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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 June 30, 2003



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



HEWITT ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)



|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)



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 an accelerated filer (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                                |  | OutstandingShares atJune 30, 2003
|------------------------------------ |  | ---------------------------------
|Class A Common Stock$0.01 par value |  | 19,201,324                       
|Class B Common Stock$0.01 par value |  | 73,726,424                       
|Class C Common Stock$0.01 par value |  | 5,568,869                        
|                                     |  |                                  
|                                     |  | 98,496,617                       



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HEWITT ASSOCIATES, INC.



Form 10-Q

for the period ended

June 30, 2003



Index



|                                  |  |                                                                                                                    |  | Page
|--------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ----
|                                  | 
|Part I.     FINANCIAL INFORMATION |  |                                                                                                                   
|                                  |  |                                                                                                                   
|ITEM 1.                           |  | Financial Statements:                                                                                              |  |     
|                                  |  |                                                                                                                   
|                                  |  | Consolidated Balance Sheets June 30, 2003 (Unaudited), and September 30, 2002                                     |  | 3   
|                                  |  |                                                                                                                   
|                                  |  | Consolidated and Combined Statements of Operations Three and Nine Months Ended June 30, 2003 and 2002 (Unaudited) |  | 5   
|                                  |  |                                                                                                                   
|                                  |  | Consolidated and Combined Statements of Cash Flows Nine Months Ended June 30, 2003 and 2002 (Unaudited)           |  | 6   
|                                  |  |                                                                                                                   
|                                  |  | Notes to Consolidated and Combined Financial Statements                                                            |  | 7   
|                                  |  |                                                                                                                   
|ITEM 2.                           |  | Managements Discussion and Analysis of Financial Conditionand Results of Operations                               |  | 20  
|                                  |  |                                                                                                                   
|ITEM 3.                           |  | Quantitative and Qualitative Disclosures about Market Risk                                                         |  | 41  
|                                  |  |                                                                                                                   
|ITEM 4.                           |  | Controls and Procedures                                                                                            |  | 42  
|                                  | 
|Part II.    OTHER INFORMATION     |  |                                                                                                                   
|                                  |  |                                                                                                                   
|ITEM 1.                           |  | Legal Proceedings                                                                                                  |  | 43  
|                                  |  |                                                                                                                   
|ITEM 6.                           |  | Exhibits and Reports on Form 8-K                                                                                   |  | 43  
|                                  | 
|SIGNATURES                        |  | 44                                                                                                                



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Part I.    Financial Information



ITEM 1.    Financial Statements



HEWITT ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except for share and per share amounts)



|                                                                                                                               |  | June 30, 2003 |           | September 30, 2002
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | ------------------
|                                                                                                                               |  | (Unaudited)   |           |                   
|ASSETS                                                                                                                         |  |               |           |                   
|                                                                                                                               |  |              
|Current Assets                                                                                                                 |  |               |           |                   
|Cash and cash equivalents                                                                                                      |  | $             | 162,885   |                   
|Client receivables and unbilled work in process, less allowances of $16,852 at June 30, 2003 and $16,160 at September 30,
2002 |  |               | 418,312   |                   
|Prepaid expenses and other current assets                                                                                      |  |               | 38,298    |                   
|Deferred income taxes, net                                                                                                     |  |               | 16,452    |                   
|                                                                                                                               |  |               |           |                   
|Total current assets                                                                                                           |  |               | 635,947   |                   
|                                                                                                                               |  |               |           |                   
|Non-Current Assets                                                                                                             |  |               |           |                   
|Property and equipment, net                                                                                                    |  |               | 240,731   |                   
|Goodwill, net                                                                                                                  |  |               | 256,629   |                   
|Intangible assets, net                                                                                                         |  |               | 207,532   |                   
|Other assets, net                                                                                                              |  |               | 22,778    |                   
|                                                                                                                               |  |               |           |                   
|Total non-current assets                                                                                                       |  |               | 727,670   |                   
|                                                                                                                               |  |               |           |                   
|Total Assets                                                                                                                   |  | $             | 1,363,617 |                   
|                                                                                                                               |  |               |           |                   
|LIABILITIES                                                                                                                    |  |               |           |                   
|                                                                                                                               |  |              
|Current Liabilities                                                                                                            |  |               |           |                   
|Accounts payable                                                                                                               |  | $             | 17,601    |                   
|Accrued expenses                                                                                                               |  |               | 197,114   |                   
|Advanced billings to clients                                                                                                   |  |               | 85,343    |                   
|Current portion of long-term debt                                                                                              |  |               | 44,559    |                   
|Current portion of capital lease obligations                                                                                   |  |               | 8,765     |                   
|Employee deferred compensation and accrued profit sharing                                                                      |  |               | 37,454    |                   
|                                                                                                                               |  |               |           |                   
|Total current liabilities                                                                                                      |  |               | 390,836   |                   
|                                                                                                                               |  |               |           |                   
|Long-Term Liabilities                                                                                                          |  |               |           |                   
|Debt, less current portion                                                                                                     |  |               | 135,297   |                   
|Capital lease obligations, less current portion                                                                                |  |               | 84,155    |                   
|Other long-term liabilities                                                                                                    |  |               | 58,440    |                   
|Deferred income taxes, net                                                                                                     |  |               | 42,754    |                   
|                                                                                                                               |  |               |           |                   
|Total long-term liabilities                                                                                                    |  |               | 320,646   |                   
|                                                                                                                               |  |               |           |                   
|Total Liabilities                                                                                                              |  | $             | 711,482   |                   
|                                                                                                                               |  |               |           |                   



Commitments and Contingencies (Note 10)



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HEWITT ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS(Continued)

(Dollars in thousands except for
share and per share amounts)



|                                                                                                                                                                                                 |  | June 30, 2003 |           |   | September 30, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ------------------ | -
|                                                                                                                                                                                                 |  | (Unaudited)   |           |   |                    |  
|STOCKHOLDERS EQUITY                                                                                                                                                                             |  |               |           |   |                    |  
|Stockholders Equity                                                                                                                                                                             |  |               |           |   |                    |  
|Preferred stock, par value $0.01 per share, 10,000,000 shares authorized                                                                                                                         |  | $             |          |   |                    | $
|Class A common stock, par value $0.01 per share, 750,000,000 shares authorized, 19,201,324 and 19,162,660 shares issued and
outstanding as of June 30, 2003 and September 30, 2002, respectively |  |               | 192       |   |                    |  
|Class B common stock, par value $0.01 per share, 200,000,000 shares authorized, 73,726,424 shares issued and outstanding as of
June 30, 2003 and September 30, 2002                              |  |               | 737       |   |                    |  
|Class C common stock, par value $0.01 per share, 50,000,000 shares authorized, 5,568,869 shares issued and outstanding as of June
30, 2003 and September 30, 2002                                |  |               | 56        |   |                    |  
|Restricted stock units, 178,198 and 319,902 units issued and outstanding as of June 30, 2003 and September 30, 2002,
respectively                                                                |  |               | 3,382     |   |                    |  
|Additional paid-in capital                                                                                                                                                                       |  |               | 627,423   |   |                    |  
|Treasury stock, at cost, 269,873 shares at June 30, 2002 (Note 11)                                                                                                                               |  |               | (6,153    | ) |                    |  
|Retained earnings (deficit)                                                                                                                                                                      |  |               | 42,016    |   |                    |  
|Unearned compensation                                                                                                                                                                            |  |               | (50,224   | ) |                    |  
|Accumulated other comprehensive income                                                                                                                                                           |  |               | 34,706    |   |                    |  
|                                                                                                                                                                                                 |  |               |           |   |                    |  
|Total stockholders equity                                                                                                                                                                       |  |               | 652,135   |   |                    |  
|                                                                                                                                                                                                 |  |               |           |   |                    |  
|Total Liabilities and Stockholders Equity                                                                                                                                                       |  | $             | 1,363,617 |   |                    | $
|                                                                                                                                                                                                 |  |               |           |   |                    |  







The accompanying notes are an integral part of these statements.



