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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the quarterly period ended December 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 001-31351



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HEWITT ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 47-0851756                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



100 Half Day Road;
Lincolnshire, Illinois 60069; 847-295-5000

(Address, including zip code, and telephone number, including area code, of
registrants principal executive offices)



N/A

(Former Name, Former Address & Former Fiscal Year, if changed since last report)



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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 periods as 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 ̈



Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer ̈Non-accelerated filer ̈



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



Indicate the number of shares outstanding of each class of the issuers common stock, as of the latest practical date.



|                                       |  |                                        
|-------------------------------------- |  | ---------------------------------------
|Class                                  |  | Outstanding shares at December 31, 2005
|Class A Common Stock - $0.01 par value |  | 64,017,757                             
|Class B Common Stock - $0.01 par value |  | 43,177,949                             
|Class C Common Stock - $0.01 par value |  | 3,305,615                              
|                                       |  |                                        
|                                       |  | 110,501,321                            



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##### Table of Contents

HEWITT ASSOCIATES, INC.



FORM 10-Q

FOR THE PERIOD ENDED

DECEMBER 31, 2005



INDEX



|           |  |                                                                                                   |  |     
|---------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                   |  | PAGE
|PART I.    |  | FINANCIAL INFORMATION                                                                             |  |     
|           |  |                                                                                                  
|ITEM 1.    |  | Financial Statements:                                                                             |  |     
|           |  |                                                                                                  
|           |  | Consolidated Balance Sheets - December 31, 2005 (Unaudited) and September 30, 2005                |  | 3   
|           |  |                                                                                                  
|           |  | Consolidated Statements of Operations - Three Months Ended December 31, 2005 and 2004 (Unaudited) |  | 5   
|           |  |                                                                                                  
|           |  | Consolidated Statements of Cash Flows - Three Months Ended December 31, 2005 and 2004 (Unaudited) |  | 6   
|           |  |                                                                                                  
|           |  | Notes to Consolidated Financial Statements                                                        |  | 7   
|           |  |                                                                                                  
|ITEM 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 15  
|           |  |                                                                                                  
|ITEM 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                        |  | 22  
|           |  |                                                                                                  
|ITEM 4.    |  | Controls and Procedures                                                                           |  | 22  
|           |  |                                                                                                  
|PART II.   |  | OTHER INFORMATION                                                                                 |  |     
|           |  |                                                                                                  
|ITEM 1.    |  | Legal Proceedings                                                                                 |  | 22  
|           |  |                                                                                                  
|ITEM 6.    |  | Exhibits                                                                                          |  | 23  
|           | 
|SIGNATURES |  | 24                                                                                               



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM1. Financial Statements



HEWITT ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except for share and per share amounts)



|                                                                                                                                                  |  |                  |           |                   |   |          
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | ----------------- | - | ---------
|                                                                                                                                                  |  | December 31,2005 |           | September 30,2005
|                                                                                                                                                  |  | (Unaudited)      |           |                  
|ASSETS                                                                                                                                            |  |                  |           |                   |   |          
|Current Assets:                                                                                                                                   |  |                  |           |                   |   |          
|Cash and cash equivalents                                                                                                                         |  | $                | 197,433   |                   | $ | 157,928  
|Short-term investments                                                                                                                            |  |                  | 93,515    |                   |   | 59,693   
|Client receivables and unbilled work in process, less allowances of $23,188 and $23,922 at December 31, 2005 and September 30, 2005,
respectively |  |                  | 551,259   |                   |   | 595,691  
|Prepaid expenses and other current assets                                                                                                         |  |                  | 94,122    |                   |   | 83,762   
|Funds held for clients                                                                                                                            |  |                  | 101,858   |                   |   | 97,907   
|Deferred income taxes, net                                                                                                                        |  |                  | 13,009    |                   |   | 5,902    
|                                                                                                                                                  |  |                  |           |                   |   |          
|Total current assets                                                                                                                              |  |                  | 1,051,196 |                   |   | 1,000,883
|                                                                                                                                                  |  |                  |           |                   |   |          
|Non-Current Assets:                                                                                                                               |  |                  |           |                   |   |          
|Deferred contract costs                                                                                                                           |  |                  | 280,461   |                   |   | 253,505  
|Property and equipment, net                                                                                                                       |  |                  | 298,827   |                   |   | 302,875  
|Other intangible assets, net                                                                                                                      |  |                  | 355,697   |                   |   | 372,996  
|Goodwill                                                                                                                                          |  |                  | 686,100   |                   |   | 694,370  
|Other assets, net                                                                                                                                 |  |                  | 34,423    |                   |   | 32,711   
|                                                                                                                                                  |  |                  |           |                   |   |          
|Total non-current assets                                                                                                                          |  |                  | 1,655,508 |                   |   | 1,656,457
|                                                                                                                                                  |  |                  |           |                   |   |          
|Total Assets                                                                                                                                      |  | $                | 2,706,704 |                   | $ | 2,657,340
|                                                                                                                                                  |  |                  |           |                   |   |          
|LIABILITIES                                                                                                                                       |  |                  |           |                   |   |          
|Current Liabilities:                                                                                                                              |  |                  |           |                   |   |          
|Accounts payable                                                                                                                                  |  | $                | 26,640    |                   | $ | 57,412   
|Accrued expenses                                                                                                                                  |  |                  | 174,757   |                   |   | 156,575  
|Funds held for clients                                                                                                                            |  |                  | 101,858   |                   |   | 97,907   
|Advanced billings to clients                                                                                                                      |  |                  | 193,270   |                   |   | 156,257  
|Accrued compensation and benefits                                                                                                                 |  |                  | 159,740   |                   |   | 171,486  
|Short-term debt                                                                                                                                   |  |                  | 11,740    |                   |   | 12,915   
|Current portion of long-term debt and capital lease obligations                                                                                   |  |                  | 16,975    |                   |   | 26,989   
|                                                                                                                                                  |  |                  |           |                   |   |          
|Total current liabilities                                                                                                                         |  |                  | 684,980   |                   |   | 679,541  
|                                                                                                                                                  |  |                  |           |                   |   |          
|Long-Term Liabilities:                                                                                                                            |  |                  |           |                   |   |          
|Deferred contract revenues                                                                                                                        |  |                  | 152,364   |                   |   | 140,474  
|Debt and capital lease obligations, less current portion                                                                                          |  |                  | 297,640   |                   |   | 299,169  
|Other long-term liabilities                                                                                                                       |  |                  | 120,637   |                   |   | 127,376  
|Deferred income taxes, net                                                                                                                        |  |                  | 102,011   |                   |   | 99,423   
|                                                                                                                                                  |  |                  |           |                   |   |          
|Total long-term liabilities                                                                                                                       |  |                  | 672,652   |                   |   | 666,442  
|                                                                                                                                                  |  |                  |           |                   |   |          
|Total Liabilities                                                                                                                                 |  | $                | 1,357,632 |                   | $ | 1,345,983
|                                                                                                                                                  |  |                  |           |                   |   |          
|Commitments and Contingencies                                                                                                                     |  |                  |           |                   |   |          



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HEWITT ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS - Continued

(In thousands except for share and per
share amounts)



|                                                                                                                                                                                                                                    |  |                  |           |   |                   |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                                                                                    |  | December 31,2005 |           |   | September 30,2005 |  
|                                                                                                                                                                                                                                    |  | (Unaudited)      |           |   |                   |  
|STOCKHOLDERS EQUITY                                                                                                                                                                                                                |  |                  |           |   |                   |   |           |  
|Stockholders Equity:                                                                                                                                                                                                               |  |                  |           |   |                   |   |           |  
|Class A common stock, par value $0.01 per share, 750,000,000 shares authorized, 77,536,842 and 72,970,960 shares issued, 64,017,757 and
59,456,565 shares outstanding, as of December 31, 2005 and September 30, 2005, respectively |  | $                | 775       |   |                   | $ | 730       |  
|Class B common stock, par value $0.01 per share, 200,000,000 shares authorized, 43,177,949 and 45,181,849 shares issued and outstanding, as of
December 31, 2005 and September 30, 2005, respectively                               |  |                  | 432       |   |                   |   | 452       |  
|Class C common stock, par value $0.01 per share, 50,000,000 shares authorized, 3,305,615 and 3,540,461 shares issued and outstanding as of
December 31, 2005 and September 30, 2005, respectively                                   |  |                  | 33        |   |                   |   | 35        |  
|Restricted stock units, 98,967 units issued and outstanding, as of December 31, 2005 and September 30, 2005,
respectively                                                                                                           |  |                  |          |   |                   |   | 2,035     |  
|Additional paid-in capital                                                                                                                                                                                                          |  |                  | 1,319,792 |   |                   |   | 1,315,119 |  
|Cost of common stock in treasury, 13,519,085 and 13,514,395 shares of Class A common stock as of December 31, 2005 and
September 30, 2005, respectively                                                                             |  |                  | (388,769  | ) |                   |   | (388,638  | )
|Retained earnings                                                                                                                                                                                                                   |  |                  | 360,695   |   |                   |   | 329,162   |  
|Unearned compensation                                                                                                                                                                                                               |  |                  |          |   |                   |   | (17,326   | )
|Accumulated other comprehensive income                                                                                                                                                                                              |  |                  | 56,114    |   |                   |   | 69,788    |  
|                                                                                                                                                                                                                                    |  |                  |           |   |                   |   |           |  
|Total stockholders equity                                                                                                                                                                                                          |  |                  | 1,349,072 |   |                   |   | 1,311,357 |  
|                                                                                                                                                                                                                                    |  |                  |           |   |                   |   |           |  
|Total Liabilities and Stockholders Equity                                                                                                                                                                                          |  | $                | 2,706,704 |   |                   | $ | 2,657,340 |  
|                                                                                                                                                                                                                                    |  |                  |           |   |                   |   |           |  



The accompanying notes
are an integral part of these financial statements.



