
| Item 3.   |   | Legal Proceedings                                                                                                   |   | 21     |
| Item 4.   |   | Submission  of Matters to a Vote of Security Holders                                                                |   | 22     |
|      |   |                                                                                                                |   |   |
| PART II.  |   |                                                                                                                |   |   |
|      |   |                                                                                                                |   |   |
| Item 5.   |   | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   | 22     |
| Item 6.   |   | Selected  Consolidated Financial Data                                                                               |   | 24     |
| Item 7.   |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   | 26     |
| Item 7A.  |   | Quantitative  and Qualitative Disclosures about Market Risk                                                         |   | 50     |
| Item 8.   |   | Financial  Statements and Supplementary Data                                                                        |   | 51     |
| Item 9.   |   | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               |   | 51     |
| Item 9A.  |   | Controls and  Procedures                                                                                            |   | 51     |
|      |   |                                                                                                                |   |   |
| PART III. |   |                                                                                                                |   |   |
|      |   |                                                                                                                |   |   |
| Item 10.  |   | Directors,  Executive Officers, and Audit Committee of the Registrant                                               |   | 53     |
| Item 11.  |   | Executive  Compensation                                                                                             |   | 53     |
| Item 12.  |   | Security  Ownership of Certain Beneficial Owners and Management                                                     |   | 54     |
| Item 13.  |   | Certain  Relationships and Related Transactions                                                                     |   | 54     |
| Item 14.  |   | Principal  Auditor Fees and Services                                                                                |   | 54     |

 

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| PART IV.       |   |                                                                                                                 |   |   |
|----------------|--------|----------------------------------------------------------------------------------------------------------------------|--------|--------|
|           |   |                                                                                                                 |   |   |
| Item 15.       |   | Exhibits  and Financial Statement Schedules                                                                          |   | 55     |
|           |   | Signatures                                                                                                           |   | 56     |
|           |   | Report of  Independent Registered Public Accounting Firm                                                             |   | 58     |
|           |   | Consolidated Financial Statements                                                                                    |   | 60     |
|           |   | Consolidated Statements of Operations—Fiscal year  ended June 30, 2007, 2006, and 2005                          |   | 60     |
|           |   | Consolidated Balance Sheets—June 30, 2007 and June 30,  2006                                                    |   | 61     |
|           |   | Consolidated Statements of Cash Flows—Fiscal year  ended June 30, 2007, 2006, and 2005                          |   | 62     |
|           |   | Consolidated Statement of Changes in Stockholders’  Equity—Fiscal year ended June 30, 2007, 2006, and 2005 |   | 63     |
|           |   | Notes to  the Consolidated Financial Statements                                                                      |   | 65     |
|           |   |                                                                                                                 |   |   |
| Certifications |   |                                                                                                                 |   | 111    |

 

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**PART I**

**Item 1.  Business.**

***The Company***

Watson Wyatt Worldwide,Inc. (referred herein as “Watson Wyatt”, “company”, “us”, “we”, or “WatsonWyatt & Company Holdings”) is a global consulting firm focusing onproviding human capital and financial management consulting services.  Including predecessors, we have been inbusiness since 1946. The Wyatt Company was incorporated in Delaware on February17, 1958.  We conducted business as TheWyatt Company from 1958 until changing our name to Watson Wyatt & Companyin connection 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 operationsconducted by our subsidiaries. To better serve the increasingly global needs ofclients, on July 31, 2005 we acquired substantially all of the assets and assumed most liabilities of WWLLP(the “WWLLP business combination”).  Thecompany’s name was changed to Watson Wyatt Worldwide, Inc. on January 1, 2006,to reflect 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 ofJune 30, 2007, we implemented this strategy through approximately 6,600associates in 96 offices located in 30 countries.

***Business Acquisitions***

***Watson Wyatt Netherlands***

OnFebruary 1, 2007, the company acquired the net assets of Watson Wyatt Brans& Co. (“Watson Wyatt Netherlands” or “WWN”), its long-time alliance partnerin the Netherlands.  As of the date ofthe acquisition, WWN employed approximately 180 associates in five offices throughout theNetherlands.  Revenues generated incalendar year 2006 were approximately $37 million (€28 million).  WWN was established in 1945 as anactuarial firm and has extended its services from retirement consulting toincorporate legal aspects of employee benefits and investment consulting to awide range of clients.  The company andWWN had jointly offered services since 1999 pursuant to alliance agreements andas a result, have business segments that are very similar in nature.  For more information regarding this businessacquisition, see Note 2 of Notes to the Consolidated Financial Statements includedin Item 15 of this report.

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***Watson Wyatt LLP***

On July 31, 2005, the company consummated theWWLLP business combination.  The companyand WWLLP had jointly offered services since 1995 pursuant to allianceagreements and as a result, have business segments that are very similar innature.  The assets acquired from WWLLPare held by the company’s principal U.K. subsidiary, Watson Wyatt Limited (“WatsonWyatt Limited” 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 and theaccounting for the company’s share of WWLLP and Watson Wyatt Holdings(Europe) Limited (“WWHE”) prior to the WWLLP business combination, see Note 2and Note 4, respectively, of Notes to the Consolidated Financial Statementsincluded in Item 15 of this report.

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

Subsequentto year end, on July 20, 2007, the company acquired the outstanding stock ofDr. Dr. Heissmann GmbH (“Heissmann”) for €99 million in cash.  Heissmann is a leading actuarial, benefits,and human resources consulting firm based in Germany with subsidiaries inIreland, Netherlands, Austria, and France. As of the date of the acquisition, Heissmann employed approximately 360 associates.  Annual revenue, including subsidiaries, wasapproximately $70 million (€52 million) for their fiscal year ended March 31,2007.

***WisdomNet***

Subsequent to year end, on July 2, 2007, the companyacquired the net assets of WisdomNet for $6.9 million in cash and stock,including the payoff of $0.2 million of debt. WisdomNet is a Denver-based talent management solution and consultingfirm that was founded in 2001.  WisdomNetoffers a proprietary line of business software products, including an end-to-endsolution for managing organizations’ talent management processes.  As of the date of the acquisition, WisdomNetemployed 15 associates.

***Access to Public Filings, Code ofBusiness Conduct and Ethics and Board Committee Charters***

Our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and amendments tothose reports are available, without charge, on our web site(www.watsonwyatt.com) or the SEC web site (www.sec.gov), as soon as reasonablypracticable after they are filed electronically with the SEC.  We have also adopted a Code of BusinessConduct and Ethics applicable to all associates, senior financial employees,the principal executive officer, other officers and members of seniormanagement.  The company also has a Codeof Business Conduct and Ethics that applies to all of the company’sdirectors.  Both codes are posted on ourwebsite.  Watson Wyatt’s Audit Committee,Compensation Committee and Nominating and Governance Committee all operatepursuant to written charters adopted by the company’s board of directors.  The company has also adopted a set ofCorporate Governance Guidelines, copies of which are available on the company’swebsite.  Copies of all these documentsare also available, without charge, from our Investor Relations Department,located in our corporate headquarters at 901 N. Glebe Road, Arlington, VA22203.

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***Certifications***

In December 2006, the company submitted to the NewYork Stock Exchange (NYSE) the required annual certification that our chiefexecutive officer is unaware of any violation by Watson Wyatt of the NYSEcorporate governance standards under section 303A.12(a) of the NYSE listedcompany manual.  The company also filedwith the SEC the CEO and CFO certifications required under section 302 ofSarbanes-Oxley Act of 2002 as an exhibit to this Form 10-K.

***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, includingcompensation, retirement, health care, insurance, and investment plans.

We design, develop, and implement human resourcestrategies and risk management strategies and programs through the followingclosely-interrelated practice areas:

**BenefitsGroup**

·                  Design and management of benefit programs

·                  Actuarialservices including development of funding and risk management strategies

·                  Expatriateand international human resource strategies

·                  Mergersand acquisitions

·                  Strategicworkforce planning

·                  Compliance and governance

**Technologyand Administration Solutions Group**

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

·                  Administration outsourcing solutions forhealth and welfare and pension benefits

·                  Call center strategy, design and tools

·                  Strategic human resources technology andservice delivery consulting

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

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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

·                  Dataservices

**InvestmentConsulting Group**

·                  Investment consulting services to pensionplans and other institutional funds

·                  Input on governance and regulatory issues

·                  Analysis of asset allocation and investmentstrategies

·                  Investmentstructure analysis, selection and evaluation of managers and performancemonitoring

**Insurance& Financial Services Group**

·                  Independent actuarial and strategic advice

·                  Assessment and advice regarding financialcondition and risk management

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

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

***Competitive Advantage***

We believe that our competitive advantages includeour global reach, strong client relationships, the depth of our professionaland technical associates, our thought leadership and our experienced managementteam.

We have long-lasting relationships with our clients,many of which have been clients for decades, for whom our services have grownover time.  Expanding our relationshipswith existing clients and identifying new prospects are key to our growthstrategy.

We also believe that we are at the forefront of manyissues affecting human capital through our research, surveys and participationin policy-making.  Our thought leadersare often called upon by the media and government to express opinions on issuesaffecting health care benefits, retirement plan design and executivecompensation.

We believe our senior management team is strong,with an average tenure of 17 years with the company and a reputation fortransparency and accountability.  Weconsider this group to 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$7.0 trillion in 2005 in direct support of human capital programs, such ascompensation and benefits.  In 2005, U.S.employers contributed nearly $346 billion to pension and profit-sharing plans,and $515 billion to group health insurance programs, while the assets ofemployer-sponsored defined benefit and defined contribution plans here in theUnited States were $5.02 trillion at the end of 2005 and private holdings inindividual retirement accounts were another $3.67 trillion, most of whichoriginated in an employer-sponsored retirement plan.

Employers, regardless of geography or industry, arefacing challenges involving the management of their people. Changingtechnology, shifting economic conditions, critical skill shortages and an agingpopulation in many developed countries have increased competition for talentedemployees.  At the same time, employees’expectations relating to compensation, benefits and other human resourceservices are growing.  To remaincompetitive, employers must address these challenges effectively.

**Consulting Services**

Our global operations include five segments:Benefits, Technology and Administration Solutions,  Human Capital, Investment Consulting andInsurance and Financial Services.  Thepercentages of revenues generated in the various groups are as follows:
| ** **                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Benefits Group                                 |       | 59       | %          | 61       | %          | 71       | %          |
| Technology and  Administration Solutions Group |       | 12       |       | 12       |       | 10       |       |
| Human Capital  Group                           |       | 12       |       | 12       |       | 14       |       |
| Investment  Consulting Group                   |       | 9        |       | 7        |       | 5        |       |
| Insurance &  Financial Services Group      |       | 8        |       | 8        |       | —   |       |
| Total Segment Revenues                         |       | 100      | %          | 100      | %          | 100      | %          |

 

For more information about our operating segments,see Note 13 of Notes to the Consolidated Financial Statements included in Item15 of this report.

***Benefits Group***

The Benefits Group – our largest and mostestablished practice with 2,900 associates – consists primarily of consultingpractices in retirement, group and health care and international.  It is our largest and most establishedpractice. It grew dramatically as a result of our business combinations, as wellas through strong organic growth.  Thisgroup assists clients in creating cost-effective benefits programs that helpour clients attract, retain and motivate a talented workforce. Our BenefitsGroup accounted for approximately 59 percent of our total segment revenues forthe fiscal year that ended June 30, 2007.

*Retirement Consulting*

We are one of the world’s largest advisers onretirement plans, providing actuarial and consulting services for large definedbenefit and defined contribution plans including funding and risk managementstrategies.  We also help our clientsassess the effect changing workforce demographics have on their retirementplans, cash flow requirements and retiree benefit adequacy and security.

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Our consultants are the named actuaries and provideactuarial services to many of the world’s largest retirement plan sponsors. Weprovide actuarial services to the three largest corporate pension plans in theUnited States and are adviser to 48 of the 100 largest pension funds in theUnited Kingdom.  As a result of theacquisitions with Watson Wyatt Netherlands and Heissmann, we now are marketleaders in both Germany and the Netherlands.

We offer clients a full range of integrated andinnovative retirement consulting services to meet the needs of all types ofemployers – including those that continue to offer defined benefit plans andthose that are re-examining their retirement benefits strategies.  For those clients who want to outsource someor all of their pension plan management, we offer integrated solutions thatcombine investment consulting, pension administration, core actuarial servicesand communication assistance.

Our retirement consulting services include:

·                  Actuarialservices

·                  Analysisand recommendations on funding strategy

·                  Developmentof risk mitigation plans

·                  Strategicplan design

·                  Administrativeservices

·                  Workforcediagnostics and analysis

·                  Definedcontribution services including non-discrimination testing and vendor selection

·                  Financialreporting

·                  Stockoption and share plan financial accounting

·                  Executiveretirement benefits and assistance with new U.S. proxy disclosures

·                  Retireehealthcare design and valuation

·                  Assistancewith changes relating to mergers, acquisitions and divestitures

·                  Development of compliance and governancestrategies

Our retirement consulting services are supported bya strong focus on research and advocacy for sound public policy.  We are leaders in the development and supportof hybrid pension designs like cash balance plans in the U.S. which are widelyseen as the future of the defined benefit system.  Our recently published paper, *Pension Aspirations and Realizations: A Perspective on Yesterday, Todayand Tomorrow**,*****includes in depth analyses on the forces affecting pension plans, howprepared employees are for retirement and a look at alternative pension plandesigns.

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 the partof 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, our recent survey of 300 large U.S. companiesprovides a unique view into design decisions (both defined benefit and definedcontribution) companies made in the past and what companies are likely to do inthe future. We have also tracked the retirement designs of the largest U.S.public companies over many years, so clients can better understand the truemagnitude of the movement from defined benefit to defined contribution designs.

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To further enhance our retirement consultingservices, we dedicate significant resources to technology systems and tools toensure the consistency and efficiency of service delivery in all our officesworldwide. We also maintain extensive proprietary databases such as WatsonWyatt COMPARISONTM, that enable our clients to track andbenchmark benefit plan provisions.  Ourtools and technology solutions include:

·                  PensionPath® – In partnership with our Technology and Administration Solutions Group,we deliver this full-featured, web-based solution designed to meet the pensionadministration needs of companies of all sizes

·                  Retirement Management Online – A web portalthat links clients to a suite of Watson Wyatt tools, research and data

·                  FASTool – An interactive tool that allows theimmediate comparison of income statement and balance sheet information andassumptions related to pension, stock option, and retiree medical plans forlarge publicly traded U.S. companies

·                  Quick Peek® Online – A web-enabled tool thatallows pension plan sponsors to quickly and easily model a variety of financialand business situations, and project retirement plan contributions, fundedstatus and expense

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

·                  Liability Watch – Enables our European clientsto keep daily track of their funding position

*Group and Health Care Consulting*

We advise clients on the strategy, design,financing, delivery, communication, and ongoing planning and management of allhealth and welfare programs. Clients seek our evidence-based, practicalsolutions to improve employee health, satisfaction and productivity whileminimizing costs. We work closely with our clients — matching their resourcesand capabilities with our methodologies, technology, and total compensation andbenefits perspective.

Globally, many health care systems are strained byshrinking resources and increasing demand due to population aging and changesin workers’ health status.  Our group andhealth care consulting services help clients provide health and welfarebenefits to attract and retain qualified workers and enhance the health andproductivity of their workforce.

In the United States, new approaches to providinghealth care benefits for workers and retirees are engaging patients asconsumers of health care and not just passive recipients.  These methods encourage employees toparticipate more actively in health care buying decisions by putting workers incharge of spending their own health care dollars and by providing them with thetools and information necessary to make wiser health purchasing decisions.  One of these tools is BenefitConnectTM – a customizable, web-basedapplication that combines self-service employee tools with administrative andcall center components to facilitate the administration and management ofhealth and welfare benefits.

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Our approach to group and health care consultingemphasizes appropriate financial incentives, health and productivity, providerquality and effective communication.  Ourglobal services include:

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

·            Retiree health programs

·            Health and productivity management, includingonsite clinics

·            Health and welfare technology solutions

·            Total program management

·            Vendor negotiations and performancemanagement

·            Measurement of program effectiveness

·            Assistance with plan changes relating tomergers, acquisitions and divestitures

***International Consulting***

To support 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.

Through our global speclialists and in cooperationwth our local offices worldwide, we help multinational companies:

·                 Resolve people issues in mergers andacquisitions

·                 Ensure the compliance and competitiveness ofhuman capital practices at all stages of the offshoring lifecycle or expansionprocess

·                  Help manage financial exposures andinvestment risks in benefit plans and determine pension funding

·                  Reward, motivate and develop employeeseffectively, regardless of location

·                  Develop an international transfer policy thatmeets 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 helpsmultinational organizations manage their benefits and compensation programsacross multiple territories - at any time, from any location.

·                  FAStrack  – To facilitate global coordination for theFAS87, FAS106 and FAS132R requirements, Watson Wyatt has developed FAStrackGlobalTM, a web-based program designed for local plan actuaries to enter FASresults by business unit, plan and/or country.

·                  Multinational Pension Governance Survey Report – an in-depth look at how multinationalcompanies govern their global pension plans, how their investment and fundingdecisions are made, and the extent of involvement in both the strategy and theexecution by head offices relative to local management

·                  Global Survey of Accounting Assumptions for Defined Benefit Plans – an annual survey of the accountingassumptions applied by major corporations for their defined benefit plansaround the world.

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***Technology and AdministrationSolutions (TAS) 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 both to 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 735 associates providesconsulting, administration, outsourcing and technology services across humanresources, but focusing in particular on:

*RetirementAdministration*

We provide retirementadministration solutions in a number of geographic areas, tailored to the needsof each local market. For example:

·                  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.

·                  In the United Kingdom, we are among the UKleaders 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 theirunderstanding of their benefits. Our technology also provides trustees andhuman resources with timely management information and the means to monitoractivity levels and reduce administration costs.

·                  In markets where defined contributionarrangements are more complex than 401(k)-style defined contribution plans, wehave deployed sophisticated defined contribution technology, processes andcontrols. Our defined contribution administration model in Germany and theUnited Kingdom leverages web technology and provides clients with “back office”reconciliation and investment manager interaction expertise, while offering theoption to “flex” the front-office operations to be as comprehensive asrequired.  Participants can access staticand transactional data allowing them to be self-sufficient in managing theirportfolios.

*Health&Welfare/Flexible Benefits 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, savings accounts and life insurance. They also help participantsbecome smart consumers through access to information from the Internet.

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·                  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 automates compensation administration and pay delivery.REWARD improves compensation planning, budgeting and data management, freeingup compensation professionals from administrative work for more strategicactivities.  We recently integrated ourglobal grading system methodology into REWARD, enabling companies to band andgrade jobs and then model pay ranges around local market conditions.

*OnlineCommunication*

·                  eStatements is our integrated, web-based solutionthat gives employees access to the true value of their compensation andbenefits package.  It aggregates datafrom a number of internal or external sources, and provides a current view ofan employee’s complete package.  It showsthe value of an organization’s human resource programs, fosters smarter planparticipation and benefit consumerism, and offers organizations another vehicleto promote plan features, provide support and deliver other focusedinformation.

*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.

*BenefitsPortals*

·                  By implementing our hosted benefits portalswe can help to ensure a seamless experience for employees needing to usemultiple human resource and benefits applications or multiple informationsources. Our hosted portals can become a central reference point and knowledgebase for pension and human resource managers, administrators and members.

Allof the above are point solutions – applications or services that serve aparticular need once clients have identified and prioritized their needs. Veryoften our involvement starts at a much earlier level. We provide clients withstrategic, research-based human resource technology and service deliveryadvisory services to help them determine their strategy for delivering humanresource services. We work with them to align their human resources deliverystrategy with their business goals. We use human resource and benefitstechnologies, those mentioned above and others, to help our clients improvesatisfaction levels and have a sustainable return on investment (ROI). Ourservices in this area include human resource transformation consulting, vendormanagement, and service delivery model development, including shared servicesstrategy and design.

OurTechnology and Administration Solutions Group represented approximately 12percent of our total segment revenues for the fiscal year ended June 30,2007.

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***Human Capital Group***

Our Human Capital Group of 885 associates helpsclients implement strategies that achieve a competitive advantage by aligningtheir workforce with their business strategy. This includes helping clientsdevelop and implement strategies for attracting, retaining and motivating theiremployees resulting in a maximized return on clients’ investment in humancapital.  The Human Capital Group alsoutilizes our Watson Wyatt Data Services practice, which is a group of 130associates that provide data, services and analysis regarding compensation andbenefits around the world.  Our HumanCapital Group represented approximately 12 percent of our total segmentrevenues for the fiscal year that ended June 30, 2007.

Our Human Capital Group focuses in five principalareas: executive compensation, Strategic Rewards*®*, sales management and rewards, organizationeffectiveness, and data services.

*Executive Compensation*

We advise our clients’ management and boards ofdirectors on executive pay programs, including cash compensation, stock optionsand stock purchase plans, and on ways to align pay-for-performance plansthroughout the organization to improve shareholder value. We help clientsunderstand and value all the components of their executives’ compensation,including base pay, bonus, incentives, options, and retirement and otherexecutive perks.  Our expertise instock-based plan design and in valuation methodologies and procedures allows usto help U.S. clients, for instance, comply with complex accounting standardssuch as FAS 123(R) and recently promulgated SEC rules regarding executivecompensation disclosure.

*Strategic Rewards**®*

We help align an organization’s global rewards –including base compensation, incentives, stock programs, recognition programsand flexible work arrangements – with its business strategies, cultural values,work design and human resources strategy. Our Human Capital Group and Benefits Group work together to developoptimal total compensation programs for our clients.

*Sales Effectiveness and Compensation*

We help maximize the performance of our clients’sales and services teams across the globe. By considering the full spectrum ofrewards, we help motivate our clients’ sales forces to maintain and expandcritical relationships while executing the organization’s go-to-marketstrategy.

*Organization Effectiveness*

We help clients clarify and implement business strategy,recognizing the impact of employee attitudes, commitment, and effective teamand leadership development on business success. We provide a wide array ofservices centered on organization assessment, including organizationmeasurement and surveys. In the area of talent management, we provide tools andmethodologies for talent selection and development, succession planning andperformance management. We also provide consulting regarding organizationdesign and the organization and development of the human resource function.

We have created the *Watson WyattHuman Capital Index*â, a proprietary tool for demonstrating therelationship between the effectiveness of an organization’s human capitalpractices and the creation of superior stockholder returns.

Our WorkUSA®/WorkCanadaTM database includes the opinionsof 12,000 North American employees surveyed independently, reflecting a largecross-section of jobs and industry types. Our clients compare their ownemployee survey results against these norms to identify workplace perceptionsand satisfaction and commitment levels.

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*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.

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***

Our Investment Consulting Group, with approximately325 associates, helps pension plan sponsors and other institutional investmentclients successfully meet their investment goals. This involves helping tomaximize the risk-adjusted return through the development of governancepolicies and investment strategies. Our work involves helping our clients withthe design and implementation of investment arrangements to manage financialliabilities within the context of overall organizational objectives. OurInvestment Consulting Group represented approximately 9 percent of our totalsegment revenues for the fiscal year ended June 30, 2007.

Our services include:

·                  Asset/liability modeling and asset allocationstudies

·                  Governance and investment policy development

·                  Investment policy implementation

·                  Investment structure analysis

·                  Investment manager selection and evaluation

·                  Performance evaluation and monitoring

We offer the following integrated services for ourclients:

·                  Watson Wyatt Pension Risk ManagementTM – anintegrated methodology for determining the appropriate amount of investmentrisk for a plan and allocating that risk across investment decisions

·                  Watson Wyatt Advanced Investment Solutions® –taking a more proactive responsibility for the investment arrangements ofdefined benefit plans and other institutional funds, a service referred to insome markets as fiduciary outsourcing. We work with the plan sponsor to develop an investment policy and helpto manage the implementation of that policy

***Insurance and Financial ServicesGroup***

Our Insurance & Financial Services consultingteam of approximately 390 associates advises insurance companies and otherfinancial institutions on strategic and financial issues. Clients include majormultinational financial groups; life, non-life and health insurance companies;re-insurers; self insurers; captives; banks and regulators. Our Insurance andFinancial Services Group represented approximately 8 percent of our totalsegment revenues for the fiscal year ended June 30, 2007.

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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

We have also developed arange of leading-edge actuarial modeling software products, including VIPitech,Pretium and Simulum. These are used internally for consulting projects andlicensed to clients around the world.

***Other Services***

*Communication Consulting*

Our communication consulting practice helps clientsproduce financial results through strategies that align employee behavior withbusiness success.  Our award-winning workand ground-breaking research prove that effective communication increases totalreturns to shareholders; improves service, quality and productivity levels;helps fuel growth; enhances organizational ability to manage changesuccessfully; builds employee community, trust and commitment; and educates,engages and motivates employee behavioral change.  Working with clientswho have responsibility for employee communication in human resources,corporate or line functions, our consultants combine strong creative skillswith technical excellence to create programs that range from high-levelstrategic planning to tactical implementation.

We help clients develop and implement communicationstrategies for diverse issues, including:

·                  Clarifying the value and scope ofemployee compensation and benefits and enhancing employees’ appreciation oftheir total rewards opportunities

·                  Drawing a clear line of sight betweenemployee performance and company objectives through open communication andleadership communication training

·                  Optimizing the use of technology incommunication through audits and best practice design

·                  Facilitating organizational change so thatall stakeholders fully understand their role in business success

·                  Maintaining employee trust, confidence andcommitment through all cycles of performance

·                  Demonstrating the return on investment (ROI)of employee communication in achieving business objectives

·                  Supporting management in efforts to target,attract and hire the right talent to meet business objectives throughinnovative communication programs

***Integrated Service Approach***

While we focus our consulting services in theprincipal areas described above, we draw upon consultants from our differentpractices to deliver integrated services to meet the needs of our clients. Anexample is our Total Rewards approach, which encompasses compensation,benefits, career growth and company culture. We help clients determine thecorrect mix of reward programs to attract and retain the right employees and tomotivate them to produce desired results. We also assemble cross-practice teams to help clients through mergers andacquisitions.

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***Sales and Marketing***

Our growth strategy is based on a commitment toensuring client satisfaction through our account management program.  Our account managers focus on effectivelydelivering services to clients and on expanding our relationships acrossservice lines, geographic boundaries and divisions within clientcompanies.  A key element of this programis 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 continually measureour performance according to agreed-upon standards. We pursue new clients usingcross-disciplinary teams of consultants, as well as dedicated client developerswho initiate relationships with carefully selected companies. Our efforts toexpand our accounts and our client base are supported by market research,comprehensive sales training programs and extensive marketing databases. Oursales efforts are also supported by a full array of marketing programs designedto raise awareness of the Watson Wyatt Worldwide brand and our reputationwithin our target markets. These programs promote our thought leadership on keyhuman resource issues, and establish us as a preferred human capital consultingfirm to many of the world’s largest companies.

**Clients**

We work with major corporations, emerging growthcompanies, government agencies and not-for-profit institutions in NorthAmerica, Europe, Asia-Pacific and Latin America across a wide variety ofindustries.  Our client base is broad andgeographically diverse.  For the fiscalyear ended June 30, 2007, our 10 largest clients accounted forapproximately 6 percent of our consolidated revenues, and no individual clientrepresented more than 4 percent of our consolidated revenues.

**Competition**

The human capital consulting industry is highlycompetitive.  We believe there areseveral barriers to entry – such as the need to assemble specializedintellectual capital to provide expertise on a global scale – and that we havedeveloped competitive advantages in providing human resources consultingservices. However, we face intense competition from several different sources.

Our current and anticipated competitors include:

·            Major human resources-focused consultingfirms that compete in serving the large employer market worldwide, includingHewitt Associates, Mercer Human Resource Consulting and Towers Perrin

·            Smaller benefits and compensation consultingfirms, including the Hay Group and The Segal Company

·            The human resources consulting and/or planadministration divisions of diversified professional services, financialservices and insurance firms, including Aon, Deloitte & Touche,Ernst & Young, Fidelity, Citistreet, PricewaterhouseCoopers and TheVanguard Group

·            Information technology services firms,including Accenture, ACS, ADP, BearingPoint, ExcellerateHRO and IBM, as well asInternet/intranet development firms

·            Boutique consulting firms consistingprimarily of professionals formerly associated with the firms mentioned above

The market for our services is subject to change asa result of increased regulatory, legislative, competitive and technologicaldevelopments and competition 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**

The company employed approximately 6,600 and 6,235associates as of June 30, 2007 and 2006 respectively, in the following practiceareas:
|                                                | ** ** | **As of June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Benefits Group                                 |       | 2,900                             |       | 2,665 |   |
| Technology and  Administration Solutions Group |       | 735                               |       | 735 |   |
| Human Capital  Group                           |       | 885                               |       | 800 |   |
| Investment  Consulting Group                   |       | 325                               |       | 335 |   |
| Insurance &  Financial Services Group      |       | 390                               |       | 335 |   |
| All Other  Segments                            |       | 785                               |       | 775 |   |
| Corporate                                      |       | 580                               |       | 590 |   |
| Total                                          |       | 6,600                             |       | 6,235 |   |

 

None of our associates are subject to collectivebargaining agreements.  We believerelations between management and associates are good.

**Item 1A – Risk Factors**

In addition to the factors discussed elsewhere inthis report, the following are some of the important factors that could causeour actual results to differ materially from those projected in anyforward-looking statements. These risk factors should be carefully consideredin evaluating our business.  The descriptionsbelow are not the only risks and uncertainties that we face.  Additional risks and uncertainties that arepresently unknown to us, may also impair our business operations. If any of therisks 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 will continue to depend on its ability torecruit and retain qualified consultants, including those employed in recentlyacquired businesses; our failure to do so could adversely affect our ability tocontinue to integrate acquired businesses and to compete successfully******.***

Watson Wyatt’s successdepends on its ability to attract, retain and motivate qualified personnelgenerally, including executive officers, key management personnel andconsultants. We cannot assure that we will be able to attract and retainqualified consultants, management and other personnel necessary for thedelivery of our sophisticated and technical services 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 largely depends upon the businessgeneration capabilities and project execution skills of our consultants. Inparticular, our consultants’ personal relationships with our clients are acritical element of obtaining and maintaining client engagements. Losingconsultants and account managers who manage substantial client relationships orpossess substantial experience or expertise could adversely affect our abilityto secure and complete engagements, which would adversely affect our results ofoperations.