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HEWITT ASSOCIATES, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (1)

(Unaudited)

(Dollars in thousands except for
share and per share amounts)



|                                                                                                 |  | Three Months EndedJune 30, |            |   | Nine Months EndedJune 30, |  
|------------------------------------------------------------------------------------------------ |  | -------------------------- | ---------- | - | ------------------------- | -
|                                                                                                 |  | 2003                       |            |   | 2002 (1)                  |  
|Revenues:                                                                                        |  |                            |            |   |                           |  
|Revenue before reimbursements (net revenues)                                                     |  | $                          | 494,886    |   |                           | $
|Reimbursements                                                                                   |  |                            | 12,862     |   |                           |  
|                                                                                                 |  |                            |            |   |                           |  
|Total revenues                                                                                   |  |                            | 507,748    |   |                           |  
|                                                                                                 |  |                            |            |   |                           |  
|Operating expenses:                                                                              |  |                            |            |   |                           |  
|Compensation and related expenses, excluding initial public offering restricted stock awards (1) |  |                            | 318,980    |   |                           |  
|Initial public offering restricted stock awards                                                  |  |                            | 5,649      |   |                           |  
|Reimbursable expenses                                                                            |  |                            | 12,862     |   |                           |  
|Other operating expenses                                                                         |  |                            | 96,511     |   |                           |  
|Selling, general and administrative expenses                                                     |  |                            | 25,318     |   |                           |  
|                                                                                                 |  |                            |            |   |                           |  
|Total operating expenses                                                                         |  |                            | 459,320    |   |                           |  
|                                                                                                 |  |                            |            |   |                           |  
|Operating income (1)                                                                             |  |                            | 48,428     |   |                           |  
|                                                                                                 |  |                            |            |  
|Other expenses, net:                                                                             |  |                            |            |   |                           |  
|Interest expense                                                                                 |  |                            | (4,856     | ) |                           |  
|Interest income                                                                                  |  |                            | 670        |   |                           |  
|Other income (expense), net                                                                      |  |                            | 420        |   |                           |  
|                                                                                                 |  |                            |            |   |                           |  
|Total other expenses, net                                                                        |  |                            | (3,766     | ) |                           |  
|                                                                                                 |  |                            |            |   |                           |  
|Income before income taxes                                                                       |  |                            | 44,662     |   |                           |  
|                                                                                                 |  |                            |            |  
|Provision for income taxes (1)                                                                   |  |                            | 18,219     |   |                           |  
|                                                                                                 |  |                            |            |   |                           |  
|Net income                                                                                       |  | $                          | 26,443     |   |                           | $
|                                                                                                 |  |                            |            |   |                           |  
|Earnings per share (2):                                                                          |  |                            |            |   |                           |  
|Basic                                                                                            |  | $                          | 0.28       |   |                           | $
|Diluted                                                                                          |  | $                          | 0.27       |   |                           | $
|                                                                                                 |  |                            |            |  
|Weighted average shares (2):                                                                     |  |                            |            |   |                           |  
|Basic                                                                                            |  |                            | 95,169,772 |   |                           |  
|Diluted                                                                                          |  |                            | 96,863,533 |   |                           |  

---

|(1) |  | In connection with the Companys transition to a corporate structure on May 31, 2002, owners who worked in the business became employees and the Company began to record their
compensation in compensation and related expenses and the Company became subject to corporate income taxes. As such, owner compensation expenses and corporate income taxes were recorded in the current year quarter and nine month period but only for
one month in the prior year quarter and nine month period. Additionally, on  June 5, 2002, the Company acquired the actuarial and benefits consulting business of Bacon & Woodrow and their results are included in the Companys results
from the acquisition date of June 5, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Earnings per share for the fiscal 2002 period is calculated based on earnings during the one month period from May 31, 2002, the date on which the Companys transition to a
corporate structure was completed, through June 30, 2002. Similarly, common stock is weighted from May 31, 2002, and not from the beginning of fiscal 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The accompanying notes are an integral part of these statements.



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HEWITT ASSOCIATES, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)



|                                                                                  |  | Nine Months EndedJune 30, |         
|--------------------------------------------------------------------------------- |  | ------------------------- | --------
|                                                                                  |  | 2003                      |         
|Cash flows from operating activities:                                             |  |                           |         
|Net income                                                                        |  | $                         | 64,708  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         
|Depreciation                                                                      |  |                           | 56,846  
|Amortization                                                                      |  |                           | 24,786  
|Net unrealized loss (gain) on securities                                          |  |                           |        
|Initial public offering restricted stock awards (Note 11)                         |  |                           | 30,847  
|Owner compensation charge (Note 3)                                                |  |                           |        
|Establishment of owner vacation liability (Note 3)                                |  |                           |        
|Director stock compensation                                                       |  |                           | 75      
|Deferred income taxes                                                             |  |                           | 24,014  
|Changes in operating assets and liabilities, net of acquisitions:                 |  |                           |         
|Client receivables and unbilled work in process                                   |  |                           | (2,288  
|Prepaid expenses and other current assets                                         |  |                           | 2,134   
|Other assets                                                                      |  |                           | (3,916  
|Accounts payable                                                                  |  |                           | (9,168  
|Due to Hewitt Holdings (Note 3)                                                   |  |                           |        
|Accrued expenses                                                                  |  |                           | 3,179   
|Advanced billings to clients                                                      |  |                           | 6,702   
|Employee deferred compensation and accrued profit sharing                         |  |                           | (19,386 
|Other long-term liabilities                                                       |  |                           | 3,815   
|                                                                                  |  |                           |         
|Net cash provided by operating activities                                         |  |                           | 182,348 
|Cash flows from investing activities:                                             |  |                           |         
|Additions to property and equipment                                               |  |                           | (27,379 
|Cash paid for acquisitions, net of cash received                                  |  |                           | (63,697 
|Increase in other assets                                                          |  |                           | (28,861 
|                                                                                  |  |                           |         
|Net cash used in investing activities                                             |  |                           | (119,937
|Cash flows from financing activities:                                             |  |                           |         
|Capital distributions, net                                                        |  |                           |        
|Proceeds from the exercise of stock options                                       |  |                           | 303     
|Short-term borrowings                                                             |  |                           | 1,016   
|Repayments of short-term borrowings                                               |  |                           | (14,637 
|Repayments of long-term debt                                                      |  |                           | (9,238  
|Repayments of capital lease obligations                                           |  |                           | (8,045  
|Purchase of treasury stock                                                        |  |                           | (6,153  
|Payment of accrued offering costs                                                 |  |                           | (796    
|                                                                                  |  |                           |         
|Net cash used in financing activities                                             |  |                           | (37,550 
|Effect of exchange rate changes on cash and cash equivalents                      |  |                           | 1,574   
|                                                                                  |  |                           |         
|Net increase (decrease) in cash and cash equivalents                              |  |                           | 26,435  
|Cash and cash equivalents, beginning of period                                    |  |                           | 136,450 
|                                                                                  |  |                           |         
|Cash and cash equivalents, end of period                                          |  | $                         | 162,885 
|                                                                                  |  |                           |         
|Change in client receivables and unbilled work in process:                        |  |                           |         
|Beginning of period client receivables and unbilled work in process               |  | $                         | 394,184 
|Non-cash distribution of client receivables to Hewitt Holdings                    |  |                           |        
|Fair value of acquired client receivables and unbilled work in process            |  |                           | 11,853  
|Effect of exchange rates on client receivables and unbilled work in process       |  |                           | 9,987   
|End of period client receivables and unbilled work in process                     |  |                           | (418,312
|                                                                                  |  |                           |         
|Change in client receivables and unbilled work in process                         |  | $                         | (2,288  
|Supplementary disclosure of cash paid during the period:                          |  |                           |         
|Interest paid                                                                     |  | $                         | 16,027  
|Income taxes paid                                                                 |  | $                         | 33,251  



The accompanying notes
are an integral part of these statements.



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HEWITT ASSOCIATES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

JUNE 30, 2003 AND 2002

(Unaudited)

(Amounts 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 human resources outsourcing and consulting services.



Prior to May 31, 2002, the results of the Company included the combined results of three Illinois limited liability companies: Hewitt Associates LLC and subsidiaries, Hewitt Financial Services LLC, and Sageo LLC (collectively, Hewitt
Associates LLC and Affiliates). Hewitt Associates LLC and Affiliates was under the control of Hewitt Holdings LLC (Hewitt Holdings) and its owners. The term owner refers to the individuals who are current or retired
members of Hewitt Holdings.



On May 31, 2002, the Company
completed its transition to a corporate structure whereby Hewitt Holdings ownership interests in Hewitt Associates LLC and Affiliates were transferred to Hewitt Holdings newly formed and then wholly-owned subsidiary, Hewitt Associates,
Inc.



On June 5, 2002, the Company acquired the actuarial and
benefits consulting business of Bacon & Woodrow in the United Kingdom. The results of operations for Bacon & Woodrows actuarial and benefits consulting business are included in the Companys and the Consulting segments
results from the acquisition date (see Note 7).



On June 27,
2002, the Company sold 11,150,000 shares of Class A common stock at $19.00 per share in its initial public offering. In July 2002, the underwriters exercised their over-allotment option to purchase an additional 1,672,500 shares of the
Companys Class A common stock at $19.00 per share. The combined transactions generated $218,502 in net cash proceeds after offering expenses.



On July 28, 2003, the Company filed an Amendment No. 1 on Form S-3 to the S-1 Registration Statement filed on May 27, 2003 with the Securities and
Exchange Commission in connection with a proposed secondary offering on behalf of the former owners, the former partners of Bacon & Woodrow and the Companys key employees. The amended registration statement covers approximately 9.9 million
shares of Class A common stock, before shares issuable upon exercise of the underwriters over-allotment option. The registration statement was filed pursuant to a request under a registration rights agreement which the Company entered into at
the time of its initial public offering.



On June 5, 2003, the
Company acquired Cyborg Worldwide, Inc., the parent of Cyborg Systems, Inc. (Cyborg), a global provider of human resources management software and payroll services. The results of operations for Cyborg are included in the Companys
and the Outsourcing segments results from the acquisition date (see Note 7).



On June 15, 2003, the Company acquired the benefits administration and retirement consulting and actuarial businesses of Northern Trust Corporation. The results of the benefit administration and retirement consulting
and actuarial businesses of Northern Trust Corporation are included in the Companys and the Outsourcing and Consulting segments results from the acquisition date (see Note 7).