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HEWITT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands except for share and
per share amounts)



|                                                                                             |  |                                |             |      |   |             |  
|-------------------------------------------------------------------------------------------- |  | ------------------------------ | ----------- | ---- | - | ----------- | -
|                                                                                             |  | Three Months EndedDecember 31, |            
|                                                                                             |  | 2005                           |             | 2004 |  
|Revenues:                                                                                    |  |                                |             |      |   |             |  
|Net revenues                                                                                 |  | $                              | 701,047     |      | $ | 708,964     |  
|Reimbursements                                                                               |  |                                | 18,646      |      |   | 14,889      |  
|                                                                                             |  |                                |             |      |   |             |  
|Total revenues                                                                               |  |                                | 719,693     |      |   | 723,853     |  
|                                                                                             |  |                                |             |      |   |             |  
|Operating expenses:                                                                          |  |                                |             |      |   |             |  
|Compensation and related expenses, excluding initial public offering restricted stock awards |  |                                | 433,493     |      |   | 420,345     |  
|Initial public offering restricted stock awards                                              |  |                                | 3,950       |      |   | 4,426       |  
|Reimbursable expenses                                                                        |  |                                | 18,646      |      |   | 14,889      |  
|Other operating expenses                                                                     |  |                                | 178,281     |      |   | 184,209     |  
|Selling, general and administrative expenses                                                 |  |                                | 35,446      |      |   | 38,251      |  
|                                                                                             |  |                                |             |      |   |             |  
|Total operating expenses                                                                     |  |                                | 669,816     |      |   | 662,120     |  
|                                                                                             |  |                                |             |      |   |             |  
|Operating income                                                                             |  |                                | 49,877      |      |   | 61,733      |  
|                                                                                             |  |                               
|Other income (expenses), net                                                                 |  |                                | 3,786       |      |   | (4,064      | )
|                                                                                             |  |                                |             |      |   |             |  
|Income before income taxes                                                                   |  |                                | 53,663      |      |   | 57,669      |  
|                                                                                             |  |                               
|Provision for income taxes                                                                   |  |                                | 22,131      |      |   | 23,644      |  
|                                                                                             |  |                                |             |      |   |             |  
|Net income                                                                                   |  | $                              | 31,532      |      | $ | 34,025      |  
|                                                                                             |  |                                |             |      |   |             |  
|Earnings per share:                                                                          |  |                                |             |      |   |             |  
|Basic                                                                                        |  | $                              | 0.29        |      | $ | 0.29        |  
|Diluted                                                                                      |  | $                              | 0.29        |      | $ | 0.28        |  
|Weighted average shares:                                                                     |  |                                |             |      |   |             |  
|Basic                                                                                        |  |                                | 107,005,870 |      |   | 117,580,361 |  
|Diluted                                                                                      |  |                                | 108,950,855 |      |   | 119,598,958 |  



The accompanying notes
are an integral part of these financial statements.



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HEWITT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)



|                                                                                             |  |                                |         |   |      |   |          |  
|-------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | -------- | -
|                                                                                             |  | Three Months EndedDecember 31, |        
|                                                                                             |  | 2005                           |         |   | 2004 |  
|Cash flows from operating activities:                                                        |  |                                |         |   |      |   |          |  
|Net income                                                                                   |  | $                              | 31,532  |   |      | $ | 34,025   |  
|Adjustments to reconcile net income to net cash provided by operating activities:            |  |                                |         |   |      |   |          |  
|Depreciation and amortization                                                                |  |                                | 37,263  |   |      |   | 36,832   |  
|Amortization of premiums and discounts on financial instruments                              |  |                                | 317     |   |      |   | 310      |  
|Stock-based compensation                                                                     |  |                                | 18,102  |   |      |   | 7,602    |  
|Deferred income taxes                                                                        |  |                                | (4,491  | ) |      |   | 15,641   |  
|Gain on contribution of business                                                             |  |                                | (6,827  | ) |      |   |         |  
|Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: |  |                                |         |   |      |   |          |  
|Client receivables and unbilled work in process                                              |  |                                | 44,480  |   |      |   | 53,180   |  
|Prepaid expenses and other current assets                                                    |  |                                | (11,401 | ) |      |   | (833     | )
|Deferred contract costs                                                                      |  |                                | (27,116 | ) |      |   | (5,900   | )
|Other assets                                                                                 |  |                                | (474    | ) |      |   | (991     | )
|Accounts payable                                                                             |  |                                | (30,522 | ) |      |   | (16,476  | )
|Accrued compensation and benefits                                                            |  |                                | (10,113 | ) |      |   | (89,958  | )
|Accrued expenses                                                                             |  |                                | 20,115  |   |      |   | (12,841  | )
|Advanced billings to clients                                                                 |  |                                | 37,453  |   |      |   | 24,551   |  
|Deferred contract revenues                                                                   |  |                                | 12,008  |   |      |   | (3,093   | )
|Other long-term liabilities                                                                  |  |                                | (5,921  | ) |      |   | 8,743    |  
|                                                                                             |  |                                |         |   |      |   |          |  
|Net cash provided by operating activities                                                    |  |                                | 104,405 |   |      |   | 50,792   |  
|                                                                                             |  |                               
|Cash flows from investing activities:                                                        |  |                                |         |   |      |   |          |  
|Purchases of short-term investments                                                          |  |                                | (72,615 | ) |      |   | (130,171 | )
|Proceeds from sales of short-term investments                                                |  |                                | 38,837  |   |      |   | 163,044  |  
|Additions to property and equipment and intangible assets                                    |  |                                | (18,076 | ) |      |   | (32,239  | )
|Cash paid for acquisitions, net of cash received                                             |  |                                | (1,400  | ) |      |   | 4,617    |  
|                                                                                             |  |                                |         |   |      |   |          |  
|Net cash (used in) provided by investing activities                                          |  |                                | (53,254 | ) |      |   | 5,251    |  
|Cash flows from financing activities:                                                        |  |                                |         |   |      |   |          |  
|Proceeds from the exercise of stock options                                                  |  |                                | 2,058   |   |      |   | 2,002    |  
|Short-term borrowings                                                                        |  |                                | 12,878  |   |      |   | 27,446   |  
|Repayments of short-term borrowings, capital leases and long-term debt                       |  |                                | (25,227 | ) |      |   | (15,971  | )
|Purchase of Class A common shares for treasury                                               |  |                                | (131    | ) |      |   | (46,562  | )
|                                                                                             |  |                                |         |   |      |   |          |  
|Net cash used in financing activities                                                        |  |                                | (10,422 | ) |      |   | (33,085  | )
|                                                                                             |  |                               
|Effect of exchange rate changes on cash and cash equivalents                                 |  |                                | (1,224  | ) |      |   | 2,818    |  
|                                                                                             |  |                                |         |   |      |   |          |  
|Net increase in cash and cash equivalents                                                    |  |                                | 39,505  |   |      |   | 25,776   |  
|                                                                                             |  |                               
|Cash and cash equivalents, beginning of period                                               |  |                                | 157,928 |   |      |   | 124,681  |  
|                                                                                             |  |                                |         |   |      |   |          |  
|Cash and cash equivalents, end of period                                                     |  | $                              | 197,433 |   |      | $ | 150,457  |  
|                                                                                             |  |                                |         |   |      |   |          |  
|Supplementary disclosure of cash paid during the period:                                     |  |                                |         |   |      |   |          |  
|Interest paid                                                                                |  | $                              | 5,315   |   |      | $ | 6,852    |  
|Income taxes paid                                                                            |  | $                              | 243     |   |      | $ | 6,148    |  



The accompanying notes
are an integral part of these financial statements.