In addition, if any of our key consultants were to join an existing competitor or form a competing company, some of our clients could choose to use the services of that competitor instead of our services.

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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.

***Competition from firms with greater resources could result in loss of our market share that could reduce our 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.

New competitors or alliances among competitors could emerge and gain 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 a decline in define 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 also may change based on their own needs and financial conditions. When economic downturns affect particular clients or industry groups, they frequently reduce their budgets for outside consultants, which could reduce the demand for our services and increase price competition.

In addition, the demand for many of our core benefits services is affected by government regulation and taxation of employee benefits plans. This regulation and taxation drive our clients’ needs for compliance related services. 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.***

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.

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***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 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 consulting industry, are increasingly 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.

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, please refer to Note 14 of Notes to the Consolidated Financial Statements.

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

Insurance markets havehardened over recent years for some classes of professional liability risk. Asthe number of claims has increased against professionals and against actuariesin particular, the cost of malpractice insurance has trended upward,deductibles or self-insured retentions may have increased and reinsuranceattachment points may continue to rise. Availability and price of insurance aresubject to many variables, including general market conditions, loss experiencein related industries and in the actuarial and benefits consulting industry,and the specific claims experience of an individual firm. Because we nowprovide services in a larger geographic market as a result of our businesscombinations, we therefore may be exposed to a greater number of claims arisingfrom our expanded operations. In the future there can be no assurance that wewill continue to be able to obtain insurance on comparable terms to what it hasobtained 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 our subsidiaries, in providing services outsideof our core human resources consulting business, which may carry greater riskof liability.***

We intend to continue andgrow the business of providing consulting services to institutional investmentand insurance and financial services companies. The risk of malpractice claimsfrom these lines of business may be greater than from our core human resourceconsulting business and claims may be for significant amounts.

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

Quarterly variations in our revenues and operating results occur as a result of a number of 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 half 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;

·                  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 $13.9 million to $33.8 million.

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***Integratingacquisitions may interrupt other activities of Watson Wyatt.***

The continuing process of integrating operationscould cause an interruption of or loss of momentum in the activities of one ormore of Watson Wyatt’s businesses after an acquisition. Members of our seniormanagement may be required to devote considerable amounts of time tointegration processes, which will decrease the time they will have to managethe company’s business, service existing clients, attract new clients andattract and retain highly skilled and motivated consultants.

The integration process after an acquisition willrequire us to expand the scope of our operational and financial systems, whichwill increase our operating complexity. Implementing uniform controls, systemsand procedures may be costly and time-consuming, and there can be no assurancethat our efforts to implement such controls, systems and procedures will besuccessful. Management’s failure to effectively integrate the operations of acompany after an acquisition could have a material adverse impact on ourbusiness, financial condition and operating results as well as our ability tomeet reporting requirements to the SEC and under Section 404 of theSarbanes-Oxley Act of 2002.

***We are subject to risks of doingbusiness internationally.***

As a result of our acquisitions over the past twoyears, an increased portion of our business is located outside of the UnitedStates. As a result, a significant portion of our business operations aresubject to foreign financial and business risks, which could arise in the eventof:

·                  currency exchange rate fluctuations;

·                  unexpected increases in taxes;

·                  new regulatory requirements and/or changes inpolicies and local laws that materially affect the demand for our services ordirectly affect our foreign operations;

·                  local economic and political conditions,including unusual, severe, or protracted recessions in foreign economies;

·                  unusual and unexpected monetary exchangecontrols; or

·                  civil disturbance or other catastrophicevents that reduce business activity in other parts of the world.

These factors may lead to decreased sales or profitsand therefore may have a material adverse effect on our business, financialcondition and operating results.

***Operational readiness of our global administrative infrastructure might not be as complete as required to manage international operations effectively.***

The management of geographically dispersed operations requires substantial management resources, resulting in significant ongoing expense. We have not fully integrated all of our global operations from an administrative and reporting standpoint. In addition, we have not yet fully integrated the businesses acquired into our administrative and reporting process. We are developing and implementing additional systems and management reporting to help us manage our global operations, but we cannot predict when these systems will be fully operational or how successful they will be. Our global operations may require additional resources to complete integration of our administrative and reporting. These risks could be aggravated in the event of a major business disruption caused by terrorist attacks or similar events.

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***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.

***The interests of our current associates who own our common stock may differ from those of other stockholders.***

The business interests of our employee stockholders may not always be consistent with the interests of our non-employee stockholders.

***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;

·                  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, the classified board 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.

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***Our stock price may decline due tothe large number of shares of common stock eligible for future sale.***

Themarket price of our common stock could decline as a result of sales of a largenumber of shares of our common stock in the market as a result of the WWLLPbusiness combination. Immediately after the WWLLP business combination andWWLLP’s distribution of consideration paid in the acquisition, former WWLLPmembers and retired members held approximately 22% of our outstanding commonstock (without taking into account shares that will be issued as part of thecontingent stock consideration). Our common stock to be transferred to votingmembers in connection with the acquisition that are not subsequentlydistributed to non-voting members or to retired members are subject tocontractual restrictions on transfer.

Commonstock distributed to non-voting members occurs over time through two trusts infour installments, and are subject to transfer restrictions. The firstinstallment occurred in August 2005 at the closing of the WWLLP businesscombination. Subsequent installments occurred are on the first and secondanniversaries in August 2006 and August 2007, respectively. However, the timingand amount of distributions from the trusts to non-voting members are mattersfor the trustees and cannot be enforced by Watson Wyatt or WWLLP. We understandthat the non-voting members have an immediate beneficial entitlement to theshares in the trusts regardless of subsequent employment. Common stock to betransferred to retired members will not be subject to any transferrestrictions.

Assuming execution by formerWWHE voting members of stock transfer agreements and distribution of shares tonon-voting members over time, of the 11,040,571 total shares that may be issuedin connection with the WWLLP business combination (including contingent stockconsideration), 4,340,774 shares, or approximately 10% of outstanding commonstock, were freely transferable immediately after the closing of theacquisition. Additionally, 2,339,761 shares were transferable after the firstanniversary of the acquisition, and 2,410,036 were transferable after thesecond anniversary. The 1,950,000 shares to be issued in fiscal year 2008 ascontingent consideration will be transferable after the fourth anniversary ofthe acquisition. The contingent shares represent 5 percent of total outstandingshares as of June 30, 2007. In addition, in the event of a change in control ofWatson Wyatt, all stock transfer restrictions will expire.

**Item 1B. Unresolved SEC Comments**

None.

**Item 2.    Properties.**

As of June 30, 2007, we operated in 96 officesin principal markets throughout the world. Operations of each of our segmentsare carried out in leased offices under operating leases that typically do notexceed 10 years in length. We do not anticipate difficulty in meeting our spaceneeds at lease expiration.

The fixed assets owned by Watson Wyatt representedapproximately 11 percent of total assets at June 30, 2007, and consistedprimarily of computer equipment and software, office furniture and leaseholdimprovements.

**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 byItem 3 regarding our legal proceedings is incorporated by reference herein fromNote 14 “Commitments and Contingent Liabilities,” of the Notes to theConsolidated Financial Statements in this Form 10-K for the year ended June 30,2007.

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

None.

**Part II**

**Item 5. Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities.**

In conjunction with our WWLLP business combinationin the first quarter of fiscal year 2006, we issued 9,090,571 Class Ashares, 4,749,797 of which were subject to sale restrictions. Sale restrictionson 2,339,761 of these shares expired July 31, 2006. Restrictions on theremaining 2,410,036 shares expired July 31, 2007.

As of June 30, 2007, an additional 1,950,000Class A shares became eligible for payment based on the achievement by theacquired business of certain agreed-upon financial performance goals. We expectto issue the shares during fiscal year 2008. Sale of these shares will berestricted 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.

*Market Information*

Watson Wyatt Worldwide, Inc. Class A commonstock is currently traded on the New York Stock Exchange under the symbol WW. Thefollowing table sets forth the range of high and low closing share prices foreach quarter of fiscal years 2007 and 2006, determined by the daily closingstock prices.
| ** **                                                | ** ** | **2007**     | ** ** | **2006**     | ** ** |
|-----------------------------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                                | ** ** | **High**     | ** ** | **Low**      | ** ** | **High** | ** ** | **Low** | ** ** |
|                                                      |       |         |       |         |       |   |   |   |   |
| First quarter  (July 1 through September 30)    |       | $ 41.60 |       | $ 31.70 |       | $ 28.62 |   | $ 25.76 |   |
| Second quarter  (October 1 through December 31) |       | 48.00        |       | 39.98        |       | 28.56 |   | 25.36 |   |
| Third quarter  (January 1 through March 31)     |       | 50.69        |       | 40.92        |       | 32.58 |   | 27.95 |   |
| Fourth quarter  (April 1 through June 30)       |       | 53.84        |       | 47.01        |       | 36.34 |   | 31.92 |   |

 

*Holders*

As of June 30, 2007, there were approximately408 registered shareholders of our Class A common stock.

*Dividends*

The board of directors of the company has approvedthe payment of a quarterly cash dividend in the amount of $0.075 per share. Totaldividends paid in fiscal years 2007 and 2006 were $12.7 million for bothperiods.

The continued payment of cash dividends in thefuture is at the discretion of our board of directors and depends on numerousfactors, including, without limitation, our net earnings, financial condition,availability of capital, debt covenant limitations and our other businessneeds, including those of our subsidiaries and affiliates. Additionally, ourcredit facility requires us to observe certain covenants, includingrequirements for minimum net worth, which potentially act to restrictdividends.

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##### *SecuritiesAuthorized for Issuance Under Equity Compensation Plans*

Our equity compensation plans include the 2000Long-Term Incentive Plan, which provides for the granting of nonqualified stockoptions and stock appreciation rights, the 2001 Employee Stock Purchase Plan,the 2001 Deferred Stock Unit Plan for Selected Employees and the AmendedCompensation Plan for Outside Directors. We grant deferred stock units tocertain senior associates through the Watson Wyatt & CompanyPerformance Share Bonus Incentive Program as a part of their annualdiscretionary compensation and have discontinued the issuance of stock options.All deferred stock units issued in connection with the 2001 Deferred Stock UnitPlan were fully vested upon issuance. The company anticipates that the deferredstock units expected to be granted in September 2007 will vestimmediately. All of our equity compensation plans have been approved bystockholders. See Note 10****of the Notesto the Consolidated Financial Statements for the general terms of these plans.

The following chart gives aggregate informationregarding grants under all of the company’s equity compensation plans throughJune 30, 2007:
| **Plan Category**                             | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options** | ** ** | **Number of securities  remaining available   for future issuance  under equity  compensation plans  (excluding securities  reflected in the first   column)** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                               |       |                                                                                                                                             |       |                                                                        |       |                                                                                                                                                                                                                            |       |
| Equity compensation plans approved by stockholders |       | 226,799                                                                                                                                          |       | $                                                                           | 14.14      |                                                                                                                                                                                                                            | 4,817,310  | (1) |
|                                               |       |                                                                                                                                             |       |                                                                        |       |                                                                                                                                                                                                                            |       |
| Total                                              |       | 226,799                                                                                                                                          |       | $                                                                           | 14.14      |                                                                                                                                                                                                                            | 4,817,310  |   |

 

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(1) Includes2,548,915 shares remaining available for future issuance under the 2000 Long-TermIncentive Plan, 552,673 shares under the 2001 Employee Stock Purchase Plan,1,630,091 shares under the 2001 Deferred Stock Unit Plan for SelectedEmployees, and 85,631 shares under the Amended Compensation Plan for OutsideDirectors.

In August 2001, the board of directors adoptedthe company’s 2001 Employee Stock Purchase Plan (the “ESPP”), whichsubsequently was approved by the stockholders in November 2001. The ESPPis intended to provide employees of the company with additional incentives bypermitting them to acquire a proprietary interest in the company through thepurchase of shares of the company’s common stock. With regard to the DeferredStock Unit Plan for Selected Employees, an additional 1,200,000 shares ofcommon stock were authorized and reserved for issuance at the 2006 AnnualMeeting of Stockholders in November 2006.

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*Issuer Purchases of Equity Securities*

The company has repurchased shares of common stock,one purpose of which is to offset potential dilution from shares issued inconnection with the company’s benefit plans. In July 2006, the companyannounced a plan to purchase up to 1,500,000 shares of our Class A commonstock. The plan does not have an expiration date. The table below presentsspecified information about the company’s stock repurchases during the fourthquarter of fiscal year 2007 and the remaining number of shares that may bepurchased 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,  2007, through April 30, 2007 |       | 99,000                                               |       | $                                                      | 48.62      |                                                                                                                                   | 99,000     |                                                                                                                                  | 1,028,534  |   |
| May 1,  2007, through May 31, 2007     |       | 102,500                                              |       | 50.45                                                  |       | 102,500                                                                                                                                |       | 926,034                                                                                                                               |       |
| June 1,  2007, through June 30, 2007   |       | 97,100                                               |       | 50.47                                                  |       | 97,100                                                                                                                                 |       | 828,934                                                                                                                               |       |
|                                             |       |                                                 |       |                                                   |       |                                                                                                                                   |       |                                                                                                                                  |       |
| Total                                            |       | 298,600                                              |       |                                                   |       | 298,600                                                                                                                                |       |                                                                                                                                  |       |
|                                                  |            |                                                      |            |                                                        |            |                                                                                                                                        |            |                                                                                                                                       |            |  |

 

**Item 6. Selected ConsolidatedFinancial Data.**

Thetable on the following page sets forth selected consolidated financial dataof Watson Wyatt for each of the years in the five-year period endedJune 30, 2007. The selected consolidated financial data as ofJune 30, 2007 and 2006, and for each of the three years in the periodended June 30, 2007, were derived from the audited consolidated financialstatements of Watson Wyatt included in this Form 10-K. The selectedconsolidated financial data as of June 30, 2005, 2004 and 2003, and foreach of the years ended June 30, 2004 and 2003, were derived from auditedconsolidated financial statements of Watson Wyatt not included in thisForm 10-K. The consolidated financial data should be read in conjunctionwith our Consolidated Financial Statements and notes thereto.

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TheWWLLP business combination was completed July 31, 2005 and as a result, ourfinancial statements reflect the consolidation of the European operationsbeginning August 1, 2005. See Part I Item 1 for more information regarding thebusiness combination with WWLLP.
| ** **                                                                         | ** ** | **Year Ended June 30** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Statement of Operations Data:**(amounts are in thousands, except per share data) | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                            |       | $                                     | 1,486,523  |   | $ | 1,271,811 |   | $ | 737,421 |   | $ | 702,005 |   | $ | 709,616 |   |
| Costs of  providing services:                                                      |       |                                  |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                                     |       | 805,571                               |       | 699,049 |   | 397,252 |   | 396,775 |   | 401,274 |   |
| Professional and subcontracted services                                            |       | 99,943                                |       | 84,165 |   | 57,810 |   | 49,159 |   | 47,356 |   |
| Occupancy, communications and other                                                |       | 184,832                               |       | 164,140 |   | 106,752 |   | 105,459 |   | 106,224 |   |
| General and administrative expenses                                                |       | 159,637                               |       | 147,122 |   | 74,612 |   | 63,631 |   | 57,285 |   |
| Depreciation and amortization                                                      |       | 57,235                                |       | 44,918 |   | 20,210 |   | 18,511 |   | 19,621 |   |
|                                                                               |       | 1,307,218                             |       | 1,139,394 |   | 656,636 |   | 633,535 |   | 631,760 |   |
|                                                                               |       |                                  |       |   |   |   |   |   |   |   |   |
| Income from  operations                                                            |       | 179,305                               |       | 132,417 |   | 80,785 |   | 68,470 |   | 77,856 |   |
|                                                                               |       |                                  |       |   |   |   |   |   |   |   |   |
| (Loss)/Income  from affiliates                                                     |       | (5,500                                | )          | 1,135 |   | 7,146 |   | 7,109 |   | 5,787 |   |
| Interest income                                                                    |       | 4,066                                 |       | 4,325 |   | 2,833 |   | 1,636 |   | 1,793 |   |
| Interest expense                                                                   |       | (1,581                                | )          | (4,093 | ) | (661 | ) | (893 | ) | (802 | ) |
| Other  non-operating income/(loss)                                                 |       | 178                                   |       | (2,081 | ) | (7,404 | ) | 6,222 |   | 761 |   |
| Income from  continuing operations before income taxes                             |       | 176,468                               |       | 131,703 |   | 82,699 |   | 82,544 |   | 85,395 |   |
| Provision for  income taxes                                                        |       | 60,193                                |       | 45,585 |   | 31,303 |   | 32,605 |   | 35,015 |   |
| Income from  continuing operations                                                 |       | 116,275                               |       | 86,118 |   | 51,396 |   | 49,939 |   | 50,380 |   |
| Discontinued  operations (a)                                                       |       | —                                |       | 1,073 |   | 766 |   | 654 |   | 6,786 |   |
| Net income                                                                         |       | $                                     | 116,275    |   | $ | 87,191 |   | $ | 52,162 |   | $ | 50,593 |   | $ | 57,166 |   |
| Earnings per  share, continuing operations, basic                                  |       | $                                     | 2.74       |   | $ | 2.08 |   | $ | 1.58 |   | $ | 1.52 |   | $ | 1.52 |   |
| Earnings per  share, continuing operations, diluted (b)                            |       | $                                     | 2.60       |   | $ | 1.99 |   | $ | 1.56 |   | $ | 1.50 |   | $ | 1.51 |   |
| Earnings per  share, discontinued operations, basic                                |       | $                                     | —     |   | $ | 0.03 |   | $ | 0.02 |   | $ | 0.02 |   | $ | 0.21 |   |
| Earnings per  share, discontinued operations, diluted                              |       | $                                     | —     |   | $ | 0.02 |   | $ | 0.02 |   | $ | 0.02 |   | $ | 0.21 |   |
| Earnings per  share, net income, basic (b)                                         |       | $                                     | 2.74       |   | $ | 2.11 |   | $ | 1.60 |   | $ | 1.54 |   | $ | 1.73 |   |
| Earnings per  share, net income, diluted (b)                                       |       | $                                     | 2.60       |   | $ | 2.01 |   | $ | 1.58 |   | $ | 1.52 |   | $ | 1.72 |   |
| Dividend  declared per share                                                       |       | $                                     | 0.30       |   | $ | 0.30 |   | $ | 0.30 |   | $ | 0.07 |   | $ | — |   |
| Weighted average  shares of common stock, basic                                    |       | 42,413                                |       | 41,393 |   | 32,541 |   | 32,866 |   | 32,962 |   |
| Weighted average shares  of common stock, diluted                                  |       | 44,684                                |       | 43,297 |   | 32,845 |   | 33,207 |   | 33,287 |   |

 

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| ** **                         | ** ** | **As of June 30** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Balance  Sheet and Other Data:** | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents         |       | $                                | 248,186    |   | $ | 165,345 |   | $ | 168,076 |   | $ | 136,940 |   | $ | 115,674 |   |
| Working capital                    |       | 326,354                          |       | 197,312 |   | 236,658 |   | 207,455 |   | 169,308 |   |
| Total assets                       |       | 1,529,709                        |       | 1,240,359 |   | 618,679 |   | 512,168 |   | 514,462 |   |
| Note payable                       |       | 105,000                          |       | 30,000 |   | — |   | — |   | — |   |
| Dividends  declared                |       | 12,717                           |       | 12,667 |   | 9,756 |   | 2,441 |   | — |   |
| Stockholders’ equity          |       | 787,519                          |       | 648,761 |   | 234,203 |   | 245,184 |   | 151,737 |   |
| Shares outstanding                 |       | 42,299                           |       | 42,386 |   | 32,627 |   | 32,317 |   | 32,943 |   |
|                                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)   In fiscal year 2003, 2004, 2005 and 2006, werevised our estimates related to the remaining future obligations and costsassociated with the discontinuation of our benefits administration outsourcingbusiness in 1998. As a result, we reduced the amount of our liability forlosses from disposal by $11.4 million, less the associated income tax expenseof $4.7 million, by $1.0 million, less the associated income tax expense of$0.4 million, by $1.25 million, less the associated income tax expense of $0.5million, and by $1.75 million, less the associated income tax expense of $0.7million, respectively. In fiscal years 2003, 2004, 2005 and 2006, the companyreceived sublease income of approximately $0.1 million each year in excess oflease payments related to this business. These items resulted in a year-to-dateincome from discontinued operations of $11.5 million, $1.1 million, $1.3million, and $1.8 million, less the associated income tax expense of $4.7million, $0.4 million, $0.5 million, and $0.7 million, respectively.

(b)   The diluted earnings per share calculationfor fiscal years 2007 and 2006 assume that 1,950,000 contingent shares relatedto the WWLLP business combination have been issued and outstanding since July31, 2005.

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

**Special Note Regarding Forward-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 - RetirementBenefits; Note 11 – Goodwill and Intangible Assets; Note 14 – Commitments andContingent Liabilities; the Executive Overview; Critical Accounting Policiesand Estimates; the discussion of our capital expenditures; Off-Balance SheetArrangements and Contractual Obligations; Risk Management; and Part II, Item 1 “LegalProceedings”. You can identify these statements and other forward-lookingstatements in this filing by words such as “may”, “will”, “expect”, “anticipate”,“believe”, “estimate”, “plan”, “intend”, “continue”, or similar words,expressions, or the negative of such terms or other comparable terminology. Youshould read these statements carefully because they contain projections of ourfuture results of operations or financial condition, or state other “forward-looking”information. A number of risks and uncertainties exist which could cause actualresults to differ materially from the results reflected in theseforward-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;

·                  our ability toobtain professional liability insurance;

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

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

·                  our ability toachieve cost reductions after our recent acquisitions;

·                  foreign currencyexchange and interest rate fluctuations;

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

·                  general economicand business conditions that adversely affect us or our clients;

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

·                  regulatorydevelopments abroad and domestically that impact our business practice;

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

and other factors discussed under “Risk Factors” in Item 1 of this Form10-K. These statements are based on assumptions that may not come true. Allforward-looking disclosure is speculative by its nature. The company undertakesno obligation to update any of the forward-looking information included in thisreport, whether as a result of new information, future events, changedexpectations or otherwise.

**Executive Overview**

WatsonWyatt is a global consulting firm focusing on providing human capital andfinancial consulting services. We provide services in five principal practiceareas: Benefits, Technology and Administration Solutions, Human CapitalConsulting, Investment Consulting and Insurance and Financial Services, operatingfrom 30 countries throughout North America, Europe, Asia Pacific and LatinAmerica.

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 expect that the company’s financial resultswill depend in large part upon how well we succeed in deepening our existingclient relationships through thought leadership and focus on cross-practicesolutions, actively pursuing new clients in our target markets, cross sellingand strategic acquisitions. We believe that the highly fragmented industry inwhich we operate represents tremendous growth opportunities for us, because weoffer a unique business combination of benefits and human capital consulting aswell as strategic technology solutions.

We design, develop and implement human resourcestrategies and programs through the following closely-interrelated practiceareas:

*BenefitsGroup –* The BenefitsGroup, accounting for 59 percent of our total fiscal year 2007 revenues, is thefoundation of our business. Retirement, the core of our Benefits Groupbusiness, is less impacted by discretionary spending reductions than our othersegments, mainly due to the recurring nature of client relationships. Ourcorporate client retention rate within our target market has remained veryhigh. Revenue for our retirement practice is seasonal, with the third andfourth quarters of each fiscal year being the busier periods. Major revenuegrowth drivers in this practice include changes in regulations, particularlythose affecting pension plans in the U.K., leverage from other practices, animproving economy, increased global demand and increased market share.

*Technologyand Administration Solutions Group –*Our Technology and Administration Solutions Group, accounting for 12percent of our total fiscal year 2007 revenues, provides information technologyservices to our customers.

*HumanCapital Group –*Our**Human Capital Group, accounting for 12 percent of our totalfiscal year 2007 revenues, generally encompasses short-term projects. Asa result, this segment is most sensitive to cyclical economic fluctuations.

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*InvestmentConsulting Group -*OurInvestment Consulting Group accounts for 9 percent of our total fiscal year2007 revenues. This business, although relationship based, can be affected byvolatility in investment returns, particularly as clients look to us forassistance in managing that volatility.

*Insurance and Financial ServicesGroup –*Our Insurance& Financial Services Group accounts for 8 percent of our total fiscal year2007 revenues. This business is characterized by ongoing relationships with ourclients who will typically use our skills on a number of different projects.

**Financial Statement Overview**

WatsonWyatt’s fiscal year ends June 30.

TheWWLLP business 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 month of the first quarter of fiscal year 2006, the company recordedits share of the results of WWLLP and WWHE using the equity method ofaccounting. This income is reflected in the “Income from affiliates” line onour income statement. Our share of the results of our affiliated captiveinsurance company, Professional Consultants Insurance Company, Inc. (PCIC),continues to be recorded using the equity method of accounting, and is alsoreflected in the “Income from affiliates” line.

Wederive substantially all of our revenue from fees for consulting services,which generally are billed based on time and materials or on a fixed-fee basis.Clients are typically invoiced on a monthly basis with revenue generallyrecognized as services are performed. For fiscal years 2005, 2006, and 2007,revenue from U.S. consulting operations has comprised approximately 80, 50 and50 percent of consolidated revenue, respectively. No single client accountedfor more than 4 percent of our consolidated revenue for any of the most recentthree fiscal years.

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 for professionalliability claims. For the last three fiscal years, approximately 60 to 70percent of these professional and subcontracted services were directly incurredon behalf of our clients and were reimbursed by them, with such reimbursementsbeing included in revenue.

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

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

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**CriticalAccounting Policies and Estimates**

Thepreparation of 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.

***RevenueRecognition***

Revenue includes feesprimarily generated from consulting services provided. We recognize revenuefrom these consulting engagements when hours are worked, either on atime-and-materials basis or on a fixed-fee basis, depending on the terms andconditions defined at the inception of 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.**The company typically has threetypes of fixed-fee arrangements: annual recurring projects, projects of a shortduration, and non-recurring system projects. Annual recurring projects and theprojects of short duration are typically straightforward and highly predictablein nature. As a result, the project manager and financial staff are able toidentify, as the project status is reviewed and bills are prepared monthly, theoccasions when cost overruns could lead to the recording of a loss accrual. Ournon-recurring system projects are typically found in our Technology andAdministration Solutions Group. They tend to be more complex projects that arelonger 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. OurTechnology and Administration Solutions Group contracts generally provide that if theclient terminates a contract, the company is entitled to payment for servicesperformed 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 client participation.The periodic engagement evaluations require us to make judgments and estimatesregarding the overall profitability and stage of project completion that, inturn, affect how we recognize revenue. The company recognizes a loss on anengagement when estimated revenue to be received for that engagement is lessthan the total estimated direct and indirect costs associated with the engagement.Losses are recognized in the period in which the loss becomes probable and theamount of the loss is reasonably estimable. The company has experienced certain costs in excess ofestimates from time to time. Management believes that it is rare, however, forthese excess costs to result in overall project losses.

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The company has developed various software programsand technologies that we provide to clients in connection with consultingservices. In most instances, such software is hosted and maintained by thecompany and ownership of the technology and rights to the related code remainwith the company. Software developed to be utilized in providing services to aclient, but for which the client does not have the contractual right to takepossession, is capitalized in accordance with the AICPA’s Statement of Position98-1 “Accounting for the Costs of Computer Software Developed or Obtained forInternal Use.” Revenue associated with the related contract, together withamortization of the related capitalized software, is recognized over theservice period. As a result we do not recognize revenue during theimplementation phase of an engagement.

Revenue recognized in excess of billings is recordedas unbilled accounts receivable. Cash collections and invoices generated inexcess of revenue recognized are recorded as deferred revenue until the revenuerecognition 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 Unbilled Receivablesfrom 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 isgenerally recorded as a reduction to revenue. Our allowance policy is based onthe aging of our billed and unbilled client receivables and has been developedbased 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 operatingperformance is reviewed by the company and the discretionary annual bonusamount is then adjusted, if necessary, by management to reflect changes in theforecast of pre-bonus profitability for the year. In those quarters where theestimated annual bonus level changes, the remaining estimated annual bonus isaccrued over the remaining quarters as a constant percentage of estimatedfuture pre-bonus profitability. Annual bonus levels may vary from currentexpectations as a result of changes in the company’s forecast of pre-bonusprofitability and competitive employment market conditions.

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***IncomeTaxes***

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 a given deferred tax asset will not be realized. Inaccordance with SFAS No. 109, income tax expense includes (i) deferred taxexpense, which generally represents the net change in the deferred tax asset orliability balance during the year plus any change in valuation allowances and(ii) current tax expense, which represents the amount of tax currently payableto or receivable from a taxing authority plus amounts accrued for expected taxdeficiencies (including both tax and interest). Accruals for expected taxdeficiencies are recorded in accordance with SFAS No. 5, “*Accountingfor Contingencies”*, when management determines that a tax deficiencyis both probable and reasonably estimable.

***Pension Assumptions***

Wesponsor both qualified and non-qualified, non-contributory defined benefitpension plans covering substantially all of our associates. Under our plans inNorth America, benefits are based on the number of years of service and theassociates’ compensation during the five highest paid consecutive years ofservice. The non-qualified plan, which exists only in North America, providesfor pension benefits that would be covered under the qualified plan but arelimited by the Internal Revenue Code. The non-qualified plan has no assets andtherefore is an unfunded arrangement. The benefit liability is reflected on thebalance sheet. The measurement date for the plans is June 30.

