ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Introduction

The Company’s reporting currency is the UK pound sterling. However, the Company’s significant international operations give rise to an exposure to changes in foreign exchange rates. The Group seeks to mitigate the effect of these structural currency exposures by borrowing in the same currencies as the operating (or “functional”) currencies of its main operating units. The majority of the Group’s debt is therefore denominated in US dollars, pounds sterling and euros.

To neutralise foreign exchange impact and to better illustrate the underlying change in revenue and profit from one year to the next, the Company has adopted the practice of discussing results in both reportable currency (local currency results translated into pounds sterling at the prevailing foreign exchange rate) and constant currency (current and prior year local currency results translated into US dollars at a budget, or “constant”, foreign exchange rate).

Certain Non GAAP measures included in this operating and financial review and prospects have been derived from amounts calculated in accordance with IFRS but are not themselves IFRS measures. They should not be viewed in isolation as alternatives to the equivalent IFRS measure, rather should be read in conjunction with the equivalent IFRS measure. These include headline PBIT and headline PBIT margin (headline PBIT as a percent of revenues) on a consolidated basis, free cash flow, and net debt, which we define, explain their use and reconcile to their nearest IFRS measure on pages 23, 31 and 32. In reviewing year on year revenue growth management also uses the measure of like-for-like revenue as discussed on page 25.

See Item 11 of this report for Quantitative and Qualitative Disclosures about Market Risk.

A. Operating Results

Overview

The Company is one of the world’s most comprehensive marketing communications groups. It operates through a large number of established national, multinational and global advertising and marketing services companies. The Company offers services in four reporting segments:

In 2008, 45% of the Company’s consolidated revenues were derived from Advertising and Media Investment Management, with the remaining 55% of its revenues being derived from the remaining three segments.

The Group has established the following financial and strategic objectives:

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The following discussion is based on the Company’s audited Consolidated Financial Statements beginning on page F-1 of this report. The Group’s consolidated financial statements have been prepared under IFRS.

2008 was largely a year of two contrasting halves. A strong first half (although second-quarter growth wobbled a little), and a weaker second half with slowing organic growth, as the impact of the sub-prime and insurance monoline crises, that started towards the end of 2007, was intensified by the collapse, emergency acquisition and restructuring of financial institutions in many parts of the world. The “Beijing bounce”, anticipated in the Group’s budget and reforecasts for the third quarter of 2008, failed to materialise. In the fourth quarter, better than anticipated revenue growth, combined with decisive action to reduce headcount growth, improved relative performance. Headcount fell through a mixture of non-replacement, the attrition rate and increased severance.

Although the US Presidential Election, the Beijing Olympics and the UEFA football championship had the usual positive maxi-quadrennial effect on client spending in 2008, worldwide advertising and marketing expenditures only rose about 2-3% in the year.

Despite the overall slow-down in the industry growth rate, three engines of relative growth remained. Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe, iconically represented by the BRICs (Brazil, Russia, India and China) and those of the Next 11 markets where we are present (Bangladesh, Egypt, Indonesia, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam), continued to grow faster than last year. As did new media and the application of technology in the form of internet, PC, mobile, video content and social networks, which now account for almost 25% of Group revenues. And finally, as did consumer insight and information, insight and consultancy, which now account for almost 27% of Group revenues.

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Segment performance

Management reviews the Group’s businesses in constant currency to better illustrate the underlying trends from one year to the next and also on a like-for-like basis, in which current year actual results on a constant currency basis (which include acquisitions from the relevant date of completion) are compared with prior year, constant currency actual results adjusted to include the results of acquisitions for the commensurate period in the prior year. Management believes that discussing like-for-like revenues provides a better understanding of the Company’s revenue performance and trends because it allows for more meaningful comparisons of current period revenue to that of prior periods. The following table reconciles revenue growth for 2008 and 2007 to like-for-like revenue growth for the same periods.

To supplement the reportable currency segment information presented in note 2 to the Consolidated Financial Statements, the table below gives details of revenue growth by region and business segment on a reported, constant currency, and like-for-like basis.

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Like-for-like revenue growth was positive across all regions other than North America, which was almost flat.

Asia Pacific, Latin America, Africa and the Middle East continued to be the fastest-growing of the Company’s geographic regions, with Africa and the Middle East being the fastest-growing sub-region. Asia Pacific remained strong across the region, with mainland China up almost 9% and India up 21%, although Japan and Australia were weaker. Continental Europe and the UK, although suffering from the deterioration in economic conditions, both grew over 2% like-for-like. In 2008, Continental Europe remained two-paced, with Western Continental Europe softer and Central and Eastern Europe, Russia and the other CIS countries, in particular, more buoyant. Of the big five Western European markets, Spain and Italy were weakest, France and Germany were stable and the UK was stronger.

Performance of the Group’s businesses is reviewed by management based on headline PBIT. A table showing these amounts by segment and geographical area for each of the three years ended 31 December 2008 is presented in note 2 to the Consolidated Financial Statements.