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HEWITT ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

(Unaudited)

(In thousands except for share and per share amounts)



1. Description of Business



Hewitt Associates, Inc., a Delaware corporation, and its subsidiaries (Hewitt or
the Company) provide global human resources outsourcing and consulting services. The Companys Outsourcing business is comprised of Benefits Outsourcing and Human Resources Business Process Outsourcing (HR BPO).
Hewitts Consulting business is primarily comprised of Benefits Consulting, which includes retirement and health care consulting, and Talent and Organization Consulting. In addition to these principal consulting services, Hewitt provides
tailored communication services to enhance the success of client solutions in all of our service areas. For additional information on the Companys business segments, see Note 12.



2. Basis of Presentation



The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of December 31, 2005, and for all
periods presented. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating
results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto, together with managements discussion and analysis of financial condition
and results of operations, included in the Companys Form 10-K for the fiscal year ended September 30, 2005, as filed with the Securities and Exchange Commission. Certain previously reported amounts have been reclassified to conform to the
current period presentation.



3. Restructuring Activities



The following table summarizes the activity in the restructuring reserves for the
three-month period ended December 31, 2005:



|                            |  |                 |       |           |   |          |  |   |             |   |                   |   |    |  |   |       
|--------------------------- |  | --------------- | ----- | --------- | - | -------- |  | - | ----------- | - | ----------------- | - | -- |  | - | ------
|                            |  | October 1, 2005 |       | Additions |   | Payments |  |   | Adjustments |   | December 31, 2005
|Outsourcing(1)              |  | $               |      |           | $ | 7,303    |  | $ | (193        | ) |                   |   |   |  | $ | 7,110 
|Client development group(2) |  |                 | 2,901 |           |   |         |  |   | (1,886      | ) |                   |   |   |  |   | 1,015 
|Exult merger(3)             |  |                 | 6,215 |           |   |         |  |   | (173        | ) |                   |   | 61 |  |   | 6,103 
|                            |  |                 |       |           |   |          |  |   |             |   |                   |   |    |  |   |       
|Total                       |  | $               | 9,116 |           | $ | 7,303    |  | $ | (2,252      | ) |                   | $ | 61 |  | $ | 14,228
|                            |  |                 |       |           |   |          |  |   |             |   |                   |   |    |  |   |       

---

|(1) | In the first quarter of fiscal 2006, the Company recorded a $7,303 severance charge related to select staffing reductions within the Outsourcing segment. The expense is reflected on
the Companys consolidated statement of operations within compensation and related expenses. The remaining severance is expected to be paid out by June 2006 in accordance with the Companys severance plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | During the third quarter of fiscal 2005, the Company recorded a $9,383 severance charge in connection with the realignment of its client development sales organization. The
remaining severance is expected to be paid out in January 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In connection with the Exult merger on October 1, 2004, the Company recorded a $13,721 liability for costs associated with a lease termination, employee severance and
relocations. These costs were recorded as a component of the purchase price. The remaining severance and lease termination costs are expected to be paid by August 2006 and October 2011, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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4. Stock-Based Compensation



In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment (SFAS 123(R)). SFAS 123(R) requires companies to measure all stock-based compensation awards using a fair value method and recognize the related compensation cost in its financial statements. On
October 1, 2005, the Company adopted SFAS 123(R) using the modified prospective method. Upon the adoption of SFAS 123(R), the Company recognized an immaterial one-time gain related to the requirement to apply an estimated forfeiture rate to
unvested awards in compensation and related expenses. Previously, the Company recorded forfeitures as incurred. Under SFAS 123(R), the Company has elected to recognize the compensation cost of all share-based awards on a straight-line basis over the
vesting period of the award. Benefits of tax deductions in excess of recognized compensation expense are now reported as a financing cash flow, rather than an operating cash flow as prescribed under the prior accounting rules.



Prior to October 1, 2005, the Company applied Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, (APB 25) to account for its stock-based compensation plans. Under APB 25, no compensation expense was recognized for non-qualified stock option awards as the exercise
price of the awards on the date of grant was equal to the current market price of the Companys stock. However, the Company did recognize compensation expense in connection with the issuance of restricted stock and restricted stock units. The
adoption of SFAS 123(R) primarily resulted in compensation expense being recorded for stock options.



During the three months ended December 31, 2005, the Company recorded pretax compensation expense of $3,477 [$2,121, net of tax, or ($0.02) per diluted share] related to the expensing of the Companys
non-qualified stock options during the quarter. For the three months ended December 31, 2005, the excess tax benefits of $35 were reflected as a cash flow from financing activities in the consolidated statement of cash flows. The total
compensation cost related to non-vested restricted stock and stock option awards not yet recognized as of December 31, 2005 was approximately $79,807, which is expected to be recognized over a weighted average of 2.4 years.



Results for fiscal 2005 have not been restated to reflect the adoption of SFAS 123(R). Had
compensation expense for the Companys stock options been determined based on the fair value method of SFAS 123, and applying the Black Scholes valuation method, net income and earnings per share for the three months ended December 31,
2004 would have been as follows:



|                                                       |  |   |        |  
|------------------------------------------------------ |  | - | ------ | -
|Net income:                                            |  |   |        |  
|As reported                                            |  | $ | 34,025 |  
|Reported stock-based compensation expense, net of tax  |  |   | 4,485  |  
|Pro forma stock-based compensation expense, net of tax |  |   | (7,984 | )
|                                                       |  |   |        |  
|Adjusted net income                                    |  | $ | 30,526 |  
|                                                       |  |   |        |  
|Net income per share  basic:                          |  |   |        |  
|As reported                                            |  | $ | 0.29   |  
|                                                       |  |   |        |  
|Pro forma                                              |  | $ | 0.26   |  
|                                                       |  |   |        |  
|Net income per share  diluted:                        |  |   |        |  
|As reported                                            |  | $ | 0.28   |  
|                                                       |  |   |        |  
|Pro forma                                              |  | $ | 0.26   |  
|                                                       |  |   |        |  



Under the Companys Global Stock
and Incentive Compensation Plan (the Plan), which was adopted in fiscal 2002 and is administered by the Compensation and Leadership Committee (the Committee) of the Companys Board of Directors, employees and directors
may receive awards of nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and cash-based awards, and employees can also receive incentive stock options. As of
December 31, 2005, only restricted stock, restricted stock units and nonqualified stock options have been granted. A total of



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25,000,000 shares of Class A common stock have been reserved for issuance under the Plan. As of December 31,
2005, there were 5,761,173 shares available for grant under the Plan.



Restricted Stock and Restricted Stock Units



On
October 3, 2005, the Company granted 2,282,190 shares of restricted stock and restricted stock units at a price of $27.59, which vest over two to four years. During the quarter, an additional 235,022 shares of restricted stock and restricted
stock units were granted, of which, 186,111 restricted stock awards vest upon meeting certain financial performance conditions as of September 30, 2008. In the quarter ended December 31, 2004, the Company also granted 706,949 shares of
restricted stock and restricted stock units at a weighted-average grant price of $26.82.



In connection with its initial public offering, the Company granted 5,789,908 shares of Class A restricted stock and restricted stock units to employees. The one-time initial public offering-related awards were
valued at $110,141 on the June 27, 2002 grant date (a weighted price of $19.02 per share) and will fully vest on June 27, 2006.



Stock Options



The Company did not grant any stock options during fiscal 2005 or fiscal 2006 to date. Outstanding nonqualified stock options were granted at a strike price equal to the fair market value of the Companys shares
on the grant date, vest ratably over a four year period and generally expire ten years from the grant date.



A summary of stock option activity for the three months ended December 31, 2005 is presented below:



|                                        |  |            |   |  |                                  |      
|--------------------------------------- |  | ---------- | - |  | -------------------------------- | -----
|                                        |  | Shares     |   |  | Weighted- Average Exercise Price
|Outstanding at beginning of fiscal year |  | 10,364,866 |   |  | $                                | 23.75
|Granted                                 |  |           |   |  | $                                |     
|Exercised                               |  | (92,371    | ) |  | $                                | 21.90
|Forfeited                               |  | (78,647    | ) |  | $                                | 23.35
|Expired                                 |  | (97,870    | ) |  | $                                | 26.57
|                                        |  |            |   |  |                                  |      
|Outstanding at December 31, 2005        |  | 10,095,978 |   |  | $                                | 23.74
|                                        |  |            |   |  |                                  |      



