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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File Number: 001-16159

WATSON WYATT WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

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

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

Securities registered pursuant to Section 12(b) of the Act:

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

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

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

Yes  x          No  o

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

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

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

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant was approximately $1,960,695,847 based on the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, December 31, 2007.

Documents Incorporated by Reference

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

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

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WATSON WYATT WORLDWIDE, INC.
INDEX TO FORM 10-K

For the Fiscal Year Ended June 30, 2008

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PART I

Item 1.  Business.

The Company

Watson Wyatt Worldwide, Inc. (referred herein as “Watson Wyatt”, “company”, “us”, “we”, or “Watson Wyatt & Company Holdings”) is a global consulting firm focusing on providing human capital and financial management consulting services.  Including predecessors, we have been in business since 1878. The Wyatt Company was incorporated in Delaware on February 17, 1958.  We conducted business as The Wyatt Company from 1958 until changing our name to Watson Wyatt & Company in connection with the establishment of the Watson Wyatt Worldwide alliance in 1995 with R. Watson & Sons (referred herein as “Watson Wyatt LLP” or “WWLLP”), a leading United Kingdom-based actuarial, benefits and human resources consulting partnership founded in 1878. In 2000, we incorporated Watson Wyatt & Company Holdings to serve as a holding company with our operations conducted by our subsidiaries. To better serve the increasingly global needs of clients, on July 31, 2005 we acquired substantially all of the assets and assumed most liabilities of WWLLP (the “WWLLP business combination”).  The company’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 clients enhance business performance by improving their ability to attract, retain, and motivate qualified employees. We focus on delivering consulting services that help our clients anticipate, identify, and capitalize on emerging opportunities in human capital management.  We also provide independent financial advice regarding all aspects of life assurance and general insurance, as well as investment advice to assist our clients in developing disciplined and efficient investment strategies to meet their investment goals.  Our target market clients include those companies in the FORTUNE 1000, Pension & Investments (P&I) 1000, FTSE 100, and equivalent organizations in markets around the world.  As of June 30, 2008, we provided these services through approximately 7,000 associates in 107 offices located in 32 countries.

Business Acquisitions

Dr. Dr. Heissmann GmbH

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

WisdomNet

On July 2, 2007, the company acquired the net assets of WisdomNet for $6.9 million in cash and stock.  WisdomNet is a Denver-based talent management solution and consulting firm that was founded in 2001.  WisdomNet offers a proprietary line of business software products, including an end-to-end solution for managing organizations’ talent management processes.  As of the date of the acquisition, WisdomNet employed 15 associates. For more information regarding this business acquisition, see Note 2 of Notes to the Consolidated Financial Statements included in Item 15 of this report.

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Marcu & Asociados S.A.

On June 16, 2008, the company acquired the outstanding stock of Marcu & Asociados S.A. (Marcu) for $2.8 million in cash.  Marcu is a leading human resource, risk and financial management consulting firm based in Buenos Aires, Argentina.  As of the date of acquisition, Marcu employed 37 associates and had annual revenues of approximately $2.5 million.

Watson Wyatt Netherlands

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

Watson Wyatt LLP

On July 31, 2005, the company consummated the WWLLP business combination.  The company and WWLLP had jointly offered services since 1995 pursuant to alliance agreements and as a result, have business segments that are very similar in nature.  The assets acquired from WWLLP are held by the company’s principal U.K. subsidiary, Watson Wyatt Limited (“Watson Wyatt Limited” or the “European business”).  Watson Wyatt Limited’s results of operations are included in the consolidated financial statements beginning August 1, 2005.  Subsequent to the WWLLP business combination, the successor entity to WWLLP, Ringley House LLP (“Ringley House”) maintains minimal business operations and assets.  For more information regarding the WWLLP business combination, see Note 2 of Notes to the Consolidated Financial Statements included in Item 15 of this report.

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

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available, without charge, on our web site (www.watsonwyatt.com) or the SEC web site (www.sec.gov), as soon as reasonably practicable after they are filed electronically with the SEC.  We have also adopted a Code of Business Conduct and Ethics applicable to all associates, senior financial employees, the principal executive officer, other officers and members of senior management.  The company also has a Code of Business Conduct and Ethics that applies to all of the company’s directors.  Both codes are posted on our website.  Watson Wyatt’s Audit Committee, Compensation Committee and Nominating and Governance Committee all operate pursuant to written charters adopted by the company’s board of directors.  The company has also adopted a set of Corporate Governance Guidelines, copies of which are available on the company’s website.  Copies of all these documents are also available, without charge, from our Investor Relations Department, located in our corporate headquarters at 901 N. Glebe Road, Arlington, VA 22203.

Certifications

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

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Recent Development

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

Business Overview

As leading economies worldwide become more services-oriented, human capital and financial management have become increasingly important to companies and other organizations. The heightened competition for skilled employees, unprecedented changes in workforce demographics, regulatory changes related to compensation and retiree benefits and rising employee-related costs have increased the importance of effective human capital management. Insurance and investment decisions become increasingly complex and important in the face of changing economies and dynamic financial markets.  We help our clients address these issues by combining our expertise in human capital and financial management with consulting and technology, to improve the design and implementation of various human resources and financial programs, including retirement, health care, compensation, insurance and investment plans.

We design, develop and implement human resource and risk management strategies and programs through the following closely interrelated practice areas:

Benefits Group

·                  Design and management of benefit programs

·                  Actuarial services including development of funding and risk management strategies

·                  Expatriate and international human resource strategies

·                  Mergers and acquisitions

·                  Strategic workforce planning

·                  Compliance and governance

Technology and Administration Solutions Group

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

·                  Administration outsourcing solutions for health and welfare, pension and flexible benefits

·                  Call center strategy, design and tools

·                  Strategic human resources technology and service delivery consulting

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

·                  Integrated talent management suite

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Human Capital Group

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

·                  Strategies to align workforce performance with business objectives

·                  Organization effectiveness consulting, including talent management

·                  Strategies for attracting, retaining and motivating employees

·                  Data services

Investment Consulting Group

·                  Investment consulting services to pension plans and other institutional funds

·                  Input on governance and regulatory issues

·                  Analysis of asset allocation and investment strategies

·                  Investment structure analysis, selection and evaluation of managers and performance monitoring

·                  Implementation/fiduciary services for defined benefit and defined contribution investment programs via our Advanced Investment Solutions (AIS) services

Insurance & Financial Services Group

·                  Independent actuarial and strategic advice

·                  Assessment and advice regarding financial condition and risk management

·                  Financial modeling software tools for product design and pricing, planning and projections, reporting, valuations and risk management

While we focus our consulting services in the areas described above, management believes that one of our primary strengths is our ability to draw upon consultants from our different practices to deliver integrated services to meet the needs of our clients.  This capability includes communication and change management implementation support services.

Competitive Advantage

We believe that our competitive advantages include our global reach, our strong client relationships, the depth of our professional and technical associates, our thought leadership and our experienced management team.

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

We also believe that we are at the forefront of many issues affecting human capital through our research, surveys and participation in policy-making.  Our thought leaders are often called upon by the media and government to express opinions on issues affecting health care benefits, retirement plan design and executive compensation.