2.    Summary of Significant Accounting Policies:



Basis of Presentation



The accompanying unaudited interim consolidated and combined financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for quarterly reports on Form



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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 June 30, 2003, 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 accounting principles generally accepted in the United States of America 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, 2002, as filed with the Securities and
Exchange Commission. Certain previously reported amounts have been reclassified to conform to the current period presentation. The consolidated and combined financial statements are prepared on the accrual basis of accounting. The significant
accounting policies are summarized below.



Principles of Consolidation and
Combination



The accompanying consolidated and combined
financial statements reflect the operations of the Company and its majority owned subsidiaries after elimination of intercompany accounts and transactions. Combined financial statements are presented for periods prior to the transition to a
corporate structure when the combined entities that now make up the Company were under common control. Upon consummation of the transition to a corporate structure, the affiliated companies of Hewitt were transferred into the newly formed
corporation, Hewitt Associates, Inc., and their results are presented on a consolidated basis.



Revenue Recognition



Revenues include fees generated from outsourcing contracts and from consulting services provided to the Companys clients. Revenues from sales of software or other types of revenue were not material. Under the Companys
outsourcing contracts, which typically have a three- to five-year term, clients generally pay an implementation fee and an ongoing service fee. In accordance with the Securities and Exchange Commissions Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements,the Company recognizes revenues for non-refundable, upfront implementation fees evenly over the period between the initiation of ongoing services through the end of the contract term (on a
straight-line basis). Most indirect costs of implementation are expensed as incurred. However, incremental direct costs of implementation are deferred and recognized as expense over the same period that deferred implementation fees are recognized.
If a client terminates an outsourcing contract prematurely, both the deferred implementation revenues and related costs are recognized in the period in which the termination occurs.



Revenues related to ongoing service fees and to services provided outside the scope of outsourcing contracts are recognized
when persuasive evidence of an arrangement exists, services have been rendered, our fee is determinable and collectibility of our fee is reasonably assured. Ongoing service fees are typically billed and recognized on a monthly basis, typically based
on the number of plan participants or services. Services provided outside the scope of our outsourcing contracts are billed and recognized on a time-and-material or fixed fee basis.



Losses on outsourcing contracts are recognized during the period in which the loss becomes probable and the amount of the
loss is reasonably estimable. Contract losses are determined to be the amount by which the estimated direct and a portion of indirect costs of the contract exceed the estimated total revenues that will be generated by the contract.



The Companys clients typically pay for consulting services either on a
time-and-materials or, to a lesser degree, on a fixed-fee basis. Revenues are recognized under time-and-material based arrangements as services are provided. On fixed-fee engagements, revenues are recognized as the services are performed, which is
measured by hours incurred in proportion to total hours estimated to complete a project. Losses on consulting



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agreements are recognized during the period in which the loss becomes probable and the amount of the loss is reasonably estimable. Losses are determined to
be the amount by which the estimated direct and a portion of indirect costs of the project exceed the estimated total revenues that will be generated for the work.



Revenues earned in excess of billings are recorded as unbilled work in progress. Billings in excess of revenues earned are
recorded as advanced billings to clients, a deferred revenue liability, until services are rendered.



The Company considers the criteria established by Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent,in determining whether revenue should be recognized on a gross versus a net basis. In consideration of these criteria, the Company recognizes revenue primarily on a gross basis. Factors considered in determining if gross
or net recognition is appropriate include whether the Company is primarily responsible to the client for the services, changes the delivered product, performs part of the service delivered, has discretion on vendor selection, or bears credit risk.
In accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred,reimbursements received for out-ofpocket expenses incurred are characterized as
revenues and are shown as a separate component of total revenues. Similarly, related reimbursable expenses are also shown separately within operating expenses.



Performance-Based Compensation



The Companys compensation program includes a performance-based component that is determined by management. Performance-based compensation is
discretionary and is based on individual, team, and total Company performance. Performance-based compensation is paid once per fiscal year after the Companys annual operating results are finalized. The amount of expense for performance-based
compensation recognized at interim and annual reporting dates involves judgment, is based on our quarterly and annual results as compared to our internal targets, and takes into account other factors, including industry-wide results and the general
economic environment. Annual performance-based compensation levels may vary from current expectations as a result of changes in the actual performance of the individual, team, or Company. As such, accrued amounts are subject to change in future
periods if actual future performance varies from performance levels anticipated in prior interim periods.



Goodwill and Other Intangible Assets



On October 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,for acquisitions made prior to July 1, 2001. The Company evaluates its goodwill and indefinite lived intangibles for impairment whenever indicators of impairment exist with reviews at least annually. The goodwill impairment evaluation is based
upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities of that reporting unit. The fair values used in this evaluation is estimated
based upon discounted future cash flow projections for the reporting unit. The indefinite lived intangible asset impairment evaluation is based upon discounted future cash flow projections.



Income Before Income Taxes



Prior to May 31, 2002, the Company operated as a group of affiliated limited
liability companies and recorded income before income taxes in accordance with accounting principles generally accepted in the United States of America. Income before income taxes prior to May 31, 2002 is not comparable to current year income before
income taxes because in the prior year periods, compensation and related expenses for services rendered by owners have not been reflected as expenses and the Company incurred no income taxes in its historical results prior to its transition to a
corporate structure. Results prior to May 31, 2002, do not reflect the financial position, results of operations, and changes in cash flows that would have been reported had the Company operated as a corporation for all the periods presented.



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Income Taxes



On May 31, 2002, the Company became subject to federal and state income taxes and began to apply the asset and liability method described in Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Prior to May 31, 2002, the
Company was not subject to income taxes because it operated as a limited liability company. Taxes on income earned prior to May 31, 2002, were the responsibility of Hewitt Holdings owners.



Earnings Per Share



On May 31, 2002, the Company completed its transition to a corporate structure and began to report earnings per share in
accordance with SFAS No. 128, Earnings Per Share.Under the treasury stock method, unvested restricted stock awards and unexercised stock options with fair market values of the underlying stock greater than the stock options exercise
prices are considered common stock equivalents for the purposes of calculating diluted earnings per share for periods when there are positive earnings and the incremental effect would be dilutive. For the three and nine months ended June 30, 2002,
earnings per share was calculated based on the net loss incurred in the one month period from May 31, 2002, through June 30, 2002. Prior to May 31, 2002, Hewitt was comprised of limited liability companies and did not have outstanding common stock
from which to calculate earnings per share, nor did the Companys earnings include owner compensation or income taxes. As such, the Companys net income prior to May 31, 2002, is not comparable to net income of a corporation or the
Companys net income after May 31, 2002. Therefore, historical earnings per share is not available for periods prior to May 31, 2002, and the consolidated and combined financial statements do not reflect the financial position and results of
operations that would have been reported had the Company operated as a corporation prior to May 31, 2002.



Use of Estimates



The
preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the
consolidated and combined financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for contract and project loss reserves, performance-based compensation, the allowance for doubtful accounts,
depreciation and amortization, asset impairment, taxes, and any contingencies. Although these estimates are based on managements best knowledge of current events and actions that the Company may undertake in the future, actual results may be
different from the estimates.



Stock-Based Compensation



The Company applies the intrinsic value method for accounting for
stock-based compensation as outlined in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employeesand provides the pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based
Compensationas amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure.



Restricted stock awards, including restricted stock and restricted stock units, are measured using the fair market value of the stock as of the grant date
and are recorded as unearned compensation on the balance sheet. As the restricted stock awards vest, the unearned compensation is amortized to compensation expense on a straight-line basis. Employer payroll taxes are also recorded as expense when
they become due over the vesting period. The shares are subject to forfeiture and restrictions on sale or transfer for six months to four years from the grant date. For purposes of calculating basic and diluted earnings per share, vested restricted
stock awards



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and exercised stock options are considered outstanding. Restricted stock awards vest on a cliff schedule so that restricted stock awards are not considered
outstanding until the stated vesting date for earnings per share calculations.



The Company also grants nonqualified stock options at an exercise price equal to the fair market value of the Companys stock on the grant date. Since the stock options have no intrinsic value on the grant date,
no compensation expense is recorded in connection with the stock option grants. Generally, stock options vest 25 percent on each anniversary of the grant date, are fully vested four years from the grant date and have a term of ten years.



For purposes of pro forma disclosures, the estimated fair value of the
stock options is amortized to compensation expense over the stock options vesting period. The Companys pro forma net income and earnings per share would have been as follows:



|                                                        |  | Three Months Ended June 30, |        |   | Nine Months Ended June 30, |  
|------------------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | -
|                                                        |  | 2003                        |        |   | 2002                       |  
|Net income:                                             |  |                             |        |   |                            |  
|As reported                                             |  | $                           | 26,443 |   |                            | $
|Less net income through May 31, 2002                    |  |                             |        |   |                            |  
|                                                        |  |                             |        |   |                            |  
|Net loss from June 1, 2002 through June 30, 2002        |  |                             |        |   |                            |  
|Pro forma stock option compensation expense, net of tax |  |                             | (1,056 | ) |                            |  
|                                                        |  |                             |        |   |                            |  
|Adjusted net income                                     |  | $                           | 25,387 |   |                            | $
|                                                        |  |                             |        |   |                            |  
|Net income (loss) per sharebasic:                      |  |                             |        |   |                            |  
|As reported                                             |  | $                           | 0.28   |   |                            | $
|Adjusted net income (loss) per share                    |  | $                           | 0.27   |   |                            | $
|                                                        |  |                             |        |  
|Net income (loss) per sharediluted:                    |  |                             |        |   |                            |  
|As reported                                             |  | $                           | 0.27   |   |                            | $
|Adjusted net income (loss) per share                    |  | $                           | 0.26   |   |                            | $



New Accounting Pronouncements



In November 2002, the FASBs Emerging Issues Task
Force reached a consensus on EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF No. 00-21 addresses the accounting treatment for arrangements that provide the delivery or performance of multiple products or
services where the delivery of a product, system or performance of services may occur at different points in time or over different periods of time. EITF No. 00-21 requires the separation of the multiple deliverables that meet certain requirements
into individual units of accounting that are accounted for separately under the appropriate authoritative accounting literature. EITF No. 00-21 is applicable to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company is currently evaluating the requirements and impact of this issue on its consolidated results of operations and financial position.