2008 compared with 2007

Revenues —Reported revenues were up 20.9% in 2008 to £7,476.9 million from £6,185.9 million in 2007 reflecting the strength of the euro and US dollar against sterling, as well as the impact of TNS. On a constant currency basis, revenue was up 9.0% and gross margin up 8.2%, with all regions showing revenue growth, as detailed in the table on page 25. In 2008, acquisitions contributed £376.3 million to revenue (including £269.6 million relating to TNS). Acquisitions completed in 2007 contributed £132.2 million to revenue. On a like-for-like basis revenues were up 2.7%. Revenue growth slowed as the year progressed: on a like-for-like basis, growth of 4.8% in the first quarter slowed to 3.8% in the second, 3.0% in the third and then flattened to 0.1% in the final quarter of the year.

Operating costs —Reported operating costs increased by 21.6%. Staff costs in 2008 were up 20.6%. Charges for incentive payments (including the cost of share-based compensation) fell by over 7% to £214 million from £231 million. The Group’s staff cost-to-revenue ratio improved slightly to 58.2% compared with 58.3% in 2007. Part of the Group’s strategy is to continue to ensure that variable staff costs (freelance, consultants and charges for incentive payments) are a significant proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues and recessions or slow downs. In 2007, the ratio of variable staff costs to total staff costs fell marginally by 0.3 percentage points to 12.7% and in 2008 to 11.4%. As a proportion of revenue, variable staff costs were 7.4% in 2007 and 6.6% in 2008. These variable staff costs provide a “shock absorber” to operating margins as revenues come under increasing pressure.

Establishment costs as a proportion of revenues were 7.0% in 2008 compared to 6.9% in 2007.

Goodwill impairment charges of £84.1 million and £44.1 million were recorded in the years ended 31 December 2008 and 2007, respectively. The impairment charges relate to certain under performing businesses in the Group. In certain markets, the impact of current local economic conditions and trading circumstances on these businesses was sufficiently severe to indicate impairment to the carrying value of goodwill. Additionally, in 2008 and 2007, an impairment charge on acquired intangible assets was recorded for £8.4 million and £1.5 million, respectively, resulting from a decline in the value of certain brands and customer relationships held within Branding & Identity, Healthcare and Specialist Communications. Investment write-downs of £30.5 million taken in 2008 mostly related to listed securities. There were no investment write-downs in 2007.

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Operating profit —Reported operating profit was up 8.9% to £876.0 million in 2008 from £804.7 million in 2007. Reported operating margins decreased from 13.0% to 11.7%. Reported profit before interest and taxation (“PBIT”) was £922.0 million in 2008, up 9.0% from £846.1 million in 2007. Reported PBIT margins were 12.3% and 13.7% in 2008 and 2007, respectively. PBIT margins were negatively impacted by 2.6% in 2008 and 1.4% in 2007 due to goodwill impairment and other goodwill and investment write-downs, and amortisation and impairment of acquired intangibles taken on subsidiaries in each year. The impact of profits on disposal of equity investments was immaterial in both 2008 and 2007. Headline PBIT margins remained at 15.0% in 2008. For 2008, the post-acquisition contribution of all acquisitions to the Group’s operating profit was £30.3 million. For 2007, the post-acquisition contribution of acquisitions to the Group’s operating profit was £14.7 million.

The Group has released £23.7 million in 2008 to operating profit relating to excess provisions and other balances established in respect of acquisitions completed prior to 2007 and £16.8 million in 2007 related to acquisitions completed prior to 2006. Further details of the Group’s approach to acquisition accounting are given in Note 28 to the Consolidated Financial Statements.

Finance income/costs —Finance income increased to £169.6 million in 2008 from £139.4 million in 2007. Finance costs increased to £344.8 million in 2008 from £266.1 million in 2007, therefore, net finance costs increased by £48.5 million, reflecting higher interest rates and increased average net debt due to cash spent on acquisitions, including TNS.

Taxes— The Company’s effective tax rate on reported profits in 2008 was 31.2% compared to 28.4% in 2007. The increase is due to an increase in the charge for impairment of goodwill and intangibles amortization in 2008, a proportion of which is not deductible for taxation purposes.

Profit for the year— PBIT increased by 9.0% from £846.1 million in 2007 to £922.0 million in 2008 on a reported basis but fell by 6% in constant currency, reflecting a combined goodwill and investment write-down of £114.6 million compared to £44.1 million in 2007. Profit before taxation increased by 3.8% from £719.4 million in 2007 to £746.8 million in 2008 on a reported basis but declined by 13.4% in constant currency reflecting increased net finance costs. Profit for the year decreased by 0.2% from £515.1 million in 2007 to £513.9 million in 2008 on a reported basis and by 16.4% in constant currency, reflecting the increased effective tax rate. In 2008, £439.1 million of profit for the year was attributable to equity holders of the parent and £74.8 million attributable to minority interests.

2007 compared with 2006

Revenues —Reported revenues were up 4.7% in 2007 to £6,185.9 million from £5,907.8 million in 2006. On a constant currency basis, revenue was up 8.2% and gross margin up 7.8%, with all regions showing revenue growth. In 2007, acquisitions contributed £132.2 million to revenue. Acquisitions completed in 2006 did not make a material contribution to revenue. On a like-for-like basis revenues were up 5.0% and gross margin was up 5.1%. Like-for-like revenues were up 5.3% in the first half of 2007 and 4.8% in the second half, continuing the strong growth of 5.4% in 2006, with the fourth quarter of 2007 up 4.9%.