We believe our senior management team has strong experience, with an average tenure of 17 years with the company and a reputation for transparency and accountability.  We consider this group to be a major asset to the company.

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Human Resources Consulting Industry

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

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

Consulting Services

Our global operations include five segments: Benefits, Technology and Administration Solutions, Human Capital, Investment Consulting, and Insurance & Financial Services.  The percentages of revenues generated in the various groups are as follows:

For more information about our operating segments, see Note 12 of Notes to the Consolidated Financial Statements included in Item 15 of this report.

Benefits Group

The Benefits Group – our largest and most established practice with 3,240 associates – consists primarily of consulting practices in retirement, group and health care, and international.  Its steady increase in revenues is a result of our business combinations and strong organic growth.  This group assists clients in creating and managing cost-effective benefits programs that help our clients attract, retain and motivate a talented workforce. Our Benefits Group accounted for approximately 60 percent of our total segment revenues for the fiscal year that ended June 30, 2008.

Retirement Consulting

We are one of the world’s leading advisers on retirement plans, providing actuarial and consulting services for large defined benefit and defined contribution plans including design, funding and risk management strategies.  We also help our clients assess the effect that changing workforce demographics have on their retirement plans, cash flow requirements, and retiree benefit adequacy and security.

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

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

Our retirement consulting services include:

·                  Actuarial services

·                  Analysis and recommendations on funding strategy

·                  Development and implementation of risk mitigation and management strategies

·                  Strategic plan design

·                  Administrative services

·                  Workforce diagnostics, analysis and planning

·                  Defined contribution services including nondiscrimination testing and vendor selection

·                  Financial reporting

·                  Stock option and share plan financial accounting

·                  Executive retirement benefits and assistance with enhanced U.S. proxy disclosures

·                  Retiree health care design and valuation

·                  Assistance with changes relating to mergers, acquisitions and divestitures

·                  Development of compliance and governance strategies

Our retirement consulting services are supported by a strong focus on research and advocacy for sound public policy.  We are leaders in the development and support of hybrid pension designs like cash balance plans in the United States which are widely seen as the future of the defined benefit system.

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

To further enhance our retirement consulting services, we dedicate significant resources to technology systems and tools to ensure the consistency and efficiency of service delivery in all our offices worldwide. We also maintain extensive proprietary databases, such as Watson Wyatt COMPARISONTM, that enable our clients to track and benchmark benefit plan provisions.  Our tools and technology solutions include:

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

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

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

·                  Quick Peek® Online – A Web-enabled tool that allows pension plan sponsors to quickly and easily model a variety of financial and business situations, and project retirement plan contributions, funded status and expense

·                  DesignIT –  A modeling tool for our European clients that provides comparisons between a selection of alternative pension designs

·                  Liability Watch – Enables our European clients to 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 all health and welfare programs. Clients seek our evidence-based, practical solutions to improve employee health, satisfaction and productivity while minimizing costs. We work closely with our clients — matching their resources and capabilities with our methodologies, technology, and total compensation and benefits perspective.

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

In the United States, more employees are adopting consumer-oriented health care approaches that encourage employees and retirees to participate more actively in health care buying decisions. These models put workers in charge of spending their own health care dollars and provide them with appropriate incentives,  tools and information to make wiser health purchasing decisions.  One of these tools is BenefitConnectTM – a customizable, Web-based application that combines self-service employee tools with administrative and call center components to facilitate the administration and management of health and welfare benefits.

Our approach to group and health care consulting emphasizes health and productivity, pharmacy, provider quality, effective communication, and data and metrics.  Our global services include:

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

·            Retiree health programs

·            Health and productivity management, including onsite clinics

·            Health and welfare technology solutions

·            Total program management

·            Vendor negotiations, audits and performance management

·            Measurement of program effectiveness

·            Assistance with plan changes relating to mergers, acquisitions and divestitures

International Consulting

To help multinational companies face the challenges of operating in the global marketplace, Watson Wyatt provides expertise in dealing with international human resources and related finance issues for corporate headquarters and their overseas subsidiaries.

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

·                  Resolution of people issues in mergers and acquisitions

·                  Compliance and competitiveness of human capital practices at all stages of the off-shoring lifecycle or expansion process

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

·                  Development and support of multinational governance procedures for managing employee benefit and worldwide reward programs

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

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

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

·                  FAStrack – To facilitate global coordination for the various global accounting standards requirements, including IFRS, FAS87, FAS106 and FAS132R, Watson Wyatt has developed FAStrack Global™, a Web-based program designed for local plan actuaries to enter IFRS/FAS results by business unit, plan and/or country.

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

Technology and Administration Solutions Group

Watson Wyatt’s Technology and Administration Solutions Group helps organizations optimize the delivery of their human resources and benefit services. We do this through a unique blend of domain expertise and experience in human resources and benefits, strong process capability and a range of enabling technology applications. We understand the importance of being able to both provide advice on the appropriate solutions to meet human resource needs and to implement and deliver those solutions on an ongoing basis, whether through outsourced services, in-house capabilities or a combination of the two.

Our Technology and Administration Solutions Group of 840 associates provides consulting, administration, outsourcing and technology services across human resources, but focusing in particular on:

Retirement Administration

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

·                  In the United States, our technology solution PensionPath® includes case management and administration tools to assist plan sponsors in managing the entire life cycle of pension administration, from new hire to retirement, and employee self-service tools that enhance workers’ understanding of their retirement benefits’ future value.  PensionPath is available whether or not Watson Wyatt provides outsourcing services.

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·                  In the United Kingdom, we are among the leaders in retirement administration outsourcing services to the private sector, using highly automated processes and modern transactional Web technology to enable members to access their records and improve their understanding of their benefits. Our technology also provides trustees and human resources with timely management information and the means to monitor activity levels and reduce administration costs.

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

Health &Welfare/Flexible Benefits Administration

·                  Flexible benefit plans exist in different forms in different geographies, and we provide Web-enabled flexible benefits administration solutions to support clients in a number of different parts of the world.

·                  In the United States, flexible benefits tend to be focused primarily around health and welfare arrangements. BenefitConnect™ is our flexible Web-based health and welfare technology that we use to provide comprehensive outsourced support to clients. New health care consumerism support tools give participants direct Web-based access to their benefits information and enrollment tools and provide modeling on a choice of medical spending and savings accounts, as well as life insurance. They also help participants become smart consumers through access to information on the World Wide Web via the Internet.

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

Compensation Administration

·                  REWARD™ is our suite of Web-based applications that automate compensation administration and pay delivery. REWARD improves compensation planning, budgeting and data management, allowing compensation professionals to focus on strategic activities by freeing them from administrative work.  We recently integrated our global grading system methodology into REWARD, enabling companies to band and grade jobs and then model pay ranges around local market conditions.

Integrated Talent Management Suite

·                  Our integrated talent management suite combines easy-to-use process automation with powerful decision support for performance management, strategic workforce planning, rewards, succession planning, recruiting, learning and career development. The system accommodates a wide range of client processes, terminology and workflow without programming.