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities,to expand upon
and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 changes that by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns or both. The adoption of FIN No. 46 is not expected to have a material impact on the Companys consolidated
financial statements.



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3.    Transition to a Corporate Structure



On May 31, 2002, the Company completed its transition to a corporate
structure in connection with its planned initial public offering.



Prior to the transition to a corporate structure, the Company consisted of single-member limited liability companies, which were wholly owned by Hewitt Holdings. As such, owners capital represented the ownership interests of Hewitt
Holdings in the Company. Historically, distributions to and contributions from Hewitt Holdings were based on the capital requirements of the Company and of Hewitt Holdings, and were subject to the discretion of the owners of Hewitt Holdings.



On March 1, 2002, Hewitt Associates, Inc., a Delaware
corporation, was formed as a subsidiary of Hewitt Holdings. Three classes of common stock were authorized. The holders of Class A, Class B, and Class C common stock have one vote per share. All shares of Class B and Class C common stock are voted in
accordance with a majority of the votes cast by the holders of Class B and Class C common stock as a group.



In May 2002, Hewitt Associates LLC distributed $152,500 of accounts receivable and $55,000 of cash to Hewitt Holdings to fund a distribution to the owners
of accumulated earnings in preparation for Hewitt Associates LLC and Affiliates transition to a corporate structure. Cash collected on the receivables was first received by the Company and then remitted to Hewitt Holdings and the Company did
not bear any collection risk associated with these receivables. At June 30, 2002, a net $25,094 of primarily these receivables had been collected by the Company and not yet remitted to Hewitt Holdings.



On May 31, 2002, Hewitt Holdings transferred all of its ownership interests
in Hewitt Associates LLC and Affiliates to Hewitt Associates, Inc., thereby making Hewitt Associates LLC and Affiliates a wholly-owned subsidiary of the Company. The capital in the business was converted and Hewitt Holdings received 70,819,520
shares of the Companys Class B common stock.



In
connection with the transition to a corporate structure, the Company incurred a non-recurring compensation expense resulting from certain owners receiving more than their proportional share of total capital, without offset for those owners who
received less than their proportional share in the issuance of the Class B common stock. The amount of this one-time charge was $17,843. As a result of owners becoming employees of the Company, the owners began to receive compensation and the
Company incurred an additional non-recurring compensation expense resulting from the establishment of a vacation liability for these owners in the amount of $8,300. The Company also became subject to income taxes subsequent to its transition to a
corporate structure. As a result, the Company incurred a non-recurring income tax expense of $21,711 to initially record deferred tax assets and liabilities under the provisions of SFAS No. 109.



4.    Initial Public Offering



On June 27, 2002, the Company sold 11,150,000 shares of Class A common stock
at $19.00 per share in its initial public offering. The Companys gross proceeds from the offering were $211,850, before the underwriting discount of $14,829 and offering expenses of $8,072. In July 2002, the underwriters exercised their
over-allotment option to purchase an additional 1,672,500 shares of the Companys Class A common stock at $19.00 per share. The option exercise generated gross proceeds of $31,778 before the underwriting discount of $2,225.



Of the $218,502 in net proceeds received in July 2002, $52,000 was used to
repay the outstanding balance on the Companys lines of credit, $8,341 was used to pay income taxes resulting from the Companys transition to a corporate structure, and the balance was retained for general corporate purposes and working
capital.



In connection with the initial public offering, the
Company granted to employees restricted stock, restricted stock units, and nonqualified stock options on common stock. (See Note 11, Stock-Based Compensation Plan, for additional information).



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5.    Earnings Per Share



In accordance with SFAS No. 128, Earnings Per Share,basic earnings per share is calculated by dividing net income by
the weighted-average number of shares of common stock outstanding. Diluted earnings per share includes the components of basic earnings per share and also gives effect to dilutive potential common stock equivalents.



For the three and nine months ended June 30, 2002, earnings per share was
calculated based on earnings between May 31, 2002, and June 30, 2002, the period during which the Company operated as a corporation. As such, earnings per share for the three and nine months ended June 30, 2002, are not indicative of earnings per
share that would normally be computed for the entire periods presented. During the month of June 2002, the Company also incurred several one-time charges totaling $47,854 (see Note 3) related to the Companys transition to a corporate structure
which resulted in a net loss. As such, the effect of incremental shares of common stock equivalents has not been reflected as an adjustment to diluted earnings per share as the impact is antidilutive. Additionally, common stock has been weighted
from the time of the Companys transition to a corporate structure on May 31, 2002, and not from the beginning of fiscal 2002.



The following table presents computations of basic and diluted earnings per share in accordance with accounting principles generally accepted in the
United States of America for the three and nine months ended June 30, 2003.



|                                                         |  | Three Months Ended June 30, |            |      | Nine Months Ended June 30, |           
|-------------------------------------------------------- |  | --------------------------- | ---------- | ---- | -------------------------- | ----------
|                                                         |  | 2003                        |            | 2002 |                            |           
|Net income as reported                                   |  | $                           | 26,443     |      | $                          | 22,375    
|                                                         |  |                             |            |      |                            |           
|Less net income through May 31, 2002                     |  |                             |            |      |                            | 59,570    
|                                                         |  |                             |            |      |                            |           
|Net loss from June 1, 2002 through June 30, 2002         |  |                             |            |      | $                          | (37,195   
|                                                         |  |                             |            |      |                            |           
|Weighted-average number ofcommon stock for basic         |  |                             | 95,169,772 |      |                            | 72,306,187
|Incremental effect of dilutive common stock equivalents: |  |                             |            |      |                            |           
|Unvested restricted stock awards                         |  |                             | 1,122,371  |      |                            |          
|Unexercised in-the-money stock options                   |  |                             | 571,390    |      |                            |          
|                                                         |  |                             |            |      |                            |           
|Weighted-average number ofcommon stock for diluted       |  |                             | 96,863,533 |      |                            | 72,306,187
|                                                         |  |                             |            |      |                            |           
|Earnings per sharebasic                                 |  | $                           | 0.28       |      | $                          | (0.51     
|                                                         |  |                             |            |      |                            |           
|Earnings per sharediluted                               |  | $                           | 0.27       |      | $                          | (0.51     
|                                                         |  |                             |            |      |                            |           



6.    Other
Comprehensive Income



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



|                                         |  | Three Months Ended June 30, |        | Nine Months Ended June 30,
|---------------------------------------- |  | --------------------------- | ------ | --------------------------
|                                         |  | 2003                        |        | 2002                      
|Net income                               |  | $                           | 26,443 |                           
|Other comprehensive income (loss):       |  |                             |        |                           
|Foreign currency translation adjustments |  |                             | 15,151 |                           
|                                         |  |                             |        |                           
|Total comprehensive income               |  | $                           | 41,594 |                           
|                                         |  |                             |        |                           





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7.    Acquisitions



Bacon & Woodrow



On June 5, 2002, the Company acquired the actuarial and benefits consulting business of Bacon & Woodrow (Bacon & Woodrow) in the
United Kingdom. The purchase price totaled $259,009, and was comprised of $219,240 of common stock, $38,882 in assumed net liabilities, and $887 of acquisition related costs. Bacon & Woodrows results of operations are included within the
Companys historical results from the acquisition date of June 5, 2002.



Pursuant to the purchase agreement, the former partners and employees of Bacon & Woodrow initially received an aggregate of 1,400,000 shares of the Companys Series A mandatorily redeemable preferred stock
which was redeemable for shares of the Companys common stock. Effective August 2, 2002, the Bacon & Woodrow former partners and employees elected to exchange their shares of Series A preferred stock for common stock. Of the 9,417,526
shares of common stock issued, the former partners of Bacon & Woodrow received 2,906,904 shares of Class B common stock and 5,568,869 shares of Class C common stock, and a trust for the benefit of the non-partner employees of Bacon & Woodrow
received 941,753 shares of Class A common stock.



The
allocation of the $259,009 purchase price to acquired net assets resulted in the allocation of $178,124 to goodwill, $65,874 to identifiable intangible assets (primarily customer relationships) with indefinite lives, $15,011 to identifiable
intangible assets with estimated five-year lives, $61,521 to identifiable assets (which includes $40,445 of client receivables and unbilled work in process), and $100,403 to assumed liabilities (which includes $22,687 of accounts payable and accrued
expenses and $36,071 of short term borrowings).