Thedisclosures for the U.K. plan are shown separately because the amounts arematerial relative to the North America plans and the assumptions used in theplan are significantly different than those used in the North America plans.Under our U.K. plan, benefits are based on the number of years of service andthe associates’ compensation during the three years before leaving the plan.The measurement date for the plan is June 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 in focus. Achange in one or a combination of these assumptions could have a materialimpact on our pension benefit obligation and related expense. For this reason,management employs a long-term view so that assumptions do not changefrequently in response to short-term volatility in the economy. Any differencebetween actual and assumed results is amortized into our pension expense overthe average remaining service period of participating employees. We considerseveral factors prior to the start of each fiscal year when determining theappropriate annual assumptions, including economic forecasts, historicaltrends, portfolio composition and peer comparisons.

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*North America*

The following assumptions were used at the end of the past three fiscalyears in the valuation of our North American defined benefit pension plans:
|                                              | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Discount rate                                |       | 6.25                                  | %          | 6.25 | % | 5.25 | % |
| Expected  long-term rate of return on assets |       | 8.75                                  | %          | 8.75 | % | 9.00 | % |
| Rate of increase in  compensation levels     |       | 3.84                                  | %          | 3.84 | % | 3.34 | % |

 

The 6.25 percent discount rate assumption used at the end of fiscalyear 2007 is unchanged from fiscal year 2006 and represents a 100 basis pointincrease from the 5.25 percent discount rate used at the end of fiscal year2005. The company’s discount rate assumptions were determined by matchingfuture pension benefit payments with expected future AA bond yields for thesame periods.

The expected long-term rate of return onassets assumption remained 8.75 percent per annum unchanged from fiscal year2006 and representing 25 basis points lower than the 9 percent rate used infiscal year 2005. Selection of the return assumption at 8.75 percent per annumwas supported by an analysis performed by the company of the weighted averageyield expected to be achieved with the anticipated makeup of investments. Theinvestment makeup is heavily weighted towards equities which on average providehigher expected returns than other investment vehicles. The actual return onassets for fiscal year 2007 was 17.3 percent, compared to a return of 9.4percent for fiscal year 2006.

The following information illustrates thesensitivity to a change in certain assumptions for the U.S. pension plans:
| Change in Assumption                                  | ** ** | **Effect on FY2007  Pre-Tax Pension Expense** |
|-------------------------------------------------------|------------|-----------------------------------------------|
| 25 basis point  decrease in discount rate             |       | +$3.3 million                                 |
| 25 basis point  increase in discount rate             |       | -$3.2 million                                 |
| 25 basis point  decrease in expected return on assets |       | +$1.0 million                                 |
| 25 basis point  increase in expected return on assets |       | -$1.0 million                                 |

 

Theabove sensitivities reflect the impact of changing one assumption at a time. Itshould be noted that economic factors and conditions often affect multiple assumptionssimultaneously and the effects of changes in key assumptions are notnecessarily linear. The company’s U.S. Other Postretirement Employee BenefitsPlan is relatively insensitive to discount rate changes due to the planprovisions that have been established to control costs and as such nosensitivity results are shown in this display.

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*United Kingdom*

The following assumptions were used at June 30, 2007 and 2006, and July31, 2005, or the date of the WWLLP business combination and the valuation ofour U.K. plan:
|                                              | ** ** | **June 30,   2007** | ** ** | **June 30,  2006** | ** ** | **July 31,  2005** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Discount rate                                |       | 5.80                          | %          | 5.10                    | %          | 5.00                    | %          |
| Expected  long-term rate of return on assets |       | 5.69                          | %          | 5.63                    | %          | 5.63                    | %          |
| Rate of increase in  compensation levels     |       | 4.95                          | %          | 4.75                    | %          | 4.75                    | %          |

 

The 5.80 percent discount rate assumption used at the end of fiscalyear 2007 represents a 70 basis point increase over the rate used at fiscalyear 2006 and an 80 basis point increase over the discount rate at July 31,2005. The discount rate is set in relation to yields on AA European corporatebonds at the measurement date and this reduction reflects the increase inyields between these two dates.

The expected long-term rateof return on assets assumption increased to 5.69 percent from 5.63 percent perannum for fiscal year 2007. The rate of return was supported by an analysisperformed by the company of the weighted average return expected to be achievedwith the anticipated makeup of investments which is heavily weighted towardsbonds. The actual return on assets through fiscal year 2007 was 16.4 percentcompared to 7.8 percent for fiscal year 2006.

The following informationillustrates the sensitivity to a change in certain assumptions for the U.K.pension plans:

| Change in Assumption                                  | ** ** | **Effect on FY2007   Pre-Tax Pension Expense** |
|-------------------------------------------------------|------------|------------------------------------------------|
| 25 basis point  decrease in discount rate             |       | +$1.3 million                                  |
| 25 basis point  increase in discount rate             |       | -$ 1.2 million                            |
| 25 basis point  decrease in expected return on assets |       | +$ 0.5 million                            |
| 25 basis point increase  in expected return on assets |       | -$ 0.5 million                            |

 

The differences in the discount rate andcompensation level assumption used for the North American and U.K. plans abovecan be attributed to the differing interest rate environments associated withthe currencies and economies to which the plans are subject. The differences inthe expected return on assets are primarily driven by the respective assetallocation in each plan, coupled with the return expectations for assets in therespective currencies. The North American plans are approximately 65 percentinvested in equities, which on average provide a higher return than bonds,which is the favored investment for the U.K. plans.

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***IncurredBut Not Reported Claims***

The companyuses actuarial assumptions to estimate and record a liability for incurred butnot reported (IBNR) professional liability claims.  Our estimated IBNR liability is based onlong-term trends and averages, and reflects consideration of a number offactors, including changes in claim reporting patterns, claim settlementpatterns, judicial decisions, and legislation and economic decisions, butexcludes the effect of claims data for large cases due to the insufficiency ofactual experience with such cases. Management does not currently expect significant fluctuations in theIBNR liability, based on the company’s historical claims experience.  However, our estimated IBNR liability willfluctuate if claims experience changes over time.

*** 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 fair valuesused in this evaluation are estimated based upon a multiple of revenue for thereporting unit. This revenue multiple is based on our experience and knowledgeof our own and other transactions in the marketplace. 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.

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**Resultsof Operations**

The followingtable sets forth Consolidated Statement of Operations data as a percentage ofrevenue for the periods indicated:
| ** **                                             | ** ** | **Year ended June 30** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                   |       |                                  |       |   |   |   |   |
| Revenue                                                |       | 100.0                                 | %          | 100.0 | % | 100.0 | % |
|                                                   |       |                                  |       |   |   |   |   |
| Costs of providing  services:                          |       |                                  |       |   |   |   |   |
| Salaries and  employee benefits                        |       | 54.2                                  |       | 55.0 |   | 53.9 |   |
| Professional and  subcontracted services               |       | 6.7                                   |       | 6.6 |   | 7.8 |   |
| Occupancy,  communications and other                   |       | 12.4                                  |       | 12.9 |   | 14.5 |   |
| General and  administrative expenses                   |       | 10.7                                  |       | 11.6 |   | 10.1 |   |
| Depreciation and  amortization                         |       | 3.9                                   |       | 3.5 |   | 2.7 |   |
|                                                   |       | 87.9                                  |       | 89.6 |   | 89.0 |   |
|                                                   |       |                                  |       |   |   |   |   |
| (Loss)/Income from  operations                         |       | 12.1                                  |       | 10.4 |   | 11.0 |   |
|                                                   |       |                                  |       |   |   |   |   |
| Income from affiliates                                 |       | (0.4                                  | )          | 0.1 |   | 1.0 |   |
| Interest income                                        |       | 0.3                                   |       | 0.3 |   | 0.2 |   |
| Interest expense                                       |       | (0.1                                  | )          | (0.3 | ) | (0.0 | ) |
| Other non-operating  (loss)/income                     |       | 0.0                                   |       | (0.2 | ) | (1.0 | ) |
|                                                   |       |                                  |       |   |   |   |   |
| Income from continuing  operations before income taxes |       | 11.9                                  |       | 10.3 |   | 11.2 |   |
|                                                   |       |                                  |       |   |   |   |   |
| Provision for income  taxes                            |       | 4.0                                   |       | 3.6 |   | 4.2 |   |
|                                                   |       |                                  |       |   |   |   |   |
| Income from continuing operations                      |       | 7.9                                   | %          | 6.7 | % | 7.0 | % |

 

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**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, fiscal year2006 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.  The appreciation ofthese European currencies resulted in $42 million of the increase in revenuesin fiscal year 2007.  Changes in thevalue of other foreign currencies relative to the U.S. dollar resulted in $4million 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.

·                  Technologyand Administration Solutions increased revenues $24.7 million, or 19 percent,over fiscal year 2006, largely due to an increase in the number of projectsthat went into service in the U.S. during the fiscal year.  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.  At June 30, 2007, thecompany had 84 projects in service delivery and 67 projects in implementation.  At June 30, 2006, the company had 51 projectsin service delivery and 58 projects in implementation.  The inclusion of an additional month ofEuropean revenues and the strengthening of the European currencies eachaccounted for 4 percentage points of the increase in fiscal year 2007.

·                  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.

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***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 to higher salaries of $69.0million, partially due to a $4.2 million Long Term Incentive Plan accrual and a5.9 percent increase in headcount, a $24.5 million increase in discretionarycompensation, increased benefits expense of $3.5 million, and lesscapitalization of $5.7 million of time spent customizing in-houseadministration systems, in accordance with AICPA’s Statement of Position 98-1, “Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use”.   The increase was partially offset by adecrease in pension expense of $11.2 million. As a percentage of revenue, salaries and employee benefits decreased to54.2 percent from 55.0 percent.

***Professional and SubcontractedServices***

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 andOther***

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.

***General and AdministrativeExpenses***

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 administrative expensesdecreased to 10.7 percent from 11.6 percent.

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***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.

*** (Loss)/Income 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 the result of a substantial increase inPCIC’s reserves during the third quarter of fiscal year 2007 in response tounusually rapid development of several claims against its three participatingfirms.  Fiscal year 2006 also includesour share of results from our European affiliates for the month of July 2005,after which time the WWLLP business combination 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, 2007 inanticipation of closing the Heissmann acquisition in early July.

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

Othernon-operating income/(loss) in fiscal year 2006 includes a $1.4 million gainrecognized by the company on the sale of its New Zealand operations, nettedagainst a loss of $3.6 million on a foreign exchange forward contract enteredinto in conjunction with the WWLLP business combination.

***Income From Continuing OperationsBefore Income Taxes***

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.

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***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 FromContinuing Operations***

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 16 of the Notes to the Consolidated Financial Statements formore information related to Wellspring.

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**FiscalYear Ended June 30, 2006, Compared to Fiscal Year Ended June 30, 2005**

***Revenue***

Revenuesfor fiscal year 2006 were $1.27 billion, an increase of $534 million, or 72percent, from $737 million in fiscal year 2005. Of the increase, $481 million is due to the WWLLP business combination.  The remaining increase of $53 million relatesto the historical company.

Theincreases in the historical company segment revenue for fiscal year 2006 ascompared to fiscal year 2005 are as follows.

·                  Benefitsincreased revenues $35.0 million, or 8 percent, over fiscal year 2005 due toincreased demand from existing clients around plan design and administration aswell as revenues from new clients.

·                  Technologyand Administration Solutions increased revenues $9.3 million, or 14 percent,over fiscal year 2005, largely due to an increase in the number of projectsthat went into service during the fiscal year. In accordance with EITF 00-3, “Application of AICPA Statement ofPosition 97-2 to Arrangements that Include the Right to Use Software Stored onAnother Entity’s Hardware” (EITF 00-3), the company begins recognizing revenueafter projects go into service.  Norevenues are recognized during project implementation.  At June 30, 2006, the company had 51 projectsin service and 58 projects in implementation. At June 30, 2005, the company had 10 projects in service and 29 projectsin implementation.

·                  HumanCapital Group increased revenues $19.8 million, or 22 percent, over fiscal year2005 primarily due to the $12.9 million reclassification of Watson Wyatt DataServices from Other into this segment, as well as continuing demand forexecutive compensation consulting.

·                  InvestmentConsulting increased revenues $3.8 million, or 12 percent, over fiscal year2005 due to an increase in pension funding and asset performance consulting.

***Salaries and Employee Benefits***

Salariesand employee benefit expenses for fiscal year 2006 were $699.0 million, anincrease of $301.7 million from $397.3 million in fiscal year 2005, andincreased as a percentage of revenue to 55 percent from 53.9 percent.  The increase was mainly due to the additionalsalary and benefit expenses of $271.5 million related to the WWLLP businesscombination. The increase in the historical company was due to higher salariesof $23.5 million, partially due to a $1.4 million Long Term Incentive Planaccrual as well as an increase in associates by 4.5 percent.  Also included is higher accrual fordiscretionary compensation of $7.3 million, higher pension expense of $9.0million, and higher benefits expense of $6.3 million, partially offset by thecapitalization of time spent customizing in-house administration systems of$15.9 million, in accordance with AICPA’s Statement of Position 98-1, “Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use”.

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***Professional and SubcontractedServices***

Professionaland subcontracted services were $84.2 million for fiscal year 2006, an increaseof $26.4 million, or 45.6 percent, from $57.8 million in the prior period, anddecreased as a percentage of revenue to 6.6 percent from 7.8 percent.  The increase was mainly due to the additionalprofessional and subcontracted services expenses of $21.0 million related tothe WWLLP business combination.  Theincrease in the historical company was attributable to higher reimbursableexpenses incurred on behalf of clients as well as higher contracting costs.

***Occupancy, Communications andOther***

Occupancy,communications and other expenses were $164.1 million for fiscal year 2006, anincrease of $57.3 million or 53.7 percent from $106.8 million during fiscalyear 2005, and decreased as a percentage of revenue to 12.9 percent from 14.5percent.  The increase was mainly due tothe additional occupancy, communications, and other expenses of $47.0 millionrelated to the WWLLP business combination. The increase in the historicalcompany was mainly due to increased travel expense of $2.6 million, higher duesand entertainment of $1.3 million, higher general office of $3.7 million,  and miscellaneous expenses of $6.2 million,partially offset by a reduction in rent of $3.5 million which is partially dueto lease terminations in both periods and lease restructuring during fiscalyear 2006.

***General and AdministrativeExpenses***

Generaland administrative expenses were $147.1 million for fiscal year 2006, anincrease of $72.5 million or 97.2 percent from $74.6 million during fiscal year2005, and increased as a percentage of revenue to 11.6 percent from 10.1percent.  The increase was mainly due tothe additional general and administrative expenses of $69.2 million related tothe WWLLP business combination.  Theincrease in the historical company was mainly due to higher travel costs of$0.5 million, higher insurance premiums of $1.1 million, higher salaries andbenefits expense of $3.6 million, partially offset by a decrease in generaloffice expense of $0.9 million as well as miscellaneous decreases of $0.9million.

***Depreciation and Amortization***

Depreciationand amortization expense was $44.9 million for fiscal year 2006, an increase of$24.7 million or 122.3 percent from $20.2 million during fiscal year 2005, andincreased as a percentage of revenue to 3.5 percent from 2.7 percent.  The increase was mainly due to the additionaldepreciation and amortization expense of $15.3 million related to the WWLLPbusiness combination. The increase in the historical company was due todepreciation on major software placed in service during fiscal year 2006 tosupport our Benefits and Technology and Administration Solutions Group.

***Income From Affiliates***

Incomefrom affiliates was $1.1 million for fiscal year 2006 compared to $7.1 millionfor fiscal year 2005.  The fiscal year2005 income reflects our share of income from WWLLP and WWHE, which wereconsidered to be affiliates of the company for the entire fiscal year.  The fiscal year 2006 amount reflects ourshare of income from these affiliates only for the first month of fiscal year2006, after which time the WWLLP business combination was consummated.

***Interest Income***

Interestincome was $4.3 million for fiscal year 2006, an increase of $1.5 million from$2.8 million during fiscal year 2005. The increase was due to higher interest earned on our investments as aresult of higher interest rates.

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***Interest Expense***

Interestexpense was $4.1 million for fiscal year 2006, an increase of $3.4 million from$0.7 million during fiscal year 2005. The increase was due to debt incurred as a result of the WWLLP businesscombination.

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

During fiscal year 2006, the company recorded a $3.6 million lossassociated with a foreign exchange forward contract entered into in conjunctionwith the WWLLP business combination, partially offset by a $1.4 million gainrecognized by the company on the sale of its New Zealand operations.  During fiscal year 2005, the company recordeda $4.8 million loss associated with a foreign exchange forward contract enteredinto in conjunction with the WWLLP business combination, recognized asettlement cost of $2.2 million related to a claim by a former joint venture partner, and spent $0.4 million toexternal advisors for strategic consulting. Non-operating income for fiscal year 2004 includes a $5.6 million gainthe company recorded in the first quarter of fiscal year 2004 related to PCIC.  See Note 18 of the Notes to the ConsolidatedFinancial Statements for more information about this non-operating gain.  During fiscal year 2004, the company alsoreceived cash payments of $0.6 million in connection with the fiscal year 2002sale of our U.S.-based public retirement business to GRS.  All payments received in connection with thissale were contingent upon the successful transition of certain clients to thepurchaser and upon their retention by the purchaser.

***Provision for Income Taxes***

Provisionfor income taxes was $45.6 million forfiscal year 2006, compared to $31.3 million for the prior period.  Our effective tax rate was 34.6 percent forfiscal year 2006, compared to 37.9 percent for fiscal year 2005.  The change in rate was principally due todecreases in tax reserves and the distribution of geographic income.

***Income From Continuing Operations***

Incomefrom continuing operations was $86.1 million, an increase of 67.5 percent from$51.4 million during fiscal year 2005. As a percentage of revenue, income from continuing operations for fiscalyear 2006 decreased to 6.8 percent from 7.0 percent.

***Earnings Per Share, Income FromContinuing Operations***

Dilutedearnings per share, income from continuing operations was $1.99 for fiscal year2006, compared to $1.56 for fiscal year 2005. 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 years 2006 and 2005 reflect thereduction of the company’s accrual for the estimated remaining futureobligations and costs related to the exit from Wellspring by $1.75 million and$1.25 million, respectively, less the associated income tax expenses.  Also, during fiscal year 2006 and 2005, thecompany received sublease income of approximately $64,000 and $44,000, respectively,in excess of lease payments related to Wellspring.  See Note 16 of the Notes to the ConsolidatedFinancial Statements for more information related to Wellspring.

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**Liquidityand Capital Resources**

Our cash and cashequivalents at June 30, 2007 totaled $248.2 million, compared to $165.3 millionat June 30, 2006.  The cash balance atJune 30, 2007 includes cash received as a result of borrowings against ourcredit facility in preparation for the Heissmann acquisition that wasconsummated subsequent to year end. During fiscal year 2007, we paid $96.5 million of previously accrueddiscretionary compensation, $68.9 million in corporate taxes, $44.0 million incapital expenditures and $12.7 million in dividends.  These payments were funded by cash flow fromcurrent consulting operations, from existing cash balances and from borrowingsunder our revolving credit facility. Consistent with the company’s liquidity position, management considersvarious alternative strategic uses of cash reserves including acquisitions,stock buybacks, and dividends, or any combination of these options. The companybelieves that it has sufficient resources to fund operations through the nexttwelve months.

Our non U.S. operationsare substantially self-sufficient for their working capital needs.  At June 30, 2007, $25.5 million of the totalcash balance of $248.2 million was held outside of North America, which we havethe ability to utilize, if necessary. There are no significant repatriationrestrictions other than local or U.S. taxes associated with repatriation.

***Cash From Operating Activities***

Cashfrom operating activities for fiscal year 2007 was $167.7 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 of daysof accounts receivable and work in process outstanding increased to 83 at June30, 2007 from 78 at June 30, 2006.

Cashfrom operating activities for fiscal year 2006 was $169.1 million, compared tocash from operating activities of $68.1 million for fiscal year 2005.

Theallowance for doubtful accounts increased $1.6 million from June 30, 2005 toJune 30, 2006.  The number of days ofaccounts receivable and work in process outstanding was 78 at June 30, 2006,down from 80 at June 30, 2005.

***Cash Used in Investing Activities***

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, compared to $137.8million in fiscal year 2006. Expenditures of capital funds were $44.0 million for fiscal year 2007.

Cash used in investingactivities for fiscal year 2006 was $202.3 million, compared to $29.7 millionfor fiscal year 2005.  The difference canbe primarily attributed to the WWLLP business combination and other acquisitionrelated payments totaling $137.8 million and higher costs associated with thecapitalization of time spent customizing in-house administration systems of$13.4 million in accordance with AICPA’s Statement of Position 98-1.

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***Cash From (Used in) FinancingActivities***

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.

Cashfrom financing activities was $16.9 million for fiscal year 2006, compared to$9.0 million used in financing activities during fiscal year 2005.  The difference was primarily attributable tonet borrowings of $30 million in fiscal year 2006 compared to no borrowingsduring fiscal year 2005.

**CapitalCommitments**

Expendituresof capital funds were $44.0 million for fiscal year 2007.  Anticipated commitments of capital funds forWatson Wyatt are estimated at $49.0 million for fiscal year 2008. We expectcash from operations to adequately provide for these cash needs.

**Dividends**

Duringfiscal year 2007, 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 2007 were$12.7 million.

Underour credit facility in effect as of June 30, 2007 (see Note 9 of Notes to theConsolidated Financial Statements included in Item 15 of this report), we arerequired 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, 2007** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| **Contractual Cash  Obligations (in thousands)** | ** ** | **Total**                                                                                                       | ** ** | **Less than   1  Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Lease  commitments                                              |       | $                                                                                                               | 292,101    |   | $ | 47,677 |   | $ | 83,082 |   | $ | 67,443 |   | $ | 93,899 |   |
| Revolving Credit  Facility                                      |       | 105,000                                                                                                         |       | — |   | 105,000 |   | — |   | — |   |
| Total                                                           |       | $                                                                                                               | 397,101    |   | $ | 47,677 |   | $ | 188,082 |   | $ | 67,443 |   | $ | 93,899 |   |

 

***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 2008 are projected to be approximately $38.0 million.

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***Guarantees***

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

*WWLLP Business Combination*.  OnJuly 31, 2005, the company acquired substantially all the assets and assumedmost liabilities of WWLLP, the company’s long-time alliance partner in the U.K.and Europe.  The company entered intoindemnity arrangements with WWLLP relating to the acquisition and also agreedthat certain indemnity obligations relating to the alliance arrangements will continueafter the WWLLP business combination. The period for which certain indemnity obligations, other than forcertain tax liabilities, has expired.

Inconnection with the WWLLP business combination, the company will issue anadditional 1,950,000 shares of the company’s common stock based on theachievement by the acquired business of agreed-upon financial performancegoals. The company expects to issue these shares during fiscal year 2008 as theperformance goals have been achieved. The value of these shares was $86.9 million based on the NYSE closingprice on July 31, 2007. The contingent consideration is payable by Watson WyattLimited and the payment obligations are guaranteed by Watson Wyatt Worldwide,Inc.

*Watson Wyatt Netherlands Acquisition*.  OnFebruary 1, 2007, the company acquired substantially all of the assets andassumed most liabilities of Watson Wyatt Netherlands, its long-time alliancepartner in the Netherlands.  Inconnection with this acquisition, payment of up to an additional €8.0 millionof Class A shares (approximately 220,000 shares) after January 31, 2008 iscontingent upon achievement by the acquired business of certain financialperformance goals during the twelve month period ending January 31, 2008.  The contingentconsideration is payable by Watson Wyatt Limited and the payment obligationsare guaranteed by Watson Wyatt Worldwide, Inc.

**CreditAgreement**

Thecompany has a credit facility provided by a syndicate of banks in an aggregateprincipal amount of $300 million. Interest rates associated with this facility vary with LIBOR and/or thePrime Rate and are based on our leverage ratio, as defined by the creditagreement.  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.  On June 29, 2007, the companyborrowed $105 million under its credit facility in connection with theanticipation of closing the Heissmann Acquisition. As of June 30, 2007 and2006, the company had $105 million and $30 million, respectively, outstandingunder the facility. Credit under the facility is available upon demand,although the credit facility requires us to observe certain covenants(including requirements for minimum net worth, which act to restrict dividends,cash flow leverage ratio and a fixed coverage charge) and is collateralizedwith a pledge of stock of material subsidiaries.  We were in compliance with all covenantsunder the credit facility as of June 30, 2007. This facility is scheduled tomature on June 30, 2010.  See Note 19 foradditional information on the Heissmann Acquisition.

Aportion of the revolving facility is used to support required letters of creditissued under the credit line.  As aresult, $8.0 million of the facility was unavailable for operating needs as ofJune 30, 2007.  In July 2007, the companyissued an additional $2.6 million letter of credit under the credit line. Weare charged a fee for outstanding letters of credit that also fluctuates basedon our leverage ratio.

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Thecompany has also provided a $5.0 million Australian dollar-denominated letterof credit (US $4.2 million) to an Australian governmental agency as required bythe local regulations.  The estimated fairmarket value of these letters of credit is immaterial because they have neverbeen used, and the company believes that future usage is remote.

**RiskManagement**

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

Informulating its premium structure, PCIC estimates the amount it expects to payfor losses (and loss expenses) for all the members as a whole and thenallocates that amount to the member firms based on the individual member’sexpected losses.  PCIC bases premiumcalculations, which are determined annually based on experience through Marchof each year, on relative risk of the various lines of business performed byeach of the owner companies, past claim experience of each owner company(experience rating), growth of each of those companies, industry risk profilesin general and the overall insurance markets. As of July 1, 2007, the captive insurance company carries reinsurancefor losses it insures above $25 million.

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

Thecompany will continue to provide for the self-insured retention where specificestimated losses and loss expenses for known claims in excess of $1 million areconsidered probable and reasonably estimable. Although the company maintainsprofessional liability insurance coverage, this insurance does not cover claimsmade after expiration of our current insurance contracts.  Generally accepted accounting principlesrequire that we record a liability for incurred but not reported (IBNR)professional liability claims if they are probable and reasonably estimable,and for which we have not yet contracted for insurance coverage.  The company uses actuarial assumptions toestimate and record its IBNR liability and has a $35.5 million IBNR liabilityrecorded as of June 30, 2007.

Insurance market conditionsfor our industry and the company include increases in overall premiumcost.  In addition, beginning in 2005PCIC raised the reinsurance attachment point from $15 million to $25 million.Trends toward higher self-insured retentions and constraints on aggregateexcess coverages for this class of insurance coverage are anticipated tocontinue or to recur periodically, and to be reflected in our future annualinsurance renewals.  As a result, we willcontinue to assess our ability to secure future insurance coverage and wecannot assure that such coverage will continue to be available indefinitely inthe event of specific adverse claims experience, adverse loss trends, marketcapacity constraints or other factors. In anticipation of the possibility of future reductions in risk transferfrom PCIC to re-insurers, as well as the hardening insurance market conditionsin recent years, the firms that own PCIC, including the company, have increasedPCIC’s capital in the past and we will continue to re-assess capitalrequirements on a regular basis.

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

**RecentAccounting Pronouncements**

In September 2006, the Financial AccountingStandards Board (“FASB”) published Statement of Financial Accounting StandardsNo. 157, “Fair Value Measurements” (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements. FAS 157 applies under other accounting pronouncementsthat require or permit fair value measurements and accordingly, does notrequire any new fair value measurements. FAS 157 is effective for fiscal yearsbeginning after November 15, 2007. The company does not believe the adoption ofFAS 157 will have a material impact on 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), which is an amendment to FAS 87, “Employers’Accounting for Pensions”; FAS 88, “Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits”;and FAS 132(R), revision to FAS132, “Employers’ Disclosures about Pensions andOther Postretirement Benefits”.  Theprovisions of FAS 158 are effective for fiscal years ending after December 15,2006 and the transition method is prospective. As a result, the company adopted the provisions of FAS 158 for thefiscal year ended June 30, 2007.  FAS 158requires companies to recognize the funded status of each of the definedbenefit pension and postretirement plans. Each over funded plan is recognizedas an asset and each under funded plan is recognized as a liability.  The initial impact of the standard, due tounrecognized prior services costs and net actuarial gains and losses as well assubsequent changes in funded status, is recognized as a component ofaccumulated other comprehensive income which is included in total shareholders’equity, net of applicable income tax. Previous amounts recorded as additional minimum liabilities and relatedintangible assets are also reversed upon adoption of the new standard.  In accordance with FAS 158, the fiscal year2006 accounting and related disclosures were not affected by the adoption ofthe new standard.

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Thetable below summarizes the incremental effect of FAS 158 adoption on theindividual line items in the company’s consolidated balance sheet at June 30,2007:
| ** **                                  | ** ** | **Pre-SFAS  No. 158  Adoption** | ** ** | **SFAS  No. 158  Adjustments** | ** ** | **Post-SFAS  No. 158  Adoption** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** **                            | ** ** |
| Net Deferred Income  Taxes                  |       | 57,650                               |       | 3,448                               |       | 61,098                                |       |
| Intangible pension  asset                   |       | 602                                  |       | (602                                | )          | —                                |       |
| Prepaid Retirement  Benefits                |       | —                               |       | 43,793                              |       | 43,793                                |       |
| Current  Retirement Benefits                |       | 7,975                                |       | 1,851                               |       | 9,826                                 |       |
| Noncurrent  Retirement Benefits             |       | 159,780                              |       | 38,897                              |       | 198,677                               |       |
| Additional  Minimum liability (net of tax)  |       | (6,716                               | )          | 6,716                               |       | —                                |       |
| Unamortized  Pension liability (net of tax) |       | —                               |       | (1,412                              | )          | (1,412                                | )          |
| Foreign Currency                            |       | —                               |       | 589                                 |       | 589                                   |       |

 

The net unrealized loss of $1.2 million, the prior service creditof $1.9 million, and the transition obligation asset of $0.1 millionresults in a net decrease in expense of $0.8 million which will beamoritized from accumulated other comprehensive income into pension expenseover the next fiscal year.

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes -an interpretation of FASB Statement No. 109” (“FAS 109”), which clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FAS No. 109, “Accounting for IncomeTaxes.”  FIN 48 prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return.  This Interpretation alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition.  ThisInterpretation is effective for fiscal years beginning after December 15, 2006so it will be effective for the company in fiscal year 2008, which began onJuly 1, 2007.   The company is currentlyevaluating the impact of FIN 48 on its consolidated financial statements.