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Online Communication

·                  eStatements is our integrated, Web-based solution that helps employees understand the true value of their compensation and benefits package.  It aggregates data from a number of internal and/or external sources, and provides a current view of an employee’s complete package.  It shows the value of an organization’s human resource programs, fosters smarter plan participation and benefit consumerism, and offers organizations another vehicle to promote plan features, provide support and deliver other focused information.

Call Center Support

·                  AnswerKey™ is our shared service center solution. Our technology supports the business of service center operations by effectively integrating data and critical tools. Using Web-based technology, it consolidates data from multiple sources, offering employees and human resource service center staff a single point of contact, faster response times and more accurate information.  We recently added the Employee Inquiry module, which enables employees to open cases, check case status, access knowledge base information and request fulfillment items.

Portals

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

All of the above are point solutions:  applications or services that meet particular demands once clients have identified and prioritized their needs. Very often our involvement starts at a much earlier level. We provide clients with strategic, research-based human resource technology and service delivery advisory services to help them develop their strategy for delivering human resource services. We work with them to align their human resources delivery strategy with their business goals. We use human resource and benefits technologies, those mentioned above and others, to help our clients improve satisfaction levels and have a sustainable return on investment. Our services in this area include human resource transformation consulting, vendor management and service delivery model development, including shared services strategy and design.

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

Human Capital Group

Our Human Capital Group of 850 associates helps clients implement strategies that achieve a competitive advantage by aligning their workforce with their business strategy. This includes helping clients develop and implement strategies for attracting, retaining and motivating their employees, resulting in a maximized return on clients’ investment in human capital.  The Human Capital Group also utilizes our Watson Wyatt Data Services practice, which is a group of 300 associates that provide data, services and analysis regarding compensation and benefits around the world.  Our Human Capital Group represented approximately 12 percent of our total segment revenues for the fiscal year ended June 30, 2008.

Our Human Capital Group focuses in six principal areas: executive compensation, Strategic Rewards^®, sales management and rewards, organization effectiveness, talent management and data services.

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Executive Compensation

We advise our clients’ management and boards of directors on executive pay programs, including cash compensation, stock options and stock purchase plans.  We also work with them to align their pay-for-performance plans throughout the organization to improve shareholder value. We help clients understand and value all the components of their executives’ compensation, including base pay, bonus, incentives, options, and retirement and other executive perks.  Our expertise in stock-based plan design and in valuation methodologies and procedures allows us to help U.S. clients, for instance, comply with complex accounting standards such as FAS 123(R) and SEC rules regarding executive compensation disclosure.

Strategic Rewards^®

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

Sales Effectiveness and Compensation

We help maximize the performance of our clients’ sales and services teams across the globe by aligning their sales force’s behavior with their organization’s business strategy and compensation philosophy. By considering the full spectrum of rewards, we help motivate our clients’ sales forces to maintain and expand critical relationships while executing the organization’s go-to-market strategy.

Organization Effectiveness

We help clients clarify and implement business strategy, recognizing the impact of employee attitudes, commitment, and effective team and leadership development on business success. We provide a wide array of services centered on organization assessment, including organization measurement and surveys. We also provide consulting regarding organization design and the organization and development of the human resource function.

We developed the Watson Wyatt Human Capital Indexâ, a proprietary tool for demonstrating the relationship between the effectiveness of an organization’s human capital practices and the creation of superior returns to shareholders.

Our Global WorkAttitudes database includes the opinions of thousands of employees worldwide, surveyed independently, reflecting a large cross-section of jobs and industry types. Our clients compare their own employee survey results against these norms to identify workplace perceptions and satisfaction and commitment levels.

Talent Management

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

Watson Wyatt Data Services

Watson Wyatt Data Services (WWDS) provides a wide range of employment practices information to the global employer community. WWDS’s client base includes local and multi-national companies in more than 80 countries.

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To serve the global marketplace, WWDS has begun a consolidation of eight strategically located data centers around the globe into one business unit to facilitate the solicitation, analysis and compilation of data on the remuneration and benefits paid to millions of employees. Our centers around the world publish this data in dozens of annual compensation and benefit survey reports on everything from local pay issues to the most complex of global pay equity concerns. WWDS also publishes reference materials that help human 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 global basis.

Investment Consulting Group

Our Investment Consulting Group, with approximately 450 associates, helps pension trusts and other institutional clients successfully meet their investment goals. This involves helping optimize risk-adjusted returns through development of appropriate governance, policies and strategies. Our work involves helping our clients with the design and implementation of investment arrangements to manage and decrease financial liabilities within a context of overall organizational objectives. Our Investment Consulting Group represented approximately 10 percent of our total segment revenues for the fiscal year ended June 30, 2008.

Our services include:

·                  Asset/liability modeling, risk budgeting and asset allocation studies

·                  Governance consulting and investment policy development

·                  Investment policy implementation

·                  Analysis of structured products

·                  Investment manager selection and monitoring

·                  Performance evaluation and monitoring

We offer the following integrated services for our clients:

·                  Watson Wyatt Pension Risk Management™ – an integrated methodology for determining the appropriate amount of investment risk for a pension plan and allocating that risk across investment decisions

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

Insurance & Financial Services Group

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

Our services include:

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

·                  Provision of strategic and actuarial advice to buyers or sellers of financial institutions

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

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

Other Services

Communication Consulting

Our communication consulting practice helps clients produce financial results through strategies that align employee behavior with business success.  Our award-winning work and our six years of ground-breaking Communication ROI research prove that effective communication:

·                  Increases total returns to shareholders

·                  Improves service, quality and productivity levels

·                  Helps fuel growth

·                  Enhances organizational ability to manage change successfully

·                  Builds employee community, trust and commitment

·                  Educates, engages and motivates employees

Working with clients who have responsibility for employee communication in human resources, corporate or line functions, our consultants combine strong creative skills with technical excellence to create programs that range from high-level strategic planning to tactical implementation.

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

·                  Clarifying the value and scope of employee compensation and benefits, and enhancing employees’ appreciation of their total rewards opportunities

·                  Drawing a clear line of sight between employee performance and company objectives through open communication and leadership communication training

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

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

·                  Maintaining employee trust, confidence and commitment through all cycles of performance

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

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

Integrated Service Approach

While we focus our consulting services in the principal areas described above, we draw upon consultants from across practices and geographies to deliver integrated services to meet the needs of our clients. An example is our Total Rewards approach, which encompasses compensation, benefits, career growth and company culture. We help clients around the world determine the correct mix of reward programs to attract and retain the right employees and to motivate them to produce desired results.  We also assemble cross-practice teams to help clients through mergers and acquisitions.

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Sales and Marketing

Our growth strategy is based on a commitment to ensuring client satisfaction through our account management program.  Our account managers focus on effectively delivering services to clients and on expanding our relationships across service lines, geographic boundaries and divisions within client organizations.  A key element of this program is an approach we call ClientFirst^TM. Using proprietary processes and tools, we work with clients to define their needs and expectations before an engagement begins, and then continually measure our performance according to agreed-upon standards.