Operating costs —Reported operating costs increased by 3.6%. Reported operating costs including direct costs (but excluding goodwill impairment and other goodwill write-downs, amortisation

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and impairment of acquired intangibles and investment gains and write-downs) rose in 2007 by 4.2% and by 7.9% in constant currency (over 4.6 % on a like-for-like basis) from the previous year.

Staff costs excluding incentives (which include the costs of share based payments) in 2007 were up 4.6%. Charges for incentive payments (including the cost of share-based compensation) totaled £230.7 million in 2007 (£246.9 million in 2006), down 6.6%, which represents 20.6% (compared with 23.1%, in 2006) of headline PBIT. Before these incentive payments, operating margins remained strong at 18.7%. The reported staff cost to revenue ratio improved 0.5 margin points to 58.3% compared with 58.8% in 2006.

Part of the Group’s strategy is to continue to increase variable staff costs (freelance, consultants and charges for incentive payments, including share option charges) as a proportion of total staff costs and revenue, as this provides flexibility to deal with volatility in revenues and recessions or slow downs. Variable staff costs as a proportion of total staff costs were 12.7% in 2007, a marginal change of 0.3 percentage points from 13.0% in 2006.

Establishment costs as a proportion of revenues continued to improve slightly from 7.1% in 2006 to 6.9% in 2007, driven by better property utilisation and higher revenues.

Goodwill impairment charges of £44.1 million and £35.5 million were recorded in the years ended 31 December 2007 and 2006, respectively. The impairment charges relate to certain under performing businesses in the Group. In certain markets, the impact of current local economic conditions and trading circumstances on these businesses was sufficiently severe to indicate impairment to the carrying value of goodwill. Goodwill write-downs in relation to the utilisation of pre-acquisition tax losses of £1.7 million and £8.8 million were taken in 2007 and 2006, respectively. These write-downs were due to the better than expected performance of certain acquisitions in the year, which enabled the utilisation of pre-acquisition tax attributes that previously could not be recognised at the time of acquisition due to insufficient evidence that they were recoverable. Additionally, in 2007 and 2006, an impairment charge on acquired intangible assets was recorded for £1.5 million, resulting from certain client relationships which were lost during the years concerned.

Operating profit —Reported operating profit was up 8.5% to £804.7 million in 2007 from £741.6 million in 2006. Reported operating margins increased from 12.6% to 13.0%. PBIT was £846.1 million in 2007, up 8.1% from £782.7 million in 2006. Reported operating margins, including income from associates, were 13.7% and 13.2% in 2007 and 2006, respectively. While margins improved overall they were negatively impacted by 1.4% in 2007 and 1.5% in 2006 due to goodwill impairment and other goodwill write-downs, and amortisation and impairment of acquired intangibles taken on subsidiaries in each year. The impact of profits on disposal of equity investments was immaterial in both 2007 and 2006. Headline PBIT margins increased to 15.0% in 2007 from 14.5% in 2006. For 2007, the post-acquisition contribution of all acquisitions to the Group’s operating profit was £14.7 million. For 2006, the post-acquisition contribution of acquisitions to the Group’s operating profit was not material.

The Group released £16.8 million in 2007 to operating profit relating to excess provisions and other balances established in respect of acquisitions completed prior to 2006 and £10.6 million in 2006 related to acquisitions completed prior to 2005. Further details of the Group’s approach to acquisition accounting are given in Note 28 to the Consolidated Financial Statements.

Finance income/costs —Finance income increased to £139.4 million in 2007 from £111.0 million in 2006 mainly due to higher interest rates on higher cash balances. Finance costs increased to £266.1 million in 2007 from £211.7 million in 2006, reflecting higher interest rates on variable interest

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rate debt. Therefore, net finance costs increased by £26 million, largely reflecting the higher interest rates, the impact of the cash cost of the acquisition of 24/7 Real Media Inc in July 2007, partly offset by the impact of improved liquidity as a result of a reduction in average working capital.

Taxes— The Company’s tax rate on reported profits in 2007 was 28.4% compared to 29.2% in 2006. This decrease reflects the continuing positive impact of the Group’s tax planning initiatives.

Profit for the year— Profit for the year attributable to equity holders of the parent was £465.9 million in 2007 against £435.8 million in 2006. The increase was driven by improved results of operations during the year, partially offset by increased net finance costs.

B. Liquidity and Capital Resources

General —The primary sources of funds for the Group are cash generated from operations and funds available under its credit facilities. The primary uses of cash funds in recent years have been for debt service and repayment, capital expenditures, acquisitions, share repurchases and cancellations and dividends. For a breakdown of the Company’s sources and uses of cash see the “Consolidated Cash Flow Statements” included as part of the Company’s Consolidated Financial Statements in Item 18 of this Report.

The Company spent £1,054.0 million (excluding cash and cash equivalents acquired) and £744.4 million for acquisitions and investments in 2008 and 2007, respectively, including payments on loan note redemptions and earnout consideration resulting from acquisitions in prior years. For the same periods, cash spent on purchases of property, plant and equipment and other intangible assets was £220.6 million and £170.8 million, respectively, and cash spent on share repurchases and buy-backs was £112.2 million and £415.4 million, respectively.