In the quarter
ending September 30, 2003, the Company will begin to amortize the customer relationships intangible asset, by taking a charge for the year then ending. The customer relationships intangible asset totaled £45,200, or $65,874 as of the
acquisition date and $74,843 at the current exchange rate at June 30, 2003. The Company will amortize the intangible asset in two classes on a straight-line basis over 15 and 30 years. The allocation between the two classes was based primarily on
customer revenue size. The useful life for each class was based primarily on historical customer turnover, the relative difficulty in the ability of customers to switch service providers and the nature and complexity of the customers. The Company
estimates that it will record recurring non-cash, pre-tax amortization expense of approximately £408 ($676 at a June 30, 2003 exchange rate) per quarter for the next 15 years and approximately £345 ($572 at a June 30, 2003 exchange rate
) per quarter thereafter through the end of the 30 year period.



Assuming the acquisition of Bacon & Woodrow occurred on October 1, 2001, pro forma net revenues for the three and nine months ended June 30, 2002 would have been approximately $454,000 and $1,334,000, respectively, and pro forma net
income would have been approximately $30,000 and $201,000, respectively. These pro forma results, which are unaudited, give effect to the Companys incorporation and initial public offering on the dates such events actually occurred, on May 31,
2002 and June 27, 2002, respectively. Because the Company was a limited liability company for the first eight months of fiscal 2002, the pro forma effect of the acquisition on earnings per share is not meaningful. The pro forma results are not
necessarily indicative of what would have occurred if the acquisition had been consummated on October 1, 2001, nor are they necessarily indicative of future consolidated operating results.



Cyborg Worldwide, Inc.



On June 5, 2003, the Company purchased Cyborg Worldwide, Inc., the parent of Cyborg Systems, Inc. (Cyborg), a
global provider of human resources management software and payroll services. Cyborg will operate within the Companys Outsourcing segment. The purchase price totaled $43,580, and was comprised of $43,000 of cash and $580 of acquisition related
costs, plus the potential for additional performance-based consideration of up to $30,000 payable through 2006. The preliminary allocation of the $43,580 purchase price to acquired net assets resulted in the allocation of $14,565 to goodwill,
$30,715 to identifiable intangible assets, which includes $17,806 to customer relationships with an estimated twelve year useful life and $12,209 to capitalized software with an estimated five-year life, $9,138 to identifiable assets, and $10,838 to
assumed liabilities.



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Benefits Administration and Actuarial Business of the Northern Trust Corporation



On June 15, 2003, the Company acquired substantially all of the assets of
Northern Trust Retirement Consulting LLC, Northern Trust Corporations retirement consulting and administration business (NTRC), which provides retirement consulting and actuarial services and defined benefit, defined contribution
and retiree health and welfare administration services. The benefit administration business will operate within the Companys Outsourcing segment and the retirement consulting and actuarial business within the Consulting segment. The purchase
price was comprised of $17,600 in cash for the assignment of client, vendor and third party contract rights and obligations applicable to the acquired business; computer equipment, furniture and leasehold improvements owned or leased by NTRC in its
Atlanta, Georgia facility and the assumption of NTRCs real estate lease obligation for its Atlanta, Georgia facility. As part of the acquisition agreement, the Company has agreed with the Northern Trust Corporation to, on a non-exclusive
basis, recommend Northern Trust Corporations custody, trustee and benefit payment services to the Companys clients and prospective clients and Northern Trust Corporation has agreed to recommend the Companys outsourcing services to
their clients and prospective clients.



8.    Related
Party Transactions



The Company has entered into real
estate transactions with Hewitt Holdings and its subsidiaries. During 2002, the Company entered into two real estate capital lease arrangements, one with Hewitt Holdings in Newport Beach, California and one with the purchaser of Hewitt
Holdings Norwalk, Connecticut property. On March 7, 2003, Hewitt Holdings sold its Newport Beach property to a third party who then assumed the lease with the Company. The remaining office space leases are operating leases. The investments in
the properties owned by these related parties were funded through capital contributions by Hewitt Holdings and third-party debt. This debt is not reflected on the Companys balance sheet as the obligation represented by the debt is an
obligation of these related parties, and is not an obligation of, nor guaranteed by, the Company.



The consolidated and combined statements of operations include expenses that have been allocated to the Company by Hewitt Holdings on a specific
identification basis for the period prior to incorporation only. Management believes these allocations and charges are reasonable and that such expenses would not have differed materially had the Company operated on a stand-alone basis.



9.    Client Receivables and Unbilled Work in Process



Client receivables and unbilled work in process, net of
allowances, for work performed through June 30, 2003, and September 30, 2002, consisted of the following:



|                         |  | June 30, 2003 |         | September 30,2002
|------------------------ |  | ------------- | ------- | -----------------
|Client receivables       |  | $             | 233,644 |                  
|Unbilled work in process |  |               | 184,668 |                  
|                         |  |               |         |                  
|                         |  | $             | 418,312 |                  
|                         |  |               |         |                  



10.    Legal
Proceedings



The Company is occasionally subject to
lawsuits and claims arising in the normal conduct of business. Management does not expect the outcome of any pending claim to have a material adverse affect on the business, financial condition or results of operations of the Company.



11.    Stock-Based Compensation Plan



In 2002, the Company adopted the Hewitt Associates, Inc. Global Stock and
Incentive Compensation Plan (the Plan) for employees and directors. The Plan is administered by the Compensation and Leadership Committee of the Board of Directors of the Company (the Committee). Under the Plan, employees and



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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 June 30, 2003, only restricted stock and restricted stock units and nonqualified stock options have been granted. A total of 25,000,000 shares of
Class A common stock has been reserved for issuance under the Plan. As of June 30, 2003, there were 15,613,211 shares available for grant under the Plan.



Restricted Stock and Restricted Stock Units



In connection with the initial public offering, the Company granted 5,789,908 shares of Class A restricted stock and restricted stock units at $19.03 per
weighted share to employees. The restricted stock and restricted stock units have substantially the same terms, except the holders of restricted stock units do not have voting rights.



During the three and nine months ended June 30, 2003, $5,649 and $35,193, respectively, of compensation and payroll tax
expense were recorded for the initial public offering-related awards. On December 31, 2002, 1,967,843 shares of restricted stock vested and 91,458 restricted stock units vested and such restricted stock units were converted to Class A common stock
and cash. Additionally, on June 27, 2003, 833,091 shares of restricted stock vested and 48,827 restricted stock units vested and such restricted stock units were converted to Class A common stock and cash. The Company withheld 269,873 shares of such
Class A common stock from the vested shares for the payment of the payroll taxes of the employees associated with the vesting of such restricted stock and restricted stock units. The shares were withheld by the Company at an average cost of $22.80
and were recorded as treasury stock. The Company subsequently remitted the $6,153 in taxes on the employees behalf.



As of June 30, 2003, the remaining $50,224 of unearned compensation within stockholders equity is related to the unvested initial public offering
stock awards and will be amortized as the awards vest through June 27, 2006, adjusted for payroll taxes and forfeitures.



Stock Options



The Committee may grant both incentive stock options and nonqualified stock options to purchase shares of Class A common stock. Subject to the terms and
provisions of the Plan, options may be granted to participants in such number, and upon such terms, as determined by the Committee, provided that incentive stock options may not be granted to non-employee directors. The option price is determined by
the Committee, provided that for options issued to participants in the United States, the option price may not be less than 100% of the fair market value of the shares on the date the option is granted and no option may be exercisable later than the
tenth anniversary of its grant. The nonqualified stock options granted in conjunction with the Companys initial public offering vest over a period of four years. As of June 30, 2003, the Company has 4,041,393 options outstanding with a
weighted average exercise price of $19.45. On July 1, 2003, the Company granted nonqualified stock options to acquire 3,767,476 shares of the Companys Class A common stock to its employees.



12.    Goodwill and Intangible Assets



In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their estimated residual values. The Company fully adopted the provisions of SFAS No. 142 effective October 1, 2002.



Under SFAS No. 142, the Company was required to perform transitional impairment tests for its goodwill and certain
intangible assets as of the date of adoption. During the three months ended December 31, 2002 and March 31, 2003, no impairments were recognized as a result of the intangible asset and goodwill transitional impairment testing that was performed.



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The following is a summary of net income for the three and nine months ended June 30, 2002, as adjusted
to remove the amortization of goodwill:



|                      |  | Three Months Ended June 30, 2002 |        | Nine Months Ended June 30, 2002
|--------------------- |  | -------------------------------- | ------ | -------------------------------
|Net income :          |  |                                  |        |                                
|As reported           |  | $                                | 22,375 |                                
|Goodwill amortization |  |                                  | 243    |                                
|                      |  |                                  |        |                                
|Adjusted net income   |  | $                                | 22,618 |                                
|                      |  |                                  |        |                                



The following is a
summary of changes in the carrying amount of goodwill by segment for the nine months ended June 30, 2003:



|                                            |  | OutsourcingSegment |        | ConsultingSegment |   | Total  
|------------------------------------------- |  | ------------------ | ------ | ----------------- | - | -------
|Balance at September 30, 2002               |  | $                  |       |                   | $ | 201,286
|Additions                                   |  |                    | 28,299 |                   |   | 14,288 
|Effect of changes in foreign exchange rates |  |                    |       |                   |   | 12,756 
|                                            |  |                    |        |                   |   |        
|Balance at June 30, 2003                    |  | $                  | 28,299 |                   | $ | 228,330
|                                            |  |                    |        |                   |   |        



Goodwill additions
during the nine months ended June 30, 2003, resulted from the acquisitions of Cyborg Worldwide, Inc., Northern Trust Corporations retirement consulting and administration business, the remaining interest in a joint venture investment in The
Netherlands, the controlling interest in a joint venture investment in India and an adjustment to the purchase price allocation related to another acquisition in Switzerland.