A
summary of stock options outstanding and exercisable at December 31, 2005 is presented below:



|                                 |  |                     |  |                                  |       |                           |   |                                |  |                   |  |                                  |  |                           |       |  |   |       
|-------------------------------- |  | ------------------- |  | -------------------------------- | ----- | ------------------------- | - | ------------------------------ |  | ----------------- |  | -------------------------------- |  | ------------------------- | ----- |  | - | ------
|                                 |  | Outstanding Options |  | Exercisable Options             
|                                 |  | Number Outstanding  |  | Weighted- Average Exercise Price |       | Aggregate Intrinsic Value |   | Weighted- Average Term (Years) |  | NumberOutstanding |  | Weighted- Average Exercise Price |  | Aggregate Intrinsic Value
|Reasonable price range groupings |  |                     |  |                                  |       |                           |   |                                |  |                   |  |                                  |  |                           |       |  |   |       
|$19.00                           |  | 3,130,372           |  | $                                | 19.00 |                           | $ | 28,205                         |  | 6.5               |  | 2,433,392                        |  | $                         | 19.00 |  | $ | 21,925
|$23.50-$29.30                    |  | 6,910,249           |  | $                                | 25.76 |                           |   | 15,571                         |  | 8.0               |  | 5,298,690                        |  | $                         | 26.21 |  |   | 9,532 
|$32.45-$34.60                    |  | 55,357              |  | $                                | 32.72 |                           |   |                               |  | 8.6               |  | 29,546                           |  | $                         | 32.70 |  |   |      
|                                 |  |                     |  |                                  |       |                           |   |                                |  |                   |  |                                  |  |                           |       |  |   |       
|                                 |  | 10,095,978          |  | $                                | 23.74 |                           | $ | 43,776                         |  | 7.5               |  | 7,761,628                        |  | $                         | 23.98 |  | $ | 31,457
|                                 |  |                     |  |                                  |       |                           |   |                                |  |                   |  |                                  |  |                           |       |  |   |       



The total intrinsic value of options
exercised during the three months ended December 31, 2005 and 2004, based upon the average market price during the period, was approximately $499 and $872, respectively.



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5. Short-Term Investments



As of December 31, 2005 and September 30, 2005, short-term investments are comprised of available-for-sale securities as follows:



|                             |  |                   |        |                      |   |                |  |                      |        |  |   |       
|---------------------------- |  | ----------------- | ------ | -------------------- | - | -------------- |  | -------------------- | ------ |  | - | ------
|                             |  | December 31, 2005 |        | September 30, 2005  
|                             |  | Amortized Cost    |        | Estimated Fair Value |   | Amortized Cost |  | Estimated Fair Value
|Short-term investments:      |  |                   |        |                      |   |                |  |                      |        |  |   |       
|Corporate notes              |  | $                 | 5,141  |                      | $ | 5,119          |  | $                    | 6,174  |  | $ | 6,131 
|Asset-backed securities      |  |                   | 43,476 |                      |   | 43,445         |  |                      | 14,989 |  |   | 14,949
|U.S. Treasuries and Agencies |  |                   | 7,786  |                      |   | 7,751          |  |                      | 7,765  |  |   | 7,713 
|Auction rate municipal bonds |  |                   | 37,200 |                      |   | 37,200         |  |                      | 30,900 |  |   | 30,900
|                             |  |                   |        |                      |   |                |  |                      |        |  |   |       
|Total                        |  | $                 | 93,603 |                      | $ | 93,515         |  | $                    | 59,828 |  | $ | 59,693
|                             |  |                   |        |                      |   |                |  |                      |        |  |   |       



As of December 31, 2005, there
were gross unrealized holding gains of $1 and gross unrealized holding losses of $89 from available-for-sale securities.



Based on the contractual maturities of the available-for-sale debt securities as of December 31, 2005 and September 30, 2005, the amortized cost and estimated
fair market value of the securities was as follows:



|                                       |  |                   |        |                      |   |                |  |                      |        |  |   |       
|-------------------------------------- |  | ----------------- | ------ | -------------------- | - | -------------- |  | -------------------- | ------ |  | - | ------
|                                       |  | December 31, 2005 |        | September 30, 2005  
|                                       |  | Amortized Cost    |        | Estimated Fair Value |   | Amortized Cost |  | Estimated Fair Value
|Short-term investments:                |  |                   |        |                      |   |                |  |                      |        |  |   |       
|Due in less than one year              |  | $                 | 16,927 |                      | $ | 16,864         |  | $                    | 21,940 |  | $ | 21,846
|Due after one year through five years  |  |                   | 4,389  |                      |   | 4,363          |  |                      | 6,929  |  |   | 6,888 
|Due after five years through ten years |  |                   | 5,000  |                      |   | 5,000          |  |                      |       |  |   |      
|Due after ten years                    |  |                   | 67,287 |                      |   | 67,288         |  |                      | 30,959 |  |   | 30,959
|                                       |  |                   |        |                      |   |                |  |                      |        |  |   |       
|Total                                  |  | $                 | 93,603 |                      | $ | 93,515         |  | $                    | 59,828 |  | $ | 59,693
|                                       |  |                   |        |                      |   |                |  |                      |        |  |   |       



6. Goodwill and Other Intangible
Assets



Following is a summary of changes
in the carrying amount of goodwill for the three months ended December 31, 2005:



|                                            |  |                    |         |   |                   |   |         |       |  |   |         |  
|------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | ----- |  | - | ------- | -
|                                            |  | OutsourcingSegment |         |   | ConsultingSegment |   |         | Total | 
|Balance at September 30, 2005               |  | $                  | 448,501 |   |                   | $ | 245,869 |       |  | $ | 694,370 |  
|Additions                                   |  |                    | 408     |   |                   |   |        |       |  |   | 408     |  
|Reclassification                            |  |                    | 6,860   |   |                   |   | (6,860  | )     |  |   |        |  
|Effect of changes in foreign exchange rates |  |                    | (3,286  | ) |                   |   | (5,392  | )     |  |   | (8,678  | )
|                                            |  |                    |         |   |                   |   |         |       |  |   |         |  
|Balance at December 31, 2005                |  | $                  | 452,483 |   |                   | $ | 233,617 |       |  | $ | 686,100 |  
|                                            |  |                    |         |   |                   |   |         |       |  |   |         |  



The increase to goodwill during the
three months ended December 31, 2005 related to finalizing the opening balance sheet for an acquisition which occurred in the fourth quarter of fiscal 2005. The goodwill reclassification results from the Companys decision to shift
management oversight for an acquired business into the Outsourcing segment (Note 12).



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Intangible assets with definite useful lives are amortized over their estimated lives and are tested for impairment
whenever indicators of impairment arise. The following is a summary of intangible assets at December 31, 2005 and September 30, 2005:



|                          |  |                     |         |                         |   |         |  |                     |         |                         |   |         |  |   |         |  |   |        
|------------------------- |  | ------------------- | ------- | ----------------------- | - | ------- |  | ------------------- | ------- | ----------------------- | - | ------- |  | - | ------- |  | - | -------
|                          |  | December 31, 2005   |         | September 30, 2005     
|Definite useful life      |  | GrossCarryingAmount |         | AccumulatedAmortization |   | Net     |  | GrossCarryingAmount |         | AccumulatedAmortization |   | Net    
|Capitalized software      |  | $                   | 311,469 |                         | $ | 209,827 |  | $                   | 101,642 |                         | $ | 310,568 |  | $ | 199,571 |  | $ | 110,997
|Trademarks and tradenames |  |                     | 13,883  |                         |   | 8,867   |  |                     | 5,016   |                         |   | 14,164  |  |   | 8,387   |  |   | 5,777  
|Core technology           |  |                     | 45,222  |                         |   | 5,636   |  |                     | 39,586  |                         |   | 45,241  |  |   | 4,434   |  |   | 40,807 
|Customer relationships    |  |                     | 238,042 |                         |   | 28,589  |  |                     | 209,453 |                         |   | 240,228 |  |   | 24,813  |  |   | 215,415
|                          |  |                     |         |                         |   |         |  |                     |         |                         |   |         |  |   |         |  |   |        
|Total                     |  | $                   | 608,616 |                         | $ | 252,919 |  | $                   | 355,697 |                         | $ | 610,201 |  | $ | 237,205 |  | $ | 372,996
|                          |  |                     |         |                         |   |         |  |                     |         |                         |   |         |  |   |         |  |   |        



The decrease in the gross carrying
amounts of trademarks and tradenames, core technology and customer relationships is due to the effects of foreign currency exchange rate changes.