There are broadly three alternative uses of funds: capital expenditure, which usually approximates depreciation cost, mergers and acquisitions, which have historically taken the lion’s share of free cash flow, and dividends and share buy backs. In 2007 the Company boosted the target level of the share buy-back program from 2-3% of the outstanding share capital to 4-5%, spending over £400 million in that year on buy-backs. In the first half of 2008, the Company bought back almost 19 million shares, equivalent to 1.6% of share capital, at a cost of £112 million, but then withdrew from the market during the TNS bid process. For the two years following the acquisition of TNS, we will limit our share buy-back program to a target of 1% of share capital per annum and dividend growth at 15% per annum, subject to review by the Board. We expect these actions, together with a reduced level of acquisition spend (targeted at £100 million per annum), to generate surplus cash and a reduction in borrowing levels. The Board has decided to increase the second interim dividend to 10.28p per share, increasing the full-year dividend 15% to 15.47p per share for 2008.

The Group’s liquidity is affected primarily by the working capital flows associated with its media buying activities on behalf of clients. The working capital movements relate primarily to the Group’s billings. Billings comprise the gross amounts billed to clients in respect of commission-based/fee-based income together with the total of other fees earned. In 2008, billings were £36.9 billion, or 4.9 times the revenue of the Group. The inflows and outflows associated with media buying activity therefore represent significant cash flow within each month of the year and are forecast and re-forecast on a regular basis throughout the year by the Group’s treasury staff so as to ensure that there is continuing coverage of peak requirements through committed borrowing facilities from the Group’s bankers and other sources.

Liquidity risk management —The Group manages liquidity risk by ensuring continuity and flexibility of funding even in difficult market conditions. Undrawn committed borrowing facilities are maintained in

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excess of peak net borrowing levels and debt maturities are closely monitored. Targets for average net debt are set on an annual basis and, to assist in meeting this, working capital targets are set for all the Group’s major operations. See the discussions below for the Group’s view on the use of net debt to measure net debt levels.

US Commercial Paper Program —The Group has a $1.4 billion US Commercial Paper Program using the $1.6 billion Revolving Credit Facility described below as a backstop. The Group’s borrowings under this program are notes issued in US dollars and swapped into other currencies as required. The average commercial paper outstanding during the year was $10 million at an average interest rate of 2.83% inclusive of margin. There was no US Commercial Paper outstanding at 31 December 2008.

US$ bonds —The Group has in issue $650 million of 5.875% bonds due June 2014. During the year, the Group repaid $100 million of 6.875% bonds on their due date of July 2008.

Eurobonds —In May 2008, the Group issued € 750 million of 6.625% bonds due May 2016. The Group has in issue € 600 million of 4.375% bonds due December 2013 and € 500 million of 5.25% bonds due January 2015. During the year, the Group repaid € 650 million of 6.0% bonds on their due date of June 2008.

Sterling bond s—The Group has in issue £400 million of 6% bonds due April 2017 and £200 million of 6.375% bonds due November 2020.

Revolving Credit Facilities —The Group has a $1.6 billion seven year Revolving Credit Facility due August 2012. During the year, £1,250 million was raised from the Group’s bankers to assist in the acquisition of TNS. This amount is made up of a £650 million term facility with a final maturity date of July 2010 and a £600 million amortising Revolving Credit Facility maturing in July 2011. The Group’s borrowing under these facilities, which are drawn down predominantly in US dollars, euros, Canadian dollars and pounds sterling, averaged $774 million in 2008. The Group had available undrawn committed credit facilities of £1,074 million at December 2008 (2007: £759 million).

Borrowings under the Revolving Credit Facilities are governed by certain financial covenants based on the results and financial position of the Group, including requirements that (i) the interest coverage ratio for each financial period equal or exceed 5.0 to 1 and (ii) the ratio of borrowed funds to earnings before interest, taxes, depreciation and amortisation at 30 June and 31 December in each year shall not exceed 3.5 to 1, both covenants as defined in the relevant agreement. The Group is in compliance with both covenants.

Convertible bonds —In March 2005, with the purchase of Grey Global Group Inc, the Group acquired $150 million of 5% convertible debentures due 2033. Each debenture holder had the right to require Grey and WPP (as co-obligor) to repurchase on each of 28 October 2008, 2010 and 2013 all or a portion of the holder’s then outstanding debentures at par ($1,000 per debenture) plus the amount of accrued and unpaid interest. This right was exercised during 2008 and all of the debentures were subsequently repurchased.

Hedging of financial instruments —The Group’s policy on interest rate and foreign exchange rate management sets out the instruments and methods available to hedge interest and currency risk exposures and the control procedures in place to ensure effectiveness. The Group uses derivative financial instruments to reduce exposure to foreign exchange risk and interest rate movements. The Group does not hold or issue derivative financial instruments for speculative purposes.

With the acquisition of TNS in October 2008 the Group took on $103 million of 6.34% Senior Notes, $62 million of 6.46% Senior Notes, $10 million of floating rate Senior Notes, $20 million of floating rate Guaranteed Senior Notes, € 20 million of floating rate Senior Notes and £25 million of

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6.51% Senior Notes which were all repaid in January 2009. With the acquisition of TNS, the Group also took on $30 million of 6.22% Senior Notes due July 2012 and $25 million of 6.34% Senior Notes due July 2014.