We pursue new clients using cross-disciplinary teams of consultants, as well as dedicated client developers who initiate relationships with carefully selected companies. Our efforts to expand our accounts and our client base are supported by market research, comprehensive sales training programs and extensive marketing databases. Our sales efforts are also supported by a full array of marketing programs designed to raise awareness of the Watson Wyatt Worldwide brand and our reputation within our target markets. These programs promote our thought leadership on key human resource issues, and establish us as a preferred human capital and financial services consulting firm to many of the world’s largest companies.

Clients

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

Competition

The human capital consulting industry is highly competitive.  We believe there are several barriers to entry – such as the need to assemble specialized intellectual capital to provide expertise on a global scale – and that we have developed competitive advantages in providing human resources consulting services. However, we face intense competition from several different sources.

Our current and anticipated competitors include:

·             Major human resources-focused consulting firms that compete in serving the large employer market worldwide, including Hewitt Associates, Mercer and Towers Perrin

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

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

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

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

The market for our services is subject to change as a result of increased regulatory, legislative, competitive and technological developments and competition from established and new competitors.  We believe the primary factors in selecting a human resources consulting firm include reputation, the ability to provide measurable increases to shareholder value, global scale, service quality and the ability to tailor services to a clients’ unique needs.  We believe we compete favorably with respect to these factors.

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Employees

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

The increase in headcount is primarily due to the acquisition of Heissmann at the beginning of fiscal year 2008 which accounts for 360 associates, all of which were in the Benefits group.  None of our associates are subject to collective bargaining agreements.  We believe relations between management and associates are good.

Item 1A – Risk Factors

In addition to the factors discussed elsewhere in this report, the following are some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements. These risk factors should be carefully considered in evaluating our business.  The descriptions below are not the only risks and uncertainties that we face.  Additional risks and uncertainties that are presently unknown to us, may also impair our business operations, financial condition or results. If any of the risks and uncertainties below or other risks were to occur, our business operations, financial condition or results of operations could be materially and adversely impacted.

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

Watson Wyatt’s success depends on its ability to attract, retain and motivate qualified personnel generally, including executive officers, key management personnel and consultants. We cannot assure that we will be able to attract and retain qualified consultants, management and other personnel necessary for the delivery 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 business generation capabilities and project execution skills of our consultants. In particular, our consultants’ personal relationships with our clients are a critical element of obtaining and maintaining client engagements. Losing consultants and account managers who manage substantial client relationships or possess substantial experience or expertise could adversely affect our ability to secure and complete engagements, which would adversely affect our results of operations. In addition, if any of our key consultants were to join an existing competitor or form a competing company, existing and potential clients could choose to use the services of that competitor instead of our services. There can be no assurance that confidentiality and non-competition agreements signed by senior consultants will be effective in preventing a loss of business.

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The trend of employers shifting from defined benefit plans to defined contribution plans could adversely affect our business and our operating results.

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

We are subject to risks of doing business internationally.

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

·                  currency exchange rate fluctuations;

·                  unexpected increases in taxes;

·                  compliance with a variety of international laws, as well as U.S. laws affecting the activities of U.S. companies abroad ;

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

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

·                  unusual and unexpected monetary exchange controls; or

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Insurance may become more difficult or expensive to obtain.

Insurance markets have hardened over recent years for some classes of professional liability risk.  As the number of claims has increased against professionals and against actuaries in particular, the cost of malpractice insurance has trended upward, deductibles or self-insured retentions have increased and levels at which reinsurance will cover losses have risen; these adverse trends may continue.  Availability and price of insurance are subject to many variables, including general market conditions, loss experience in related industries and in the actuarial and benefits consulting industry, and the specific claims experience of an individual firm. Because we now provide services in a larger geographic market as a result of our business combinations, we therefore may be exposed to a greater number of claims arising from our expanded operations.  In the future there can be no assurance that we will continue to be able to obtain insurance on comparable terms to what we have obtained in the past. Increases in the cost of insurance could affect our profitability and the unavailability of insurance to cover certain levels of risk could have an adverse effect on our financial condition, particularly in a specific period.

We are engaged, through our subsidiaries, in providing services outside of our core human resources consulting business, which may carry greater risk of liability.

We intend to continue to grow the business of providing consulting services to institutional investment and insurance and financial services companies. The risk of malpractice claims from these lines of business may be greater than from our core human resource consulting business and claims may be for significant amounts. Contractual provisions intended to mitigate risk may not be enforceable in litigation or in some jurisdictions or in connection with claims involving breaches of fiduciary duty or other alleged errors or omissions.

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

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

·                  The size and scope of assignments; and

·                  General economic conditions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Item 1B. Unresolved SEC Comments

None.

Item 2.  Properties.

As of June 30, 2008, we operated in 107 offices in principal markets throughout the world.  Operations of each of our segments are carried out in leased offices under operating leases that typically do not exceed 10 years in length. We do not anticipate difficulty in meeting our space needs at lease expiration.

The fixed assets owned by Watson Wyatt represented approximately 11 percent of total assets at June 30, 2008, and consisted primarily of computer equipment and software, office furniture and leasehold improvements.

Item 3.  Legal Proceedings.

From time to time, we are a party to various lawsuits, arbitrations or mediations that arise in the ordinary course of business.  The disclosure called for by Item 3 regarding our legal proceedings is incorporated by reference herein from Note 13 “Commitments and Contingent Liabilities,” of the Notes to the Consolidated Financial Statements in this Form 10-K for the year ended June 30, 2008.

Item 4.  Submission of Matters to a Vote of Security Holders.

None.

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Part II

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

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

An additional 1,950,000 shares were paid to the former partners of WWLLP on April 15, 2008, after the achievement by the acquired business of certain agreed-upon financial performance goals.  Sale of these shares will be restricted until July 31, 2009.  See Note 2 of Notes to the Consolidated Financial Statements included in Item 15 of this report for further information regarding the WWLLP business combination. The diluted earnings per share calculation assumes these shares had been issued since July 31, 2005.

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

Market Information

Watson Wyatt Worldwide, Inc. Class A common stock is currently traded on the New York Stock Exchange and NASDAQ under the symbol WW.  The following table sets forth the range of high and low closing share prices for each quarter of fiscal years 2008 and 2007, determined by the daily closing stock prices.

Holders

As of June 30, 2008, there were approximately 380 registered shareholders of our Class A common stock.

Dividends

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

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The continued payment of cash dividends in the future is at the discretion of our board of directors and depends on numerous factors, including, without limitation, our net earnings, financial condition, availability of capital, debt covenant limitations and our other business needs, including those of our subsidiaries and affiliates. Additionally, our credit facility requires us to observe certain covenants, including requirements for minimum net worth, which potentially act to restrict dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

Our equity compensation plans include the 2000 Long-Term Incentive Plan, which provides for the granting of nonqualified stock options and stock appreciation rights, the 2001 Employee Stock Purchase Plan, the 2001 Deferred Stock Unit Plan for Selected Employees and the Amended Compensation Plan for Outside Directors.  We grant deferred stock units to certain senior associates through the Watson Wyatt & Company Performance Share Bonus Incentive Program as a part of their annual discretionary compensation and have discontinued the issuance of stock options.  All deferred stock units issued in connection with the 2001 Deferred Stock Unit Plan were fully vested upon issuance.  All of our equity compensation plans have been approved by stockholders.  See Note 9 of the Notes to the Consolidated Financial Statements for the general terms of these plans.