Amortization expense related to definite-lived intangible assets for the three months ended December 31, 2005 and 2004 is as follows:



|                          |  |      |        |      |   |       
|------------------------- |  | ---- | ------ | ---- | - | ------
|                          |  | 2005 |        | 2004
|Capitalized software      |  | $    | 10,749 |      | $ | 9,630 
|Trademarks and tradenames |  |      | 675    |      |   | 717   
|Core technology           |  |      | 1,202  |      |   | 1,175 
|Customer relationships    |  |      | 4,025  |      |   | 4,256 
|                          |  |      |        |      |   |       
|Total                     |  | $    | 16,651 |      | $ | 15,778
|                          |  |      |        |      |   |       



Applying foreign exchange rates in
effect at September 30, 2005, estimated amortization expense related to intangible assets with definite lives at September 30, 2005, for each of the years in the five-year period ending September 30, 2010 and thereafter is as follows:



|                                           |  |      |        |      |   |        |  |      |        |      |   |                    |  |       |        |  |   |         |  |   |        
|------------------------------------------ |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------------------ |  | ----- | ------ |  | - | ------- |  | - | -------
|Year ending:                               |  | 2006 |        | 2007 |   | 2008   |  | 2009 |        | 2010 |   | 2011 andthereafter |  | Total
|Estimated intangibles amortization expense |  | $    | 64,462 |      | $ | 53,460 |  | $    | 40,505 |      | $ | 32,986             |  | $     | 27,357 |  | $ | 154,226 |  | $ | 372,996



7. Pension and Postretirement
Benefit Plans



The Company has defined benefit pension plans to provide
benefits to eligible employees in the United Kingdom, Switzerland, The Netherlands, Germany, India, France, Ireland and Mexico. It is the Companys policy to fund these plans in accordance with local practice and legislation. The Company also
provides health benefits for retired U.S. and Canadian employees and certain dependents when the employee becomes eligible for these benefits by satisfying plan provisions, which include certain age and service requirements. The health benefit plans
are contributory and contributions are reviewed annually and adjusted periodically.



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The components of net periodic benefit costs for the three months ended
December 31, 2005 and 2004 include:



|                                         |  |                  |        |   |                 |   |        |      |  |   |      |   |  |   |    
|---------------------------------------- |  | ---------------- | ------ | - | --------------- | - | ------ | ---- |  | - | ---- | - |  | - | ---
|                                         |  | Pension Benefits |        |   | Health Benefits
|                                         |  | 2005             |        |   | 2004            |   |        | 2005 |  |   | 2004
|Components of Net Periodic Benefit Costs |  |                  |        |   |                 |   |        |      |  |   |      |   |  |   |    
|Service cost                             |  | $                | 2,220  |   |                 | $ | 2,436  |      |  | $ | 99   |   |  | $ | 317
|Interest cost                            |  |                  | 1,750  |   |                 |   | 1,904  |      |  |   | 125  |   |  |   | 192
|Expected return on plan assets           |  |                  | (1,550 | ) |                 |   | (1,729 | )    |  |   |     |   |  |   |   
|Amortization of:                         |  |                  |        |   |                 |   |        |      |  |   |      |   |  |   |    
|Unrecognized prior service cost          |  |                  |       |   |                 |   |       |      |  |   | (67  | ) |  |   | 9  
|Unrecognized loss                        |  |                  | 131    |   |                 |   | 45     |      |  |   | 114  |   |  |   | 50 
|Transition obligation                    |  |                  |       |   |                 |   |       |      |  |   |     |   |  |   | 32 
|                                         |  |                  |        |   |                 |   |        |      |  |   |      |   |  |   |    
|Net periodic benefit cost                |  | $                | 2,551  |   |                 | $ | 2,656  |      |  | $ | 271  |   |  | $ | 600
|                                         |  |                  |        |   |                 |   |        |      |  |   |      |   |  |   |    



During the three months ended December 31, 2005, $7,471 in contributions were made by the Company to the pension plans.



8. Legal Proceedings



In the ordinary course of our business, the Company is routinely subject to audits, actions related to employment, benefits, contracts and other matters and inquiries by governmental and regulatory agencies. The
Company is not engaged in any legal proceedings that are expected to have a material adverse effect on the Companys business, financial condition or results of operations.



The Company provides indemnifications of varying scope and size to customers against certain claims arising from the Companys services
or use of the Companys products. The Company is not aware of any obligations arising under indemnification or related agreements that would require material payments.



9. Other Income (Expenses), Net



Other income (expenses), net consists of the following components:



|                                 |  |                                |        |   |      |   |        |  
|-------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                 |  | Three Months EndedDecember 31, |       
|                                 |  | 2005                           |        |   | 2004 |  
|Interest expense                 |  | $                              | (5,799 | ) |      | $ | (5,458 | )
|Interest income                  |  |                                | 2,073  |   |      |   | 2,289  |  
|Gain on contribution of business |  |                                | 6,827  |   |      |   |       |  
|Other                            |  |                                | 685    |   |      |   | (895   | )
|                                 |  |                                |        |   |      |   |        |  
|Other income (expenses), net     |  | $                              | 3,786  |   |      | $ | (4,064 | )
|                                 |  |                                |        |   |      |   |        |  



During the three months ended
December 31, 2005, the Company recognized a gain of $6,827 in connection with the contribution of its retirement and financial management business within Germany in exchange for an increased investment in a German actuarial business
(investee). The Company currently has a 28% non-controlling interest in the investee and accounts for its investment under the equity method of accounting.



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10. Earnings Per Share



Basic and diluted earnings per share are calculated as follows:



|                                                              |  |                                 |             |      |   |            
|------------------------------------------------------------- |  | ------------------------------- | ----------- | ---- | - | -----------
|                                                              |  | Three Months Ended December 31,
|                                                              |  | 2005                            |             | 2004
|Net income as reported                                        |  | $                               | 31,532      |      | $ | 34,025     
|                                                              |  |                                 |             |      |   |            
|Weighted-average number of shares of common stock for basic   |  |                                 | 107,005,870 |      |   | 117,580,361
|Incremental effect of dilutive common stock equivalents:      |  |                                 |             |      |   |            
|Unvested restricted stock awards                              |  |                                 | 925,673     |      |   | 766,447    
|Unexercised in-the-money stock options                        |  |                                 | 1,019,312   |      |   | 1,252,150  
|                                                              |  |                                 |             |      |   |            
|Weighted-average number of shares of common stock for diluted |  |                                 | 108,950,855 |      |   | 119,598,958
|                                                              |  |                                 |             |      |   |            
|Earnings per share  basic                                    |  | $                               | 0.29        |      | $ | 0.29       
|                                                              |  |                                 |             |      |   |            
|Earnings per share  diluted                                  |  | $                               | 0.29        |      | $ | 0.28       
|                                                              |  |                                 |             |      |   |            



Debt securities convertible into
1,870,748 shares of Class A common stock were outstanding in the three months ended December 31, 2005 and 2004, but the weighted-average convertible shares were not included in the computation of diluted earnings per share because the
effect of including the convertible debt securities would be antidilutive. Warrants to sell 200,000 shares of Class A common stock, which the Company assumed in the Exult merger, were outstanding in the three months ended December 31, 2005
and 2004, but the warrants were not included in the computation of diluted earnings per share because the exercise price of the warrants was greater than the average market price of the Class A common stock. Of the outstanding stock options as
of December 31, 2005 and 2004, 3,540,959 and 56,237 weighted average shares, respectively, were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market
price of the Class A common stock.



11. Other Comprehensive Income



The following table presents the after-tax components of the
Companys other comprehensive income for the periods presented:



|                                         |  |                                |         |   |      |   |        |  
|---------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------ | -
|                                         |  | Three Months EndedDecember 31, |        
|                                         |  | 2005                           |         |   | 2004 |  
|Net income                               |  | $                              | 31,532  |   |      | $ | 34,025 |  
|Other comprehensive income:              |  |                                |         |   |      |   |        |  
|Foreign currency translation adjustments |  |                                | (13,721 | ) |      |   | 30,926 |  
|Unrealized gains (losses) on investments |  |                                | 47      |   |      |   | (259   | )
|                                         |  |                                |         |   |      |   |        |  
|Total comprehensive income               |  | $                              | 17,858  |   |      | $ | 64,692 |  
|                                         |  |                                |         |   |      |   |        |  



12. Segment Results



During the first quarter of fiscal 2006, the Company completed an internal reorganization
which was intended to further improve the way the Companys business units work together, share knowledge and leverage resources. The reorganization did not change the Companys reportable segments, but it did impact the revenues and costs
reported within each segment and the level of unallocated shared service costs. The changes include the movement of the client development sales organization and certain business support services, financial services, research and internal
communications personnel and related costs from shared services into the segments that they support on a dedicated basis. Certain shared service practices previously embedded in one segment, but which provide services across the business groups,
have also been moved and now integrated and managed consistently within our global shared service operations. Certain business units, primarily the pension administrative services businesses in Europe and Canada, were also realigned and moved into
the segments where they will be managed and operated. Additionally, the Company changed the way it



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tracks and reports intersegment revenues. Previously, the business group with the direct client billing responsibility recognized the revenue. Now, revenues
are recognized by each segment providing services and any intersegment revenues are eliminated in consolidation. These changes are reflected in the Companys results for the three months ended December 31, 2005. The prior year segment
results have been presented on the fiscal 2006 basis for comparative purposes.