Intangible assets with definite useful lives are amortized over their respective estimated useful lives. Effective October
1, 2002, intangible assets with indefinite useful lives are not amortized but instead tested for impairment at least annually. The following is a summary of intangible assets at June 30, 2003 and September 30, 2002:



|                        |  | June 30, 2003       |         | September 30, 2002     
|----------------------- |  | ------------------- | ------- | -----------------------
|                        |  | GrossCarryingAmount |         | AccumulatedAmortization
|Definite useful lives   |  |                     |         |                        
|Capitalized software    |  | $                   | 212,032 |                        
|Trademarks              |  |                     | 11,462  |                        
|Customer relationships  |  |                     | 27,106  |                        
|                        |  |                     |         |                        
|Total                   |  | $                   | 250,600 |                        
|                        |  |                     |         |                        
|Indefinite useful life  |  |                     |         |                        
|Customer relationships  |  |                     |         |                        
|                        |  |                     |         |                        
|Total intangible assets |  |                     |         |                        
|                        |  |                     |         |                        



Amortization expense
related to definite lived intangible assets for the three and nine months ended June 30, 2003 and 2002, are as follows:



|                       |  | Three Months Ended June 30, |       | Nine Months Ended June 30,
|---------------------- |  | --------------------------- | ----- | --------------------------
|                       |  | 2003                        |       | 2002                      
|Capitalized software   |  | $                           | 8,091 |                           
|Trademarks             |  |                             | 539   |                           
|Customer relationships |  |                             | 179   |                           
|                       |  |                             |       |                           
|Total                  |  | $                           | 8,809 |                           
|                       |  |                             |       |                           



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Estimated amortization expense for intangible assets as of September 30, 2002, for each of the next five
years and thereafter is as follows:



|Fiscal year ending:                        |  | 2003 |        | 2004 |   | 2005   |  | 2006 |        | 2007 |   | 2008 andthereafter |  | Total
|------------------------------------------ |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------------------ |  | -----
|Estimated intangibles amortization expense |  | $    | 29,645 |      | $ | 26,240 |  | $    | 19,396 |      | $ | 14,375             |  | $    



Please also see Note 7
for information on recent acquisitions.



13.    Segment
Data



Under SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information,the Company has determined that it has two reportable segments based on similarities among the operating units including homogeneity of services, service delivery methods, and use of technology. The two
segments are Outsourcing and Consulting.



| |  |  | OutsourcingHewitt applies its human resources expertise and employs its integrated technology systems to administer its clients human resource programs: benefits,
payroll and workforce management. 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). The Companys recent acquisition of
Cyborg expands Hewitts outsourcing service offering to include payroll administration, allows Hewitt to provide clients with a stand-alone payroll service and, importantly, enables Hewitt to offer a comprehensive range of human resources
services. Hewitts payroll services include installed payroll software and fully outsourced processing. Hewitts workforce management services include workforce administration, compensation, recruiting and staffing, talent management,
performance management, and learning and development.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Hewitt 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 businesses. These shared services include information systems, human resources, general office support and space management, overall corporate management, finance and legal
services. Additionally, Hewitt utilizes a client development group that markets the entire spectrum of its services and devotes resources to maintaining existing client relationships. The compensation and related expenses, other operating expenses,
and selling, general and administrative expenses of the administrative and marketing functions are not allocated to the business segments, rather, they are included in unallocated shared costs. The costs of information systems and human resources,
however, are allocated to the Outsourcing and Consulting segments on a specific identification basis or based on usage and headcount.



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The table below presents information about the Companys reportable segments for the periods
presented:



|Business Segments                                   |  | Three Months EndedJune 30, |         | Nine Months Ended June 30,
|--------------------------------------------------- |  | -------------------------- | ------- | --------------------------
|                                                    |  | 2003                       |         | 2002                      
|Outsourcing                                         |  |                            |         |                           
|Revenues before reimbursements (net revenues)       |  | $                          | 304,095 |                           
|Segment income (1)                                  |  |                            | 59,581  |                           
|                                                    |  |                            |         |                           
|Consulting (2)                                      |  |                            |         |                           
|Revenues before reimbursements (net revenues)       |  | $                          | 190,791 |                           
|Segment income (1)                                  |  |                            | 36,440  |                           
|                                                    |  |                            |         |                           
|Total Company                                       |  |                            |         |                           
|Revenues before reimbursements (net revenues)       |  | $                          | 494,886 |                           
|Reimbursements                                      |  |                            | 12,862  |                           
|                                                    |  |                            |         |                           
|Total revenues                                      |  | $                          | 507,748 |                           
|                                                    |  |                            |         |                           
|                                                    |  |                            |         |                           
|Segment income (1)                                  |  | $                          | 96,021  |                           
|Charges not recorded at the Segment level:          |  |                            |         |                           
|One-time charges (3)                                |  |                            |        |                           
|Initial public offering restricted stock awards (4) |  |                            | 5,649   |                           
|Unallocated shared costs (1)                        |  |                            | 41,944  |                           
|                                                    |  |                            |         |                           
|Operating income (1)                                |  | $                          | 48,428  |                           
|                                                    |  |                            |         |                           

---

|(1) |  | Prior to May 31, 2002, owners were compensated through distributions of income. In connection with the Companys transition to a corporate structure on May 31, 2002, owners who
worked in the business became employees and the Company began to record their compensation in compensation and related expenses in arriving at segment income.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | On June 5, 2002, the Company acquired the actuarial and benefits consulting business of Bacon & Woodrow. As such, the results of Bacon & Woodrow have been included in the
Companys Consulting segment results from the acquisition date of June 5, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | In connection with the Companys transition to a corporate structure, the Company incurred one-time charges which included an $8,300 non-recurring compensation expenses related
to the establishment of a vacation liability for its former owners, and a $17,843 non-recurring, non-cash compensation expense resulting from certain owners receiving more than their proportional share of total capital, without offset for those
owners who received less than their proportional share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Compensation expense of $5,649 and $1,105 for the three months ended June 30, 2003 and 2002, respectively, and $35,193 and $1,105 for the nine months ended June 30, 2003 and 2002,
respectively, related to the amortization of the initial public offering restricted stock awards.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14.    Subsequent Events



In connection with the Registration Rights Agreement between the Company and Hewitt Holdings, on July 28, 2003, the Company filed an Amendment No. 1 on
Form S-3 to the Form S-1 Registration Statement filed on May 27, 2003, on behalf of the former owners, the former partners of Bacon & Woodrow and the Companys key employees, for a planned Secondary Offering. The Company will not receive
any proceeds from this offering and pursuant to the Registration Rights Agreement, the Company will pay all offering expenses other than underwriting discounts and commissions. Completion of this offering is subject to market conditions and approval
of the Companys Board of Directors.



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ITEM 2.    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 and Combined Financial Statements and
related notes included elsewhere in this Quarterly Report on Form 10-Q. Please also refer to our Combined and 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. This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. We refer you to the discussion within the Notes Regarding Forward-Looking Statements.



We use the terms Hewitt, the Company, we, us and our in this Quarterly Report on Form 10-Q
to refer to the business of Hewitt Associates, Inc. and its subsidiaries and, with respect to the period prior to Hewitts transition to a corporate structure on May 31, 2002, the businesses of Hewitt Associates LLC and its subsidiaries and its
then affiliated companies, Hewitt Financial Services LLC and Sageo LLC (Hewitt Associates LLC and Affiliates).



We use the term owner to refer to the individuals who are current or retired members of Hewitt Holdings LLC. These individuals (with the
exception of our retired owners) became employees of Hewitt Associates, Inc. upon the completion of our transition to a corporate structure on May 31, 2002. We use the term Hewitt Holdings to refer to Hewitt Holdings LLC.



All references to years, unless otherwise noted, refer to our fiscal
years, which end on September 30. For example, a reference to 2002 or fiscal 2002 means the twelve-month period that ended September 30, 2002. 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 and combined financial statements, included elsewhere in this Quarterly Report on Form 10-Q. Prior period amounts have
been reclassified to conform with the current year presentation.



Overview



Hewitt Associates, Inc., a Delaware
corporation, and its subsidiaries provide human resources outsourcing and consulting services.



In connection with our transition to a corporate structure, which was completed on May 31, 2002, Hewitt Associates, Inc. was formed as a subsidiary of Hewitt Holdings and Hewitt Holdings transferred all of its
ownership interests in Hewitt Associates LLC and Affiliates to Hewitt Associates, Inc. In our limited liability company form, Hewitt Holdings owners were compensated through distributions of income rather than through salaries, benefits and
performance-based bonuses, and we did not incur any corporate income tax. Upon our transition to a corporate structure, (i) Hewitt Holdings owners who worked in the business became our employees and we began to include their compensation in
our compensation and related expenses, (ii) we became subject to corporate income taxes and (iii) we began to report net income and earnings per share.