The following chart gives aggregate information regarding grants under all of the company’s equity compensation plans through June 30, 2008:

(1) Includes 2,548,915 shares remaining available for future issuance under the 2000 Long-Term Incentive Plan, 420,714 shares under the 2001 Employee Stock Purchase Plan, 1,191,026 shares under the 2001 Deferred Stock Unit Plan for Selected Employees, and 77,045 shares under the Amended Compensation Plan for Outside Directors.

In August 2001, the board of directors adopted the company’s 2001 Employee Stock Purchase Plan (the “ESPP”), which subsequently was approved by the stockholders in November 2001.  The ESPP is intended to provide employees of the company with additional incentives by permitting them to acquire a proprietary interest in the company through the purchase of shares of the company’s common stock.  With regard to the Deferred Stock Unit Plan for Selected Employees, an additional 1,200,000 shares of common stock were authorized and reserved for issuance at the 2006 Annual Meeting of Stockholders in November 2006.

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Performance Graph

This information is incorporated by reference to the definitive Watson Wyatt Worldwide, Inc. Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

Issuer Purchases of Equity Securities

The table below presents specified information about the company’s stock repurchases during the fourth quarter of fiscal year 2008 and the remaining number of shares that may be purchased under the plan:

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

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

Item 6.  Selected Consolidated Financial Data

The table on the following page sets forth selected consolidated financial data of Watson Wyatt for each of the years in the five-year period ended June 30, 2008.  The selected consolidated financial data as of June 30, 2008 and 2007, and for each of the three years in the period ended June 30, 2008, were derived from the audited consolidated financial statements of Watson Wyatt included in this Form 10-K.  The selected consolidated financial data as of June 30, 2006, 2005 and 2004, and for each of the years ended June 30, 2005 and 2004, were derived from audited consolidated financial statements of Watson Wyatt not included in this Form 10-K.  The consolidated financial data should be read in conjunction with our Consolidated Financial Statements and notes thereto.

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

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

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

Special Note Regarding Forward-Looking Statements

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

·                  our ability to integrate acquired businesses into our own business, processes and systems, and achieve the anticipated results;

·                  our continued ability to recruit and retain qualified associates;

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

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

·                  declines in demand for our services;

·                  outcomes of pending or future professional liability cases and the availability and capacity of professional liability insurance to fund the outcome of pending cases or future judgments or settlements;

·                  our ability to obtain professional liability insurance;

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

·                  actions by competitors offering human resources consulting services, including public accounting and consulting firms, technology consulting firms and Internet/intranet development firms;

·                  our ability to achieve cost reductions after our recent acquisitions;

·                  foreign currency exchange and interest rate fluctuations;

·                  exposure to liabilities that have not been expressly assumed in our acquisition transactions;

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

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

·                  regulatory developments abroad and domestically that impact our business practice;

·                  legislative and technological developments that may affect the demand for or costs of our services;

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

Executive Overview

Watson Wyatt is a global consulting firm focusing on providing human capital and financial consulting services.  We provide services in five principal practice areas: Benefits, Technology and Administration Solutions, Human Capital Consulting, Investment Consulting and Insurance and Financial Services, operating from 32 countries throughout North America, Europe, Asia Pacific, Latin America, Africa and the Middle East.

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In the short term, our revenues are driven by many factors including the general state of the global economy and the resulting level of discretionary spending by our clients, the ability of our consultants to attract new clients or cross-sell to existing clients, and the impact of new regulations in the legal and accounting fields that most recently increased demand for our executive compensation and benefits practices.  In the long term, we expect that the company’s financial results will depend in large part upon how well we succeed in deepening our existing client relationships through thought leadership and focus on cross-practice solutions, actively pursuing new clients in our target markets, cross selling and strategic acquisitions.  We believe that the highly fragmented industry in which we operate represents tremendous growth opportunities for us, because we offer a unique business combination of benefits and human capital consulting as well as strategic technology solutions.

We design, develop and implement human resource strategies and programs through the following closely-interrelated practice areas:

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

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

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

Investment Consulting Group - Our Investment Consulting Group accounts for 10 percent of our total fiscal year 2008 revenues.  This business, although relationship based, can be affected by volatility in investment returns, particularly as clients look to us for assistance in managing that volatility.

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

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Financial Statement Overview

Watson Wyatt’s fiscal year ends June 30.

The company has acquired many entities over the past three fiscal years including, WWLLP, WWN and Heissmann.  The WWLLP business combination was completed July 31, 2005 and as a result, our financial statements reflect the consolidation of the European operations through 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 recorded its share of the results of WWLLP and WWHE using the equity method of accounting.  This income is reflected in the “Income from affiliates” line on our income statement.  Our share of the results of our affiliated captive insurance company, Professional Consultants Insurance Company, Inc. (PCIC), continues to be recorded using the equity method of accounting, and is also reflected in the “Income from affiliates” line.  WWN and Heissmann were purchased on February 1, 2007 and July 20, 2007, respectively.  Our financial statements reflect the consolidation of these two entities effective February 1, 2007 and July 1, 2007, respectively.

We derive 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 generally recognized as services are performed. For fiscal years 2008, 2007, and 2006, no single client accounted for more than 2 percent of our consolidated revenue for any of the most recent three fiscal years.

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

(1) Germany includes the revenue from Heissmann which was acquired by the company in fiscal year 2008.

In delivering consulting services, 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.

Professional and subcontracted services represent fees paid to external service providers for employment, marketing and other services, including reserves for professional liability claims.  For the last three fiscal years, approximately 60 to 70 percent of these professional and subcontracted services were directly incurred on behalf of our clients and were reimbursed by them, with such reimbursements being included in revenue.

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

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

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our estimates, judgments and assumptions are 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 are critical accounting policies include revenue recognition, valuation of billed and unbilled receivables from clients, discretionary compensation, income taxes, pension assumptions, incurred but not reported claims, and goodwill and intangible assets. The critical accounting policies discussed below involves making difficult, subjective or complex accounting estimates that could have a material effect on our financial condition and results of operations. These critical accounting policies require us to make assumptions about matters that are highly uncertain at the time of the estimate or assumption and different estimates that we could have used or changes in the estimate that are reasonably likely to occur may have a material impact on our financial statements and results of operations.

Revenue Recognition

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

Revenue for fixed-fee arrangements, which span multiple months, is based upon the percentage of completion method.  The company typically has three types of fixed-fee arrangements:  annual recurring projects, projects of a short duration, and non-recurring system projects.  Annual recurring projects and the projects of short duration are typically straightforward and highly predictable in nature.  As a result, the project manager and financial staff are able to identify, as the project status is reviewed and bills are prepared monthly, the occasions when cost overruns could lead to the recording of a loss accrual.