The Company has two reportable segments, Outsourcing and Consulting.



| |  |  | OutsourcingHewitts benefits outsourcing services include health and welfare (such as medical plans), defined contribution (such as 401(k) plans) and defined benefit
(such as pension plans). In addition to benefits outsourcing services, Hewitts HR BPO services include workforce administration, rewards management, recruiting and staffing, payroll processing, performance management, learning and development,
talent management, global mobility, time and attendance, accounts payable, procurement expertise and vendor management.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ConsultingHewitt provides a wide array of consulting and actuarial services covering the design, implementation, communication and operation of health and welfare,
compensation and retirement plans, and broader human resources programs and processes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company operates many of the administrative and support functions of its business through the use of centralized shared service operations to provide an economical and effective means of supporting the Outsourcing
and Consulting segments. These shared services include information systems, human resources, overall corporate management, firmwide marketing, finance and legal services, support services and space management. The costs of information systems, human
resources and some support services are allocated to the Outsourcing and Consulting segments on a specific identification basis and based on usage or headcount. The compensation and related expenses, other operating expenses, and selling, general
and administrative expenses of the remaining shared services are not allocated to the business segments; rather, they are included in unallocated shared costs.



The table below summarizes the Companys reportable segment results, reflecting the changes of the fiscal 2006 internal reorganization in both periods:



|                                                      |  |                                |         |   |      |   |         |  
|----------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                      |  | Three Months EndedDecember 31, |        
|                                                      |  | 2005                           |         |   | 2004 |  
|Outsourcing                                           |  |                                |         |   |      |   |         |  
|Revenues before reimbursements (net revenues)         |  | $                              | 512,131 |   |      | $ | 527,384 |  
|Segment income                                        |  |                                | 43,965  |   |      |   | 61,817  |  
|                                                      |  |                               
|Consulting                                            |  |                                |         |   |      |   |         |  
|Revenues before reimbursements (net revenues)         |  | $                              | 195,737 |   |      | $ | 184,767 |  
|Segment income                                        |  |                                | 41,817  |   |      |   | 33,867  |  
|                                                      |  |                               
|Total Company                                         |  |                                |         |   |      |   |         |  
|Segment revenues before reimbursements (net revenues) |  | $                              | 707,868 |   |      | $ | 712,151 |  
|Intersegment revenues                                 |  |                                | (6,821  | ) |      |   | (3,187  | )
|Reimbursements                                        |  |                                | 18,646  |   |      |   | 14,889  |  
|                                                      |  |                                |         |   |      |   |         |  
|Total revenues                                        |  | $                              | 719,693 |   |      | $ | 723,853 |  
|                                                      |  |                                |         |   |      |   |         |  
|Segment income                                        |  | $                              | 85,782  |   |      | $ | 95,684  |  
|Charges not recorded at the segment level:            |  |                                |         |   |      |   |         |  
|Initial public offering restricted stock awards       |  |                                | 3,950   |   |      |   | 4,426   |  
|Unallocated shared service costs                      |  |                                | 31,955  |   |      |   | 29,525  |  
|                                                      |  |                                |         |   |      |   |         |  
|Operating income                                      |  | $                              | 49,877  |   |      | $ | 61,733  |  
|                                                      |  |                                |         |   |      |   |         |  



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ITEM2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following information should be read in conjunction with the information contained in our consolidated financial statements and related notes presented earlier in
this Quarterly Report on Form 10-Q. Please also refer to our consolidated financial statements and related notes and the information under the heading Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for additional information. In addition to historical information, this Quarterly Report on Form 10-Q may contain forward-looking
statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from managements expectations. Some of the risks and uncertainties are described below and in the Notes Regarding
Forward-Looking Statements which appears later in this section and in our Annual Report on Form 10-K, in Item 1 under the heading Risk Factors.



We use the terms Hewitt, the Company, we, us, and our to refer to the
business of Hewitt Associates, Inc. and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal years, which end on September 30. For example, a reference to 2005 or fiscal 2005 means the
twelve-month period that ended September 30, 2005. References to and adjustments for foreign currency translation are made within our discussion of results so that the financial results can be viewed without the impact of
fluctuating foreign currency exchange rates used in reporting results in one currency (U.S. Dollar) and helps facilitate a comparative view of business results. All references to percentages contained in Managements Discussion and
Analysis of Financial Condition and Results of Operations refer to calculations based on the amounts in our consolidated financial statements, presented earlier in this Quarterly Report on Form 10-Q. Certain prior period amounts have been
reclassified to conform to the current year presentation.



Overview



During the first quarter of fiscal 2006, we made progress towards
achieving more profitable growth within our business including:



| |  |  | Completing our internal reorganization focused on improving the way our business units work together on an integrated basis, share knowledge and leverage resources. Within both of
our business segments, we created a global leadership group better positioned to take advantage of emerging opportunities in the global marketplace. Outsourcing completed the integration of Exult and will continue to leverage the knowledge and
delivery expertise across the business. We also completed a number of strategic and operational organizational changes which impacted the way we have historically reported our segment results (see Note 12 to the consolidated financial statements).
The changes resulting from the internal reorganization are reflected in our segment results beginning in the first quarter of fiscal 2006 and prior year segment results have been presented on the fiscal 2006 basis for comparative purposes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reducing our U.S. associate workforce in selected areas and redeploying associates to other roles within our Outsourcing segment to better align our resources to continue to improve
our execution with existing clients and to support new client growth. The Company recorded a $7.3 million pretax charge for severance costs associated with the staff reductions. This charge is included within compensation and related expenses on the
consolidated statements of operations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the first quarter,
we were notified by one of our Outsourcing clients in implementation of their intention to terminate their services contract with us, effective in the second quarter of this fiscal year. We are in discussions with this client regarding whether the
contract will be terminated or restructured. We recognized a net $10 million charge in the first quarter, comprised of $3 million of deferred revenue recognized in the quarter offset by approximately $11 million of compensation and related expenses
and $2 million of other operating expenses related to implementation that were previously deferred. The contract provides for a termination fee which will be recorded upon receipt.



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The Company recognized a gain of $6.8 million in connection with the contribution of its retirement and financial
management business within Germany to a German actuarial business (investee) in exchange for an increased investment in the investee. The Company currently has a 28% non-controlling interest in the investee.



In addition, effective October 1, 2005, we adopted Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment (SFAS 123(R)), resulting in a change in how we account for stock-based compensation. During the first quarter, we began recognizing compensation expense for stock options and
recognized approximately $3.5 million of pretax compensation expense, or $0.02 per diluted share, related to the expensing of non-qualified stock options. In accordance with the modified prospective application of SFAS 123(R), the prior-year
stock-based compensation expenses have not been restated to reflect this accounting change.



Consolidated Results of Operations



The
following table sets forth our historical results of operations. Operating results for any period are not necessarily indicative of results for any future periods.



Three Months Ended December 31, 2005 and 2004

Unaudited



|                                                                                             |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  
|-------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | ---- | ------- | ------- | - | ----------------- | ----- | -- | ---- | ----- | - |  | ----- | -
|                                                                                             |  | Three Months EndedDecember 31, |         |      | %Change |         |   | % of Net Revenues |      
|(in thousands)                                                                               |  | 2005                           |         | 2004 |         |         |   | 2005              |       |    | 2004 |      
|Revenues:                                                                                    |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  
|Net revenues(1)                                                                              |  | $                              | 701,047 |      | $       | 708,964 |   |                   | (1.1  | )% |      | 100.0 | % |  | 100.0 | %
|Reimbursements                                                                               |  |                                | 18,646  |      |         | 14,889  |   |                   | 25.2  | %  |      | 2.7   |   |  | 2.1   |  
|                                                                                             |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  
|Total revenues                                                                               |  |                                | 719,693 |      |         | 723,853 |   |                   | (0.6  | )% |      | 102.7 |   |  | 102.1 |  
|                                                                                             |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  
|Operating expenses:                                                                          |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  
|Compensation and related expenses, excluding initial public offering restricted stock awards |  |                                | 433,493 |      |         | 420,345 |   |                   | 3.1   | %  |      | 61.8  |   |  | 59.3  |  
|Initial public offering restricted stock awards                                              |  |                                | 3,950   |      |         | 4,426   |   |                   | (10.8 | )% |      | 0.6   |   |  | 0.6   |  
|Reimbursable expenses                                                                        |  |                                | 18,646  |      |         | 14,889  |   |                   | 25.2  | %  |      | 2.7   |   |  | 2.1   |  
|Other operating expenses(1)                                                                  |  |                                | 178,281 |      |         | 184,209 |   |                   | (3.2  | )% |      | 25.4  |   |  | 26.0  |  
|Selling, general and administrative expenses                                                 |  |                                | 35,446  |      |         | 38,251  |   |                   | (7.3  | )% |      | 5.1   |   |  | 5.4   |  
|                                                                                             |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  
|Total operating expenses                                                                     |  |                                | 669,816 |      |         | 662,120 |   |                   | 1.2   | %  |      | 95.6  |   |  | 93.4  |  
|                                                                                             |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  
|Operating income                                                                             |  |                                | 49,877  |      |         | 61,733  |   |                   | (19.2 | )% |      | 7.1   |   |  | 8.7   |  
|                                                                                             |  |                                |         |      |        
|Other income (expense), net                                                                  |  |                                | 3,786   |      |         | (4,064  | ) |                   | 193.2 | %  |      | 0.6   |   |  | (0.6  | )
|                                                                                             |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  
|Income before income taxes                                                                   |  |                                | 53,663  |      |         | 57,669  |   |                   | (6.9  | )% |      | 7.7   |   |  | 8.1   |  
|                                                                                             |  |                                |         |      |        
|Provision for income taxes                                                                   |  |                                | 22,131  |      |         | 23,644  |   |                   | (6.4  | )% |      | 3.2   |   |  | 3.3   |  
|                                                                                             |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  
|Net income                                                                                   |  | $                              | 31,532  |      | $       | 34,025  |   |                   | (7.3  | )% |      | 4.5   | % |  | 4.8   | %
|                                                                                             |  |                                |         |      |         |         |   |                   |       |    |      |       |   |  |       |  