As at 31 December 2008, the Group’s net debt was £3,068 million, up £1,782 million from £1,286 million in 2007. Net debt averaged £2,206 million in 2008, against £1,458 million in 2007 (up £614 million from £1,592 million at 2008 exchange rates) reflecting the net acquisition cost of TNS and other, smaller acquisitions.

It is expected that in May 2009 the Group will issue £450 million of 5.75% convertible bonds due May 2014. The conversion price has been set at 600 pence per share. The net proceeds of the offering will be used to pay debt drawn under the £650 million term facility discussed on page 30. These securities will not be registered under the Securities Act of 1933, as amended, and may not be offered or sold in the US absent registration or an applicable exemption from registration requirements.

In 2008, operating cash flow before movements in working capital and provisions was £1,304.3 million, net cash inflow from operating activities was £922.7 million after movements in working capital provisions of £109.3 million, tax paid £182.5 million, interest and similar charges paid, interest received and investment income of £134.4 million and dividends from associates of £44.6 million. Free cash flow available for debt repayment, acquisitions, share buy-backs and dividends was £777 million. This free cash flow was absorbed by £1,049 million in net acquisition payments and investments, share repurchases and cancellations of £112 million and dividends of £162 million. This resulted in a net outflow of £546 million.

The Group bases its internal cash flow objectives on free cash flow. Management believes free cash flow is meaningful to investors because it is the measure of our funds available for acquisition-related payments, dividends to shareowners, share repurchases and debt repayment. The purpose of presenting free cash flow is to indicate the ongoing cash generation within the control of the Group after taking account of the necessary cash expenditures of maintaining the capital and operating structure of the Group (in the form of payments of interest, corporate taxation and capital expenditure). Net working capital movements are excluded from this measure since these are principally associated with our media buying activities on behalf of clients and are not necessarily within the control of the Group. This computation may not be comparable to that of similarly titled measures presented by other companies.

A tabular reconciliation of free cash flow is shown below.

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Because of the seasonal swings in our working capital generally, and those resulting from our media buying activities on behalf of our clients in particular, together with the fact that we choose for commercial reasons to locate the debt of the Group in particular countries and leave cash resources in others, though our cash resources could be used to repay the debt concerned, management believes that net debt is an appropriate and meaningful measure of the debt levels within the Group. We similarly believe average net debt to be a more accurate reflection of the amount of debt the Group has supporting its activities through the year.

The following table is an analysis of net debt.

As at 31 December 2008, the Company’s credit rating was “BBB” (S&P) and “Baa2” (Moody’s). The rating agencies have placed the Company’s debt ratings on “negative outlook” which means that, in the event the Company’s financial performance and outlook materially deteriorate, a ratings downgrade could occur.

The Company’s borrowings are evenly distributed between fixed and floating rate debt. Given the strong cash generation of the business, its debt maturity profile and available facilities, the directors believe the Company has sufficient liquidity to match its requirements for the foreseeable future.

As part of the scheme of arrangement on 19 November 2008, 1,252,652,646 ordinary shares were issued at a price of 340.75 pence each. On 24 November 2008 the entire balance standing to the credit of the share premium account was transferred to retained earnings as sanctioned by The Royal Court of Jersey. As a result £4,143.1 million was added to retained earnings for both WPP plc and the Group. For the Company this amount is distributable.

C. Research and Development, Patents and Licenses

Not applicable.

D. Trend Information

The discussion below and in the rest of this Item 5 includes forward-looking statements regarding plans, objectives, projections and anticipated future performance based on assumptions that are subject to risks and uncertainties. As such, actual results or outcomes may differ materially from those discussed in the forward-looking statements. See “Forward-Looking Statements” elsewhere in this annual report.

As the first year of the quadrennial cycle, there are no mini- or maxi-quadrennial events in 2009 to boost client spending. It is true that 2009 was always likely to be a weaker year, but the unprecedented current financial crisis has triggered a vicious recession across the globe.

In the first quarter of 2009, reported revenues rose by 35.9% to £2.117 billion. Revenues in constant currency were up 11.1%, reflecting the weakness of the pound sterling against the US dollar and euro. On a like-for-like basis, excluding the impact of acquisitions and currency fluctuations, revenues were down 5.8%. This reflected cuts in client spending in reaction to the global financial and economic crisis, essentially after both the sub-prime crisis and the collapse of Lehman Brothers in September, as de-stocking followed declines in consumer spending.

The first quarter results reflect the acquisition of Taylor Nelson Sofres plc (“TNS”), which was completed on 29 October 2008. Although, the final quarter of 2008 and especially December, with flat Group revenues, were better than expected, the first three months of 2009 were markedly different, although the rate of decline eased in March, perhaps reflecting some stabilisation or maybe re-stocking of inventories.