On June 5, 2002, we acquired the actuarial and benefits consulting business of Bacon & Woodrow in the United Kingdom. The purchase price totaled $259
million and consisted of 9.4 million shares of Hewitt Associates common stock valued at $219 million, $39 million of assumed net liabilities and approximately $1 million of acquisition-related costs. For additional information on the Bacon &
Woodrow acquisition, we refer you to Note 7 to the consolidated financial statements for the nine months ended June 30, 2003. The results of operations for Bacon & Woodrow are included in our historical results from the date of the acquisition,
June 5, 2002.



On June 27, 2002, we sold 11,150,000 shares of
Class A common stock at $19.00 per share in our initial public offering. In July 2002, the underwriters exercised their over-allotment option to purchase an additional 1,672,500 shares of our Class A common stock at $19.00 per share. The combined
transactions generated $219 million in net cash proceeds after offering expenses.



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For a pro forma presentation of results had these events occurred at the beginning of the fiscal 2002, we
refer you to the Pro Forma Results of Operations section.



On July 28, 2003, we filed an Amendment No. 1 on Form S-3 to our S-1 Registration Statement filed on May 27, 2003 with the Securities and Exchange Commission in connection with a proposed secondary offering by the former owners, the former
partners of Bacon & Woodrow and the Companys key employees. The amended registration statement covers approximately 9.9 million shares of Class A common stock, before shares issuable upon exercise of the underwriters over-allotment
option. The registration statement was filed pursuant to a request under a registration rights agreement which we entered into at the time of our initial public offering.



On June 5, 2003, we acquired Cyborg Worldwide, Inc., the parent of Cyborg Systems, Inc. (Cyborg), a global
provider of human resources management software and payroll services. The results of operations for Cyborg are included in our results and the results of the Outsourcing segment from the acquisition date (see Note 7 to the consolidated financial
statements).



On June 15, 2003, we acquired the benefits
administration and retirement consulting and actuarial businesses of the Northern Trust Corporation. The results of the benefit administration and retirement consulting and actuarial businesses of Northern Trust Corporation are included in our
results and the results of the Outsourcing and Consulting segments from the acquisition date (see Note 7 to the consolidated financial statements).



Segments



We have two reportable segments:



| |  |  | OutsourcingWe apply our human resources expertise and employ our integrated technology systems to administer our clients human resources programs: benefits, payroll and
workforce management. Our benefit outsourcing services include health and welfare (such as medical plans), defined contribution (such as 401(k) plans), and defined benefit (such as pension plans). Our recent acquisition of Cyborg expands our
outsourcing service offering to include payroll administration, allows us to provide our clients with a stand-alone payroll service and, importantly, enables us to offer a comprehensive range of human resources outsourcing services. Our payroll
services include installed payroll software and fully outsourced processing. Our workforce management services include workforce administration, compensation, recruiting and staffing, talent management, performance management, and learning and
development.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ConsultingWe provide 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



While we report revenues and direct expenses based on these two segments, we present our offering to clients as a continuum of human resources services.



Critical Accounting Policies and Estimates



Revenues



Revenues include fees generated from outsourcing contracts and from consulting services provided to our clients. Revenues from sales of software or other
types of revenue were not material. Of our $1.7 billion of net revenues for fiscal 2002, 65% was generated in our Outsourcing segment and 35% was generated in our Consulting segment. In the nine months ended June 30, 2003, with the acquisition of
the benefits consulting business of Bacon & Woodrow in June 2002, net revenues from the Consulting segment increased such that 62% of net revenues were generated in our Outsourcing segment and 38% in our Consulting segment.



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Under our outsourcing contracts, our clients generally agree to pay us an implementation fee and an
ongoing service fee. The implementation fee covers only a portion of the costs we incur to transfer the administration of a clients plan onto our systems, including costs associated with gathering, converting, inputting and testing the
clients data, tailoring our systems and training our employees. The amount of the ongoing service fee is a function of the complexity of the clients benefit plans or human resource programs or processes, the number of participants or
personnel, and the scope of the delivery model.



In accordance
with the Securities and Exchange Commissions Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,we recognize revenues for non-refundable, upfront implementation fees evenly over the period between the
initiation of ongoing services through the end of the contract term (on a straight-line basis). Most indirect costs of implementation are expensed as incurred. However, incremental direct costs of implementation are deferred and recognized as
expense over the same period that deferred implementation fees are recognized. If a client terminates an outsourcing contract prematurely, both the deferred implementation revenues and related costs are recognized in the period in which the
termination occurs.



Revenues related to ongoing service fees
and to services provided outside the scope of outsourcing contracts are recognized when persuasive evidence of an arrangement exists, services have been rendered, our fee is determinable and collectibility of our fee is reasonably assured. Ongoing
service fees are typically billed and recognized on a monthly basis, typically based on the number of plan participants or services. There is often an agreement that the ongoing service fee will be adjusted prospectively if the number of
participants changes materially. However, a weakening of general economic conditions or the financial condition of our clients, which could lead to workforce reductions (and potentially participant reductions) or competitive pressure, could have a
negative effect on our outsourcing revenues. Services provided outside the scope of our outsourcing contracts are billed and recognized on a time-and-material or fixed fee basis.



Our outsourcing contracts typically have three- to five-year terms. However, a substantial portion of our outsourcing
contracts may be terminated by our clients, generally upon 90 to 180 days notice. Normally, if a client terminates a contract or project, the client remains obligated to pay for services performed (including unreimbursed implementation costs), and
for any commitments we have made on behalf of our clients to pay third parties.



Losses on outsourcing contracts are recognized during the period in which the loss becomes probable and the amount of the loss is reasonably estimable. Contract losses are determined to be the amount by which the
estimated direct and a portion of indirect costs of the contract exceed the estimated total revenues that will be generated by the contract. Estimates are continuously monitored during the term of the contract and any changes to estimates are
recorded in the current period and can result in either increases or decreases to income.



Our clients pay for our consulting services either on a time-and-materials basis or, to a lesser degree, on a fixed-fee basis. We recognize revenues under time-and-materials based arrangements as services are
provided. On fixed-fee engagements, we recognize revenues as the services are performed, which is measured by hours incurred in proportion to total hours estimated to complete a project. Losses on consulting projects are recognized during the period
in which the loss becomes probable and the amount of the loss is reasonably estimable. Losses are determined to be the amount by which the estimated direct and a portion of indirect costs of the project exceed the estimated total revenues that will
be generated for the work. Each project has different terms based on the scope, deliverables and complexity of the engagement, the terms of which frequently require us to make judgments and estimates about overall profitability and stage of project
completion which impacts how we recognize revenue. Estimates are continuously monitored during the term of the engagement and any changes to estimates are recorded in the current period and can result in either increases or decreases to income.



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Performance-Based Compensation



Our compensation program includes a performance-based component that is determined by management. Performance-based
compensation is discretionary and is based on individual, team, and total Company performance. Performance-based compensation is paid once per fiscal year after our annual operating results are finalized. The amount of expense for performance-based
compensation recognized at interim and annual reporting dates involves judgment, is based on our quarterly and year to date results as compared to our internal targets, and takes into account other factors, including industry-wide results and the
general economic environment. Annual performance-based compensation levels may vary from current expectations as a result of changes in the actual performance of the individual, team, or Company. As such, accrued amounts are subject to change in
future periods if actual future performance varies from performance levels anticipated in prior interim periods.



Goodwill and Other Intangible Assets



On October 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, for
acquisitions made prior to July 1, 2001. We evaluate our goodwill for impairment whenever indicators of impairment exist with reviews at least annually. The evaluation is based upon a comparison of the estimated fair value of the reporting unit to
which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities for that reporting unit. The fair values used in this evaluation are estimated based upon discounted future cash flow projections for the reporting
unit.



Our estimate of future cash flows will be based on our
experience, knowledge and typically third-party advice or market data. However, these estimates can be affected by other factors and economic conditions that can be difficult to predict.



Client Receivables and Unbilled Work In Process



We periodically evaluate the collectibility of our client receivables and unbilled work in process based on a combination of
factors. In circumstances where we are aware of a specific clients difficulty in meeting its financial obligations to us (e.g., bankruptcy filings, failure to pay amounts due to us or to others), we record an allowance for doubtful accounts to
reduce the client receivable to what we reasonably believe will be collected. For all other clients, we recognize an allowance for doubtful accounts based on past write-off history and the length of time the receivables are past due. Facts and
circumstances may change that would require us to alter our estimates of the collectibility of client receivables and unbilled work in progress. Factors mitigating this risk include our servicing a diverse client base such that we do not have
significant industry concentrations among our clients. Also, for the nine months ended June 30, 2003, no single client accounted for more than 10% of our total revenues.



Long-Lived Assets Held and Used



We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable. If the undiscounted future cash flows from the long-lived asset are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the discounted future cash flows of the asset.



Our estimate of future cash flows will be based on our experience, knowledge,
and typically third-party advice or market data. However, these estimates can be affected by other factors and economic conditions that can be difficult to predict.