---

|(1) | Net revenues include $41,827 and $57,414 of third party supplier revenues for the three months ended December 31, 2005 and 2004, respectively. The third party supplier
arrangements are generally marginally profitable. The related third party supplier expenses are included in other operating expenses.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Net Revenues



The decrease in net revenues was primarily driven by a significant decline in third party supplier revenues resulting from the termination of an Outsourcing client
contract previously disclosed in the second quarter of fiscal 2005. Net revenues, excluding the third party supplier revenues and after adjusting for the effects of foreign currency translation of approximately $6 million, increased 1.9% as compared
to the prior-year quarter. The increase was driven by revenue growth primarily in the Consulting segment. Segment results are discussed in greater detail later in this section.



Compensation and Related Expenses



Compensation and related expenses include all personnel, supplemental staffing and related expenses. The current quarters expense includes approximately $11 million
of previously deferred implementation costs recognized due to a clients intention to terminate an existing contract, $7 million related to severance costs, $3.5 million stock option expense under SFAS 123(R) and an incremental $9 million of
stock-based compensation related to the grant of restricted stock awards in the first quarter of fiscal 2006. These items were partially offset by savings resulting from prior-year severance activities and the deferral of higher levels of
compensation and related expenses in the current year attributable to our growing the HR BPO business.



Initial Public Offering Restricted Stock Awards



In connection with our initial public offering on June 27, 2002, we granted approximately 5.8 million shares of Class A restricted stock and restricted stock units to our employees. Compensation and related payroll tax
expenses of approximately $105 million were recorded as initial public offering restricted stock award expense from June 27, 2002 through December 31, 2005. We expect to recognize an additional $7 million of compensation expense related to
these awards through June 27, 2006, when the grants fully vest.



Other
Operating Expenses



Other operating expenses include technology, occupancy
and non-compensation related direct client service costs, including third party supplier costs. The decrease in other operating expenses is primarily due to a significant decrease in the third party supplier costs, offset in part by an increase in
client service delivery costs incurred to support new HR BPO contracts.



Selling, General and Administrative Expenses



Selling, general
and administrative (SG&A) expenses primarily include promotion and marketing costs, corporate professional services, provisions for doubtful accounts and other general office expenses. The Companys increased focus on managing
its overall cost structure resulted in reductions in various components of SG&A expense as compared to the prior-year quarter.



Other Income (Expense), Net



Other income (expense), net includes interest expense, interest income, equity earnings on unconsolidated investments and other non-operating gains or losses. During the
current-year quarter, we recognized a gain of $6.8 million in connection with the contribution of our German retirement and financial management business in exchange for an increased investment in a German actuarial business.



Provision for Income Taxes



The Companys consolidated effective income tax rate is 41.2% for the three months
ended December 31, 2005, as compared to 41.0% for the comparable prior year period. The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes
in forecasted annual operating income; changes to the valuation allowance for net deferred tax assets; changes to actual or forecasted permanent book to tax differences; impacts from future tax settlements with state, federal or foreign tax
authorities; or impacts from tax law changes. In addition, the Company



17



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identifies items which are not normal and recurring in nature and treats these as discrete events. The tax effect of
discrete items is booked entirely in the quarter in which the discrete event occurs.



Segment Results



During the first quarter of fiscal 2006, we
completed an internal reorganization which did not change our reportable segments, but did impact the revenues and income reported within each segment and the level of unallocated shared service costs. Additionally, we began to record intersegment
revenues for work performed on behalf of another segment. All of these changes are reflected in both the results for the three months ended December 31, 2005 and the prior-year quarter. Operating income before unallocated shared costs is
referred to as segment income throughout this discussion.



Reconciliation of Segment Results to Total Company Results



Three Months Ended December 31, 2005 and 2004

Unaudited



|                                                       |  |                                |         |   |         |   |         |   |  |        |   
|------------------------------------------------------ |  | ------------------------------ | ------- | - | ------- | - | ------- | - |  | ------ | --
|                                                       |  | Three Months EndedDecember 31, |         |   | %Change |  
|(in thousands)                                         |  | 2005                           |         |   | 2004    |   |        
|Outsourcing                                            |  |                                |         |   |         |   |         |   |  |        |   
|Revenues before reimbursements (net revenues)(1)       |  | $                              | 512,131 |   |         | $ | 527,384 |   |  | (2.9   | )%
|Segment income                                         |  |                                | 43,965  |   |         |   | 61,817  |   |  | (28.9  | )%
|Segment income as a percentage of segment net revenues |  |                                | 8.6     | % |         |   | 11.7    | % |  |        |   
|                                                       |  |                                |        
|Consulting                                             |  |                                |         |   |         |   |         |   |  |        |   
|Revenues before reimbursements (net revenues)          |  | $                              | 195,737 |   |         | $ | 184,767 |   |  | 5.9    | % 
|Segment income                                         |  |                                | 41,817  |   |         |   | 33,867  |   |  | 23.5   | % 
|Segment income as a percentage of segment net revenues |  |                                | 21.4    | % |         |   | 18.3    | % |  |        |   
|                                                       |  |                                |        
|Total Company                                          |  |                                |         |   |         |   |         |   |  |        |   
|Revenues before reimbursements (net revenues)(1)       |  | $                              | 707,868 |   |         | $ | 712,151 |   |  | (0.6   | )%
|Intersegment revenues                                  |  |                                | (6,821  | ) |         |   | (3,187  | ) |  | (114.0 | )%
|Reimbursements                                         |  |                                | 18,646  |   |         |   | 14,889  |   |  | 25.2   | % 
|                                                       |  |                                |         |   |         |   |         |   |  |        |   
|Total revenues                                         |  | $                              | 719,693 |   |         | $ | 723,853 |   |  | (0.6   | )%
|                                                       |  |                                |         |   |         |   |         |   |  |        |   
|Segment income                                         |  | $                              | 85,782  |   |         | $ | 95,684  |   |  | (10.3  | )%
|Charges not recorded at the segment level:             |  |                                |         |   |         |   |         |   |  |        |   
|Initial public offering restricted stock awards        |  |                                | 3,950   |   |         |   | 4,426   |   |  | (10.8  | )%
|Unallocated shared service costs                       |  |                                | 31,955  |   |         |   | 29,525  |   |  | 8.2    | % 
|                                                       |  |                                |         |   |         |   |         |   |  |        |   
|Operating income                                       |  | $                              | 49,877  |   |         | $ | 61,733  |   |  | (19.2  | )%
|                                                       |  |                                |         |   |         |   |         |   |  |        |   

---

|(1) | Outsourcing net revenues include $41,827 and $57,414 of third party supplier revenues for the three months ended December 31, 2005 and 2004, respectively. The third party
supplier arrangements are generally marginally profitable. The related third party supplier expenses are included in other operating expenses.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Outsourcing



Outsourcing net revenues decreased 2.9% during the three months ended December 31, 2005 as compared to the prior-year quarter. The decline primarily related to the
loss of one HR BPO client previously disclosed in the second quarter of fiscal 2005. This was partially offset by increases in Benefits Outsourcing revenues on both new and existing clients, increased one-time project work and increases in revenues
from new HR BPO client services.



Outsourcing segment income as a percentage of
Outsourcing net revenues decreased to 8.6% in the three months ended December 31, 2005, compared to 11.7% in the comparable prior-year quarter. The current quarter includes approximately $10 million of net expenses related to a clients
intention to terminate an existing contract, $7 million of severance expense and $5 million of incremental stock-based compensation related to the adoption of SFAS 123(R) and the grant of restricted stock awards in the first quarter of fiscal 2006.
The impact of these items was partially offset by improved margins in Benefits Outsourcing related to the increase in one-time project revenues.