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

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Revenue recognition for fixed-fee engagements is affected by a number of factors that change the estimated amount of work required to complete the project such as changes in scope, the staffing on the engagement and/or the level of client participation.  The periodic engagement evaluations require us to make judgments and estimates regarding the overall profitability and stage of project completion that, in turn, affect how we recognize revenue.  The company recognizes a loss on an engagement when estimated revenue to be received for that engagement is less than the total estimated direct and indirect costs associated with the engagement.  Losses are recognized in the period in which the loss becomes probable and the amount of the loss is reasonably estimable.  The company has experienced certain 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 programs and technologies that we provide to clients in connection with consulting services.  In most instances, such software is hosted and maintained by the company and ownership of the technology and rights to the related code remain with the company.  Software developed to be utilized in providing services to a client, but for which the client does not have the contractual right to take possession, is capitalized in accordance with the AICPA’s Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”  Revenue associated with the related contract, together with amortization of the related capitalized software, is recognized over the service period.  As a result we do not recognize revenue during the implementation phase of an engagement.

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

Valuation of Billed and Unbilled Receivables from Clients

We maintain allowances for doubtful accounts to reflect estimated losses resulting from our clients’ failure to pay for our services after the services have been rendered, including allowances when customer disputes may exist.  The related provision is generally recorded as a reduction to revenue.  Our allowance policy is based on the aging of our billed and unbilled client receivables and has been developed based on our write-off history.  Facts and circumstances such as the average length of time the receivables are past due, general market conditions, current economic trends and our clients’ ability to pay may cause fluctuations in our valuation of billed and unbilled receivables.

Discretionary Compensation

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

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

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Income Taxes

The company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”, which prescribes the use of the asset and liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect. Valuation allowances are established , when necessary, to reduce deferred tax assets when it is more likely than not that a portion or all of a given deferred tax asset will not be realized. In accordance with SFAS No. 109, income tax expense includes (i) deferred tax expense, which generally represents the net change in the deferred tax asset or liability balance during the year plus any change in valuation allowances and (ii) current tax expense, which represents the amount of tax currently payable to or receivable from a taxing authority plus amounts accrued for expected tax contingencies (including both tax and interest). Reserves for income tax-related uncertainties are based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for tax contingencies are provided for in accordance with the requirements of FIN 48.

Pension Assumptions

We sponsor both qualified and non-qualified, non-contributory defined benefit pension plans in North America and the U.K. that cover approximately 85% of our liability.  Under our plans in North America, benefits are based on the number of years of service and the associate’s compensation during the five highest paid consecutive years of service.  Beginning January 2008, we have made changes to our plan in the U.K. related to years of service used in calculating benefits for associates.  Benefits earned prior to January 2008 are based on the number of years of service and the associate’s compensation during the three years before leaving the plan and benefits earned after January 2008 are based on the number of years of service and the associate’s average compensation during the associate’s term of service since that date.  The non-qualified plan, included only in North America, provides for pension benefits that would be covered under the qualified plan but are limited by the Internal Revenue Code.  The non-qualified plan has no assets and therefore is an unfunded arrangement.  The benefit liability is reflected on the balance sheet.  The measurement date for each of the plans is June 30.

Determination of our obligations and annual expense under the plans is based on a number of assumptions that, given the longevity of the plans, are long-term in focus.  A change in one or a combination of these assumptions could have a material impact on our pension benefit obligation and related expense.  For this reason, management employs a long-term view so that assumptions do not change frequently in response to short-term volatility in the economy.  Any difference between actual and assumed results is amortized into our pension expense over the average remaining service period of participating employees.  We consider several factors prior to the start of each fiscal year when determining the appropriate annual assumptions, including economic forecasts, relevant benchmarks, historical trends, portfolio composition and peer comparisons.

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North America

The following assumptions were used at the end of the past three fiscal years in the valuation of our North American plans:

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

The expected long-term rate of return on assets assumption remained at 8.75 percent per annum, unchanged from fiscal years 2007 and 2006. Selection of the return assumption at 8.75 percent per annum was supported by an analysis performed by the company of the weighted average yield expected to be achieved with the anticipated makeup of investments.  The investment makeup is heavily weighted towards equities.  The actual return on assets for fiscal year 2008 was a loss of 10.1 percent, compared to a return of 17.3 percent for fiscal year 2007.

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

The above sensitivities reflect the impact of changing one assumption at a time. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear. The company’s U.S. Other Postretirement Employee Benefits Plan is relatively insensitive to discount rate changes due to the plan provisions that have been established to control costs and as such no sensitivity results are shown in the table above.

United Kingdom

The following assumptions were used at the end of the past three fiscal years in the valuation of our U.K. plan:

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

The expected long-term rate of return on assets assumption increased to 6.46 percent per annum for fiscal year 2008 from 5.69 percent per annum for fiscal year 2007.  The rate of return was supported by an analysis performed by the company of the weighted average return expected to be achieved with the anticipated makeup of investments which is heavily weighted towards bonds.  The actual return on assets through fiscal year 2008 was a loss of 2.1 percent compared to a gain of 16.4 percent for fiscal year 2007.

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

The differences in the discount rate and compensation level assumption used for the North American and U.K. plans above can be attributed to the differing interest rate environments associated with the currencies and economies to which the plans are subject.  The differences in the expected return on assets are primarily driven by the respective asset allocation in each plan, coupled with the return expectations for assets in the respective currencies.  The North American plans are approximately 60 percent invested in equities, which on average provide a higher return than bonds, which is the predominant investment for the U.K. plans.

Incurred But Not Reported Claims

The company uses actuarial assumptions to estimate and record a liability for incurred but not reported (IBNR) professional liability claims.  Our estimated IBNR liability is based on long-term trends and averages, and reflects consideration of a number of factors, including changes in claim reporting patterns, claim settlement patterns, judicial decisions, and legislation and economic decisions, but excludes the effect of claims data for large cases due to the insufficiency of actual experience with such cases.  Management does not currently expect significant fluctuations in the IBNR liability, based on the company’s historical claims experience.  However, our estimated IBNR liability will fluctuate if claims experience changes over time.

Goodwill and Intangible Assets

In applying the purchase method of accounting for our business combinations, amounts assigned to identifiable assets and liabilities acquired have been based on estimated fair values as of the date of the acquisitions, with the remainder recorded as goodwill. Intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. We evaluate our goodwill for impairment annually and whenever indicators of impairment exist. The evaluation is based upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the net assets for that reporting unit. The fair values used in this evaluation are estimated based upon a multiple of revenue for the reporting unit. This revenue multiple is based on our experience and knowledge of our own and other transactions in the marketplace. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise.

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

Results of Operations

The following table sets forth Consolidated Statement of Operations data as a percentage of revenue for the periods indicated:

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

Revenue

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

The average exchange rate used to translate our revenues earned in British pounds sterling increased to 2.0114 for fiscal year 2008 from 1.9391 for fiscal year 2007, and the average exchange rate used to translate our revenues earned in Euros increased to 1.4736 for fiscal year 2008 from 1.3113 for fiscal year 2007.  The appreciation of the British pound and the Euro resulted in $34 million of the increase in revenues in fiscal 2008.  Changes in the value of other foreign currencies relative to the U.S. dollar resulted in $16 million of the increase in fiscal year 2008 revenues.