InSeptember 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements When Quantifying Misstatements in Current Year FinancialStatement” (“SAB 108”)*,*which provides guidance on how companies should quantify financial statementmisstatements.  SAB 108 requiresthat the effect of misstatements that were not corrected at the end of theprior year be considered in quantifying misstatements in the current-yearfinancial statements. Two techniques were identified as being used by companiesin practice to accumulate and quantify misstatements – the “rollover”approach and the “iron curtain” approach. The rollover approach quantifies amisstatement based on the amount of the misstatement originating in thecurrent-year income statement. Thus, this approach ignores the effects ofcorrecting the portion of the current-year balance sheet misstatement thatoriginated in prior years. The iron curtain approach quantifies a misstatementbased on the effects of correcting the cumulative misstatement existing in thebalance sheet at the end of the current year, irrespective of the misstatement’syear(s) of origination. SAB 108 permits companies to adjust for the cumulativeeffect of misstatements relating to prior years in the carrying amount ofassets and liabilities as of the beginning of the current fiscal year, with anoffsetting adjustment to the opening balance of retained earnings in the yearof adoption.

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Prior to the issuance of SAB108, the company used the rollover method to evaluate the effects ofmisstatements that were not corrected at the end of the prior year but weredetermined to be immaterial individually and in the aggregate. The companyadopted SAB 108 in the fourth quarter of fiscal year 2007 and performed anevaluation of prior year misstatements under the iron curtain method. Thecompany concluded that a prior year misstatement would have been material underthe iron curtain method.  Specifically, thepractice by which we value work in process, resulted in the need for a materialadjustment to the financial statements under the iron curtain method describedabove.  As a result, the company haselected, as allowed under SAB 108, to record the effect of initially applyingthis guidance by adjusting the carrying amount of the impacted accounts as ofthe beginning of fiscal year 2007 and recording an offsetting adjustment to theopening balance of retained earnings in fiscal year 2007.

The following table summarizes the SAB 108cumulative effect adjustment as of July 1, 2006:
| ** **                             | ** ** | **Retained Earnings  Adjustment Recorded  As of July 1, 2006  Decrease/(Increase)  (In thousands) (1)** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Valuation of  unbilled receivables (2) |       | $                                                                                                                                               | 9,184      |   |
| Lease Incentives  (3)                  |       | 3,650                                                                                                                                           |       |
| Stock-based  compensation (4)          |       | 2,234                                                                                                                                           |       |
| Associate  expense (5)                 |       | 1,750                                                                                                                                           |       |
| Deferred taxes  and taxes payable (6)  |       | (6,762                                                                                                                                          | )          |
| Retained Earnings (7)                  |       | $                                                                                                                                               | 10,056     |   |

 

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(1) We previously evaluated these misstatementsutilizing the roll-over approach and concluded that they were insignificantindividually and in the aggregate to all periods prior to April 1, 2007.  The entries below reflect the impact ofrecording these misstatements on the iron curtain method.

(2)Valuation of Unbilled Receivables - The company’s practice in North America associated with the valuationof unbilled receivables has historically been to adjust the net realizablevalue in conjunction with our billing process, which typically occurs in themonth after the unbilled receivables are generated.  Thus, each accounting period has containedthe valuation adjustments from the previous period, which has resulted inimmaterial differences to our income statements over time.  The cumulative impact has resulted in an overstatementof our unbilled receivables that would be material to the company under theiron curtain approach.  In June 2007, thecompany corrected the unbilled receivables with an adjustment of $9.2 million,less an income tax effect of $3.7 million, to the beginning balance of retainedearnings at July 1, 2006.

(3)Lease Incentives - InFebruary 2005, the SEC clarified its view on accounting for leaseholdincentives and indicated that the gross method, which requires that leaseholdincentives be recorded separately and amortized over the life of the lease, wasthe only acceptable method of accounting for leasehold incentives.  Prior to that time, the company had accountedfor leasehold incentives by netting them into the related leaseholdimprovements (the net method).  EffectiveMarch 1, 2005, the company changed its accounting with regards to leaseholdincentives such that incentives associated with any new leases entered intoafter that date would be amortized separately over the life of the lease or theuseful life, whichever is shorter.

Sincethe majority of the company’s leases were for terms in excess of thedepreciable life of the leasehold improvements, the impact of our using the netmethod was that the benefits of the leasehold incentives were amortized intothe income statement faster than they would have been if amortized over thefull term of the leases.  Thus at thetime of the policy change, our deferred rent liability was understated by theamount of the incentives that had been prematurely amortized into income.  In June 2007, the company corrected thisliability with an adjustment of $3.7 million, less an income tax effect of $1.5million, to the beginning balance of retained earnings at July 1, 2006.

(4)Stock-based Compensation– During the fourth quarter of fiscal year 2007, we determined thatcompensation expense and the related liability associated with one of ourstock-based compensation plans had erroneously not been recorded for fiscalyear 2006.  In June 2007, the companycorrected this liability with an adjustment of $2.2 million, less an income taxeffect of $0.9 million, to the beginning balance of retained earnings at July1, 2006.

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(5)Associate Expenses -The company’s associates incur expenses on behalf of the company in fulfillmentof their work responsibilities. Submission of these expenses to the company for reimbursement hashistorically lagged the actual expenditure, typically by a month. Thus, eachaccounting period has contained the associate expenses from the previousperiod, which has resulted in immaterial differences to our income statementsover time.  In June 2007, the company correctedthis misstatement with an adjustment of $1.8 million, less an  income tax effect of $0.7 million, to thebeginning balance of retained earnings at July 1, 2006.

(6)Deferred Taxes and Taxes Payable – As a result of the misstatements previouslydescribed, we recorded an increase to deferred income tax as of July 1, 2006with a corresponding offset to retained earnings to correct thesemisstatements.

(7)Retained Earnings – Represents the net reduction to retained earnings as ofJuly 1, 2006, to reflect the initial application of SAB 108.

Certain of the adjustments included above also resulted in mistatementsin the first three quarters of fiscal year 2007.  We previously evaluated these misstatementsutilizing the rollover approach and concluded that these errors wereinsignificant, individually and in the aggregate, to each of the first threequarters of fiscal 2007.

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

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

**Interest Rate Risk**

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

**ForeignCurrency Risk**

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

**TranslationExposure**

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

We consolidate ourinternational subsidiaries by converting them into U.S. dollars in accordancewith Statement of Financial Accounting Standards No. 52, “Foreign CurrencyTranslation” (“FAS 52”). The results of operations and our financial positionwill fluctuate when there is a change in foreign currency exchange rates.

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

Thefinancial statements and supplementary data are included as Item 15 of thisreport.

**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**

An evaluation was performed under the supervisionand with the participation of our principal executive officer, principalfinancial officer and senior management, of the effectiveness of the design andoperation of our disclosure controls and procedures as such term is defined inrules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the“Exchange Act”). Based upon that evaluation, our principal executive officer,principal financial officer, and senior management concluded that ourdisclosure controls and procedures were effective in providing reasonableassurance that the information required to be disclosed in our periodic reportswe file or submit under the Exchange Act is (1) recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms, and (2) accumulated and communicated to ourmanagement to allow their timely decisions regarding required disclosure.

**Changes in Internal Control Over Financial Reporting**

There were no changes in ourinternal control over financial reporting in the fourth quarter of 2007 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 thatcould have a material effect on the financial statements.

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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 thecompany’s internal control over financial reporting was effective as of June30, 2007.

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.

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting, that Watson Wyatt Worldwide, Inc. andsubsidiaries (the “Company”) maintained effective internal control overfinancial reporting as of June 30, 2007, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects.  Ouraudit included obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating the designand operating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances.  We believethat our audit provides a reasonable basis for our opinions.

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A company’s internal controlover financial reporting is a process designed by, or under the supervision of,the company’s principal executive and principal financial officers, or personsperforming similar 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 maintenance ofrecords 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 prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherentlimitations of internal control over financial reporting, including thepossibility of collusion or improper management override of controls, materialmisstatements due to error or fraud may not be prevented or detected on atimely basis.  Also, projections of any evaluation of the effectiveness ofthe internal control over financial reporting to future periods are subject tothe risk that the controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

In our opinion, based on ouraudit, management’s assessment that the Company maintained effective internalcontrol over financial reporting as of June 30, 2007, is fairly stated, in allmaterial respects, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.  Also, in our opinion, based onour audit, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of June 30, 2007, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated financial statements and financial statement schedule as of andfor the year ended June 30, 2007 of the Company and our report dated August 24,2007 expressed an unqualified opinion on those financial statements andfinancial statement schedule and included an explanatory paragraph regardingthe Company’s adoption of new accounting standards.

*DELOITTE & TOUCHE LLP*

McLean, VirginiaAugust 24, 2007

**Part III**

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

The response tothis item will be included in a definitive proxy statement to be filed within120 days after the end of the company’s fiscal year, and that information isincorporated herein by this reference.

**Item 11.  Executive Compensation.**

The response to this item will be included in a definitive proxystatement to be filed within 120 days after the end of the company’s fiscalyear, and that information is incorporated herein by this reference.

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

The response to this item will be included in a definitive proxystatement to be filed within 120 days after the end of the company’s fiscalyear, and that information 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, 2007                                                |   |   |
|   |   | Consolidated  Balance Sheets at June 30, 2007 and 2006                                                                                               |   |   |
|   |   | Consolidated  Statements of Cash Flows for each of the three years in the period ended June  30, 2007                                                |   |   |
|   |   | Consolidated  Statements of Changes in Stockholders’ Equity for each of the three years in  the period ended June 30, 2007                      |   |   |
|   |   | Notes to the Consolidated Financial Statements                                                                                                       |   |   |
|   |   |                                                                                                                                                 |   |   |
| (2)    |   | Consolidated Financial Statement Schedule for each  of the three years in the period ended June 30, 2007                                             |   |   |
|   |   |                                                                                                                                                 |   |   |
|   |   | 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 105                                                                                                                        |   |   |
|   |   |                                                                                                                                                 |   |   |
| c)     |   | Financial Statement Schedules                                                                                                                        |   |   |
|   |   |                                                                                                                                                 |   |   |
|   |   | Not applicable.                                                                                                                                      |   |   |

 

55

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|                        |   | WATSON WYATT WORLDWIDE, INC. |
|------------------------|--------|------------------------------|
|                   |   | (Registrant)                 |
|                   |   |                         |
| Date: August 24,  2007 |   | 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 |     | 8/24/07 |
|     John  J. Haley                |       | and Director      |                               |     |
|                                                  |       |              |                               |     |
|                                                  |       |              |                               |     |
|     /s/  Carl D. Mautz            |       |              | Vice President and Chief           |     | 8/24/07 |
|     Carl  D. Mautz                |       | Financial Officer |                               |     |
|                                                  |       |              |                               |     |
|                                                  |       |              |                               |     |
|     /s/  Peter L. Childs          |       |              | Controller                         |     | 8/24/07 |
|     Peter  L. Childs              |       |              |                               |     |
|                                                  |       |              |                               |     |
|                                                  |       |              |                               |     |
|     /s/  John J. Gabarro          |       |              | Director                           |     | 8/24/07 |
|     John  J. Gabarro              |       |              |                               |     |
|                                                  |       |              |                               |     |
|                                                  |       |              |                               |     |
|     /s/  R. Michael McCullough    |       |              | Director                           |     | 8/24/07 |
|     R.  Michael McCullough        |       |              |                               |     |
|                                                  |       |              |                               |     |
|                                                  |       |              |                               |     |
|     /s/  Brendan O’Neill     |       |              | Director                           |     | 8/24/07 |
|     Brendan  O’Neill         |       |              |                               |     |
|                                                  |       |              |                               |     |
|                                                  |       |              |                               |     |
|     /s/  Linda D. Rabbitt         |       |              | Director                           |     | 8/24/07 |
|     Linda  D. Rabbitt             |       |              |                               |     |
|                                                  |       |              |                               |     |
|                                                  |       |              |                               |     |
|     /s/  Chandrasekhar Ramamurthy |       |              | Vice President and Director        |     | 8/24/07 |
|     Chandrasekhar  Ramamurthy     |       |              |                               |     |
|                                                  |       |              |                               |     |
|                                                  |       |              |                               |     |
| /s/ Gilbert T.  Ray                                   |       |              | Director                           |     | 8/24/07 |
| Gilbert T. Ray                                        |       |              |                               |     |
|                                                  |       |              |                               |     |

 

56

----

 

 
|                                             |   |   |                        |   |
|---------------------------------------------|--------|--------|-----------------------------|--------|
|     /s/  Roger Urwin    |   |   | Vice President and Director |   | 8/24/07 |
|     Roger  Urwin        |   |   |                        |   |
|                                        |   |   |                        |   |
|                                        |   |   |                        |   |
|     /s/  Gene H. Wickes |   |   | Vice President and Director |   | 8/24/07 |
|     Gene  H. Wickes     |   |   |                        |   |
|                                        |   |   |                        |   |
|                                        |   |   |                        |   |
|     /s/  John C. Wright |   |   | Director                    |   | 8/24/07 |
|     John  C. Wright     |   |   |                        |   |
|                                             |        |        |                             |        |  |  |

 

57

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited theaccompanying consolidated balance sheet of Watson Wyatt Worldwide, Inc. andsubsidiaries (the “Company”) as of June 30, 2007 and the related consolidatedstatements of operations, changes in stockholders’ equity, and cash flows forthe year then ended.  Our audit also included the financial statementschedule listed in the Index at Item 15 for the year ended June 30, 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 audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditprovides a reasonable basis for our opinion.

In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position ofWatson Wyatt Worldwide, Inc. and subsidiaries at June 30, 2007, and the resultsof their operations and their cash flows for the year then ended in conformitywith accounting principles generally accepted in the United States ofAmerica.  Also, in our opinion, suchfinancial statement schedule for the year ended June 30, 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 financialstatements, effective June 30, 2007, the Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Post Retirement Plans — An Amendment of FASBStatements No. 87, 88, 106, and 132(R)*, as well SEC Staff AccountingBulletin No. 108, *Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements*.

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as ofJune 30, 2007, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission and our report dated August 24, 2007, expressed an unqualifiedopinion on management’s assessment of the effectiveness of the Company’s internalcontrol over financial reporting and an unqualified opinion on theeffectiveness of the Company’s internal control over financial reporting.

*DELOITTE & TOUCHE LLP*

McLean, VirginiaAugust 24, 2007

58

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REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Directors and Stockholders

WatsonWyatt Worldwide, Inc.

In our opinion, theconsolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of Watson WyattWorldwide, Inc. and its subsidiaries at June 30, 2006, and the results of theiroperations and their cash flows for each of the two years in the period endedJune 30, 2006 in conformity with accounting principles generally accepted inthe United States of America. In addition, in our opinion, the financialstatement schedule for each of the two years in the period ended June 30, 2006,listed in the accompanying index presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.  Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

PricewaterhouseCoopers LLP

McLean, Virginia

August17, 2006

59

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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** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Revenue                                                                                                                                                           |       | $                                     | 1,486,523  |   | $ | 1,271,811 |   | $ | 737,421 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Costs of providing  services:                                                                                                                                     |       |                                  |       |   |   |   |   |
| Salaries and  employee benefits                                                                                                                                   |       | 805,571                               |       | 699,049 |   | 397,252 |   |
| Professional and  subcontracted services                                                                                                                          |       | 99,943                                |       | 84,165 |   | 57,810 |   |
| Occupancy,  communications and other                                                                                                                              |       | 184,832                               |       | 164,140 |   | 106,752 |   |
| General and  administrative expenses                                                                                                                              |       | 159,637                               |       | 147,122 |   | 74,612 |   |
| Depreciation and  amortization                                                                                                                                    |       | 57,235                                |       | 44,918 |   | 20,210 |   |
|                                                                                                                                                              |       | 1,307,218                             |       | 1,139,394 |   | 656,636 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Income from operations                                                                                                                                            |       | 179,305                               |       | 132,417 |   | 80,785 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| (Loss)/Income from  affiliates                                                                                                                                    |       | (5,500                                | )          | 1,135 |   | 7,146 |   |
| Interest income                                                                                                                                                   |       | 4,066                                 |       | 4,325 |   | 2,832 |   |
| Interest expense                                                                                                                                                  |       | (1,581                                | )          | (4,093 | ) | (660 | ) |
| Other non-operating  income/(loss)                                                                                                                                |       | 178                                   |       | (2,081 | ) | (7,404 | ) |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Income from continuing  operations before income taxes                                                                                                            |       | 176,468                               |       | 131,703 |   | 82,699 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Provision for income  taxes                                                                                                                                       |       | 60,193                                |       | 45,585 |   | 31,303 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Income from continuing  operations                                                                                                                                |       | 116,275                               |       | 86,118 |   | 51,396 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Discontinued  operations:                                                                                                                                         |       |                                  |       |   |   |   |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Adjustment to reduce  estimated loss on disposal of discontinued operations (less applicable income  tax expense for the years ended June 30, 2006 and 2005) |       | —                                |       | 1,028 |   | 739 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Sublease income from  discontinued operations, less applicable income tax expense for the years  ended June 30, 2006 and 2005                                     |       | —                                |       | 45 |   | 27 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Net income                                                                                                                                                        |       | $                                     | 116,275    |   | $ | 87,191 |   | $ | 52,162 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Basic earnings per  share:                                                                                                                                        |       |                                  |       |   |   |   |   |
| Income from  continuing operations                                                                                                                                |       | $                                     | 2.74       |   | $ | 2.08 |   | $ | 1.58 |   |
| Income from  discontinued operations                                                                                                                              |       | —                                |       | 0.03 |   | 0.02 |   |
| Net income                                                                                                                                                        |       | $                                     | 2.74       |   | $ | 2.11 |   | $ | 1.60 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Diluted earnings per  share:                                                                                                                                      |       |                                  |       |   |   |   |   |
| Income from  continuing operations                                                                                                                                |       | $                                     | 2.60       |   | $ | 1.99 |   | $ | 1.56 |   |
| Income from  discontinued operations                                                                                                                              |       | —                                |       | 0.02 |   | 0.02 |   |
| Net income                                                                                                                                                        |       | $                                     | 2.60       |   | $ | 2.01 |   | $ | 1.58 |   |
|                                                                                                                                                              |       |                                  |       |   |   |   |   |
| Weighted average shares  of common stock,                                                                                                                         |       |                                  |       |   |   |   |   |
| basic (000)                                                                                                                                                       |       | 42,413                                |       | 41,393 |   | 32,541 |   |
| Weighted average shares  of common stock,                                                                                                                         |       |                                  |       |   |   |   |   |
| diluted (000)                                                                                                                                                     |       | 44,684                                |       | 43,297 |   | 32,845 |   |

 

See accompanyingnotes to theconsolidated financial statements

60

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**WATSON WYATT WORLDWIDE, INC.Consolidated Balance Sheets**(Thousands of U.S. Dollars, Except Share Data)

 
| ** **                                                                                                | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                | ** ** | **2007**          | ** ** | **2006**          | ** ** |
|                                                                                                      |       |              |       |              |       |
| **Assets**                                                                                                |       |              |       |              |       |
| Cash and cash  equivalents                                                                                |       | $                 | 248,186    |              | $          | 165,345 |   |
| Receivables from  clients:                                                                                |       |              |       |              |       |
| Billed, net of allowances of $6,216 and $3,678                                                            |       | 227,130           |       | 180,533           |       |
| Unbilled, at estimated net realizable value                                                               |       | 109,697           |       | 123,044           |       |
|                                                                                                      |       | 336,827           |       | 303,577           |       |
|                                                                                                      |       |              |       |              |       |
| Deferred income  taxes                                                                                    |       | 17,016            |       | 567               |       |
| Other current  assets                                                                                     |       | 34,733            |       | 24,158            |       |
| Total current assets                                                                                      |       | 636,762           |       | 493,647           |       |
|                                                                                                      |       |              |       |              |       |
| Investment in  affiliate                                                                                  |       | 3,058             |       | 8,564             |       |
| Fixed assets,  net                                                                                        |       | 172,147           |       | 147,738           |       |
| Deferred income  taxes                                                                                    |       | 66,751            |       | 70,417            |       |
| Goodwill                                                                                                  |       | 382,936           |       | 324,041           |       |
| Intangible  assets, net                                                                                   |       | 211,715           |       | 187,075           |       |
| Other assets                                                                                              |       | 56,340            |       | 8,877             |       |
|                                                                                                      |       |              |       |              |       |
| **Total  Assets**                                                                                         |       | $                 | 1,529,709  |              | $          | 1,240,359 |   |
| ** **                                                                                                | ** ** | ** **        | ** ** | ** **        | ** ** |
| **Liabilities**                                                                                           | ** ** | ** **        | ** ** | ** **        | ** ** |
| Accounts payable  and accrued liabilities, including discretionary compensation                           |       | $                 | 303,346    |              | $          | 288,396 |   |
| Deferred income  taxes                                                                                    |       | 2,972             |       | 168               |       |
| Income taxes  payable                                                                                     |       | 4,090             |       | 7,771             |       |
| Total current liabilities                                                                                 |       | 310,408           |       | 296,335           |       |
|                                                                                                      |       |              |       |              |       |
| Revolving credit  facility                                                                                |       | 105,000           |       | 30,000            |       |
| Accrued  retirement benefits                                                                              |       | 198,677           |       | 162,505           |       |
| Deferred rent  and accrued lease losses                                                                   |       | 32,686            |       | 28,982            |       |
| Deferred income  taxes                                                                                    |       | 2,663             |       | 480               |       |
| Other noncurrent  liabilities                                                                             |       | 92,756            |       | 73,296            |       |
|                                                                                                      |       |              |       |              |       |
| **Total  Liabilities**                                                                                    |       | 742,190           |       | 591,598           |       |
|                                                                                                      |       |              |       |              |       |
| Commitments and  contingencies (Note 14)                                                                  |       |              |       |              |       |
|                                                                                                      |       |              |       |              |       |
| **Stockholders’  Equity**                                                                            |       |              |       |              |       |
| Preferred Stock  - No par value:                                                                          |       |              |       |              |       |
| 1,000,000 shares authorized; none issued and  outstanding                                                 |       | —            |       | —            |       |
| Class A Common  Stock - $.01 par value:                                                                   |       |              |       |              |       |
| 99,000,000 shares authorized; 42,763,451 and  42,463,451 issued and 42,299,792 and 42,385,513 outstanding |       | 428               |       | 425               |       |
| Additional  paid-in capital                                                                               |       | 395,521           |       | 386,392           |       |
| Treasury stock,  at cost - 463,659 and 77,938 shares                                                      |       | (22,251           | )          | (2,134            | )          |
| Retained  earnings                                                                                        |       | 336,101           |       | 242,599           |       |
| Accumulated  other comprehensive income                                                                   |       | 77,720            |       | 21,479            |       |
| **Total  Stockholders’ Equity**                                                                      |       | 787,519           |       | 648,761           |       |
|                                                                                                      |       |              |       |              |       |
| **Total Liabilities and  Stockholders’ Equity**                                                      |       | $                 | 1,529,709  |              | $          | 1,240,359 |   |

 

See accompanyingnotes to theconsolidated financial statements

61

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**WATSON WYATT WORLDWIDE, INC.Consolidated Statements of Cash Flows**(Thousands of U.S. Dollars)
| ** **                                                                                               | ** ** | **Year ended June 30** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                               | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                                   |       |                                  |       |   |   |   |   |
| Net income                                                                                               |       | $                                     | 116,275    |   | $ | 87,191 |   | $ | 52,162 |   |
| Adjustments to reconcile net income to net cash from  operating activities:                              |       |                                  |       |   |   |   |   |
| Loss on foreign currency forward contract                                                                |       | —                                |       | 3,602 |   | 4,803 |   |
| Income from discontinued operations, net of income  tax expense                                          |       | —                                |       | (1,028 | ) | (739 | ) |
| Provision for doubtful receivables from clients                                                          |       | 8,551                                 |       | 5,687 |   | 5,755 |   |
| Depreciation                                                                                             |       | 47,090                                |       | 36,763 |   | 19,899 |   |
| Amortization of intangible assets                                                                        |       | 10,145                                |       | 8,155 |   | 311 |   |
| Provision for (benefit from) deferred income taxes                                                       |       | (3,045                                | )          | 33,692 |   | (4,587 | ) |
| Loss/(Income) from affiliates                                                                            |       | 5,500                                 |       | (1,136 | ) | (7,146 | ) |
| Distributions from affiliates                                                                            |       | —                                |       | 1,614 |   | 6,131 |   |
| Other, net                                                                                               |       | 977                                   |       | 449 |   | 866 |   |
| Changes in operating assets and liabilities (net of  business acquisitions and discontinued operations): |       |                                  |       |   |   |   |   |
| Receivables from clients                                                                                 |       | (43,464                               | )          | (27,917 | ) | (14,738 | ) |
| Other current assets                                                                                     |       | (7,211                                | )          | 7,181 |   | (488 | ) |
| Other assets                                                                                             |       | 1,324                                 |       | (2,000 | ) | (6,868 | ) |
| Accounts payable and accrued liabilities                                                                 |       | 19,246                                |       | 5,238 |   | 9,532 |   |
| Income taxes payable                                                                                     |       | 564                                   |       | 760 |   | (8,601 | ) |
| Accrued retirement benefits                                                                              |       | (2,831                                | )          | 4,148 |   | 2,101 |   |
| Deferred rent and accrued lease losses                                                                   |       | 54                                    |       | 1,561 |   | 8,502 |   |
| Other noncurrent liabilities                                                                             |       | 13,937                                |       | 5,163 |   | 1,189 |   |
| Cash flows from operating activities:                                                                    |       | 167,112                               |       | 169,123 |   | 68,084 |   |
|                                                                                                     |       |                                  |       |   |   |   |   |
| Cash flows used  in investing activities:                                                                |       |                                  |       |   |   |   |   |
| Purchases of marketable securities                                                                       |       | —                                |       | — |   | (469,400 | ) |
| Sales and maturities of marketable securities                                                            |       | —                                |       | — |   | 489,400 |   |
| Business acquisitions and contingent consideration  payments                                             |       | (48,099                               | )          | (137,784 | ) | (812 | ) |
| Purchases of fixed assets                                                                                |       | (43,989                               | )          | (38,060 | ) | (34,648 | ) |
| Capitalized software costs                                                                               |       | (22,295                               | )          | (27,743 | ) | (14,296 | ) |
| Contingent proceeds from divestitures                                                                    |       | 178                                   |       | 1,296 |   | 20 |   |
| Cash flows used in investing activities:                                                                 |       | (114,205                              | )          | (202,291 | ) | (29,736 | ) |
|                                                                                                     |       |                                  |       |   |   |   |   |
| Cash flows  from/(used in) financing activities                                                          |       |                                  |       |   |   |   |   |
| Borrowings                                                                                               |       | 149,600                               |       | 102,000 |   | — |   |
| Repayments of borrowings                                                                                 |       | (74,600                               | )          | (72,000 | ) | — |   |
| Foreign currency forward contract                                                                        |       | —                                |       | (8,405 | ) | — |   |
| Dividends paid                                                                                           |       | (12,717                               | )          | (12,667 | ) | (9,756 | ) |
| Repurchases of common stock                                                                              |       | (48,303                               | )          | (4,272 | ) | (9,358 | ) |
| Excess tax benefit of exercises of stock options and  stock purchase plan                                |       | 3,349                                 |       | 2,034 |   | — |   |
| Issuances of common stock - exercises of stock  options                                                  |       | 3,714                                 |       | 3,911 |   | 1,992 |   |
| Issuances of common stock - employee stock purchase  plan                                                |       | 6,182                                 |       | 6,255 |   | 8,078 |   |
| Cash flows from/(used in) financing activities                                                           |       | 27,225                                |       | 16,856 |   | (9,044 | ) |
|                                                                                                     |       |                                  |       |   |   |   |   |
| Effect of  exchange rates on cash                                                                        |       | 2,709                                 |       | 13,581 |   | 1,832 |   |
|                                                                                                     |       |                                  |       |   |   |   |   |
| Increase/(decrease)  in cash and cash equivalents                                                        |       | 82,841                                |       | (2,731 | ) | 31,136 |   |
|                                                                                                     |       |                                  |       |   |   |   |   |
| Cash and cash  equivalents at beginning of period                                                        |       | 165,345                               |       | 168,076 |   | 136,940 |   |
|                                                                                                     |       |                                  |       |   |   |   |   |
| Cash and cash  equivalents at end of period                                                              |       | $                                     | 248,186    |   | $ | 165,345 |   | $ | 168,076 |   |

 