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In the first quarter the economic pressure, both in terms of constant currency revenue growth and like-for-like revenue growth, was most keenly felt in the United States, with the United Kingdom less affected and Asia Pacific, Latin America, Africa and the Middle East least affected. Despite the overall position, some parts of the world showed some resilience, with Latin America, Africa and Eastern Continental Europe still showing like-for-like growth. Some countries were particularly affected such as Spain, Italy and Denmark, but others such as Russia and Poland continued to grow. In Asia Pacific, Australia and New Zealand, Japan, Singapore and South Korea were difficult, but Mainland China and India still showed some like-for-like growth. In Latin America, Brazil, Argentina, Mexico and Colombia, all showed like-for-like growth. By communications services sector, advertising and media investment management was least affected on a like-for-like basis, with public affairs and public relations and information, insight and consultancy a little more affected. Branding and identity, healthcare and specialist communications (including direct, internet and interactive) were most affected. Cyclical and structural pressure on traditional media in the developed countries continued, whilst digital media grew faster, although at lower rates. Public relations and public affairs continued to benefit from new media and polling research, although for the first quarter, for some time, less so. The Company’s specialist communications businesses in the United States and Western Europe continued to be impacted by the recession although healthcare showed some improvement, driven by account consolidation new business success.

The Group continues to benefit from consolidation trends in the industry, winning several assignments from existing and new clients. The general economic situation is encouraging a significant number of account reviews, consolidations and new business opportunities, particularly in media investment management.

In the first quarter, although revenue was below budget, operating margins were ahead of budget and revenue shortfalls were offset by operating cost reductions. Operating margins were down against last year, partly due to severance costs as headcount was reduced in line with the fall in revenues.

The Company is in the process of reviewing its quarter one revised forecasts, but indications are that like-for-like revenues will be below budget, closer to recent industry forecasts of mid-single digit declines, reflecting continued pressure in most regions, but most significantly in the United States, Western Continental Europe and parts of Asia Pacific, like Japan and Australia. Given the first quarter overall performance and the preliminary quarter one forecast for the year, it will be difficult to maintain operating margins at the level achieved in 2008, after adjusting for TNS.

E. Off-Balance Sheet Arrangements

Not applicable.

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F. Tabular Disclosure of Contractual Obligations

The following summarises the Company’s estimated contractual obligations at 31 December 2008, and the effect such obligations are expected to have on its liquidity and cash flows in the future periods. Certain obligations presented below held by one subsidiary of the Company may be guaranteed by another subsidiary in the ordinary course of business.

Notes

The Company expects to make annual contributions to its funded defined benefit schemes, as determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due. In 2006 the Group implemented a funding strategy under which we expect to fully eliminate the deficit for funded schemes by 31 December 2010. The total contributions (for funded schemes) and benefit payments (for unfunded schemes) paid for 2008 amounted to £44.2 million (2007: £47.0 million, 2006: £48.6 million). Employer contributions and benefit payments in 2009 are expected to be in the range of £63 million to £90 million depending on the performance of the assets. Projections for years after 2009 are subject to a number of factors, including future asset performance and changes in assumptions which mean the Company is unable to make sufficiently reliable estimations of future contributions.

Property Costs

Our future priority in managing the property portfolio of approximately 19 million sq ft worldwide is to ensure growth in additional square footage is far less than the growth in revenues and headcount. In the short term our objectives will be to manage our lease expiries so that we can reduce our portfolio in line with any short-term reductions in headcount and revenue.

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Inflation

As in 2007, in management’s opinion the effect of inflation has not had a material impact on the Company’s results for the year or financial position as at 31 December 2008.

Use of Estimates

The preparation of financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Critical Accounting Policies

The Company’s financial statements have been prepared in accordance with IFRS. A summary of the Group’s principal accounting policies are described in the Accounting Policies section of the Consolidated Financial Statements, entitled “Accounting Policies”. The Company believes certain of these accounting policies are particularly critical to understanding the more significant judgments and estimates used in the preparation of its consolidated financial statements. Therefore, we have prepared the following supplemental discussion of critical accounting policies, which should be read together with our financial statements and notes thereto.

Goodwill and other intangibles

The Company has a significant amount of goodwill and other intangible assets. In accordance with the guidance provided by IAS 36 ‘Impairment of Assets’, the Company initially tests the carrying value of goodwill and other indefinite lived intangible assets for impairment annually as at 30 June of each year, and then updates the review as at 31 December or whenever there is an indication of impairment.

Under IFRS, an impairment charge is required for both goodwill and other indefinite lived assets when the carrying amount exceeds the ‘recoverable amount’, defined as the higher of fair value less costs to sell and value in use. Our approach in determining the recoverable amount utilises a discounted cash flow methodology, which necessarily involves making numerous estimates and assumptions regarding revenue growth, operating margins, tax rates, appropriate discount rates and working capital requirements. These estimates will likely differ from future actual results of operations and cash flows, and it is possible that these differences could be material. In addition, judgments are applied in determining the level of cash-generating unit we identify for impairment testing and the criteria we use to determine which assets should be aggregated. A difference in testing levels could affect whether an impairment is recorded and the extent of impairment loss. Changes in our business activities or structure may also result in changes to the level of testing in future periods. Further, future events could cause the Company to conclude that impairment indicators exist and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on the Company’s financial condition and results of operations.

In 2007, the Group acquired 24/7 Real Media, Inc. for consideration of approximately £330 million. 24/7 significantly enhances the Group’s digital capability and will make a major contribution to winning new business for the Group, primarily our Advertising and Media Investment Management businesses. For this reason, goodwill relating to 24/7 was reviewed for impairment against the net present value of future cash flows of this segment as the appropriate cash-generating unit.