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

·                  The Benefits Group increased revenues $172.6 million, or 21 percent, over fiscal year 2007.  Approximately $97.7 million of the increase is due to the acquisitions of Heissmann and Watson Wyatt Netherlands.  The remainder of the increase is due to increased demand for our services, primarily in the U.S. and Europe, and changes in foreign exchange rates.  The strengthening of the European and Canadian currencies accounted for 3 percentage points of the increase.  Excluding the impact of acquisitions and changes in foreign exchange rates, the Benefits Group revenue growth was 6%.

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

·                  The Human Capital Group increased revenues $26.1 million, or 15 percent, over fiscal year 2007, primarily due to increased demand for our compensation consulting and our data services.  The strengthening of the European and Canadian currencies accounted for 3 percentage points of the increase.

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

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

Salaries and Employee Benefits

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

 Professional and Subcontracted Services

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

Occupancy, Communications and Other

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

General and Administrative Expenses

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

Depreciation and Amortization

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

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

Income/(Loss) From Affiliates

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

Interest Income

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

Interest Expense

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

Other Non-Operating Income/(Loss)

Other non-operating income was $0.5 million for fiscal year 2008, an increase of $0.3 million from $0.2 million during fiscal year 2007.  The increase was mainly due to additional payments on divestitures, including payments for the sales of $0.3 million of the financial planning practice in Australia and $0.2 million of the company’s multi-employer retirement consulting business.

Income From Continuing Operations Before Income Taxes

Income from continuing operations before income taxes for fiscal year 2008 was $228.9 million, an increase of 29.7 percent from $176.5 million during fiscal year 2007.  As a percentage of revenue, income from continuing operations for fiscal year 2008 increased to 13.0 percent from 11.9 percent.

Provision for Income Taxes

Provision for income taxes for fiscal year 2008 was $73.5 million, compared to $60.2 million for fiscal year 2007. Our effective tax rate was 32.1 percent for fiscal year 2008 and 34.1 percent for fiscal year 2007.  The tax rate decrease is due to the geographic mix of income and the release of tax reserves.  The company has not provided U.S. deferred taxes on cumulative earnings of foreign subsidiaries that have been reinvested indefinitely, which also includes foreign subsidiaries affiliated with the WWLLP business combination.  We record a tax benefit on foreign net operating loss carryovers and foreign deferred expenses only if it is more likely than not that a benefit will be realized.

Income From Continuing Operations

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

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Earnings Per Share, Income From Continuing Operations

Diluted earnings per share, income from continuing operations was $3.50 for fiscal year 2008, compared to $2.60 for fiscal year 2007. The diluted earnings per share calculations assume that the 1,950,000 contingent shares related to the WWLLP business combination have been issued and outstanding since July 31, 2005. The diluted earnings per share calculation for 2008 also assumes that the 218,089 WWN contingent shares were also outstanding at the beginning of the fiscal year.

 Discontinued Operations

During 1998, the company exited from its benefits administration outsourcing business, Wellspring Resources, LLC (“Wellspring”).  Discontinued operations for fiscal year 2006 reflects the reduction of the company’s accrual for the estimated remaining future obligations and costs related to the exit from Wellspring by $1.75 million less the associated income tax expenses.  Also, during fiscal year 2006 the company received sublease income of approximately $64,000 in excess of lease payments related to Wellspring.  See Note 15 of the Notes to the Consolidated Financial Statements for more information related to Wellspring.

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

Revenue

Revenues for fiscal year 2007 were $1.49 billion, an increase of $215 million, or 17 percent, from $1.27 billion in fiscal year 2006.  The WWLLP business combination was completed on July 31, 2005, and therefore, fiscal year 2006 only includes eleven months of our European operations.  The overall increase in revenues is due to an increase in demand for services in all of our segments, strengthening of the European currencies and the additional month of European operations.

The average exchange rate used to translate our revenues earned in British pounds sterling increased to 1.9391 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 in Euros increased to 1.3113 for fiscal year 2007 from 1.221 for the eleven months ended June 30, 2006.  The appreciation of these European currencies resulted in $42 million of the increase in revenues in fiscal year 2007.  Changes in the value of other foreign currencies relative to the U.S. dollar resulted in $4 million of the increase in fiscal year 2007 revenues.

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

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

·                  Technology and Administration Solutions increased revenues $24.7 million, or 19 percent, over fiscal year 2006, largely due to an increase in the number of projects that went into service in the U.S. during the fiscal year.  In accordance with EITF 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity’s Hardware” (EITF 00-3), the company begins recognizing revenue after projects go into service.  No revenues are recognized during project implementation.  At June 30, 2007, the company had 84 projects in service delivery and 67 projects in implementation.  At June 30, 2006, the company had 51 projects in service delivery and 58 projects in implementation.  The inclusion of an additional month of European revenues and the strengthening of the European currencies each accounted for 4 percentage points of the increase in fiscal year 2007.

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·                  Human Capital Group increased revenues $23.7 million, or 16 percent, over fiscal year 2006 primarily due to increased demand for our compensation consulting and our data services.  The inclusion of an additional month of European revenues and the strengthening of the European currencies each accounted for 2 percentage points of the increase in fiscal year 2007.

·                  Investment Consulting increased revenues $42.3 million, or 49 percent, over fiscal year 2006 due to an increase in demand for our services, especially investment strategy advice.  The inclusion of an additional month of European revenues and the strengthening of the European currencies each accounted for 6 and 5 percentage points, respectively, of the increase in fiscal year 2007.

·                  Insurance and Financial Services increased revenues $21.7 million, or 24 percent, over fiscal year 2006 due to an increase in project work, including life insurance consulting projects.  The inclusion of an additional month of European revenues and the strengthening of the European currencies accounted for 10 and 5 percentage points, respectively, of the increase in fiscal year 2007.

Salaries and Employee Benefits

Salaries and 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 million or 15.3 percent.  Of this increase, $15.1 million, or 2.2 percentage points, was attributable to the inclusion of an additional month of European results while 4.1 percentage points was attributable to the strengthening European currencies.  The remaining increase was principally due to higher salaries of $69.0 million, partially due to a $4.2 million Long Term Incentive Plan accrual and a 5.9 percent increase in headcount, a $24.5 million increase in discretionary compensation, increased benefits expense of $3.5 million, and less capitalization of $5.7 million of time spent customizing in-house administration systems, in accordance with AICPA’s Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”.  The increase was partially offset by a decrease in pension expense of $11.2 million.  As a percentage of revenue, salaries and employee benefits decreased to 54.2 percent from 55.0 percent.

Professional and Subcontracted Services

Professional and subcontracted 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 1.9 percentage points, was attributable to the inclusion of an additional month of European results while 4.6 percentage points was attributable to the strengthening European currencies.  The remaining increase was principally due to higher reimbursable expenses incurred on behalf of clients. As a percentage of revenue, professional and subcontracted services increased to 6.7 percent from 6.6 percent.