See accompanyingnotes to theconsolidated financial statements

62

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** **

**WATSON WYATTWORLDWIDE, INC.Consolidated Statement of Changes in Stockholders’ Equity**(Thousands of U.S. Dollars)
| ** **                                                       | ** ** | **Class A**       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|------------------|------------|----------------|------------|------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                       | ** ** | **Common**             | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Stock**              | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Outstanding**        | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **(number **      | ** ** | **Class A** | ** ** | **Additional** | ** ** | **Treasury**     | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **of shares,**    | ** ** | **Common**       | ** ** | **Paid-in**    | ** ** | **Stock,**       | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **in thousands)** | ** ** | **Stock**        | ** ** | **Capital**    | ** ** | **at Cost** | ** ** | **Earnings** | ** ** | **(Loss)/Income** | ** ** | **Total**  | ** ** |
|                                                             |       |                   |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Balance at July 1, 2004                                          |       | 32,317                 |       | $                | 334        |           | $          | 149,508          |       | $            | (26,149    | )                 | $          | 125,669    |       | $ | (4,178 | ) | $ | 245,184 |   |
| Comprehensive income/(loss):                                     |       |                   |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Net income                                                       |       | —                 |       | —           |       | —         |       | —           |       | 52,162       |       | —            |       | 52,162     |       |
| Additional minimum  pension liability, net of tax                |       | —                 |       | —           |       | —         |       | —           |       | —       |       | (61,728           | )          | (61,728    | )          |
| Foreign currency  translation adjustment, net of tax             |       | —                 |       | —           |       | —         |       | —           |       | —       |       | 2,457             |       | 2,457      |       |
| Total comprehensive loss                                         |       |                   |       |             |       |           |       |             |       |         |       |              |       | (7,109     | )          |
| Cash dividends                                                   |       | —                 |       | —           |       | —         |       | —           |       | (9,756       | )          | —            |       | (9,756     | )          |
| Repurchases of common  stock                                     |       | (365                   | )          | —           |       | —         |       | (9,358           | )          | —       |       | —            |       | (9,358     | )          |
| Issuances of common  stock - employee stock purchase plan shares |       | 362                    |       | —           |       | (936           | )          | 9,014            |       | —       |       | —            |       | 8,078      |       |
| Issuances of common  stock - deferred stock units                |       | 151                    |       | —           |       | 276            |       | 3,769            |       | —       |       | —            |       | 4,045      |       |
| Issuances of common  stock to outside directors                  |       | 8                      |       | —           |       | 16             |       | 209              |       | —       |       | —            |       | 225        |       |
| Issuances of common  stock - stock options                       |       | 154                    |       | —           |       | (1,818         | )          | 3,810            |       | —       |       | —            |       | 1,992      |       |
| Tax benefit of exercises  of stock options                       |       | —                 |       | —           |       | 902            |       | —           |       | —       |       | —            |       | 902        |       |
|                                                             |       |                   |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Balance at June 30, 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                                                   |       | —                 |       | —           |       | —         |       | —           |       | (12,667      | )          | —            |       | (12,667    | )          |
| Repurchases of common  stock                                     |       | (150                   | )          | —           |       | —         |       | (4,272           | )          | —       |       | —            |       | (4,272     | )          |
| Issuances of common  stock - employee stock purchase plan shares |       | 228                    |       | —           |       | 405            |       | 5,850            |       | —       |       | —            |       | 6,255      |       |
| Issuances of common  stock - deferred stock units                |       | 181                    |       | —           |       | 721            |       | 4,553            |       | —       |       | —            |       | 5,274      |       |
| Issuances of common  stock to outside directors                  |       | 14                     |       | —           |       | 21             |       | 356              |       | —       |       | —            |       | 377        |       |
| Issuances of common  stock - stock options                       |       | 302                    |       | —           |       | (3,845         | )          | 7,756            |       | —       |       | —            |       | 3,911      |       |
| Business combination  with WWLLP                                 |       | 9,091                  |       | 91               |       | 238,627        |       | —           |       | —       |       | —            |       | 238,718    |       |
| Other business  acquisition                                      |       | 93                     |       | —           |       | 172            |       | 2,328            |       | —       |       | —            |       | 2,500      |       |
| 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 |   |

 

See accompanyingnotes to theconsolidated financial statements

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** **

**WATSON WYATT &COMPANY HOLDINGSConsolidated Statement of Changes in Stockholders’ Equity, continued**(Thousands of U.S.Dollars)
| ** **                                                                      | ** ** | **Class A**       | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|------------------|------------|----------------|------------|------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                                      | ** ** | **Common**             | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                                                      | ** ** | **Stock**              | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                                                      | ** ** | **Outstanding**        | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
| ** **                                                                      | ** ** | **(number**            | ** ** | **Class A** | ** ** | **Additional** | ** ** | **Treasury**     | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                      | ** ** | **of shares,**    | ** ** | **Common**       | ** ** | **Paid-in**    | ** ** | **Stock,**       | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                      | ** ** | **in thousands)** | ** ** | **Stock**        | ** ** | **Capital**    | ** ** | **at Cost** | ** ** | **Earnings** | ** ** | **(Loss)/Income** | ** ** | **Total**  | ** ** |
|                                                                            |       |                   |       |             |       |           |       |             |       |         |       |              |       |       |       |
| 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    | )          |
| Issuance of common stock  - WWN acquisition                                     |       | 252                    |       | 3                |       | 11,274         |       | 99               |       | —       |       | —            |       | 11,376     |       |
| Issuances of common  stock - employee stock                                     |       |                   |       |             |       |           |       |             |       |         |       |              |       | —     |       |
| purchase plan  shares                                                           |       | 151                    |       | —           |       | 93             |       | 6,089            |       | —       |       | —            |       | 6,182      |       |
| Issuances of common  stock - deferred stock                                     |       |                   |       |             |       |           |       |             |       |         |       |              |       |       |       |
| units and other                                                                 |       | 301                    |       | —           |       | 2,182          |       | 10,174           |       | —       |       | —            |       | 12,356     |       |
| Issuances of common  stock to outside directors                                 |       | 10                     |       | —           |       | 64             |       | 277              |       | —       |       | —            |       | 341        |       |
| Issuances of common  stock - stock options                                      |       | 282                    |       | —           |       | (7,833         | )          | 11,547           |       | —       |       | —            |       | 3,714      |       |
| Excess tax benefit of  exercises of stock options and stock purchase plan       |       | —                 |       | —           |       | 3,349          |       | —           |       | —       |       | —            |       | 3,349      |       |
|                                                                            |       |                   |       |             |       |           |       |             |       |         |       |              |       |       |       |
| Balance at June 30, 2007                                                        |       | 42,299                 |       | $                | 428        |           | $          | 395,521          |       | $            | (22,251    | )                 | $          | 336,101    |       | $ | 77,720 |   | $ | 787,519 |   |
|                                                                                 |            |                        |            |                  |            |                |            |                  |            |              |            |                   |            |            |            |  |  |  |  |  |  |

 

See accompanyingnotes to theconsolidated financial statements

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**WATSON WYATT WORLDWIDE, INC.**

**Notes to the Consolidated Financial 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”, “Watson Wyatt”or the “company”), together with our subsidiaries, is an international companyengaged in the business of providing professional consultative services on afee basis, primarily in the human resource areas of employee benefits andcompensation, but also in other areas of specialization such as human capitalconsulting and human resource-related technology consulting.  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 have been reclassified toconform to the current presentation. See Note 12 and Note 13 for furtherinformation regarding these reclassifications.

*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, 2007 were deemedto 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 as theproject progresses than projects undertaken in other segments. We evaluate atleast 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 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.  Cash collectionsand invoices generated in excess of revenue recognized are recorded as deferredrevenue 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, short-terminvestments, receivables from clients and notes and accounts payableapproximates fair value because of the short maturity and liquidity of thoseinstruments.  There were borrowings of$105 million and $30 million outstanding under our revolving credit agreementat June 30, 2007 and 2006, respectively. There were no events of default that would require us to satisfy theguarantees described in Note 14.

*Concentration of Credit Risk* - Financial instruments that potentiallysubject the company to concentrations of credit risk consist principally ofcertain cash and cash equivalents, short-term investments and receivables fromclients.  We invest our excess cash infinancial instruments that are rated in the highest short-term rating categoryby major rating agencies such as Moody’s and Standard and Poor’s. Concentrationsof credit risk with respect to receivables from clients are limited due to ourlarge number of clients and their dispersion across many industries andgeographic 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 $35.5 million and $33.9million at June 30, 2007 and 2006, respectively.

*Stock-based Compensation* - In December 2004, the Financial Accounting Standards Board (FASB)published revisions to Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (FAS 123(R)). FAS 123(R) requires companies to account for share-based payment transactionswith employees using a fair-value based method, thereby eliminating thedisclosure-only provisions of FAS 123.  FAS 123(R) became effective forthe company as of July 1, 2005. FAS 123(R) was implemented using the modifiedprospective method.

During fiscal year 2005, the company elected to follow APB 25 inaccounting for its share-based compensation plans, in accordance with FAS123.  As a result, the company disclosedpro forma compensation cost as if the company had accounted for its share-basedcompensation plans using a fair value based method.

Thetable below reflects the effect on net income and earnings per share for fiscalyear 2005, as if the company were to recognize compensation expense under the “fair-value-basedmethod” of FAS 123.
|                                                                                                                                               | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
|                                                                                                                                          |       |     |       |
| Net income, as  reported                                                                                                                      |       | $        | 52,162     |   |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects                                           |       | 241      |       |
| Deduct: Total  stock-based employee compensation expense determined under fair-value-based  method for all awards, net of related tax effects |       | (1,411   | )          |
| Pro forma net  income                                                                                                                         |       | $        | 50,992     |   |
|                                                                                                                                          |       |     |       |
| Earnings per  share:                                                                                                                          |       |     |       |
| Basic - as reported                                                                                                                           |       | $        | 1.60       |   |
| Basic - pro forma                                                                                                                             |       | $        | 1.57       |   |
|                                                                                                                                          |       |     |       |
| Diluted - as reported                                                                                                                         |       | $        | 1.58       |   |
| Diluted - pro  forma                                                                                                                          |       | $        | 1.55       |   |

 

Duringfiscal year 2007 and 2006, the company recognized compensation expense of $4.1million or $0.09 per diluted share and $2.1 million, or $.05 per diluted share,respectively, in connection with our share-based compensation plans.  This does not include any expense related tothe 2001 Deferred Stock Unit Plan for Selected Employees, as expense related toshares awarded under this plan is recorded as a component of the company’saccrual for discretionary compensation.

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

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

*Earningsper Share* - Thecomputation of basic earnings per share is based upon the weighted averagenumber of common shares outstanding. 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. See Note 15 for identification of the components of basic and dilutedearnings per share.  The diluted earningsper share calculation for fiscal years 2007 and 2006 assume that 1,950,000contingent shares related to the WWLLP business combination had been issued asof the date of the WWLLP business combination.

*Goodwill and Intangible Assets* - Goodwill is not amortized but is reviewedfor impairment during the fourth quarter of each fiscal year or more frequentlyif indicators arise. 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 assets and liabilities for that reportingunit. The fair values used in this evaluation are estimated based upon amultiple of revenue for the reporting unit. Intangible assets with definitelives are amortized over their estimated useful lives and are reviewed forimpairment 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.

*RecentAccounting Pronouncements* - In September 2006, the Financial Accounting Standards Board (“FASB”)published Statement of Financial Accounting Standards No.157, “Fair ValueMeasurements” (FAS 157).  FAS 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and expands disclosures about fair valuemeasurements. FAS 157 applies under other accounting pronouncements thatrequire or permit fair value measurements and accordingly, does not require anynew fair value measurements. FAS 157 is effective for fiscal years beginningafter November 15, 2007. The company does not believe the adoption of FAS 157will have a material impact on its consolidated financial statements.

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InSeptember 2006, the FASB published Statement of Financial Accounting StandardsNo. 158, “Employers’ Accounting for Defined Benefit Pension Plans and OtherPostretirement Plans” (FAS 158), which is an amendment to FAS 87, “Employers’Accounting for Pensions”; FAS 88, “Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits”;and FAS 132(R), revision to FAS132, “Employers’ Disclosures about Pensions andOther Postretirement Benefits”.  Theprovisions of FAS 158 are effective for fiscal years ending after December 15,2006 and the transition method is prospective. As a result, the company adopted the provisions of FAS 158 for thefiscal year ended June 30, 2007.  FAS 158requires companies to recognize the funded status of each of the definedbenefit pension and postretirement plans. Each over funded plan is recognizedas an asset and each under funded plan is recognized as a liability.  The initial impact of the standard, due tounrecognized prior services costs and net actuarial gains and losses as well assubsequent changes in funded status, is recognized as a component ofaccumulated other comprehensive income which is included in total shareholders’equity, net of applicable income tax. Previous amounts recorded as additional minimum liabilities and relatedintangible assets are also reversed upon adoption of the new standard.  In accordance with FAS 158, the fiscal year2006 accounting and related disclosures were not affected by the adoption ofthe new standard.

Thetable below summarizes the incremental effect of FAS 158 adoption on theindividual line items in the company’s consolidated balance sheet at June 30,2007:
| ** **                                  | ** ** | **Pre-SFAS  No. 158  Adoption** | ** ** | **SFAS  No. 158  Adjustments** | ** ** | **Post-SFAS  No. 158  Adoption** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** **                            | ** ** |
| Net Deferred Income  Taxes                  |       | 57,650                               |       | 3,448                               |       | 61,098                                |       |
| Intangible pension  asset                   |       | 602                                  |       | (602                                | )          | —                                |       |
| Prepaid Retirement  Benefits                |       | —                               |       | 43,793                              |       | 43,793                                |       |
| Current  Retirement Benefits                |       | 7,975                                |       | 1,851                               |       | 9,826                                 |       |
| Noncurrent  Retirement Benefits             |       | 159,780                              |       | 38,897                              |       | 198,677                               |       |
| Additional  Minimum liability (net of tax)  |       | (6,716                               | )          | 6,716                               |       | —                                |       |
| Unamortized  Pension liability (net of tax) |       | —                               |       | (1,412                              | )          | (1,412                                | )          |
| Foreign Currency                            |       | —                               |       | 589                                 |       | 589                                   |       |

 

The net unrealized loss of $1.2 million, the prior service creditof $1.9 million, and the transition obligation asset of $0.1 millionresults in a net decrease in expense of $0.8 million which will beamoritized from accumulated other comprehensive income into pension expenseover the next fiscal year.

InJune 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”(“FAS109”), 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.”  FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected 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.  This Interpretation is effective for fiscalyears beginning after December 15, 2006 so it will be effective for the companyin first quarter of fiscal year 2008, which begins on July 1, 2007.  Thecompany is currently evaluating the impact of FIN 48 on its consolidatedfinancial statements.

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InSeptember 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements When Quantifying Misstatements in Current Year FinancialStatement” (“SAB 108”)*,*which provides guidance on how companies should quantify financial statementmisstatements.  SAB 108 requiresthat the effect of misstatements that were not corrected at the end of theprior year be considered in quantifying misstatements in the current-yearfinancial statements. Two techniques were identified as being used by companiesin practice to accumulate and quantify misstatements — the “rollover” approachand the “iron curtain” approach. The rollover approach quantifies amisstatement based on the amount of the misstatement originating in thecurrent-year income statement. Thus, this approach ignores the effects ofcorrecting the portion of the current-year balance sheet misstatement thatoriginated in prior years. The iron curtain approach quantifies a misstatementbased on the effects of correcting the cumulative misstatement existing in thebalance sheet at the end of the current year, irrespective of the misstatement’syear(s) of origination. SAB 108 permits companies to adjust for thecumulative effect of misstatements relating to prior years in the carryingamount of assets and liabilities as of the beginning of the current fiscalyear, with an offsetting adjustment to the opening balance of retained earningsin the year of adoption.

Prior to the issuance of SAB108, the company used the rollover method to evaluate the effects ofmisstatements that were not corrected at the end of the prior year but weredetermined to be immaterial individually and in the aggregate. The companyadopted SAB 108 in the fourth quarter of fiscal year 2007 and performed anevaluation of prior year misstatements under the iron curtain method. Thecompany concluded that a prior year misstatement would have been material underthe iron curtain method.  Specifically,the practice by which we value work in process, resulted in the need for amaterial adjustment to the financial statements under the iron curtain methoddescribed above.  As a result, thecompany has elected, as allowed under SAB 108, to record the effect ofinitially applying this guidance by adjusting the carrying amount of theimpacted accounts as of the beginning of fiscal year 2007 and recording anoffsetting adjustment to the opening balance of retained earnings in fiscalyear 2007.

The following table summarizes the SAB 108cumulative effect adjustment as of July 1, 2006:
|                                        | ** ** | **Retained Earnings  Adjustment Recorded  As of July 1, 2006  Decrease/(Increase)  (In thousands) (1)** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Valuation of  unbilled receivables (2) |       | $                                                                                                                                               | 9,184      |   |
| Lease Incentives  (3)                  |       | 3,650                                                                                                                                           |       |
| Stock-based  compensation (4)          |       | 2,234                                                                                                                                           |       |
| Associate  expense (5)                 |       | 1,750                                                                                                                                           |       |
| Deferred taxes  and taxes payable (6)  |       | (6,762                                                                                                                                          | )          |
| Retained Earnings (7)                  |       | $                                                                                                                                               | 10,056     |   |

 

----

(1) We previously evaluated these misstatementsutilizing the roll-over approach and concluded that they were insignificantindividually and in the aggregate to all periods prior to April 1, 2007.  The entries below reflect the impact of recordingthese misstatements on the iron curtain method.

(2)Valuation of Unbilled Receivables - The company’s practice in North America associated with the valuationof unbilled receivables has historically been to adjust the net realizablevalue in conjunction with our billing process, which typically occurs in themonth after the unbilled receivables are generated.  Thus, each accounting period has containedthe valuation adjustments from the previous period, which has resulted inimmaterial differences to our income statements over time.  The cumulative impact has resulted in anoverstatement of our unbilled receivables that would be material to the companyunder the iron curtain approach.  In June2007, the company corrected the unbilled receivables with an adjustment of $9.2million, less an income tax effect of $3.7 million, to the beginning balance ofretained earnings at July 1, 2006.

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(3)Lease Incentives - InFebruary 2005, the SEC clarified its view on accounting for leaseholdincentives and indicated that the gross method, which requires that leaseholdincentives be recorded separately and amortized over the life of the lease, wasthe only acceptable method of accounting for leasehold incentives. Prior tothat time, the company had accounted for leasehold incentives by netting theminto the related leasehold improvements (the net method). Effective March 1,2005, the company changed its accounting with regards to leasehold incentivessuch that incentives associated with any new leases entered into after thatdate would be amortized separately over the life of the lease or the usefullife, whichever is shorter.

Sincethe majority of the company’s leases were for terms in excess of thedepreciable life of the leasehold improvements, the impact of our using the netmethod was that the benefits of the leasehold incentives were amortized intothe income statement faster than they would have been if amortized over thefull term of the leases. Thus at the time of the policy change, our deferredrent liability was understated by the amount of the incentives that had beenprematurely amortized into income. In June 2007, the company corrected thisliability with an adjustment of $3.7 million, less an income tax effect of $1.5million, to the beginning balance of retained earnings at July 1, 2006.

(4)Stock-based Compensation– During the fourth quarter of fiscal year 2007, we determined that compensationexpense and the related liability associated with one of our stock-basedcompensation plans had erroneously not been recorded for fiscal year 2006. InJune 2007, the company corrected this liability with an adjustment of $2.2million, less an income tax effect of $0.9 million, to the beginning balance ofretained earnings at July 1, 2006.

(5)Associate Expenses -The company’s associates incur expenses on behalf of the company in fulfillmentof their work responsibilities. Submission of these expenses to the company forreimbursement has historically lagged the actual expenditure, typically by amonth. Thus, each accounting period has contained the associate expenses fromthe previous period, which has resulted in immaterial differences to our incomestatements over time. In June 2007, the company corrected this misstatementwith an adjustment of $1.8 million, less an income tax effect of $0.7 million,to the beginning balance of retained earnings at July 1, 2006.

(6)Deferred Taxes and Taxes Payable – As a result of the misstatements previouslydescribed, we recorded an increase to deferred income tax as of July 1, 2006with a corresponding offset to retained earnings to correct thesemisstatements.

(7)Retained Earnings – Represents the net reduction to retained earnings as ofJuly 1, 2006, to reflect the initial application of SAB 108.

Certainof the adjustments included above also resulted in mistatements in the firstthree quarters of fiscal year 2007. We previously evaluated these misstatementsutilizing the rollover approach and concluded that these errors wereinsignificant, individually and in the aggregate, to each of the first threequarters of fiscal 2007.

**Note 2- Business Combinations**

*Watson Wyatt Netherlands*

On February 1, 2007, Watson Wyatt B.V., an indirectwholly-owned subsidiary of the company, acquired the net assets of Watson WyattNetherlands (WWN), its long-time alliance partner in the Netherlands. As of thedate of the acquisition, WWN employed approximately 180 associates in five offices throughout theNetherlands. Revenues generated in calendar year 2006 were approximately $37million (Euro 28 million). The financial results of WWN have beenconsolidated into the company’s financial statements since February 1, 2007.

WWN was established in 1945 as an actuarial firm andhas extended its services from retirement consulting to incorporate legalaspects of employee benefits and investment consulting to a wide range ofclients. The company and WWN had jointly offered services since 1999 pursuantto alliance agreements and as a result, have business segments that are verysimilar in nature.

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The purchase priceof $58.5 million consisted of €34.3 million in cash, or $44.5 million, theissuance of 252,285 shares of the company’s common stock valued at $11.4million, and transaction costs and investment elimination of $2.6 million. Theshares paid were valued at $45.09 per share, which was the average of theclosing market prices of the company’s stock over five business days beginningwith two business days prior to the announcement date of January 3, 2007 andending with the two business days following the announcement date. Inconnection with this acquisition, payment of up to an additional €8.0 millionworth of Class A shares (approximately 220,000 shares) after January 31,2008 is contingent upon achievement by the acquired business of certainfinancial performance goals during the twelve month period ending January 31,2008. The contingentconsideration is payable by Watson Wyatt Limited, an indirect wholly ownedsubsidiary of Watson Wyatt Worldwide, Inc., and the payment obligations areguaranteed by the company. If the contingent shares are issued they willbe accounted for as additional goodwill. Pro forma information has not beenprovided as WWN is not deemed to be a material business combination.

*Purchase Price Allocation*

This business combination has been accounted for usingthe purchase method of accounting as prescribed in Statement of FinancialAccounting Standards No. 141, “Business Combinations” (“FAS 141”), where theassets acquired and liabilities assumed are recorded at their respective fairvalues as of the business combination date. The company has determined thefollowing preliminary fair values for the proportionate assets purchased andliabilities assumed. The determination of estimated fair value requiresmanagement to make significant estimates and assumptions.
| ** **                              | ** ** | **February 1, 2007** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **(in thousands)**        | ** ** |
| Total purchase  price                   |       |                           |       | $ | 58,474 |   |
| Less net assets acquired:               |       |                           |       |   |   |
| Customer related intangibles            |       | 18,671                         |       |   |   |
| Non-compete agreements                  |       | 596                            |       |   |   |
| Client receivables and unbilled revenue |       | 7,519                          |       |   |   |
| Fixed assets                            |       | 2,066                          |       |   |   |
| Other assets                            |       | 1,904                          |       |   |   |
| Liabilities                             |       | (3,482                         | )          |   |   |
|                                    |       |                           |       |   |   |
| Net assets acquired                     |       |                           |       | 27,274 |   |
| Goodwill                                |       |                           |       | $ | 31,200 |   |

 

The allocation of the purchase price resulted in theallocation of $31.2 million to goodwill, which has been assigned to oursegments as follows:
|                                              | ** ** | **Goodwill** | ** ** |
|----------------------------------------------|------------|--------------|------------|
| Benefits Group                               |       | $            | 27,768     |   |
| Human Capital  Group                         |       | 624          |       |
| Investment  Consulting Group                 |       | 2,808        |       |
| Allocation of goodwill  to business segments |       | $            | 31,200     |   |

 

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

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*Watson Wyatt LLP*

On July 31, 2005, the company acquired substantiallyall of the assets and assumed most liabilities of Watson Wyatt LLP (“WWLLP”)(the “WWLLP business combination”), a leading United Kingdom-based actuarial,benefits and human resources consulting partnership. The company and WWLLP hadjointly offered services since 1995 pursuant to alliance agreements and as aresult, have business segments that are very similar in nature. See Note 13 forfurther information regarding the related accounting and operating segments ofthe combined company. The financial results of WWLLP have been consolidatedinto the company’s financial statements since August 1, 2005.

The purchase price of $437.0 million consisted of£88.3 million in cash, or $156.1 million at the exchange rate in effect at July31, 2005, the issuance of 9,090,571 shares of the company’s common stock valuedat $238.7 million, transaction costs of $20.5 million and additionalconsideration including debt forgiveness and investment elimination. The sharespaid were valued at $26.26 per share, which was the average of the closingmarket prices of the company’s stock over five business days beginning with twobusiness days prior to the announcement date of January 18, 2005 and endingwith the two business days following the announcement date. As of June 30,2007, the contingencies associated with the payment of an additional 1,950,000shares were met. As a result, these shares will be issued in fiscal year 2008. Theissuance of these shares will be accounted for as additional goodwill.

*Purchase Price Allocation*

The WWLLP business combination has been accounted forusing the purchase method of accounting as prescribed in FAS 141, where theassets acquired and liabilities assumed are recorded at their respective fairvalues as of the combination date. As of the combination date, the companydetermined the following estimated fair values for the proportionate assetspurchased and liabilities assumed. The determination of estimated fair valuerequires management to make significant estimates and assumptions.
|                                         | ** ** | **July 31, 2005** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **(in thousands)**     | ** ** |
| Total purchase  price                   |       |                        |       | $ | 437,042 |   |
| Less net assets acquired:               |       |                        |       |   |   |
| Trademark and trade name                |       | $                           | 108,000    |   |   |   |
| Customer related intangibles            |       | 60,600                      |       |   |   |
| Core/developed technology               |       | 17,500                      |       |   |   |
| Cash and cash equivalents               |       | 31,230                      |       |   |   |
| Client receivables and unbilled revenue |       | 111,305                     |       |   |   |
| Other current assets                    |       | 47,153                      |       |   |   |
| Fixed assets                            |       | 13,068                      |       |   |   |
| Other assets                            |       | 3,795                       |       |   |   |
| Current liabilities                     |       | (154,854                    | )          |   |   |
| Accrued retirement benefits             |       | (49,046                     | )          |   |   |
| Other non current liabilities           |       | (33,657                     | )          |   |   |
|                                    |       |                        |       | 155,094 |   |
| Goodwill                                |       |                        |       | $ | 281,948 |   |
|                                         |            |                             |            |  |  |  |  |

 

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The allocation of the purchase price resulted in theallocation of $281.9 million to goodwill, which has been assigned to oursegments as follows:
|                                                | ** ** | **Goodwill** | ** ** |
|------------------------------------------------|------------|--------------|------------|
| Benefits Group                                 |       | $            | 136,463    |   |
| Technology and  Administration Solutions Group |       | 40,037       |       |
| Human Capital Group                            |       | 16,071       |       |
| Insurance and Financial  Services Group        |       | 52,160       |       |
| Investment Consulting  Group                   |       | 37,217       |       |
| Allocation of goodwill  to business segments   |       | $            | 281,948    |   |

 

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

*Hedge Treatment*

During the third quarter of fiscal year 2005, thecompany entered into a foreign currency forward contract to offset the riskassociated with the foreign exchange (British Pound) exposure inherent in theWWLLP business combination. The forward contract provided for the purchase of£88 million at a fixed price of $164.5 million, with a settlement date of July29, 2005. In accordance with Statement of Financial Accounting Standards BoardNo. 133, “Accounting for Derivative Instruments and Hedging Activities” (FAS133), as amended and interpreted, since the forward contract was associatedwith a business combination that is subject to the provisions of FAS 141 andthe combination involves an equity method investment, the forward contract didnot qualify for hedge accounting. As a result, changes in fair value associatedwith the forward contract were required to be recognized in the ConsolidatedStatement of Operations during the first quarter of fiscal year 2006. Consequently,a loss of $3.6 million was recognized during the first quarter of fiscal year2006 in non-operating income.

**Note 3 - Cash Flow Information**

Netcash from operating activities in the Consolidated Statements of Cash Flowsincludes cash payments for the following:
| ** **       | ** ** | **Year Ended June 30** | ** ** |
|------------------|------------|---------------------------------------|------------|
| ** **       | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|             |       |                                  |       |   |   |   |   |
| Interest expense |       | $                                     | 1,822      |   | $ | 3,822 |   | $ | 662 |   |
| Income taxes     |       | 68,893                                |       | 21,578 |   | 43,373 |   |
|                  |            |                                       |            |  |  |  |  |  |  |  |

 

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**Note 4- Investments in Affiliates**

Thecompany has historically worked with three affiliates: PCIC, as defined below,WWLLP and Watson Wyatt Holdings (Europe) Limited (“WWHE”). PCIC has been andcontinues to be an affiliate of the company during the three years ended June30, 2007.

WWLLP and WWHE were historically the company’s principal affiliatesthrough which we operated globally as alliance partners. However, as a resultof the WWLLP business combination described in Note 2, WWLLP and WWHE ceased tobe affiliates during fiscal year 2006 and began to be included in the company’sconsolidated results from the effective date of the combination, July 31, 2005.  Thus, for fiscal year 2005 and for the firstmonth of fiscal year 2006 (July 2005), the company’s investment in affiliatesincluded our investments in WWLLP, WWHE and PCIC. Our investments in WWLLP andWWHE were eliminated in conjunction with the accounting for the WWLLP businesscombination. Starting August 1, 2005, the company’s investment in affiliatesincluded PCIC alone. Our investments in PCIC were $3.1 million and $8.6 millionas of June 30, 2007 and 2006, respectively. Our share of the results of ouraffiliates for the relevant times periods were recorded using the equity methodof accounting and is reflected in the “Income from affiliates” line in theConsolidated Statements of Operations.

Combined summarized operating results (prior to distribution ofprofits) reported by the affiliates for the years ended June 30 are as follows:
|                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |     |       |
| Revenue             |       | $        | 36,394     |     | $          | 33,313   |       | $ | 495,264 |   |
| Operating expenses  |       | 44,630   |       | 26,391   |       | 373,423  |       |
|                |       |     |       |     |       |     |       |
| Income before taxes |       | (8,236   | )          | 6,922    |       | 121,841  |       |
|                |       |     |       |     |       |     |       |
| Net income          |       | $        | (5,436     | )        | $          | 4,568    |       | $ | 121,612 |   |

 

*Professional Consultants Insurance Company, Inc.*

Professional Consultants Insurance Company, Inc. (PCIC) was organizedin 1987 as a captive insurance company under the laws of the State of Vermont. PCICprovides professional liability insurance on a claims-made basis to threeactuarial and management consulting firms, all of which participate in theprogram as both policyholders and stockholders.

Capital contributions to PCIC are required when approved by a majorityof its stockholders. From the time PCIC was organized through June 30, 2007, wehave contributed $5.4 million in cash and have designated PCIC as thebeneficiary on a total of $8.0 million of letters of credit. Our ownershipinterest in PCIC as of June 30, 2007 and 2006 was 34.15 percent for bothperiods. Management believes that the company’s maximum financial statementexposure to loss of its investment in PCIC as of June 30, 2007 is limited tothe carrying value of the company’s investment in PCIC of $3.1 million,combined with letters of credit totaling $8.0 million for which PCIC has beendesignated as beneficiary, for a total maximum exposure of $11.1 million.