Historically our impairment losses have resulted from a specific event, condition or circumstance in one of our companies, such as the loss of a significant client. As a result, changes in the assumptions

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used in our impairment model have not had a significant effect on the impairment charges recognised. The carrying value of goodwill and other intangible assets will continue to be reviewed at least annually for impairment and adjusted to the recoverable amount if required.

The most significant assumptions employed by the Company in determining recoverable amounts are as follows:

Future anticipated payments to vendors in respect of contingent consideration (earnouts) are based on the directors’ best estimates of future obligations, which are dependent on the future performance of the interests acquired and assume the operating companies improve profits in line with directors’ estimates. A summary of earnout related obligations included in creditors is shown in note 19 to the Consolidated Financial Statements. WPP has also entered into option agreements that allow the Group’s equity partners to require the Group to purchase the minority interest. These agreements are treated as derivatives over equity instruments and are recorded in the balance sheet at fair value and the valuation is remeasured at year end. Under IFRS, fair value is based on the present value of expected cash outflows. Actual performance may differ from the assumptions used resulting in amounts ultimately paid out with respect to these earnout and option agreements at more or less than the recorded liabilities.

Acquisition accounting

The Group accounts for acquisitions in accordance with IFRS 3 ‘Business Combinations’. IFRS 3 requires the acquiree’s identifiable assets, liabilities and contingent liabilities (other than non-current assets or disposal groups held for sale) to be recognised at fair value at acquisition date. In assessing fair value at acquisition date, management make their best estimate of the likely outcome where the fair value of an asset or liability may be contingent on a future event. In certain instances, the underlying transaction giving rise to an estimate may not be resolved until some years after the acquisition date. IFRS 3 requires the release to profit of any acquisition reserves which subsequently become excess in the same way as any excess costs over those provided at acquisition date are charged to profit. At each period end management assess provisions and other balances established in respect of acquisitions for their continued probability of occurrence and amend the relevant value accordingly through the income statement or as an adjustment to goodwill as appropriate under IFRS 3. In 2008 operating profit includes credits totaling £23.7 million (2007: £16.8 million, 2006: £10.6 million) relating to the release of excess provisions and other balances established in respect of acquisitions completed prior to 2007.

Revenue recognition

Advertising and media investment management revenue is typically derived from commissions on media placements and fees for advertising services. Revenue may consist of various arrangements involving commissions, fees, incentive-based revenue or a combination of the three, as agreed upon with each client.

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Revenue is recognised when the service is performed, in accordance with the terms of the contractual arrangement. Incentive-based revenue typically comprises both quantitative and qualitative elements; on the element related to quantitative targets, revenue is recognised when the quantitative targets have been achieved; on the element related to qualitative targets, revenue is recognised when the incentive is received or receivable.

The Group receives volume rebates from certain suppliers for transactions entered into on behalf of clients that, based on the terms of the relevant contracts and local law, are either remitted to clients or retained by the Group. If amounts are passed on to clients they are recorded as liabilities until settled or, if retained by the Group, are recorded as revenue when earned.

In applying the proportional performance method of revenue recognition for both market research and other long-term contracts, management is required to make significant judgments, estimates and assumptions. In assessing contract performance, both input and output criteria are reviewed. Costs incurred are used as an objective input measure of performance. The primary input of all work performed under these arrangements is labor. As a result of the relationship between labor and cost, there is normally a direct relationship between costs incurred and the proportion of the contract performed to date. Costs incurred as a proportion of expected total costs is used as an initial proportional performance measure. The indicative proportional performance measure is subsequently validated against other more subjective criteria (i.e. relevant output measures) such as the percentage of interviews completed, percentage of reports delivered to a client and the achievement of any project milestones stipulated in the contract. In the event of divergence between the objective and more subjective measures, the more subjective measure takes precedence since these are output measures.

Since project costs can vary from initial estimates, the reliance on total project cost estimate represents an uncertainty inherent in the revenue recognition process. Individual project budgets are reviewed regularly with project leaders to ensure that cost estimates are based upon up to date and as accurate information as possible, and take into account any relevant historic performance experience. Also, the majority of contracted services subject to proportional performance method revenue recognition are in relation to short term projects, averaging approximately 3 months. Due to this close and frequent monitoring of budgeted costs and the preponderance of short term projects, the impact of variances between actual and budgeted project costs has historically been minimal. The Company does not believe that the effect of these uncertainties, taken as a whole, will significantly impact their results of operations in the future.

Pension costs

Pension costs are accounted for in accordance with IAS 19, “Employee Benefits” under IFRS. Pension costs are assessed in accordance with the advice of local independent qualified actuaries. The latest full actuarial valuations for the various schemes were carried out as at various dates in the last three years. These valuations have generally been updated by the local independent qualified actuaries to 31 December 2008.

The Group has a policy of closing defined benefit schemes to new members which has been effected in respect of a significant number of the schemes. As a result, these schemes generally have an ageing membership population. In accordance with IAS 19, the actuarial calculations have been carried out using the projected unit method. In these circumstances, use of this method implies that the contribution rate implicit in the current service cost will increase in future years.

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The Group’s pension deficit was £268.7 million as at 31 December 2008, compared to £133.6 million as at 31 December 2007. The pension deficit is primarily due to a decrease in pension scheme asset values in 2008 and reflects the deterioration in the global economic environment during the year and the effect of foreign exchange rates.