Occupancy, Communications and Other

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

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General and Administrative Expenses

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

Depreciation and Amortization

Depreciation and amortization for fiscal year 2007 was $57.2 million, compared to $44.9 million for fiscal year 2006, an increase of $12.3 million or 27.4 percent.  Of this increase, $0.9 million, or 2.0 percentage points, was attributable to the inclusion of an additional month of European results while 4.0 percentage points, was attributable to the strengthening European currencies.  The remaining increase was due to $7.8 million of amortization on internally developed software used to support our Benefits Group and Technology and Administration Solutions Group and $3.6 million higher depreciation expense on capital assets and amortization of intangibles.  As a percentage of revenue, depreciation and amortization increased to 3.9 percent from 3.5 percent.

  Income/(Loss) From Affiliates

Loss from affiliates was $5.5 million for fiscal year 2007 compared to income of $1.1 million for fiscal year 2006.  The loss in fiscal year 2007 reflects our share of PCIC’s loss compared to our share of  PCIC’s earnings in fiscal year 2006.  Our share of those losses are the result of a substantial increase in PCIC’s reserves during the third quarter of fiscal year 2007 in response to unusually rapid development of several claims against its three participating firms.  Fiscal year 2006 also includes our share of results from our European affiliates for the month of July 2005, after which time the WWLLP business combination was consummated.

Interest Income

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

  Interest Expense

Interest expense 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 year 2007.  The $105 million of borrowings on the balance sheet as of June 30, 2007 was borrowed on June 29, 2007 in anticipation of closing the Heissmann acquisition in early July.

Other Non-Operating Income/(Loss)

Other non-operating income/(loss) in fiscal year 2006 includes a $1.4 million gain recognized by the company on the sale of its New Zealand operations, netted against a loss of $3.6 million on a foreign exchange forward contract entered into in conjunction with the WWLLP business combination.

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Income From Continuing Operations Before Income Taxes

Income from continuing operations before income taxes for fiscal year 2007 was $176.5 million, an increase of 34.0 percent from $131.7 million during fiscal year 2006.  As a percentage of revenue, income from continuing operations for fiscal year 2007 increased to 11.9 percent from 10.3 percent.

Provision for Income Taxes

Provision for income taxes for fiscal year 2007 was $60.2 million, compared to $45.6 million for fiscal year 2006. Our effective tax rate was 34.1 percent for fiscal year 2007 and 34.6 percent for fiscal year 2006.  The tax rate decrease is due to the geographic mix of income and the release of tax reserves.  The company has not provided U.S. deferred taxes on cumulative earnings of foreign subsidiaries that have been reinvested indefinitely, which also includes foreign subsidiaries affiliated with the WWLLP business combination.  We record a tax benefit on foreign net operating loss carryovers and foreign deferred expenses only if it is more likely than not that a benefit will be realized.

Income From Continuing Operations

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

Earnings Per Share, Income From Continuing Operations

Diluted earnings per share, income from continuing operations was $2.60 for fiscal year 2007, compared to $1.99 for fiscal year 2006. The diluted earnings per share calculation assumes that the 1,950,000 contingent shares related to the WWLLP business combination have been issued and outstanding since July 31, 2005.

Discontinued Operations

During 1998, the company exited from its benefits administration outsourcing business, Wellspring Resources, LLC (“Wellspring”).  Discontinued operations for fiscal year 2006 reflects the reduction of the company’s accrual for the estimated remaining future obligations and costs related to the exit from Wellspring by $1.75 million less the associated income tax expenses.  Also, during fiscal year 2006 the company received sublease income of approximately $64,000 in excess of lease payments related to Wellspring.  See Note 15 of the Notes to the Consolidated Financial Statements for more information related to Wellspring.

Liquidity and Capital Resources

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

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

Under the terms of the WWLLP Business Combination, we are required under certain circumstances to place funds into an insurance trust designed to satisfy potential litigation settlement related to the former partners of WWLLP.  If the assets of the trust are not used by 2017, they will be returned to the company. As of June 30, 2008, we maintained $6.6 million of restricted cash related to this obligation. This restricted cash balance was included in Other Assets on our consolidated balance sheet.

Cash From Operating Activities

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

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

Cash from operating activities for fiscal year 2007 was $167.1 million, compared to cash from operating activities of $169.1 million for fiscal year 2006.

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

Cash Used in Investing Activities

Cash used in investing activities for fiscal year 2008 was $204.6 million, compared to $114.2 million for fiscal year 2007.  The difference can be primarily attributed to the Heissmann business combination and other acquisition related payments totaling $138.8 million.

Cash used in investing activities for fiscal year 2007 was $114.2 million, compared to $202.3 million for fiscal year 2006.  The difference can be primarily attributed to a reduction in the amounts spent on acquisitions and contingent consideration payments in fiscal year 2007.  Expenditures of capital funds were $44.0 million for fiscal year 2007.

Cash (Used in) From Financing Activities

Cash used in financing activities was $188.8 million for fiscal year 2008, compared to $27.2 million from financing activities during fiscal year 2007.  The difference was primarily attributable to net debt repayments of $105.0 million in fiscal year 2008, compared to net borrowings of $75 million during fiscal year 2007 and higher stock repurchases of $33.7 million.

Cash from 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 to higher 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 looking foreign currency contract.

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Capital Commitments

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

Dividends

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

Under our credit facility in effect as of June 30, 2007 (see Note 9 of Notes to the Consolidated Financial Statements included in Item 15 of this report), we are required to observe certain covenants (including requirements for a fixed coverage charge, cash flow leverage ratio and asset coverage) that affect the amounts available for the declaration or payment of dividends.  The continued payment of cash dividends in the future is at the discretion of our Board of Directors and depends on numerous factors, including, without limitation, our net income, financial condition, availability of capital, debt covenant limitations and our other business needs, including those of our subsidiaries and affiliates.

Off-Balance Sheet Arrangements and Contractual Obligations

(1) Pension Contributions for this category cannot be estimated.

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

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

Credit Agreement

The company has a credit facility provided by a syndicate of banks in an aggregate principal amount of $300 million.  Interest rates associated with this facility vary with LIBOR and/or the Prime Rate and are based on our leverage ratio, as defined by the credit agreement.  We are charged a quarterly commitment fee, currently 0.125 percent of the facility, which varies with our financial leverage and is paid on the unused portion of the credit facility.  The company had no borrowings under the credit facility as of June 30, 2008 compared to $105.0 million of borrowings outstanding under the facility at June 30, 2007.  Credit under the facility is available upon demand, although the credit facility requires us to observe certain covenants (including a cash flow leverage ratio and a fixed coverage charge ratio) and is collateralized with a pledge of stock of material subsidiaries.  We were in compliance with both covenants under the credit facility as of June 30, 2008. This facility is scheduled to mature on June 30, 2010.

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

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

Risk Management

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

In formulating its premium structure, PCIC estimates the amount it expects to pay for losses (and loss expenses) for all the members as a whole and then allocates that amount to the member firms based on the individual member’s expected losses.  PCIC bases premium calculations, which are determined annually based on experience through March of each year, on relative risk of the various lines of business performed by each of the owner companies, past claim experience of each owner company, growth of each of those companies, industry risk profiles in general and the overall insurance markets.