In July 2007, the Shareholders of PCIC approved a requirement for anadditional capital contribution. As a result, the company contributed, in July2007, an additional $1.9 million of capital to PCIC and increased the amount ofthe letter of credit for which PCIC is designated as beneficiary by $2.6million for a total maximum exposure as of July 2007 of $15.6 million. This capitalcontribution resulted in an increase in the company’s ownership percentage ofPCIC from 34.15 percent to 36.43 percent.

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Summarized balance sheet information for PCIC, whose year end isDecember 31, is as follows:
|                                                  | ** ** | **December 31** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **2006**             | ** ** | **2005** | ** ** |
|                                             |       |                 |       |   |   |
| Current  assets                                  |       | $                    | 135,754    |   | $ | 98,011 |   |
| Noncurrent  assets                               |       | 100,689              |       | 101,518 |   |
|                                             |       |                 |       |   |   |
| Total  assets                                    |       | $                    | 236,443    |   | $ | 199,529 |   |
|                                             |       |                 |       |   |   |
| Current  liabilities                             |       | $                    | 24,323     |   | $ | 20,831 |   |
| Noncurrent  liabilities                          |       | 193,513              |       | 155,107 |   |
| Stockholders’  equity                       |       | 18,607               |       | 23,591 |   |
|                                             |       |                 |       |   |   |
| Total  liabilities and stockholders’ equity |       | $                    | 236,443    |   | $ | 199,529 |   |

 

**Note 5 - Fixed Assets**

Furniture, fixtures, equipment and leasehold improvements are recordedat cost and presented net of accumulated depreciation or amortization. Furniture,fixtures and equipment are depreciated using straight-line and acceleratedmethods over lives ranging from three to seven years. Leasehold improvementsare amortized on a straight-line basis over the shorter of the lease terms orthe asset lives.

The components of fixed assets are as follows:
|                                                  | ** ** | **June 30** | ** ** |
|--------------------------------------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2007**         | ** ** | **2006** | ** ** |
|                                             |       |             |       |   |   |
| Furniture, fixtures and  equipment               |       | $                | 182,591    |   | $ | 189,650 |   |
| Computer software                                |       | 144,427          |       | 103,914 |   |
| Leasehold improvements                           |       | 73,738           |       | 67,574 |   |
|                                             |       | 400,756          |       | 361,138 |   |
| Less: accumulated  depreciation and amortization |       | (228,609         | )          | (213,400 | ) |
|                                             |       |             |       |   |   |
| Fixed assets,  net                               |       | $                | 172,147    |   | $ | 147,738 |   |

 

Total unamortized computer software costs were $94.7 million and $76.7million as of June 30, 2007 and 2006, respectively. Total amortization expensefor computer software was $21.0 million, $12.9 million and $5.1 million forfiscal years 2007, 2006 and 2005, respectively.

**Note 6 — Retirement Benefits**

*Defined Benefit Plans*

We sponsor both qualified and non-qualified, non-contributory definedbenefit pension plans in North America and the UK that cover approximately 85%of our associates. Under our plans in North America, benefits are based on thenumber of years of service and the associates’ compensation during the five highestpaid consecutive years of service. Under our plan in the UK, benefits are basedon the number of years of service and the associates’ compensation during thethree years before leaving the plan. The non-qualified plan in North Americaprovides for pension benefits that would be covered under the qualified planbut are limited by the Internal Revenue Code. The non-qualified plan has noassets and therefore is an unfunded arrangement which is reflected in thebalance sheet. The UK does not have a non-qualified plan. The measurement datefor all plans is June 30.

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The disclosures for the UK plan are shown separately because theamounts are material relative to North America plans and the assumptions usedin the plan are significantly different than those used in the North Americaplans. The measurement date for the plan is June 30.

Determination of our obligations and annual expense under the plans isbased on a number of assumptions that, given the longevity of the plans, arelong-term in focus. A change in one or a combination of these assumptions couldhave a material impact on our pension benefit obligation and related expense. Forthis reason, management employs a long-term view so that assumptions do notchange frequently in response to short-term volatility in the economy. Anydifference between actual and assumed results is amortized into our pensionexpense over the average remaining service period of participating employees. Weconsider several factors prior to the start of each fiscal year when determiningthe appropriate annual assumptions, including economic forecasts, historicaltrends, portfolio composition and peer comparisons.

Funding is based on actuarially determined contributions and is limitedto amounts that are currently deductible for tax purposes. Since fundingcalculations are based on different measurements than those used for accountingpurposes, pension contributions are not equal to net periodic pension cost. Theexcess of net periodic pension cost over such contributions and direct benefitpayments under non-qualified plan provisions is accrued by the company. Thefollowing table sets forth our projected pension contributions for fiscal year2008, as well as the pension contributions to our various plans in fiscal years2007 and 2006:
|        | ** ** | **2008  (Projected)** | ** ** | **2007  (Actual)** | ** ** | **2006  (Actual)** | ** ** |
|--------|------------|-----------------------|------------|--------------------|------------|--------------------|------------|
| U.S.   |       | $                     | 15,000     |               | $          | 15,000             |       | $ | 15,000 |   |
| Canada |       | 3,000                 |       | 2,488              |       | 2,747              |       |
| U.K.   |       | 20,000                |       | 12,036             |       | 11,039             |       |
|        |            |                       |            |                    |            |                    |            |  |  |  |

 

The fair value of plan assets is based on the market value of domesticequity, international equity and fixed income securities that are in thepension portfolio, which vary by country. To the extent the expected return onthe pension portfolio varies from the actual return, there is an unrecognizedgain or loss.

The assumptions used in the valuation for the North America plans,included the following at the end of the past three fiscal years:
|                                                              | ** ** | **Year Ended June 30** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                         |       |                                  |       |   |   |   |   |
| Discount  rate, Projected Benefit Obligation                 |       | 6.25                                  | %          | 6.25 | % | 5.25 | % |
| Discount  rate, Net Periodic Benefit Cost                    |       | 6.25                                  | %          | 5.25 | % | 6.25 | % |
| Expected long-term rate  of return on assets                 |       | 8.75                                  | %          | 8.75 | % | 9.00 | % |
| Rate  of increase in compensation, PBO                       |       | 3.84                                  | %          | 3.84 | % | 3.34 | % |
| Rate  of increase in compensation, Net Periodic Benefit Cost |       | 3.84                                  | %          | 3.34 | % | 3.34 | % |

 

The 6.25 percent discount rate assumption used at the end of fiscalyear 2007 and 2006 represents a 100 basis point increase from the 5.25 percentdiscount rate used at the end of fiscal year 2005. The company’s 2006 and 2007discount rate assumption was determined by matching future pension benefitpayments with expected future AA bond yields for the same periods.

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The expected long-term rate of return on assets assumption of 8.75percent per annum used in fiscal years 2007 and 2006 represents a 25 basispoint decrease from the 9.0 percent rate utilized in fiscal years 2005. Selectionof the return assumption at 8.75 percent per annum was supported by an analysisperformed in fiscal year 2006 by the company of the weighted average yieldexpected to be achieved with the anticipated makeup of investments. A similaranalysis was performed in fiscal year 2007 to validate the rate remaining at8.75 percent. The investment makeup is heavily weighted towards equities. Thereturn on assets for fiscal year 2007 was 17.3 percent, compared to a return of9.4 percent for fiscal year 2006.

The following assumptions were used at June 30, 2007 and 2006, and July31, 2005, or the date of the WWLLP business combination and the valuation ofour U.K. plan:
|                                              | ** ** | **June 30,  2007** | ** ** | **June 30,  2006** | ** ** | **July 31,  2005** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| Discount rate                                |       | 5.80                    | %          | 5.10                    | %          | 5.00                    | %          |
|                                         |       |                    |       |                    |       |                    |       |
| Expected  long-term rate of return on assets |       | 5.69                    | %          | 5.63                    | %          | 5.63                    | %          |
|                                         |       |                    |       |                    |       |                    |       |
| Rate of increase in  compensation levels     |       | 4.95                    | %          | 4.75                    | %          | 4.75                    | %          |

 

The 5.80 percent discount rate assumption used at the end of fiscalyear 2007 represents a 70 basis point increase over the rate used at fiscalyear 2006 and an 80 basis point increase over the discount rate at July 31,2005. The discount rate is set in relation to yields on AA European corporatebonds at the measurement date and this change reflects the increase in yieldsbetween these two dates.

The expected long-term rateof return on assets assumption remained 5.69 percent per annum for fiscal year2007. The rate of return was supported by an analysis performed by the companyof the weighted average return expected to be achieved with the anticipatedmakeup of investments which is heavily weighted towards bonds. The actualreturn on assets through fiscal year 2007 was 16.4 percent compared to 7.8percent for fiscal year 2006.

Net periodic pension cost consists of the following componentsreflected as expense in the company’s Consolidated Statements of Operations:
| ** **                                      | ** ** | **Year Ended June 30, 2007** | ** ** | **Year Ended June 30, 2006** | ** ** | **Year Ended  June 30,  2005** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **North  America**                               | ** ** | **U.K.**                                         | ** ** | **North  America**                       | ** ** | **U.K.** | ** ** | **North  America** | ** ** |
|                                            |       |                                             |       |                                             |       |                                     |       |   |   |   |   |
| Service cost                                    |       | $                                                | 26,275     |                                             | $          | 13,461                                   |       | $ | 29,423 |   | $ | 11,007 |   | $ | 24,280 |   |
| Interest cost                                   |       | 40,159                                           |       | 18,061                                           |       | 36,811                                   |       | 14,319 |   | 34,368 |   |
| Expected return on plan assets                  |       | (46,845                                          | )          | (18,123                                          | )          | (43,824                                  | )          | (13,717 | ) | (40,252 | ) |
| Amortization of transition obligation           |       | (39                                              | )          | —                                           |       | (38                                      | )          | — |   | (36 | ) |
| Amortization of net unrecognized losses/(gains) |       | 8,594                                            |       | (555                                             | )          | 16,155                                   |       | 294 |   | 6,989 |   |
| Amortization of prior service cost              |       | (2,934                                           | )          | 754                                              |       | (1,718                                   | )          | 11 |   | (2,161 | ) |
|                                            |       |                                             |       |                                             |       |                                     |       |   |   |   |   |
| Net periodic pension  cost                      |       | $                                                | 25,210     |                                             | $          | 13,598                                   |       | $ | 36,809 |   | $ | 11,914 |   | $ | 23,188 |   |

 

78

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In March 2006, the company amended its pension plan to remove long-termdisability benefits from the plan effective July 1, 2006. These benefits willthereafter be provided through an insurance provider. Given the significance ofthis amendment, the company remeasured the pension plan effective March 31,2006. The remeasurement caused pension expense to decrease by $4.0 millionduring the fourth quarter of fiscal year 2006.

The following table provides a reconciliation of the changes in thequalified plans projected benefit obligations and fair value of assets for theyears ended June 30, 2007 and 2006, and a statement of funded status as of June30, 2007 and 2006.
| ** **                                                             | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                             | ** ** | **North  America**          | ** ** | **U.K.**                    | ** ** | **North  America** | ** ** | **U.K.** | ** ** |
| **Change  in Benefit Obligation**                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit obligation at beginning of year                                |       | $                           | 561,566    |                        | $          | 344,862 |   | $ | 603,616 |   | $ | 312,481 |   |
| Service cost                                                           |       | 20,995                      |       | 13,461                      |       | 23,422 |   | 11,007 |   |
| Interest cost                                                          |       | 35,076                      |       | 18,061                      |       | 31,759 |   | 14,319 |   |
| Actuarial (gains)/losses                                               |       | 27,004                      |       | (38,010                     | )          | (70,849 | ) | (1,330 | ) |
| Benefit payments                                                       |       | (20,154                     | )          | (5,862                      | )          | (17,725 | ) | (3,869 | ) |
| Change in assumptions                                                  |       | 4,302                       |       | —                      |       | (1,484 | ) | — |   |
| Settlements                                                            |       | 305                         |       | —                      |       | 305 |   | — |   |
| Plan amendments & other                                            |       | —                      |       | 1,731                       |       | (11,999 | ) | 1,380 |   |
| Foreign currency adjustment                                            |       | 2,944                       |       | 28,960                      |       | 4,521 |   | 10,874 |   |
| Benefit obligation at end of year                                      |       | $                           | 632,038    |                        | $          | 363,203 |   | $ | 561,566 |   | $ | 344,862 |   |
|                                                                   |       |                        |       |                        |       |   |   |   |   |
| **Change  in Plan Assets**                                             | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value of plan assets, beginning of year                           |       | $                           | 541,237    |                        | $          | 294,153 |   | $ | 491,989 |   | $ | 254,513 |   |
| Actual return on plan assets                                           |       | 98,988                      |       | 14,646                      |       | 44,524 |   | 21,742 |   |
| Company contributions                                                  |       | 16,273                      |       | 23,339                      |       | 17,747 |   | 11,039 |   |
| Benefit payments                                                       |       | (20,154                     | )          | (5,862                      | )          | (17,725 | ) | (3,869 | ) |
| Participant contributions                                              |       | —                      |       | 1,672                       |       | — |   | 1,380 |   |
| Foreign currency adjustment                                            |       | 3,034                       |       | 26,462                      |       | 4,702 |   | 9,348 |   |
| Fair value of plan assets, end of year                                 |       | $                           | 639,378    |                        | $          | 354,410 |   | $ | 541,237 |   | $ | 294,153 |   |
|                                                                   |       |                        |       |                        |       |   |   |   |   |
| **Reconciliation  of Accrued Obligation and Total Amounts Recognized** | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Funded status at end of year                                           |       | $                           | 7,340      |                        | $          | (8,793 | ) | $ | (20,329 | ) | $ | (50,709 | ) |
| Unrecognized prior service cost                                        |       | —                      |       | —                      |       | (17,904 | ) | 115 |   |
| Unrecognized net loss/(gain)                                           |       | —                      |       | —                      |       | 84,819 |   | (675 | ) |
| Unrecognized transition obligation/(asset)                             |       | —                      |       | —                      |       | (214 | ) | — |   |
| **Net Amount Recognized**                                              |       | $                           | 7,340      |                        | $          | (8,793 | ) | $ | 46,372 |   | $ | (51,269 | ) |
| Accrued benefit liability                                              |       | (16,195                     | )          | —                      |       | — |   | (9,154 | ) |
| Prepaid benefit/Intangible asset                                       |       | (24,466                     | )          | 32,373                      |       | — |   | 115 |   |
| Accumulated other comprehensive income                                 |       | 40,661                      |       | (32,373                     | )          | — |   | 9,039 |   |
| **Net  Amounts Recognized**                                            |       | $                           | 7,340      |                        | $          | (8,793 | ) | $ | 46,372 |   | $ | (51,269 | ) |

 

79

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The following table provides a reconciliation of the changes in theNorth American non-qualified plans projected benefit obligations for the yearsended June 30, 2007 and 2006, and a statement of funded status as of June 30,2007 and 2006:
| ** **                                                             | ** ** | **June 30,**   | ** ** |
|------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                             | ** ** | **2007**            | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **Non-  Qualified** | ** ** | **Non-  Qualified** | ** ** |
| **Change  in Benefit Obligation**                                      |       |                |       |   |   |
| Benefit obligation, beginning of year                                  |       | $                   | 96,789     |   | $ | 92,613 |   |
| Service cost                                                           |       | 5,280               |       | 6,001 |   |
| Interest cost                                                          |       | 5,084               |       | 5,052 |   |
| Actuarial losses                                                       |       | 166                 |       | 3,999 |   |
| Benefit payments                                                       |       | (1,350              | )          | (9,574 | ) |
| Change in assumptions                                                  |       | 613                 |       | 132 |   |
| Settlements                                                            |       | (11,015             | )          | — |   |
| Plan  Amendments                                                       |       | 3,748               |       | (2,972 | ) |
| Foreign  currency adjustment                                           |       | 644                 |       | 1,538 |   |
| Benefit  obligation, end of year                                       |       | $                   | 99,959     |   | $ | 96,789 |   |
|                                                                   |       |                |       |   |   |
| **Change in Plan Assets**                                              |       |                |       |   |   |
| Fair  value of plan assets, beginning of year                          |       | $                   | —     |   | $ | — |   |
| Actual return on plan assets                                           |       | —              |       | — |   |
| Company contributions                                                  |       | 12,364              |       | 9,574 |   |
| Benefit payments                                                       |       | (12,364             | )          | (9,574 | ) |
| Participant contributions                                              |       | —              |       | — |   |
| Foreign currency adjustment                                            |       | —              |       | — |   |
| Fair value of plan assets, end of year                                 |       | $                   | —     |   | $ | — |   |
|                                                                   |       |                |       |   |   |
| **Reconciliation of Accrued  Obligation and Total Amounts Recognized** |       |                |       |   |   |
| Funded  status at end of year                                          |       | $                   | (99,959    | ) | $ | (96,789 | ) |
| Unrecognized prior service cost                                        |       | —              |       | (5,826 | ) |
| Unrecognized net loss/(gain)                                           |       | —              |       | 10,664 |   |
| Unrecognized transition obligation/(asset)                             |       | —              |       | 115 |   |
| **Net Amount Recognized**                                              |       | $                   | (99,959    | ) | $ | (91,836 | ) |
| Accrued benefit liability                                              |       | (8,651              | )          | (1,244 | ) |
| Intangible assets                                                      |       | —              |       | 456 |   |
| Accumulated other comprehensive income                                 |       | 8,651               |       | 788 |   |
| **Net  Amounts Recognized**                                            |       | $                   | (99,959    | ) | $ | (91,836 | ) |

 

In fiscal year 2006, the unrecognized prior service cost represents thecumulative prior service costs and benefits from amendments to thepostretirement plan which has not yet been recognized in the financialstatements. Previous amendments are being amortized and included in the netperiodic postretirement benefit costs over the average remaining service periodof participating employees, which is approximately eight years. The companyadopted SFAS 158 for fiscal year ending 2007 which required the recognition ofthe funded status of each of the defined benefit pension plans thereforeeliminating unrecognized differences.

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All qualified plans in North America and U.K. each had assets greaterthan the accumulated benefit obligation. The non-qualified amounts reflect onlythe U.S. and Canadian plans and are unfunded.
| ** **                      | ** ** | **June 30,**   | ** ** |
|---------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **2007**            | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **Non-  Qualified** | ** ** | **Non-  Qualified** | ** ** |
| Projected Benefit  Obligation   |       | $                   | 99,959     |   | $ | 96,789 |   |
| Accumulated  Benefit Obligation |       | 79,099              |       | 74,454 |   |
| Fair value of plan  assets      |       | —              |       | — |   |
|                                 |            |                     |            |  |  |  |  |

 

The following table, and the narrative that follows, provideinformation relating to the weighted-average asset allocations at June 30, 2007and 2006 and the investment strategy for the company’s U.S. and U.K. definedbenefit pension plan, which comprises the majority of our define benefitpension plans:
|                    | ** ** | **North America Plan  Assets at June 30,** | ** ** | **U.K. Plan Assets at  June 30,** | ** ** |
|--------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **         | ** ** | **2007**                                                            | ** ** | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Asset Category     |       |                                                                |       |                                                  |       |   |   |   |   |
| Equity  securities |       | 64.9                                                                | %          | 73.7                                                  | %          | 33.0 | % | 26.0 | % |
| Debt securities    |       | 33.8                                                                | %          | 26.0                                                  | %          | 57.0 | % | 57.0 | % |
| Real estate        |       | 0.0                                                                 | %          | 0.0                                                   | %          | 9.0 | % | 14.0 | % |
| Other              |       | 1.3                                                                 | %          | 0.3                                                   | %          | 1.0 | % | 3.0 | % |
| Total              |       | 100.0                                                               | %          | 100.0                                                 | %          | 100.0 | % | 100.0 | % |

 

The investment objectives of the company’s qualified pension plan aredesigned to generate returns that will enable the plan to meet its futureobligations. The precise amount for which these obligations will be settleddepends on future events, including the life expectancy of the plan’s membersand salary inflation. The obligations are estimated using actuarialassumptions, based on the current economic environment.

The pension plan seeks to achieve total returns both sufficient to meetexpected future obligations as well as returns greater than its policybenchmark reflecting the target weights of the asset classes used in itstargeted strategic asset allocation. The plan’s targeted strategic allocationto each asset class was determined through an Asset-Liability Modeling study toevaluate long-term asset-allocation strategy. This comprehensive study providesan evaluation of the projected status of asset and liability measures for theplan under a range of both positive and negative environments. The studyincludes a number of different asset mixes, spanning a range of diversificationand potential equity exposures.

In evaluating the strategic asset allocation choices, an emphasis isplaced on the long-term characteristics of each individual asset class, and thebenefits of diversification among multiple asset classes. Consideration is alsogiven to the proper long-term level of risk for the plan, particularly withrespect to the long-term nature of the plan’s liabilities, the impact of assetallocation on investment results, and the corresponding impact on thevolatility and magnitude of plan contributions and expense and the impactcertain actuarial techniques may have on the plan’s recognition of investmentexperience. The currently adopted strategic asset allocation targets for eachof the plans is displayed above.

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The company monitors investment performance and portfoliocharacteristics on a quarterly basis to ensure that managers are meetingexpectations with respect to their investment approach. With the exception ofsecurities issued by the U.S. Government and its agencies, no single issue isto comprise more than 5 percent of the portfolio’s value although index fundmanagers are exempt from the security weighting constraints. There are alsovarious restrictions and controls placed on managers including prohibition frominvesting in company stock.

The expected return on assets assumption is developed in conjunctionwith advisors and using the company’s asset model that reflects a combinationof rigorous historical analysis and the forward looking views of the financialmarkets as revealed through the yield on long-term bonds, the price earningsratios of the major stock market indices and long-term inflation. Amounts aretested for reasonableness against their historical averages. The actual returnon assets for the U.S. plan in fiscal year 2007 was 17.3 percent, compared to areturn of 9.4 percent in fiscal year 2006. The actual return on assets for theU.K. plan in fiscal year 2007 was 16.4 percent, compared to a return of 7.8percent in fiscal year 2006.

Benefit payments for our defined benefit pension plan, which reflectexpected future service, as appropriate, are expected to be paid as follows:
|                      | ** ** | **Benefit Payments** | ** ** |
|----------------------|------------|---------------------------|------------|
| **Fiscal Year** | ** ** | **North America**    | ** ** | **U.K.** | ** ** | **Total** | ** ** |
| 2008                 |       | $                         | 26,629     |   | $ | 5,422 |   | $ | 32,051 |   |
| 2009                 |       | 28,691                    |       | 5,823 |   | 34,514 |   |
| 2010                 |       | 30,731                    |       | 6,225 |   | 36,956 |   |
| 2011                 |       | 32,897                    |       | 6,627 |   | 39,524 |   |
| 2012                 |       | 34,691                    |       | 7,229 |   | 41,920 |   |
| Years 2013-2017      |       | 215,793                   |       | 45,986 |   | 261,779 |   |
|                 |       | $                         | 369,432    |   | $ | 77,312 |   | $ | 446,744 |   |

 

In fiscal year 2006, the rise in interest rates was the principalreason for the decrease in our accumulated benefit obligation, resulting inplan assets becoming greater than the accumulated benefit obligation for theU.S. pension plans. As a result, the company is no longer required to record aminimum pension liability. Elimination of the prior year’s minimum pensionliability resulted in a decrease in the pension liability of $103.7 million, areduction in the charge to Stockholders’ Equity of $61.3 million (reflected inaccumulated other comprehensive income) and a decrease in deferred tax assetsof $42.4 million as of June 30, 2006. Our Canadian non-qualified plan liabilityrecorded in the financial statements remained less than its accumulated benefitobligation, although the amount of the difference decreased in fiscal year2006, resulting in a decrease in the pension liability of $0.8 million, adecrease in intangible assets of $0.1 million, a reduction in the charge toStockholders’ Equity of $0.4 million (reflected in accumulated othercomprehensive income) and a decrease in deferred tax assets of $0.3 million. Thevalue of the assets held in the historical pension plan in the U.K. remainedbelow the accumulated benefit obligation, resulting in the accumulated benefitobligation remaining greater than the value of the plan assets for U.K.historical pension plan. Our historical U.K. plan currently has an additionalminimum pension liability recorded of $9.0 million at June 30, 2006. Our Canadianand Hong Kong qualified pension plan assets were greater than their associatedaccumulated benefit obligations as of June 30, 2006 and thus did not requirethe recording of additional minimum pension liabilities in either period.

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*Defined Contribution Plans*

We sponsor a savings plan that provides benefits to substantially allU.S. associates. The company provides a match to employee contributions at arate of 50% of the first 6% up to $60,000 of associates’ eligible compensation.The company will also make an annual profit sharing contribution to the plan inan amount that is dependant upon the company’s financial performance during thefiscal year. The company contributed $3.5 million, $3.4 million, and $3.0million in fiscal years 2007, 2006, and 2005 respectively.

We also sponsor a Canadian Separation Allowance Plan (CSAP) thatprovides retirement benefits to substantially all Canadian associates. The CSAPis an unfunded benefit plan; as such, the amounts due to associates arerecorded as a liability in the Consolidated Balance Sheets of the company. CSAPexpense for fiscal years 2007, 2006 and 2005 amounted to $0.2 million eachyear.

*Health Care Benefits*

We sponsor a contributory health care plan that provideshospitalization, medical and dental benefits to substantially all U.S.associates. We accrue a liability for estimated incurred but unreported claimsbased on projected use of the plan as well as prior plan history. The liabilitytotaled $1.8 million at June 30, 2007 and $2.3 million at June 30, 2006, and isincluded in accounts payable and accrued liabilities in the ConsolidatedBalance Sheets.

*Postretirement Benefits*

We provide certain health care and life insurance benefits for retiredassociates. The principal plans cover associates in the U.S. and Canada whohave met certain eligibility requirements. Our principal plans are unfunded.

Assumptions used in the valuation for the U.S. plan, which comprisesthe majority of the principal postretirement plans, included the following overthe past three fiscal years:
|                                                                       | ** ** | **Year Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                  |       |                                   |       |   |   |   |   |
| Health care cost trend, accumulated benefit obligation:               |       |                                   |       |   |   |   |   |
| Pre-65 benefits  (decreasing to 5.00% for 2010 and thereafter)        |       | 8.00                                   | %          | 9.00 | % | 10.00 | % |
| Post-65 benefits  (decreasing to 5.00% for 2010 and thereafter)       |       | 9.00                                   | %          | 9.00 | % | 10.00 | % |
| Discount  rate, accumulated benefit obligation postretirement benefit |       | 6.25                                   | %          | 6.25 | % | 5.25 | % |

 

Actuarial gains and losses associated with changing any of theassumptions are accumulated as part of the unrecognized net gain balance whichis amortized and included in the netperiodic postretirement costs over the average remaining service periodof participating employees, which is approximately 16 years.

83

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A one percentage point change in the assumed health care cost trendrates would have the following effect:
|                                                                              | ** ** | **1%  Increase** | ** ** | **1%  Decrease** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
|                                                                         |       |             |       |             |       |
| Effect on net periodic postretirement benefit cost in fiscal year 2007       |       | $                | 294        |             | $          | (190 | ) |
| Effect  on accumulated postretirement benefit obligation as of June 30, 2007 |       | 2,447            |       | (2,385           | )          |
|                                                                              |            |                  |            |                  |            |  |  |

 

Net periodic postretirement benefit cost consists of the followingcomponents reflected as expense in the company’s Consolidated Statements ofOperations:
|                                                 | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                                   |       |   |   |   |   |
| Service cost                                    |       | $                                      | 1,423      |   | $ | 1,703 |   | $ | 1,556 |   |
| Interest cost                                   |       | 2,646                                  |       | 2,334 |   | 2,414 |   |
| Amortization of transition obligation           |       | —                                 |       | — |   | 77 |   |
| Amortization of net unrecognized losses/(gains) |       | (395                                   | )          | 5 |   | (362 | ) |
| Amortization of prior service cost              |       | (661                                   | )          | (660 | ) | (659 | ) |
| Net periodic  postretirement benefit cost       |       | $                                      | 3,013      |   | $ | 3,382 |   | $ | 3,026 |   |

 

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The following table provides a reconciliation of the changes in thepostretirement plan projected benefit obligations and fair value of assets forthe years ended June 30, 2007and 2006 and a statement of funded status as ofJune 30, 2007and 2006:
|                                                                        | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                             | ** ** | **2007**          | ** ** | **2006** | ** ** |
| **Change  in Benefit Obligation**                                      | ** ** | ** **        | ** ** | ** ** | ** ** |
| Benefit obligation, beginning of year                                  |       | $                 | 43,596     |   | $ | 42,046 |   |
| Service cost                                                           |       | 1,423             |       | 1,703 |   |
| Interest cost                                                          |       | 2,646             |       | 2,334 |   |
| Participant contributions                                              |       | 1,887             |       | 1,613 |   |
| Actuarial losses/(gains)                                               |       | 38                |       | (1,710 | ) |
| Benefit payments                                                       |       | (3,551            | )          | (3,332 | ) |
| Other                                                                  |       | 1,535             |       | — |   |
| Foreign currency adjustment                                            |       | 638               |       | 942 |   |
| Benefit obligation, end of year                                        |       | $                 | 48,212     |   | $ | 43,596 |   |
|                                                                   |       |              |       |   |   |
| **Change  in Plan Assets**                                             | ** ** | ** **        | ** ** | ** ** | ** ** |
| Fair value of plan assets, beginning of year                           |       | $                 | —     |   | $ | — |   |
| Company contributions                                                  |       | 1,664             |       | 1,719 |   |
| Participant contributions                                              |       | 1,887             |       | 1,613 |   |
| Benefit payments                                                       |       | (3,551            | )          | (3,332 | ) |
| Fair value of plan assets, end of year                                 |       | $                 | —     |   | $ | — |   |
|                                                                   |       |              |       |   |   |
| **Reconciliation  of Accrued Obligation and Total Amounts Recognized** |       |              |       |   |   |
| Funded status at end of year                                           |       | $                 | (48,212    | ) | $ | (43,596 | ) |
| Unrecognized prior service cost                                        |       | —            |       | (5,506 | ) |
| Unrecognized net gain                                                  |       | —            |       | (7,874 | ) |
| Unrecognized transition obligation                                     |       | —            |       | — |   |
| **Net Accrued Postretirement Liability**                               |       | $                 | (48,212    | ) | $ | (56,976 | ) |
| Reduction of accrued benefit liability                                 |       | 10,622            |       | — |   |
| Accumulated other comprehensive income                                 |       | (10,622           | )          | — |   |
| **Net  Accrued Postretirement Liability**                              |       | $                 | (48,212    | ) | $ | (56,976 | ) |

In fiscal year 2006, the unrecognized prior service cost represents thecumulative prior service costs and benefits from amendments to thepostretirement plan which has not yet been recognized in the financialstatements. Previous amendments are being amortized and included in the netperiodic postretirement benefit costs over the average remaining service periodof participating employees, which is approximately eight years. The companyadopted SFAS 158 for fiscal year ending 2007 which required the recognition ofthe funded status of each of the defined benefit pension plans thereforeeliminating unrecognized differences.