There are a number of areas in the pension accounting that involve judgments made by management. These include establishing the long-term expected rates of investment return on pension assets, mortality assumptions, discount rates, inflation, rate of increase in pensions in payment and salary increases.

Most of the Group’s pension scheme assets are held by its schemes in the UK and North America. In the UK, the forecasted weighted average return on assets decreased from 5.8% as at 31 December 2007 to 5.7% as at 31 December 2008, and in North America, the forecasted weighted average return decreased from 6.7% to 6.6%, broadly in line with the yields available in both markets.

Management reviews the expected long-term rates of return on an annual basis and revises them as appropriate.

Also, we periodically commission detailed asset and liability studies performed by third-party professional investment advisors and actuaries, which generate probability-adjusted expected future returns on those assets. These studies also project our estimated future pension payments and evaluate the efficiency of the allocation of our pension plan assets into various investment categories.

At 31 December 2008, the life expectancies underlying the value of the accrued liabilities for the main defined benefit pension plans operated by the Group were as follows:

In the determination of mortality assumptions, management use the most up-to-date mortality tables available in each country and consistently allows for expected generational improvement.

For a 0.25% increase or decrease in the discount rate at 31 December 2008, the 2009 pension expense would be broadly unchanged as the change in service cost and interest cost are similar. The effect on the year-end 2008 pension deficit would be a decrease or increase, respectively, of approximately £22.5 million.

Contributions to funded schemes are determined in line with local conditions and practices. Certain contributions in respect of unfunded schemes are paid as they fall due. In 2006 the Group implemented a funding strategy under which our objective is to fully eliminate the deficit for funded schemes by 31 December 2010. Employer contributions and benefit payments in 2009 are expected to be in the range of £63 million to £90 million depending on the performance of the assets.

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Deferred taxes

We record deferred tax assets and liabilities using tax rates enacted, or substantively enacted, at the balance sheet date for the effect of temporary differences between book and tax bases of assets and liabilities. Currently we have deferred tax assets resulting from operating loss carryforwards and deductible temporary differences, all of which could reduce taxable income in the future. Based on available evidence, both positive and negative, we determine whether it is probable that all or a portion of the deferred tax assets will be realised. The main factors that we consider include:

If it is our belief that it is probable that some portion of these assets will not be realised, then no asset is recognised in relation to the portion not considered to be realisable. Gross unrecognised assets under IFRS were £3,796.6 million in 2008.

If market conditions improve and future results of operations exceed our current expectations, our existing recognised deferred tax assets may be adjusted, resulting in future tax benefits. Alternatively, if market conditions deteriorate further or future results of operations are less than expected, future assessments may result in a determination that some or all of the deferred tax assets are not realisable. As a result, we may need to reverse all or a portion of the deferred tax assets, which may have a significant effect on our results of operations and financial condition.

New IFRS Accounting Pronouncements

The following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:

IFRIC 13 Customer Loyalty;

IFRIC 16 Hedges of a Net Investment in a Foreign Operation;

IFRIC 17 Distributions of Non-cash Assets to Owners;

IFRIC 18 Transfers of Assets from Customers;

IFRS 1 (amended)/IAS 27 (amended): Cost of an Investment in a Subsidiary, Jointly Controlled Entity or associate;

IFRS 2 (amended): Share-Based Payment-Vesting Conditions and Cancellations;

IFRS 8 Operating Segments;

IAS 1 (revised) Presentation of Financial Statements;

IAS 23 (revised) Borrowing Costs; and

IAS 32 (amended)/IAS 1 (amended): Puttable Financial Instruments and Obligations arising on Liquidation.

The Group does not consider that these Standards and Interpretations will have a significant impact on the financial statements of the Group except for additional disclosures when the relevant standards come into effect for periods commencing on or after 1 January 2009.

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In addition, IFRS 3 (revised) Business Combinations and IAS 27 (revised) Consolidated and Separate Financial Statements become effective for the Group in the year ending 31 December 2010. The revisions to these standards will apply to business combinations completed after 1 January 2010. The main changes under the revised standards are: all acquisition-related costs must be recognised as an expense in the period; contingent consideration payable is to be measured at fair value at the acquisition date. Any subsequent movements in the fair value of such consideration as a result of post-acquisition events (such as changes in estimates of earnout consideration) must be recognised as a gain or loss in the income statement; equity interests held prior to control being obtained must be re-measured to fair value at the acquisition date, with any gain or loss recognised in the income statement; increases in ownership interest in a subsidiary that do not result in a change of control are treated as transactions among equity holders and are reported within equity. No gain or loss is recognised on such transactions and goodwill is not re-measured.

The revisions to the standards apply prospectively to business combinations for which the acquisition date is on or after the first annual financial reporting period beginning on or after 1 January 2009. Consequently, the impact that these revised standards will have on the financial statements of the Group will depend on the circumstances of business combinations occurring on or after 1 January 2010.

In the current year, the following interpretations issued became effective:

IFRIC 11: IFRS 2 – Group and Treasury Share Transactions; and

IFRIC 14: IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction.

The adoption of these interpretations has not led to any changes in the Group’s accounting policies.

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