Consulting



Consulting net revenues increased by 5.9% during the three months ended December 31, 2005 as compared to the comparable prior-year quarter. Adjusting for the unfavorable effects of foreign currency translation of
$4.3 million quarter over quarter and the impact of the contribution of our German retirement and financial management business of approximately $1.2 million, Consulting net revenues increased 8.9%. The majority of this growth was driven by growth
in Benefits Consulting due to higher actuarial consulting and healthcare consulting (including specific projects related to the new Medicare regulations) and increased demand for Talent and Organizational Consulting services, particularly executive
compensation consulting. Communication consulting services also contributed to the increase in net revenues, driven by demand for communications support of client annual employee benefit enrollment processes and increased support for the
implementation of Outsourcing programs.



Consulting segment income as a
percentage of Consulting net revenues increased primarily due to higher revenues as well as lower operating costs across the segment service areas, offset in part by the recognition of approximately $6 million of incremental stock-based compensation
related to the adoption of SFAS 123(R) and the grant of restricted stock awards in the first quarter of fiscal 2006.



Critical Accounting Policies and Estimates



For a description of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the fiscal year ended September 30, 2005. During the
quarter, the Company changed its accounting policy for stock-based compensation upon adopting SFAS No. 123(R), Share Based Payments. Please refer to Note 4 for a description of the stock-based compensation accounting change.



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Liquidity and Capital Resources



We have historically funded our growth and working capital requirements with internally generated funds, credit facilities and term notes.
Our initial public offering in June 2002 enhanced our ability to access public market financing to fund new investments and acquisitions, as well as to meet ongoing and future capital resource needs.



Summary of Cash Flows



|                                                 |  |                                |         |   |      |   |         |  
|------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                 |  | Three Months EndedDecember 31, |        
|(in thousands)                                   |  | 2005                           |         |   | 2004 |  
|Cash provided by operating activities            |  | $                              | 104,405 |   |      | $ | 50,792  |  
|Cash (used in) provided by investing activities  |  |                                | (53,254 | ) |      |   | 5,251   |  
|Cash used in financing activities                |  |                                | (10,422 | ) |      |   | (33,085 | )
|Effect of exchange rates on cash                 |  |                                | (1,224  | ) |      |   | 2,818   |  
|                                                 |  |                                |         |   |      |   |         |  
|Net increase in cash and cash equivalents        |  |                                | 39,505  |   |      |   | 25,776  |  
|Cash and cash equivalents at beginning of period |  |                                | 157,928 |   |      |   | 124,681 |  
|                                                 |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period       |  | $                              | 197,433 |   |      | $ | 150,457 |  
|                                                 |  |                                |         |   |      |   |         |  



Working capital, defined as current
assets less current liabilities, was $366 million and $321 million at December 31, 2005 and September 30, 2005, respectively.



The increase in cash provided by operating activities was primarily due to lower performance-based compensation paid in the current period as well as the receipt of $33
million of contract prepayments from a client during the quarter. The increase was partially offset by continued investments on new HR BPO client contracts and a decrease in accounts payable primarily resulting from the timing of payments.



The increase in cash used in investing activities was primarily due to
increased purchases of short-term investments, partially offset by lower expenditures on property and equipment and intangible assets, primarily capitalized software, in the three months ended December 31, 2005 compared to the prior year.



The reduction of cash used in financing activities was primarily due to lower
repurchases of Class A shares into treasury partially offset by a reduction in outstanding borrowings. The prior-year financing activities included the repurchase of 1,672,800 shares in the Companys Stock Repurchase Program.



We believe the cash on hand, together with funds from operations, other current assets,
and existing credit facilities will satisfy our expected working capital, contractual obligations, capital expenditures, and investment requirements for at least the next 12 months and the foreseeable future.



Commitments



Significant ongoing commitments consist primarily of leases, debt, purchase commitments and certain other long-term liabilities. For a
summary and description of our ongoing commitments and contractual obligations, see our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 and the Commitments section of the Liquidity and Capital Resources
section of Managements Discussion and Analysis of Financial Condition and Results of Operations. There were no material changes in these commitments during the three months ended December 31, 2005.



20



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Note Regarding Forward-Looking Statements



This report contains forward-looking statements relating to our operations that are based on our current expectations, estimates and
projections. Words such as anticipates, believes, continues, estimates, expects, goal, intends, may, opportunity, plans,
potential, projects, forecasts, should, will, and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and
involve risks, uncertainties, and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is
expressed or forecasted in these forward-looking statements. Actual results may differ from the forward-looking statements for many reasons. Important factors known to us that could cause such material differences are identified and discussed from
time to time in our filings with the Securities and Exchange Commission, including those factors discussed in Part I, Item 1, Risk Factors of our Annual Report on Form 10-K for the year ended September 30, 2005. Such important
factors include:



| |  | The outsourcing and consulting markets are highly competitive, and if we are not able to compete effectively our revenues and profit margins will be adversely affected
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A significant or prolonged economic downturn could have a material adverse effect on our revenues and profit margin
|- |  | -------------------------------------------------------------------------------------------------------------------



| |  | The profitability of our engagements with clients may not meet our expectations due to unexpected costs, cost overruns, early contract terminations and the inability to maintain our
prices
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We might not be able to achieve the cost savings required to sustain and increase our profit margins
|- |  | ----------------------------------------------------------------------------------------------------



| |  | Our accounting for long-term contracts requires using estimates and projections that may change over time; such changes may have a significant or adverse effect on our reported
results of operations or consolidated balance sheet
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The loss of a significantly large client or several clients could have a material adverse effect on our revenues and profitability
|- |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  | We may have difficulty integrating or managing acquired businesses, which may harm our financial results or reputation in the marketplace
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in government regulations or if government regulations decrease the need
for our services or increase our costs
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | If we are unable to satisfy regulatory requirements relating to internal controls over financial reporting, our business could suffer
|- |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  | Our business will be negatively affected if we are not able to keep pace with rapid changes in technology or if growth in the use of technology in business is not as rapid as in the
past
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | If our clients or third parties are not satisfied with our services, we may face damage to our professional reputation or legal liability
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | We depend on our employees; the inability to attract new talent or the loss of key employees could damage or result in the loss of client relationships and adversely affect our
business
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our global operations and expansion strategy pose complex management, foreign currency, legal, tax and economic risks, which we may not adequately address
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The demand for Benefits Outsourcing services and/or Human Resources Business Process Outsourcing services may not grow at rates we anticipate
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | If we fail to establish and maintain alliances for developing, marketing and delivering our services, our ability to increase our revenues and profitability may suffer
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We rely on third parties to provide services and their failure to perform the service could do harm to our business
|- |  | -------------------------------------------------------------------------------------------------------------------



| |  | We have only a limited ability to protect the intellectual property rights that are important to our success, and we face the risk that our services or products may infringe upon
the intellectual property rights of others
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We rely on our computing and communications infrastructure and the integrity of these systems, and our revenue growth depends, in part, on our ability to use the Internet as a means
of delivering human resources services
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our quarterly revenues, operating results and profitability will vary from quarter to quarter, which may result in volatility of our stock price
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Our initial stockholders, many of whom are employees, continue to hold a high percentage of our outstanding stock and their interests may differ from those of other stockholders
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our stock price may decline due to the large number of shares of common stock eligible for future sale
|- |  | ------------------------------------------------------------------------------------------------------



| |  | Section 203 of the Delaware General Corporation Law may delay, defer or prevent a change in control that our stockholders might consider to be in their best interest
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



You should carefully consider each cautionary factor and all of
the other information in this report. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosure we
make on related subjects in future reports to the SEC.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



We are exposed to market risk from changes in interest rates and foreign currency exchange rates. As of December 31, 2005, there have been no material changes in our market risk from September 30, 2005. For
further information regarding our market risk, refer to our Annual Report on Form 10-K for the year ended September 30, 2005.



Item 4. Controls and Procedures



Evaluation of Disclosure Controls and Procedures.



Under the
supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this quarterly report (the Evaluation Date). Based on
this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated
subsidiaries, required to be disclosed in our Securities and Exchange Commission (SEC) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to the Companys management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.



Changes in Internal Control Over Financial Reporting.



There has been no significant change in our internal control over financial reporting that
occurred during the three months ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II. OTHER INFORMATION



ITEM1. Legal Proceedings



In
the ordinary course of our business, we are routinely subject to audits, actions related to employment, benefits, contracts and other matters and inquiries by governmental and regulatory agencies. We are not engaged in any legal proceedings that we
expect to have a material adverse effect on our business, financial condition or results of operations.



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ITEM6. Exhibits



a. Exhibits.



|     |  |                                                                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).



ITEMS 1A, 2, 3, 4
And 5 Are Not Applicable And Have Been Omitted



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                       |  |                         |  |                                             
|---------------------- |  | ----------------------- |  | --------------------------------------------
|                       |  | HEWITT ASSOCIATES, INC.
|                       |  | (Registrant)           
|                       |  |                        
|Date: February 6, 2006 |  | By:                     |  | /s/ John J. Park                            
|                       |  |                         |  | John J. Park                                
|                       |  |                         |  | Chief Financial Officer                     
|                       |  |                         |  | (principal financial and accounting officer)



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