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The following benefit payments for our postretirement plan, whichreflect expected future service, as appropriate, are expected to be paid:

| Fiscal  Year    | ** ** | **Benefit  Payments** | ** ** |
|-----------------|------------|-----------------------|------------|
|            |       |                  |       |
| 2008            |       | $                     | 2,957      |   |
| 2009            |       | 3,019                 |       |
| 2010            |       | 3,122                 |       |
| 2011            |       | 3,217                 |       |
| 2012            |       | 3,334                 |       |
| Years 2013-2017 |       | 17,621                |       |
|            |       | $                     | 33,270     |   |

 

Based on the Financial Accounting Standards Board Staff Position No.106-2 “Accounting and Disclosure Requirements Related to the MedicarePrescription Drug Improvement and Modernization Act of 2003” (FAS 106-2), plansmeeting the definition of actuarial equivalence can begin to reflect drugsubsidies that will be provided in 2006 under Medicare (Part D). Theliabilities determined as of June 30, 2007 and 2006 for disclosure purposesreflect these changes. The adoption of FAS 106-2 did not have a material effecton liabilities above.

**Note 7- Accounts Payable and Accrued Liabilities, Including DiscretionaryCompensation**

Accounts payable and accrued liabilities consist of:
|                                                                                                      | ** ** | **June 30** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                           | ** ** | **2007**         | ** ** | **2006** | ** ** |
|                                                                                                 |       |             |       |   |   |
| Accounts payable and accrued liabilities                                                             |       | $                | 63,052     |   | $ | 88,157 |   |
| Accrued salaries and bonuses                                                                         |       | 149,424          |       | 116,633 |   |
| Current portion of defined benefit retirement plans and postretirement  benefits other than pensions |       | 9,826            |       | 13,299 |   |
| Accrued vacation                                                                                     |       | 28,147           |       | 25,095 |   |
| Advance billings deferred revenue                                                                    |       | 49,754           |       | 42,053 |   |
| Dividends payable                                                                                    |       | 3,143            |       | 3,159 |   |
| Total  accounts payable and accrued liabilities                                                      |       | $                | 303,346    |   | $ | 288,396 |   |

 

**Note 8 - Leases**

We lease office space, furniture and selected computer equipment underoperating lease agreements with terms generally ranging from one to ten years. Wehave entered into sublease agreements for some of our excess leased space. Rentalexpense was $81.8 million, $74.8 million, and $51.8 million for fiscal years2007, 2006 and 2005, respectively, inclusive of operating expenses related tosuch space and equipment. Sublease income was $1.1 million and $0.7 million forfiscal years 2007 and 2006. There was no sublease income in fiscal year 2005.

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Future minimum lease payments for Watson Wyatt’s operating leasecommitments net of anticipated cash inflows for sublease income are:

| Fiscal     | ** ** | **Lease**       | ** ** |
|------------|------------|-----------------|------------|
| **Year**   | ** ** | **Commitments** | ** ** |
|       |       |            |       |
| 2008       |       | $               | 47,677     |   |
| 2009       |       | 44,229          |       |
| 2010       |       | 38,853          |       |
| 2011       |       | 35,774          |       |
| 2012       |       | 31,669          |       |
| Thereafter |       | 93,899          |       |
| Total      |       | $               | 292,101    |   |

 

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

**Note 9 - 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 this facilityvary with LIBOR and/or the Prime Rate and are based on our leverage ratio, asdefined by the credit agreement. We are charged a quarterly commitment fee,currently 0.125 percent of the facility, which varies with our financialleverage and is paid on the unused portion of the credit facility. On June 29,2007, the company accessed $105 million under its credit facility inanticipation of closing the Heissmann Acquisition. As of June 30, 2007 and2006, the company had $105 million and $30 million, respectively, outstandingunder the facility. Credit under the facility is available upon demand,although the credit facility requires us to observe certain covenants(including requirements for minimum net worth, which potentially act torestrict dividends, cash flow leverage ratio and a fixed coverage charge) andis collateralized with a pledge of stock of material subsidiaries. We were incompliance with all covenants under the credit facility as of June 30, 2007.This facility is scheduled to mature on June 30, 2010. See Note 19 foradditional information related to the Heissmann Acquisition.

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 facility wasunavailable for operating needs as of June 30, 2007. We are also charged a feefor outstanding letters of credit that also fluctuates based on our leverageratio.

Thecompany has also provided a $5.0 million Australian dollar-denomoninated letterof credit (US $4.2 million) to an Australian governmental agency as required bythe local regulations. The estimated fair market value of these letters ofcredit is immaterial because they have never been used, and the companybelieves that future usage is remote.

**Note 10 - Employee Stock Plans and Equity**

*Share-basedCompensation Plans*

Thecompany has four share-based compensation plans, which are described below. Thesecompensation plans include the 2001 Employee Stock Purchase Plan, 2001 DeferredStock Unit Plan for Selected Employees, Amended Compensation Plan for OutsideDirectors and the 2000 Long-Term Incentive Plan. All four plans have beenapproved by stockholders.

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*2001 Employee Stock Purchase Plan*

The 2001 Employee Stock Purchase Plan (the “Stock Purchase Plan”) wasapproved at the annual stockholders’ meeting in November 2001. Full-time andregular part-time employees are eligible to participate in the Stock PurchasePlan through payroll deductions of up to 10 percent of each participant’scompensation, subject to certain restrictions. Offering periods are heldmonthly. Shares of common stock acquired pursuant to the Stock Purchase Planmay not be disposed of by the participant for at least three months followingthe date of purchase.

Certain provisions of the Stock Purchase Plan were revised by the Boardof Directors in February 2005. Prior to these changes, under the plan, offeringperiods were held every three months beginning each November 1, February 1, May1 and August 1. The purchase price for shares of common stock purchased duringoffering periods was 85 percent of the lower of the fair market value of commonstock on the beginning or ending date of each offering period. Subsequent tochanges approved by the Board of Directors, offering periods are now held monthly.Additionally, the purchase price for shares is now calculated as 95 percent ofthe fair market value of common stock as of the ending date of each offeringperiod.

As a result of the changes to the Stock Purchase Plan discussed above,the company was not required to recognize compensation expense due to the awardof shares under the Stock Purchase Plan during fiscal year 2007 or 2006. Duringfiscal year 2005, the company disclosed pro forma compensation cost resultingfrom the 15% discount, which approximated fair value. Approximately 150,000shares, 200,000 shares and 350,000 shares were issued under this plan duringfiscal year 2007, 2006 and 2005 respectively.

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

Deferred Stock Units - In November 2001, the 2001 Deferred Stock Unit Plan for SelectedEmployees (the “Stock Unit Plan”) was approved at the annual meeting ofstockholders. The Stock Unit Plan is intended to provide senior associates ofthe company with additional incentives by permitting the company to grant theman equity interest in the company in the form of deferred stock units, in lieuof a portion of their annual fiscal year end bonus, typically paid in Septemberof each year. Each stock unit represents one share of common stock at themarket price on the date of grant. The total number of shares authorized forissuance in payment of deferred stock units under the Stock Unit Plan is2,700,000 shares.

Deferred stock units have been granted annually since September 2002and have vested immediately in each year. Vesting of future awards is at thediscretion of the company, with such determination being made prior to issuanceof the deferred stock units.

During fiscal year 2007, 300,552 shares of common stock, at an averagemarket price of $40.48, were awarded for a total fair value of $12.4 million.During fiscal year 2006, approximately 181,000 shares of common stock, at amarket price of $29.14 were awarded for a total fair value of $5.3 million. Infiscal year 2005, 151,610 shares of common stock, at a market price of $26.68were awarded, for a total fair value of $4.0 million.

SBI Program - On November19, 2004, the company’s Board of Directors approved a long-term bonusarrangement pursuant to the company’s 2001 Deferred Stock Unit Plan forSelected Employees.  The arrangement, called the Performance Share BonusIncentive Program (the “SBI Program”), is a long-term stock bonus arrangementfor senior executives of the company and its affiliates that is designed tostrengthen incentives and align behaviors to grow the business in a way that isconsistent with the strategic goals of the company.

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Incentives under the SBIProgram are provided through grants of deferred stock units pursuant to thecompany’s 2001 Deferred Stock Unit Plan for Selected Employees.  Grants ofdeferred stock units are based 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 fiscal year-end prior to grant.  Participants mayvest between zero and 170% of the target number of deferred stock units basedon the extent to which financial and strategic performance metrics are achievedover a three fiscal year period.  The financial and strategic performancemetrics are established at the beginning of each performance period.  Forthe fiscal years 2005 through 2007 performance period, the vesting criteria arebased upon earnings per share growth and the change in market penetration andcross-selling ratios. For the fiscal year 2006 through 2008 and the 2007through 2009 performance periods, the vesting criteria are based upon growth inearnings per share and revenue.

Compensationexpenses of $3.8 million and $1.4 million was recorded pursuant to this planduring fiscal year 2007 and 2006, respectively. Expenses for this plan arerecognized when awards are both probable and reasonably estimable. Thecompensation expense associated with these plans is recognized as a componentof salaries and employee benefits.

The table below presents share activity and weighted average fairvalues for fiscal year 2007:
|                             | ** ** | **Number of**       | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|--------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **Shares**               | ** ** | **Fair Value**       | ** ** |
| ** **                  | ** ** | **(in 000’s)** | ** ** | ** **                | ** ** |
|                        |       |                     |       |                      |       |
| Nonvested at  June 30, 2006 |       | 287                      |       | $                         | 26.08      |   |
| Granted                     |       | 117                      |       | 35.14                     |       |
| Vested                      |       | (126                     | )          | 26.65                     |       |
| Forfeited                   |       | —                   |       | —                    |       |
|                        |       |                     |       |                      |       |
| Nonvested at June 30,  2007 |       | 278                      |       | $                         | 29.64      |   |

 

##### The weighted average grant date fair value of shares granted duringfiscal year 2007, 2006 and 2005 were $4.1 million, $4.1 million and $3.4million, respectively. No shares vested during 2006 or 2005.

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

In November 2001, the Board of Directors approvedthe Amended Compensation Plan for Outside Directors (the “Outside Director’sPlan”) which provides for the cash and stock compensation of outside Directors.Under the Outside Director’s Plan, outside Directors are initially paid inshares of the company’s common stock, or in a combination of cash and shares,quarterly, at the completed quarter-end share price (which approximates fairvalue), for services provided during the preceding quarter. The total number ofshares reserved for issuance under the Outside Director’s Plan is 150,000.

During fiscal year 2007, 10,000 shares of common stock were awarded fora total fair value of $0.3 million. During fiscal year 2006, 14,000 shares ofcommon stock were awarded for a total fair value of $0.4 million. In fiscalyear 2005, 8,000 shares of common stock were awarded for a total fair value of$0.2 million.

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

In June 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 totalnumber of shares of common stock awards that may be granted under the Stock OptionPlan is 4,500,000 shares.

The stock option agreements have a seven-year life and vest 20 percentat each option anniversary date over a five-year period. All options under theStock Option Plan were granted with an exercise price equal to the stock’s fairmarket value on the date of grant. Generally, the number of options granted toassociates was based on a percentage of annual compensation. The company doesnot currently intend to issue further stock options under the Stock OptionPlan.

For the Stock Option Plan, the Company uses the Black-Scholes optionvaluation model to calculate the fair value of options granted. Using theBlack-Scholes model, the weighted average fair value of options granted duringfiscal year 2002 was $8.00 per option, and $5.26 per option for fiscal year2001. The following assumptions were used in the calculation:
|                          | ** ** | **Fiscal year** | ** ** |
|--------------------------|------------|----------------------|------------|
| ** **               | ** ** | **2002**             | ** ** | **2001** | ** ** |
| Expected  dividend yield |       | 0                    | %          | 0 | % |
| Volatility               |       | 40                   | %          | 40 | % |
| Risk free  interest rate |       | 4.12                 | %          | 5.79 | % |
| Expected life            |       | 4 years              |       | 4 years |   |

 

As discussed above, during fiscal year 2005, the company elected tofollow APB 25 in accounting for its Stock Option Plan, in accordance with FAS123. As a result, in fiscal year 2005 the company disclosed pro formacompensation cost of $0.9 million related to nonqualified stock options. Compensationexpense of $0.1 million and $0.3 million was recorded pursuant to the StockOption Plan for fiscal year 2007 and 2006, respectively.

The table below presents stock option activity and weighted averageexercise prices for fiscal year 2007:
| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Average  Remaining  Contractual  Life (years)** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                            | ** ** | **(in 000’s)**   | ** ** | ** **                             | ** ** | ** **                                             | ** ** |
| ** **                            | ** ** | ** **                 | ** ** | ** **                             | ** ** | ** **                                             | ** ** |
| Outstanding at  June 30, 2006         |       | 544                        |       | $                                      | 13.65      |                                                   |       |   |
| Granted                               |       | —                     |       | —                                 |       |                                                   |       |
| Exercised                             |       | (283                       | )          | 13.12                                  |       |                                                   |       |
| Forfeited                             |       | (34                        | )          | 13.35                                  |       |                                                   |       |
| Expired                               |       | —                     |       | —                                 |       |                                                   |       |
|                                  |       |                       |       |                                   |       |                                                   |       |
| Outstanding at  June 30, 2007         |       | 227                        |       | $                                      | 14.14      |                                                   | 0.4        |   |
| Exercisable Options at  June 30, 2007 |       | 227                        |       |                                   |       | 0.4                                                    |       |

 

The total fair value of options vested during fiscal year 2007 and 2006was less than $100,000 in fiscal year 2007 and $1.0 million in fiscal year2006. Cash received from the exercise of nonqualifed stock options for fiscalyear 2007 was $3.7 million.

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**Note 11 - Goodwill and Intangible Assets**

The increases in goodwill and intangible assets outlined below for thefiscal year ended June 30, 2007 are principally attributable to the WWNbusiness acquisition during the third quarter. See Note 2 for further details regarding our business combinations.  The carrying amount of goodwill for thefiscal years ended June 30, 2007 and 2006, 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,  2006                               |       | $                   | 167,538    |                                                  | $          | 43,168                    |       | $                                 | 18,990     |                                                 | $          | 38,780             |       | $          | 54,351     |   | $ | 1,214 |   | $ | 324,041 |   |
| Goodwill acquired  during the year and contingent payments |       | 28,003              |       | —                                                |       | 2,198                     |       | 2,808                             |       | —                                               |       | —             |       | 33,009     |       |
| Impairment losses                                          |       | —              |       | —                                                |       | —                    |       | —                            |       | —                                               |       | —             |       | —     |       |
| Translation adjustment                                     |       | 12,912              |       | 3,494                                                 |       | 1,617                     |       | 3,309                             |       | 4,554                                                |       | —             |       | 25,886     |       |
| Balance as of June 30, 2007                                |       | $                   | 208,453    |                                                  | $          | 46,662                    |       | $                                 | 22,805     |                                                 | $          | 44,897             |       | $          | 58,905     |   | $ | 1,214 |   | $ | 382,936 |   |

 

The following table reflects changes in the net carrying amount of thecomponents of intangible assets for the fiscal years ended June 30, 2007 and2006:
| ** **                                  | ** ** | **Trademark  & trade  name** | ** ** | **Customer  related  intangible** | ** ** | **Core/developed  technology** | ** ** | **Non-compete  agreements** | ** ** | **Pension** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|-----------------------------|------------|-------------|------------|-----------|------------|
| Balance as of June 30,  2006                |       | $                                     | 112,966    |                              | $          | 58,546                         |       | $                           | 14,973     |        | $          | 21        |       | $ | 569 |   | $ | 187,075 |   |
| Intangible assets  acquired during the year |       | —                                |       | 18,671                            |       | —                         |       | 596                         |       | —      |       | 19,267    |       |
| Reversal of additional  minimum liability   |       | —                                |       | —                            |       | —                         |       | —                      |       | (569        | )(1)       | (569      | )          |
| Amortization expense                        |       |                                  |       | (6,176                            | )          | (3,864                         | )          | (105                        | )          | —      |       | (10,145   | )          |
| Translation adjustment                      |       | 9,700                                 |       | 5,229                             |       | 1,147                          |       | 11                          |       | —      |       | 16,087    |       |
| Balance as of June 30, 2007                 |       | $                                     | 122,666    |                              | $          | 76,270                         |       | $                           | 12,256     |        | $          | 523       |       | $ | — |   | $ | 211,715 |   |

 

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(1) Reversal based on adoption of FAS 158.

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The following table reflects the carrying value of intangible assets atJune 30, 2007 and 2006:
| ** **                                            | ** ** | **Fiscal year 2007** | ** ** | **Fiscal year 2006** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **Gross  Carrying  Amount**    | ** ** | **Accumulated  Amortization**  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible  assets and intangible pension assets:     |       |                           |       |                           |       |   |   |   |   |
| Trademark & trade  name                           |       | $                              | 122,666    |                           | $          | — |   | $ | 112,966 |   | $ | — |   |
| Customer related  intangibles                         |       | 85,064                         |       | 8,794                          |       | 64,210 |   | 5,664 |   |
| Core/developed  technology                            |       | 17,935                         |       | 5,679                          |       | 18,443 |   | 3,470 |   |
| Non-compete                                           |       | 1,028                          |       | 505                            |       | 672 |   | 651 |   |
| Intangible pension  asset                             |       | —                         |       | —                         |       | 569 |   | — |   |
| Total intangible  assets and intangible pension asset |       | $                              | 226,693    |                           | $          | 14,978 |   | $ | 196,860 |   | $ | 9,785 |   |

 

A component of the changein the gross carrying amount of trademark & trade name, customer relatedintangibles, core/developed technology and the intangible pension assetreflects foreign currency translation adjustments between June 30, 2006 andJune 30, 2007.  These intangible assetsare denominated in the currencies of our subsidiaries outside the United States,and are translated into our reporting currency, the U.S. dollar, based onexchange rates at the balance sheet date.

The company amortizes itsintangible assets using the straight-line method over their estimated usefullives as follows: customer related intangibles, 12years; core/developed technology, 5 years; non-competeagreements, 3 years.  Certain trade-mark and trade-name intangiblespurchased as part of the WWLLP combination in fiscal year 2005 haveindefinite useful lives and are not amortized.

The weighted average remaining life of amortizable intangible assets atJune 30, 2007, was 9.4 years.  Futureestimated amortization expense is as follows:

| Fiscal year ending June 30 | ** ** | **Amount** | ** ** |
|------------------------------------------------|------------|------------|------------|
| 2008                                           |       | $          | 11,505     |   |
| 2009                                           |       | 11,505     |       |
| 2010                                           |       | 11,420     |       |
| 2011                                           |       | 7,658      |       |
| 2012                                           |       | 7,326      |       |
| Thereafter                                     |       | 39,635     |       |
| Total estimated  amortization expense          |       | $          | 89,049     |   |

 

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**Note 12 - Income Taxes**

The components of the income tax provision for continuing operationsinclude:
|                                   | ** ** | **Year Ended June 30** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                              |       |                                  |       |   |   |   |   |
| Current tax (benefit) expense:    |       |                                  |       |   |   |   |   |
| U.S.                              |       | $                                     | 40,485     |   | $ | (1,112 | ) | $ | 21,917 |   |
| State and local                   |       | 5,439                                 |       | 1,402 |   | 4,221 |   |
| Foreign                           |       | 17,352                                |       | 12,371 |   | 7,587 |   |
|                              |       | 63,276                                |       | 12,661 |   | 33,725 |   |
| Deferred tax (benefit) expense:   |       |                                  |       |   |   |   |   |
| U.S.                              |       | (10,585                               | )          | 23,297 |   | (1,151 | ) |
| State and local                   |       | (835                                  | )          | 5,166 |   | (156 | ) |
| Foreign                           |       | 8,337                                 |       | 4,461 |   | (1,115 | ) |
|                              |       | (3,083                                | )          | 32,924 |   | (2,422 | ) |
| Total  provision for income taxes |       | $                                     | 60,193     |   | $ | 45,585 |   | $ | 31,303 |   |

 

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. Prior periodamounts have been reclassified to conform to the current classification.

Deferredincome tax assets (liabilities) included in the Consolidated Balance Sheets atJune 30, 2007, and June 30, 2006, are comprised of the following:
|                                          | ** ** | **June 30** | ** ** |
|------------------------------------------|------------|------------------|------------|
| ** **                               | ** ** | **2007**         | ** ** | **2006** | ** ** |
|                                     |       |             |       |   |   |
| Prepaid                                  |       | $                | (1,422     | ) | $ | (1,339 | ) |
| Depreciation and amortization            |       | (31,103          | )          | (16,462 | ) |
| Goodwill                                 |       | (6,926           | )          | (4,268 | ) |
| Change in accounting method              |       | —           |       | (40 | ) |
| Other                                    |       | (4,905           | )          | (1,673 | ) |
| Gross deferred tax liabilities           |       | (44,356          | )          | (23,782 | ) |
|                                     |       |             |       |   |   |
| Accrued retirement benefits              |       | 61,098           |       | 63,789 |   |
| Deferred rent                            |       | 6,924            |       | 5,488 |   |
| Other                                    |       | 7,762            |       | 9,317 |   |
| Foreign net operating loss carryforwards |       | 9,084            |       | 17,990 |   |
| Share based compensation                 |       | 1,433            |       | 123 |   |
| Accrued liability                        |       | 20,135           |       | 15,335 |   |
| Capitalized expenditure                  |       | 866              |       | 941 |   |
| Accrued compensation                     |       | 7,966            |       | 475 |   |
| Deferred revenue                         |       | 17,046           |       | 4,501 |   |
| Gross deferred tax assets                |       | 132,314          |       | 117,959 |   |
| Deferred tax assets valuation allowance  |       | (9,826           | )          | (23,841 | ) |
| Net  deferred tax asset                  |       | $                | 78,132     |   | $ | 70,336 |   |

 

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At June 30, 2007, we had unused loss carryforwards for tax purposes invarious jurisdictions outside the U.S. amounting to $48.9 million of which$38.4 million can be indefinitely carried forward under local statutes.  The remaining foreign loss carryforwards willexpire, if unused, in varying amounts from 2008 through 2014.  The valuation allowance includes the taxeffect of foreign net operating loss carryforwards of $9.1 million and the taxeffect of certain foreign temporary expenses of $0.7 million.

The company maintains a valuation allowance of $9.8 million and $23.8million at June 30, 2007 and 2006, respectively, against certain of itsdeferred tax assets, as it is more likely than not that they will not be fullyrealized. The principal components of the deferred tax assets for which avaluation allowance has been established include certain foreign country net operating loss carry-forwards anddeferred foreign expenses.

The net change in the valuation allowance of $14.0 million in fiscalyear 2007 and $1.1 million in fiscal year 2006 is due to the release ofvaluation allowance in foreign jurisdictions, the tax effect of the change inforeign net operating losses and deferred foreign expense, and thereclassification of deferred tax assets for foreign branches.

The domestic and foreign components of income from continuingoperations before income taxes for each of the three years ended June 30 are asfollows:
|          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------|------------|----------|------------|----------|------------|----------|------------|
|     |       |     |       |     |       |     |       |
| Domestic |       | $        | 97,241     |     | $          | 73,672   |       | $ | 69,003 |   |
| Foreign  |       | 79,229   |       | 58,031   |       | 13,696   |       |
|     |       |     |       |     |       |     |       |
|     |       | $        | 176,470    |     | $          | 131,703  |       | $ | 82,699 |   |

 

The company has not provided U.S. deferred taxes on cumulative earningsof foreign subsidiaries that have been reinvested indefinitely.  These earnings relate to ongoing operationsand at June 30, 2007 were approximately $153 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 reinvestedindefinitely.  Deferred taxes have beenprovided for the portion of earnings of foreign subsidiaries which the companyplans to remit.  If future events, includingmaterial changes in estimates of cash, working capital and long-term investmentrequirements, necessitate that these earnings be distributed, an additionalprovision for withholding taxes may apply, which could materially affect ourfuture effective tax rate.

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The reported income tax provision differs from the amounts that wouldhave resulted had the reported income before income taxes been taxed at theU.S. federal statutory rate.  Theprincipal reasons for the differences between the amounts provided and thosethat would have resulted from the application of the U.S. federal statutory taxrate are as follows:
| ** **                                                     | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                           |       |                                  |       |   |   |   |   |
| Tax provision at U.S. federal statutory tax rate of 35 percent |       | $                                     | 61,764     |   | $ | 46,096 |   | $ | 28,944 |   |
| Increase (reduction) resulting from:                           |       |                                  |       |   |   |   |   |
| Foreign income tax rate differential,  net                     |       | (5,678                                | )          | (5,974 | ) | 1,110 |   |
| State income taxes, net of  federal tax effect                 |       | 4,604                                 |       | 4,720 |   | 1,787 |   |
| Non-deductible expenses                                        |       | 5,999                                 |       | 6,205 |   | (782 | ) |
| Tax credits                                                    |       | (8,338                                | )          | (2,812 | ) | (443 | ) |
| Other                                                          |       | 1,842                                 |       | (2,650 | ) | 687 |   |
|                                                           |       |                                  |       |   |   |   |   |
| Income  tax provision                                          |       | $                                     | 60,193     |   | $ | 45,585 |   | $ | 31,303 |   |

 

**Note 13 - Segment Information**

Watson Wyatt isorganized and managed through a matrix form of organization. Beginning fiscalyear 2007, the Asia-Pacific and Latin America operations have been reported ona practice basis and are included in our operating segments listed below. Wenow have five reportable operating segments or practice areas as follows:
| (1) |   | Benefits Group                                |
|-----|--------|-----------------------------------------------|
| (2) |   | Technology and Administration Solutions Group |
| (3) |   | Human Capital 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. The category previously reported as “other” has been reclassified as “Allother segments” in the reconciliation of reportable segments to consolidatedamounts as prescribed in Statement of Financial Accounting Standards No. 131 “Disclosuresabout Segments of an Enterprise and Related Information”, (FAS 131).  This includes communication and changemanagement implementation support services. Prior period amounts have been reclassified to conform to the currentclassification.

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The table below presentsspecified information about reported segments as of and for the year ended June30, 2007:
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance &  Financial  Services Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|----------------------------------------------------------|------------|-----------|------------|
| Revenue (net of reimbursable  expenses) |       | $                   | 820,806    |                                                      | $          | 157,516                   |       | $                                 | 169,845    |                                                     | $          | 128,720   |       | $ | 113,676 |   | $ | 1,390,563 |   |
| Net operating income                    |       | 222,021             |       | 36,663                                                    |       | 24,052                    |       | 39,269                            |       | 18,985                                                   |       | 340,990   |       |
| Interest expense                        |       | 3,352               |       | 425                                                       |       | 506                       |       | 369                               |       | 555                                                      |       | 5,207     |       |
| Depreciation  & Amortization        |       | 11,118              |       | 14,108                                                    |       | 2,695                     |       | 830                               |       | 796                                                      |       | 29,547    |       |
| Receivables                             |       | 228,284             |       | 15,616                                                    |       | 40,516                    |       | 27,427                            |       | 31,959                                                   |       | 343,802   |       |
|                                         |            |                     |            |                                                           |            |                           |            |                                   |            |                                                          |            |           |            |  |  |  |  |  |  |

 

The table below presentsspecified information about reported segments as of and for the year ended June30, 2006. As a result, it includes the consolidated results from the acquiredbusinesses since July 31, 2005, as now held by Watson Wyatt Limited:
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance &  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|-----------|------------|
| Revenue (net of reimbursable  expenses) |       | $                   | 725,630    |                                                      | $          | 132,805                   |       | $                                 | 146,111    |                                                 | $          | 86,462    |       | $ | 91,987 |   | $ | 1,182,995 |   |
| Net operating income                    |       | 186,463             |       | 31,539                                                    |       | 12,796                    |       | 12,622                            |       | 18,161                                               |       | 261,581   |       |
| Interest expense                        |       | 2,618               |       | 321                                                       |       | 559                       |       | 198                               |       | 252                                                  |       | 3,948     |       |
| Depreciation  & Amortization        |       | 13,267              |       | 9,615                                                     |       | 2,848                     |       | 1,578                             |       | 1,413                                                |       | 28,721    |       |
| Receivables                             |       | 194,014             |       | 16,709                                                    |       | 37,355                    |       | 19,088                            |       | 26,992                                               |       | 294,158   |       |
|                                         |            |                     |            |                                                           |            |                           |            |                                   |            |                                                      |            |           |            |  |  |  |  |  |  |

 

The table below presentsspecified information about reported segments as of and for the year ended June30, 2005.  As a result, it does notinclude results from Watson Wyatt Limited since the combination was notcompleted until July 31, 2005:
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance &  Financial  Services Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|----------------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 459,186    |                                                  | $          | 67,941                    |       | $                                 | 89,864     |                                                     | $          | 30,307    |       | $ | — |   | $ | 647,298 |   |
| Net operating  income                   |       | 105,281             |       | 7,429                                                 |       | 11,888                    |       | 2,411                             |       | —                                                   |       | 127,009   |       |
| Interest expense                        |       | 1,008               |       | 137                                                   |       | 110                       |       | 62                                |       | —                                                   |       | 1,317     |       |
| Depreciation  & Amortization        |       | 9,434               |       | 1,830                                                 |       | 2,072                     |       | 731                               |       | —                                                   |       | 14,067    |       |
| Receivables                             |       | 114,292             |       | 5,345                                                 |       | 20,602                    |       | 6,470                             |       | —                                                   |       | 146,709   |       |
|                                         |            |                     |            |                                                       |            |                           |            |                                   |            |                                                          |            |           |            |  |  |  |  |  |  |

 

96

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A reconciliation of the information reported bysegment to the consolidated amounts follows for the years ended June 30 (inthousands):
| ** **                                                                                       | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                       | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                             |       |                                   |       |   |   |   |   |
| *Revenue:*                                                                                       | * *   | * *                               | * *   | * * | * * | * * | * * |
| Total segment revenue                                                                            |       | $                                      | 1,390,563  |   | $ | 1,182,995 |   | $ | 647,298 |   |
| Reimbursable expenses not included in segment revenue                                            |       | 58,164                                 |       | 51,925 |   | 37,941 |   |
| All other segments                                                                               |       | 41,104                                 |       | 40,431 |   | 46,520 |   |
| Other, net                                                                                       |       | (3,308                                 | )          | (3,540 | ) | 5,662 |   |
| Consolidated revenue                                                                             |       | $                                      | 1,486,523  |   | $ | 1,271,811 |   | $ | 737,421 |   |
|                                                                                             |       |                                   |       |   |   |   |   |
| *Net Operating Income:*                                                                          | * *   | * *                               | * *   | * * | * * | * * | * * |
| Total segment income                                                                             |       | $                                      | 340,990    |   | $ | 261,581 |   | $ | 127,009 |   |
| Income from affiliates                                                                           |       | (5,500                                 | )          | 1,135 |   | 7,146 |   |
| Differences in allocation methods for depreciation, G&A, pension  and medical costs (1) |       | (9,422                                 | )          | (4,694 | ) | 3,538 |   |
| Interest Expense                                                                                 |       | (1,581                                 | )          | (4,093 | ) | (661 | ) |
| Loss on hedge                                                                                    |       | —                                 |       | (3,602 | ) | (4,807 | ) |
| Other non-operating income/(loss)                                                                |       | 178                                    |       | 1,521 |   | (2,597 | ) |
| Discretionary bonuses                                                                            |       | (139,433                               | )          | (108,671 | ) | (47,403 | ) |
| All other segments                                                                               |       | (6,108                                 | )          | (5,321 | ) | 4,428 |   |
| Other, net                                                                                       |       | (2,656                                 | )          | (6,153 | ) | (3,954 | ) |
|                                                                                             |       |                                   |       |   |   |   |   |
| Income from Continuing Operations Before Income Taxes                                            |       | $                                      | 176,468    |   | $ | 131,703 |   | $ | 82,699 |   |
|                                                                                             |       |                                   |       |   |   |   |   |
| *Interest Expense:*                                                                              | * *   | * *                               | * *   | * * | * * | * * | * * |
| Total segment expense                                                                            |       | $                                      | 5,207      |   | $ | 3,948 |   | $ | 1,317 |   |
| All other segments                                                                               |       | 138                                    |       | 104 |   | 61 |   |
| Differences in allocation method                                                                 |       | (3,764                                 | )          | 41 |   | (718 | ) |
| Consolidated interest expense                                                                    |       | $                                      | 1,581      |   | $ | 4,093 |   | $ | 660 |   |
|                                                                                             |       |                                   |       |   |   |   |   |
| *Depreciation & Amortization:*                                                               | * *   | * *                               | * *   | * * | * * | * * | * * |
| Total segment expense                                                                            |       | $                                      | 29,547     |   | $ | 28,721 |   | $ | 14,067 |   |
| All other segments                                                                               |       | 8,757                                  |       | 2,631 |   | 2,704 |   |
| Intangible asset amortization, not allocated to segments                                         |       | 10,145                                 |       | 8,155 |   | 311 |   |
| Differences in allocation method and other                                                       |       | 8,786                                  |       | 5,411 |   | 3,128 |   |
| Consolidated depreciation and amortization expense                                               |       | $                                      | 57,235     |   | $ | 44,918 |   | $ | 20,210 |   |
|                                                                                             |       |                                   |       |   |   |   |   |
| *Receivables:*                                                                                   | * *   | * *                               | * *   | * * | * * | * * | * * |
| Total segment receivables                                                                        |       | $                                      | 343,802    |   | $ | 294,158 |   | $ | 146,709 |   |
| All other segments                                                                               |       | 6,689                                  |       | 5,030 |   | 6,407 |   |
| Net valuation differences (2)                                                                    |       | (13,664                                | )          | 4,389 |   | 5,701 |   |
| Total billed and unbilled receivables                                                            |       | 336,827                                |       | 303,577 |   | 158,817 |   |
| Assets not reported by segment                                                                   |       | 1,192,882                              |       | 936,782 |   | 459,862 |   |
| Consolidated  assets                                                                             |       | $                                      | 1,529,709  |   | $ | 1,240,359 |   | $ | 618,679 |   |

 

97

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(1)Depreciation, general and administrative, pension, and medical costs areallocated to our segments based on budgeted expenses determined at thebeginning of the fiscal year as management believes that these costs arelargely uncontrollable to the segment. To the extent that the actual expense base upon which allocations aremade differs from the forecast/budget amount, a reconciling item will becreated between internally allocated expenses and the actual expense that wereport for GAAP purposes.

(2) Total segment receivables, which reflect the receivable balancesused by management to make business decisions, are included for managementreporting purposes net of deferred revenues.

The following represents total revenue andlong-lived assets information by geographic area as of and for the years endedJune 30:
| ** **     | ** ** | **Revenue** | ** ** | **Long-lived Assets** | ** ** |
|----------------|------------|-------------|------------|----------------------------|------------|
| ** **     | ** ** | **2007**    | ** ** | **2006**                   | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|           |       |        |       |                       |       |   |   |   |   |   |   |   |   |
| United States  |       | $           | 707,784    |                       | $          | 649,109 |   | $ | 587,670 |   | $ | 174,369 |   | $ | 153,278 |   | $ | 112,424 |   |
| United Kingdom |       | 468,142     |       | 345,732                    |       | — |   | 617,816 |   | 493,942 |   | 21,816 |   |
| Rest of World  |       | 310,597     |       | 276,970                    |       | 149,751 |   | 34,009 |   | 29,075 |   | 27,314 |   |
|           |       | $           | 1,486,523  |                       | $          | 1,271,811 |   | $ | 737,421 |   | $ | 826,194 |   | $ | 676,295 |   | $ | 161,554 |   |

 

Revenue is based on the country of domicile for the legal entity thatoriginated the revenue.  Exclusive of theUnited States and the U.K., revenue from no single country constituted morethan 10 percent of consolidated revenues. Revenue from no single customer constituted more than four percent ofconsolidated revenues.

**Note 14 - Commitments and Contingent Liabilities**

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

*Letters of Credit*.  At June 30, 2007, the companyhas one outstanding letter of credit totaling $8.0 million under our existingcredit facility to guarantee payment to beneficiaries in the event that thecompany fails to meet its financial obligations to these beneficiaries.  This letter of credit will remain outstandingas long as we retain an ownership share of our affiliated captive insurancecompany, PCIC.  An additional letter ofcredit for $2.6 million was issued in July 2007 as an additional capitalcontribution to PCIC.

The company has also provided a $5.0 million Australiandollar-denominated letter of credit (US $4.2 million) to an Australiangovernmental agency as required by local regulations.  The estimated fair market value of theseletters of credit is immaterial because they have never been used, and thecompany believes that probability of future usage is remote.

*Indemnification Agreements*.  The company has variousagreements that provide that it may be obligated to indemnify the other partywith respect to certain matters. Generally, these indemnification clauses are included in contractsarising in the normal course of business and in connection with the purchaseand sale of certain businesses.  Althoughit is not possible to predict the maximum potential amount of future paymentsunder these indemnification agreements due to the conditional nature of thecompany’s obligations and the unique facts of each particular agreement, thecompany does not believe that any potential liability that might arise fromsuch indemnity provisions is probable or material.  There are no provisions for recourse to thirdparties, nor are any assets held by any third parties that any guarantor canliquidate to recover amounts paid under such indemnities.

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

*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.

We carry substantialprofessional liability insurance with a self-insured retention of $1 millionper occurrence, which provides coverage for professional liability claimsincluding the cost of defending such claims. We reserve for contingentliabilities based on Statement of Financial Accounting Standards No. 5, “Accountingfor Contingencies” (FAS 5) when it is determined that a liability, inclusive ofdefense costs, is probable and reasonably estimable. Management believes, basedon currently available information including the existence of professionalliability insurance, that the results of all pending claims against the companywill not have a material adverse effect on the results of operations, butlitigation is subject to many factors which are difficult to predict so therecan be no assurance that in the event of a material unfavorable result in oneor more of such matters, we will not incur material costs.

*Watson Wyatt v. SBC Holdings, Inc.(Stroh Brewery Company): *  On July 23, 2004, we received a demand letter from Stroh’s counselalleging that errors in valuations for 2001 and subsequent years understatedthe liabilities of its pension plan and overstated the company’s networth.  As a result, Stroh claimed it did not annuitize its definedbenefit plan and redeemed its stock at an inflated price.  On April 15,2005, Watson Wyatt filed a petition in federal court to compel arbitration ofthe matter. Subsequently, Stroh filed an answer and counterclaim, alleging damagesin excess of $46 million.  The court granted in part and denied in partour motion for summary judgment, and an appeal to the Sixth Circuit Court ofAppeals  is pending.

*Department of Labor Investigation:*  On November 17, 2006, Watson Wyatt InvestmentConsulting Inc. (“WWIC”) received a subpoena from the United States Departmentof Labor (“DOL”) in connection with its investigation into the compensation ofconsultants and other investment advisers.  WWIC has responded to thesubpoena and continues to cooperate with the DOL.

*Government Inquiry into ExecutiveCompensation Disclosure*: On May 11, 2007, wereceived an “Information Request” from the House Oversight and GovernmentAffairs Committee (the “Committee”). The Information Request asked Watson Wyattto identify all clients in the 2007 Fortune 250 for which we provided executivecompensation consulting in addition to any other services between 2002 and2006. The letter also requested the disclosure of revenues from executivecompensation consulting and from “other services”. The stated purpose of therequest was for a better understanding of “concerns that a compensationconsultant’s on-going business relationships with a company could compromisethe independence of the advice consultants provide to the company’s board aboutexecutive compensation.” Identical requests were made to the CEO’s of at leastfive other consulting firms, all of which were posted on the Committee’swebsite. After contacting each affected client, we responded to the InformationRequest by its May 23, 2007 due date by identifying clients and revenues forthose that consented to disclosure. On June 29, 2007, we received a subpoenafrom the Committee compelling the indentification of the remaining clients andrevenues. We complied with the subpoena on July 10, 2007, after first providingfinal notice to all clients.

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**Note 15 - Earnings Per Share**

Basic earnings per share is calculated on the basis of the weightedaverage number of common shares outstanding during the year.  Diluted earnings per share is calculated onthe basis of the weighted average number of common shares outstanding plus theeffect of outstanding stock options, stock-based compensation plan shares andemployee stock purchase plan shares using the “treasury stock” method.  The components of basic and diluted earningsper share are as follows:
| ** **                                                                                                                | ** ** | **Year Ended June 30** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                      |       |                                  |       |   |   |   |   |
| Income from  continuing operations                                                                                        |       | $                                     | 116,275    |   | $ | 86,118 |   | $ | 51,396 |   |
| Income from  discontinued operations                                                                                      |       | —                                |       | 1,073 |   | 766 |   |
| Net income                                                                                                                |       | $                                     | 116,275    |   | $ | 87,191 |   | $ | 52,162 |   |
|                                                                                                                      |       |                                  |       |   |   |   |   |
| Weighted average  outstanding shares of common stock                                                                      |       | 42,413                                |       | 41,393 |   | 32,541 |   |
| Contingency  Stock                                                                                                        |       | 1,950                                 |       | 1,787 |   | — |   |
| Dilutive effect  of employee stock options, stock-based compensation plan shares and employee  stock purchase plan shares |       | 321                                   |       | 117 |   | 304 |   |
|                                                                                                                      |       |                                  |       |   |   |   |   |
| Common stock and  stock equivalents                                                                                       |       | 44,684                                |       | 43,297 |   | 32,845 |   |
|                                                                                                                      |       |                                  |       |   |   |   |   |
| Basic earnings  per share                                                                                                 |       |                                  |       |   |   |   |   |
| Income from  continuing operations                                                                                        |       | $                                     | 2.74       |   | $ | 2.08 |   | $ | 1.58 |   |
| Income from  discontinued operations                                                                                      |       | —                                |       | 0.03 |   | 0.02 |   |
| Basic earnings  per share, net income                                                                                     |       | $                                     | 2.74       |   | $ | 2.11 |   | $ | 1.60 |   |
|                                                                                                                      |       |                                  |       |   |   |   |   |
| Diluted earnings  per share                                                                                               |       |                                  |       |   |   |   |   |
| Income from  continuing operations                                                                                        |       | $                                     | 2.60       |   | $ | 1.99 |   | $ | 1.56 |   |
| Income from  discontinued operations                                                                                      |       | —                                |       | 0.02 |   | 0.02 |   |
| Diluted earnings per  share, net income                                                                                   |       | $                                     | 2.60       |   | $ | 2.01 |   | $ | 1.58 |   |

 

There were no outstanding stock options for the yearsended June 30, 2007, 2006, that were excluded because they would have beenantidilutive, and in fiscal year 2005 there were 1,920 that were not includedin the diluted earnings per share calculation because their effect would havebeen antidilutive. Thediluted earnings per share calculation for fiscal years 2007 and 2006 assumethat 1,950,000 contingent shares related to the WWLLP business combination havebeen issued and outstanding since July 31, 2005.

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**Note 16 - Discontinued Operations**

During the third quarter of fiscal years 2005 and 2006, the companyevaluated its accrual for the estimated remaining future obligations and costsrelated to the exit from Wellspring.  Theevaluations included an analysis of occupancy rates of Wellspring, along withan analysis of real estate market conditions in cities in which the leasesexist and an assessment of probable future sublease income for these leases.  As a result of the analysis performed duringfiscal years 2005 and 2006, the company reduced its accrual by $1.25 millionand $1.75 million, respectively, less the associated income tax expenses.  Based on our analysis in fiscal year 2006,the Company no longer recorded an obligation as the probability of paymentunder the lease guarantees is remote. Such adjustments are reflected in the Consolidated Statement ofOperations for the third quarter of each fiscal year in the line “Adjustment toreduce estimated loss on disposal of discontinued operations.”

**Note 17 –Restricted Shares.**

In conjunctionwith our WWLLP business combination on July 31, 2005, we issued 9,090,571Class A common shares, 4,749,797 of which were subject to contractualtransfer restrictions.  Transfer restrictionsexpired on 2,339,761 of these shares on July 31, 2006 and expired on theremaining 2,410,036 shares on July 31, 2007.  At June 30, 2007,  the contingencies associated with the paymentof an additional 1,950,000 Class A shares were met.  The company expects to issue these sharesduring fiscal year 2008. Sale of these shares will be restricted until July 31,2009.

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

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

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**Note 18 - Quarterly Financial Data (unaudited)**

Unaudited, summarized financial data by quarter for the years endedJune 30, 2007 and 2006, is as follows (in thousands, except per share amounts):
| ** **                                            | ** ** | **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 from continuing operations before income taxes |       | 39,387                           |       | 39,787 |   | 48,486 |   | 48,808 |   |
| Income from continuing operations                     |       | 24,814                           |       | 25,994 |   | 33,834 |   | 31,633 |   |
| Discontinued operations                               |       | —                           |       | — |   | — |   | — |   |
| Net income                                            |       | 24,814                           |       | 25,994 |   | 33,834 |   | 31,633 |   |
| Earnings per share: (a)                               |       |                             |       |   |   |   |   |   |   |
| Continuing operations, basic                          |       | 0.59                             |       | 0.61 |   | 0.80 |   | 0.71 |   |
| Continuing operations, diluted                        |       | 0.56                             |       | 0.58 |   | 0.76 |   | 0.71 |   |
| Discontinued operations, basic                        |       | —                           |       | — |   | — |   | — |   |
| Discontinued operations,  diluted                     |       | —                           |       | — |   | — |   | — |   |
| Net income, basic                                     |       | 0.59                             |       | 0.61 |   | 0.80 |   | 0.71 |   |
| Net income, diluted                                   |       | 0.56                             |       | 0.58 |   | 0.76 |   | 0.71 |   |
|                                                       |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                            | ** ** | **2006 Quarter Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **September 30**            | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
|                                                  |       |                             |       |   |   |   |   |   |   |
| Revenue                                               |       | $                                | 265,886    |   | $ | 315,764 |   | $ | 343,072 |   | $ | 347,089 |   |
| Income from operations                                |       | 25,406                           |       | 28,937 |   | 41,107 |   | 36,967 |   |
| Income from continuing operations before income taxes |       | 24,807                           |       | 27,746 |   | 41,164 |   | 37,986 |   |
| Income from continuing operations                     |       | 13,892                           |       | 17,175 |   | 29,336 |   | 25,715 |   |
| Discontinued operations                               |       | 9                                |       | 8 |   | 1,045 |   | 11 |   |
| Net income                                            |       | 13,901                           |       | 17,183 |   | 30,381 |   | 25,726 |   |
| Earnings per share: (a)                               |       |                             |       |   |   |   |   |   |   |
| Continuing operations, basic                          |       | 0.36                             |       | 0.41 |   | 0.69 |   | 0.61 |   |
| Continuing operations, diluted                        |       | 0.36                             |       | 0.41 |   | 0.69 |   | 0.58 |   |
| Discontinued operations, basic                        |       | —                           |       | — |   | 0.02 |   | — |   |
| Discontinued operations,  diluted                     |       | —                           |       | — |   | 0.02 |   | — |   |
| Net income, basic                                     |       | 0.36                             |       | 0.41 |   | 0.71 |   | 0.60 |   |
| Net income, diluted                                   |       | 0.36                             |       | 0.41 |   | 0.71 |   | 0.58 |   |
|                                                       |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

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(a)          The basic earnings per share calculation forfiscal year 2007 and the diluted earnings per share calculation for fiscal  years 2007 and 2006 assume that the 1,950,000contingent shares related to the WWLLP business combination have been issued andoutstanding since July 31, 2005.

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**Note 19 - Subsequent Events**

Heissmann Acquisition - On July 20, 2007, the company acquired the outstanding stock ofHeissmann for €99 million in cash. Heissmann is a leading actuarial,benefits, and human resources consulting firm based in Germany withsubsidiaries in Ireland, Netherlands, Austria, and France.  Annual revenue, including subsidiaries, wasapproximately $70 million (Euro 52 million) for their fiscal year ended March31, 2007.

WisdomNet Acquisition - On July 2, 2007, the company acquired thenet assets of WisdomNet for $6.9 million in cash and stock, including thepayoff of $0.2 million of debt. WisdomNet is a Denver-based talent management solution and consultingfirm that was founded in 2001.  WisdomNetoffers a proprietary line of business software products, including anend-to-end solution for managing organizations’ talent management processes.

PCIC Capital Contribution - In July 2007, the company contributed anadditional $1.9 million of capital to PCIC and increased the amount of theletter of credit associated with PCIC by $2.6 million.  As a result of this capital contribution, thecompany’s ownership percentage in PCIC increased from 34.15 percent to 36.43percent.

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**WATSONWYATT 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,  2007                    |       |
| Allowance for  uncollectible accounts        |       | $                                    | 3,678      |                                                     | $          | 8,676                                       |       | $                                            | —     |           | $          | —                             |       | $ | (6,138 | ) | $ | 6,216 |   |
|                          |       |                                 |       |                                                     |       |                                        |       |                                         |       |           |       |                               |       |
| Allowance for  unbillable accounts           |       | 5,348                                |       | 2,335                                                    |       | —                                      |       | —                                       |       | —         |       | 7,683                              |       |
|                     |       |                                 |       |                                                     |       |                                        |       |                                         |       |           |       |                               |       |
| Valuation  allowance for deferred tax assets |       | 23,841                               |       | —                                                   |       | (9,777                                      | )(2)       | —                                       |       | (4,238         | )          | 9,826                              |       |
| Year Ended June 30,  2006                    |       |
|                                         |       |                                 |       |                                                     |       |                                        |       |                                         |       |           |       |                               |       |
| Allowance for  uncollectible accounts        |       | $                                    | 2,114      |                                                     | $          | 5,680                                       |       | $                                            | —     |           | $          | 1,574                              |       | $ | (5,690 | ) | $ | 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                             |       |
| Year  Ended June 30, 2005                    |       |
| Allowance for  uncollectible accounts        |       | $                                    | 1,241      |                                                     | $          | 5,479                                       |       | $                                            | —     |           | $          | —                             |       | $ | (4,606 | ) | $ | 2,114 |   |
|           |       |                                 |       |                                                     |       |                                        |       |                                         |       |           |       |                               |       |
| Allowance for unbillable  accounts           |       | 730                                  |       | (30                                                      | )          | —                                      |       | —                                       |       | —         |       | 700                                |       |
|           |       |                                 |       |                                                     |       |                                        |       |                                         |       |           |       |                               |       |
| Valuation allowance for  deferred tax assets |       | 10,887                               |       | —                                                   |       | 2,662                                       | (1)        | —                                       |       | —         |       | 13,549                             |       |

 

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(1)           Thenet (decrease)/increase is primarily due to the tax effect of the change inrealizable foreign net operating losses and other foreign temporarydifferences.

(2)           Thedecrease is due to reclassification of the deferred tax assets for foreignbranches.

104

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**ITEM 6. EXHIBITS.**
| 3.1   |   | Amended and Restated Certificate of Incorporation of  Watson Wyatt Worldwide, Inc.(16)                                                                                                                                                                                                                                                                                                                                 |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   |   | Amended and Restated Bylaws of Watson Wyatt  Worldwide, Inc.(16)                                                                                                                                                                                                                                                                                                                                                       |
| 4     |   | Form of Certificate Representing Common  Stock(1)                                                                                                                                                                                                                                                                                                                                                                      |
| 10.1  |   | Amended and Restated Revolving Credit Agreement  Among Suntrust Bank and Others dated July 11, 2005(9)                                                                                                                                                                                                                                                                                                                 |
| 10.2  |   | Senior Officer Deferred Compensation Plan(2)                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3  |   | 2001 Deferred Stock Unit Plan for Selected  Employees(16)                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4  |   | Amended Compensation Plan for Outside Directors(11)                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5  |   | Deed of Lease between Watson Wyatt &  Company and Arlington Office, LLC, dated April 27, 2004(4)                                                                                                                                                                                                                                                                                                              |
| 10.6  |   | Watson Wyatt & Company Performance Share  Bonus Incentive Program(5)                                                                                                                                                                                                                                                                                                                                               |
| 10.7  |   | First Amendment to Deed of Lease between Watson  Wyatt & Company and Arlington Office L.L.C., dated April 22,  2005(6)                                                                                                                                                                                                                                                                                        |
| 10.8  |   | Business Transfer Agreement, dated as of  April 15, 2005, by and among Watson Wyatt & Company Holdings,  Watson Wyatt LLP, Watson Wyatt (UK) Acquisitions 2 Limited and The Wyatt  Company Holdings Limited(7)                                                                                                                                                                                                |
| 10.9  |   | Form of Employment Agreement between Watson  Wyatt Limited and each of Chandrasekhar Ramamurthy, Paul N. Thornton and  Roger C. Urwin(7)                                                                                                                                                                                                                                                                               |
| 10.10 |   | Distribution Agreement, dated as of April 15, 2005,  by and among Watson Wyatt LLP, The Wyatt Company Holdings Limited, The Wyatt  Company (UK) Limited, Wyatt Trustee Limited and Watson Wyatt Limited(7)                                                                                                                                                                                                             |
| 10.11 |   | Deed of Termination and Amendment and Restatement of  Indemnities Relating to the Alliance Documents, dated as of April 15,  2005, by and among The Wyatt Company Holdings Limited, Watson Wyatt LLP,  Watson Wyatt & Company, Watson Wyatt Holdings Limited, Watson Wyatt  Holdings (Europe) Limited, The Wyatt Company (UK) Limited and Wyatt Trustee  Limited (in its capacity as Wyatt Partner)  (7) |
| 10.12 |   | Deed of Contribution, dated as of April 15,  2005, by and among Watson Wyatt LLP, Watson Wyatt Limited and Watson  Wyatt & Company Holdings(8)                                                                                                                                                                                                                                                                |
| 10.13 |   | Bonuses Deed, dated as of April 15, 2005, by  and among Watson Wyatt LLP, Watson Wyatt Limited and Watson Wyatt &  Company Holdings(7)                                                                                                                                                                                                                                                                        |
| 10.14 |   | Form of P.I. Claims Deed by and among the P.I.  Trustees, Watson Wyatt LLP, Watson Wyatt Limited and Watson Wyatt &  Company Holdings(8)                                                                                                                                                                                                                                                                      |
| 10.15 |   | Form of Stock Transfer Agreement by and between  Watson Wyatt & Company Holdings, Watson Wyatt (UK) Acquisitions 2  Limited and Watson Wyatt Limited and each of Watson Wyatt LLP and each voting  member(7)                                                                                                                                                                                                  |
| 10.16 |   | Watson Wyatt Incentive Compensation Plan 2005(15)                                                                                                                                                                                                                                                                                                                                                                           |
| 10.17 |   | Form of Indemnification Agreement among Watson  Wyatt & Company Holdings and each of its directors and Section   16 officers(11)                                                                                                                                                                                                                                                                         |
| 10.18 |   | Amendment to the Credit Agreement Among Suntrust  Bank and Others dated September 30, 2005(12)                                                                                                                                                                                                                                                                                                                         |
| 10.19 |   | First Amendment to Lease Between Watson Wyatt &  Company and Arlington Office LLC dated November 14, 2005 (16)                                                                                                                                                                                                                                                                                                |
| 10.20 |   | FY06 Performance Share Bonus Incentive Program (14)                                                                                                                                                                                                                                                                                                                                                                         |
| 10.21 |   | Trust Deed and Rules of the Watson Wyatt Share  Incentive Plan 2005 (U.K.) (17)                                                                                                                                                                                                                                                                                                                                             |
| 10.22 |   | Watson Wyatt Share Incentive Plan 2005 Deed of  Amendment (U.K.) (17)                                                                                                                                                                                                                                                                                                                                                       |
| 10.23 |   | Trust Deed and Rules of the Watson Wyatt Ireland  Share Participation Scheme (17)                                                                                                                                                                                                                                                                                                                                           |
| 10.24 |   | Share Purchase Plan 2005 (Spain) (17)                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.25 |   | Watson Wyatt Worldwide, Inc. Performance Share Bonus  Incentive Program FY07 (16)                                                                                                                                                                                                                                                                                                                                           |
| 10.26 |   | Amendment to Credit Agreement Among Suntrust Bank  and Others dated June 21, 2007 (13)                                                                                                                                                                                                                                                                                                                                      |
| 16    |   | Letter re change in certifying accountant (18)                                                                                                                                                                                                                                                                                                                                                                              |
| 21    |   | Subsidiaries of Watson Wyatt  Worldwide, Inc.(13)                                                                                                                                                                                                                                                                                                                                                                      |
| 23    |   | Consent of the Company’s Independent Registered  Public Accounting Firm – Deloitte & Touche LLP(13)                                                                                                                                                                                                                                                                                                           |
| 23.1  |   | Consent of the Company’s Independent Registered  Public Accounting Firm – PricewaterhouseCoopers(13)                                                                                                                                                                                                                                                                                                              |
| 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(13)                                                                                                                                                                                                                                  |
| 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(13)                                                                                                                                                                                                                                  |
| 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(13)                                                                                                                                                                                                                           |

 

105

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| (1)  |   | Incorporated by reference from Registrant’s  Form 8-K, filed on January 3, 2006                                                  |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Incorporated by reference from Registrant’s  Form 10-K, filed on August 20, 2001                                                 |
| (3)  |   | Incorporated by reference from Registrant’s  Form DEF14A, filed on October 17, 2006                                              |
| (4)  |   | Incorporated by reference from Registrant’s  Form 10-Q, filed on May 7, 2004                                                     |
| (5)  |   | Incorporated by reference from Registrant’s  Form 10-Q, filed on February 9, 2005                                                |
| (6)  |   | Incorporated by reference from Registrant’s  Form 10-Q, filed on May 10, 2005                                                    |
| (7)  |   | Incorporated by reference from Registrant’s  Form S-4 (File No. 33-3124629), filed on May 4, 2005                           |
| (8)  |   | Incorporated by reference from Registrant’s  Form S-4/A, Amendment No. 1 (File No. 33-3124629) filed on  June 13, 2005 |
| (9)  |   | Incorporated by reference from Registrant’s  Form 8-K, filed on July 14, 2005                                                    |
| (10) |   | Incorporated by reference from Registrant’s  Form 8-K, filed on August 25, 2005                                                  |
| (11) |   | Incorporated by reference from Registrant’s  Form 8-K, filed on October 4, 2005                                                  |
| (12) |   | Incorporated by reference from Registrant’s  Form 10-Q, filed on November 9, 2005                                                |
| (13) |   | Filed with this Form 10-K                                                                                                                  |
| (14) |   | Incorporated by reference from Registrant’s  Form 8-K, filed on May 16, 2006                                                          |
| (15) |   | Incorporated by reference from Registrant’s Form  8-K, filed on November 17, 2005                                                          |
| (16) |   | Incorporated by reference from Registrant’s  Form 10-Q, filed on February 9, 2007                                                |
| (17) |   | Incorporated by reference from Registrant’s  Form 10-K, filed on September 1, 2006                                                    |
| (18) |   | Incorporated by reference from Registrant’s Form  8-K, filed on December 13, 2006                                                          |

 

106

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