Stock-Based Compensation



Our stock-based compensation program is a long-term retention and incentive program that is intended to attract, retain and motivate talented employees
and align stockholder and employee interests. The program allows



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for the granting of restricted stock, restricted stock units, and nonqualified stock options as well as other forms of stock-based compensation. For
additional information on this plan, we refer you to Note 11 to the consolidated and combined financial statements for the nine months ended June 30, 2003.



We account for our stock-based compensation plans under SFAS No. 123, Accounting for Stock-Based Compensation,which allows companies to apply the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,and provide pro forma net income and net income per share disclosures for employee stock option grants as if the fair value
method defined in SFAS No. 123 had been applied.



From our
initial public offering on June 27, 2002 through June 30, 2003, we granted nonqualified stock options to acquire 4,155,690 shares of our Class A common stock to our employees. As of June 30, 2003, options to acquire a total of 4,041,393 shares of
Class A common stock were outstanding and represented approximately 4.1% of our outstanding common stock on that date. Had we determined compensation cost for the stock options granted using the fair value method as set forth under SFAS No. 123,
during the three and nine months ended June 30, 2003, we would have recorded approximately $1.1 million and $3.2 million, respectively, in additional expense, and reported net income of $25 million and $62 million, respectively. The net earnings per
basic and diluted share for the three months ended June 30, 2003 would have been $0.27 and $0.26, respectively. The net earnings per basic and diluted share for the nine months ended June 30, 2003 would have been $0.65 and $0.64, respectively. The
difference between the net diluted earnings per share as reported and the net earnings per share under the provisions of SFAS No. 123 would have been ($0.01) and ($0.03), respectively, for the three and nine months ended June 30, 2003. On July 1,
2003, we granted nonqualified stock options to acquire 3,767,476 shares of our Class A common stock to our employees which represented approximately 3.8% of our outstanding common stock on that date.



In December 2002, 2,059,301 shares, constituting 36% of our then outstanding
unvested restricted stock awards, vested, which included 91,458 restricted stock units that converted to Class A common stock. In June 2003, 881,918 shares, constituting 25% of our then outstanding unvested restricted stock awards vested, which
included 48,827 restricted stock units that converted to Class A common stock and cash. As of June 30, 2003, 2,473,784 shares of restricted stock and 178,198 restricted stock units remain unvested. The related deferred compensation expense of $50
million will be recognized as compensation expense evenly over the remaining vesting period through June 27, 2006, and will be adjusted for payroll taxes and forfeitures.



Estimates



Various assumptions and other factors underlie the determination of significant accounting estimates. The process of determining significant estimates is
fact specific and takes into account factors such as historical experience, known facts, current and expected economic conditions and, in some cases, actuarial techniques. We periodically reevaluate these significant factors and make adjustments
when facts and circumstances dictate, however, actual results may differ from estimates.



Basis of Presentation



Revenues



Revenues include fees primarily generated from
outsourcing contracts and from consulting services provided to our clients. Revenues earned in excess of billings are recorded as unbilled work in progress. Billings in excess of revenues earned are recorded as advanced billings to clients, a
deferred revenue liability, until services are rendered.



We
record gross revenue for any outside services when we are primarily responsible to the client for the services, we change the delivered product, perform part of the service delivered, have discretion on vendor selection, or bear the credit risk in
the arrangement. We record revenue net of related expenses when a third party assumes primary responsibility to the client for the services.



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Additionally, reimbursements received for out-of-pocket expenses incurred are characterized as revenues
and are shown separately within total revenue in accordance with Emerging Issue Task Force (EITF) Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred.
Similarly, related reimbursable expenses are also shown separately within operating expenses. We refer to revenues before reimbursements as net revenues.



Compensation and Related Expenses



Our largest operating expense is compensation and related expenses, which includes salaries and wages, annual performance-based bonuses, benefits, payroll
taxes, global profit sharing, temporary staffing services, training, and recruiting. For all historical periods presented prior to May 31, 2002, compensation and related expenses do not include compensation expense related to Hewitt Holdings
owners since these individuals received distributions of income rather than compensation when we operated as a limited liability company. As a result of our transition to a corporate structure on May 31, 2002, Hewitt Holdings owners became
employees and we began to expense their compensation and related expenses.



Other Operating Expenses



Other operating
expenses include equipment, occupancy, and non-compensation related direct client service costs. Equipment costs include computer servers, data storage and retrieval, data center operation and benefit center telecommunication expenses, and
depreciation and amortization of capitalized computer technology and proprietary software. Occupancy costs primarily include rent and related occupancy expenses for our offices. Non-compensation-related direct client service costs include costs
associated with the provision of client services such as printing, duplication, fulfillment, and delivery.



Selling, General and Administrative Expenses



Selling, general and administrative (SG&A) expenses consist primarily of third-party costs associated with promotion and marketing, professional services, advertising and media, corporate travel, and
other general office expenses such as insurance, postage, office supplies, and bad debt expense.



Other Expenses, Net



Other expenses, net primarily includes interest expense, interest income, gains and losses from investments, and gains and losses on asset disposals, shown on a net basis.



Income Before Income Taxes



Prior to May 31, 2002, the Company operated as a group of affiliated limited liability companies and recorded income before income taxes in accordance
with accounting principles generally accepted in the United States of America. As a result of our transition to a corporate structure on May 31, 2002, Hewitt Holdings owners who worked in the business became our employees and we began to
include their compensation in our compensation and related expenses, we became subject to corporate income taxes and we started to report net income and earnings per share. As such, the historical results of operations after May 31, 2002 reflect a
corporate basis of presentation and are not directly comparable to the results from prior periods, which reflect a partnership basis of presentation.



Provision for Income Taxes



Prior to May 31, 2002, taxes on income earned by the predecessor limited liability company were the responsibility of the individual Hewitt Holdings
owners. Therefore, for periods ended on or prior to May 31, 2002, the historical financial statements do not reflect the income taxes that we would have incurred as a



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corporation. As a result of our transition to a corporate structure on May 31, 2002, we became subject to corporate income taxes and began applying the
provisions of the asset and liability method outlined in SFAS No. 109, Accounting for Income Taxes.



Historical Results of Operations



The following table sets forth our historical results of operations as a percentage of net revenues. The information for each of the three and nine-month periods is derived from unaudited consolidated and combined
financial statements which were prepared on the same basis as the annual consolidated and combined financial statements. In our opinion, information for the three and nine months ended June 30, 2003 and 2002, contains all adjustments, consisting
only of normal recurring adjustments, except as noted, necessary to fairly present this information. Operating results for any period are not necessarily indicative of results for any future periods.



|                                                    |  | Three Months EndedJune 30, |   |  | Nine Months EndedJune 30, |  
|--------------------------------------------------- |  | -------------------------- | - |  | ------------------------- | -
|                                                    |  | 2003                       |   |  | 2002                      |  
|Revenues:                                           |  |                            |   |  |                           |  
|Revenues before reimbursements (net revenues)       |  | 100.0                      | % |  | 100.0                     | %
|Reimbursements                                      |  | 2.6                        |   |  | 2.0                       |  
|                                                    |  |                            |   |  |                           |  
|Total revenues                                      |  | 102.6                      |   |  | 102.0                     |  
|Operating expenses:                                 |  |                            |   |  |                           |  
|Compensation and related expenses, excluding        |  |                            |   |  |                           |  
|initial public offering restricted stock awards (1) |  | 64.5                       |   |  | 63.2                      |  
|Initial public offering restricted stock awards (2) |  | 1.1                        |   |  | 0.3                       |  
|Reimbursable expenses                               |  | 2.6                        |   |  | 2.0                       |  
|Other operating expenses                            |  | 19.5                       |   |  | 20.0                      |  
|Selling, general and administrative expenses        |  | 5.1                        |   |  | 5.0                       |  
|                                                    |  |                            |   |  |                           |  
|Total operating expenses                            |  | 92.8                       |   |  | 90.5                      |  
|Operating income                                    |  | 9.8                        |   |  | 11.5                      |  
|Other expenses, net                                 |  | (0.8                       | ) |  | (0.6                      | )
|                                                    |  |                            |   |  |                           |  
|Income before income taxes                          |  | 9.0                        |   |  | 10.9                      |  
|Provision for income taxes                          |  | 3.7                        |   |  | 5.7                       |  
|                                                    |  |                            |   |  |                           |  
|Net income (3)                                      |  | 5.3                        | % |  | 5.2                       | %
|                                                    |  |                            |   |  |                           |  

---

|(1) |  | Compensation and related expenses did not include compensation related to Hewitt Holdings owners for the eight months of 2002 prior to our transition to a corporate structure
on May 31, 2002. Additionally, on June 5, 2002 we acquired the benefits consulting business of Bacon & Woodrow and their compensation and related expenses were included in our results from the acquisition date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Compensation expense of $6 million and $1 million for the three months ended June 30, 2003 and 2002, respectively, and $35 million and $1 million for the nine months ended June 30,
2003 and 2002, respectively related to the amortization of initial public offering restricted stock awards.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Net income between fiscal 2003 and 2002 is not comparable because, due to our limited liability company form in the first eight months of fiscal 2002, (i) compensation and related
expenses did not include compensation expense related to our owners since these individuals received distributions of income rather than compensation, and (ii) the Company incurred no income tax. Additionally, on June 5, 2002, we acquired the
benefits consulting business of Bacon & Woodrow and their operations were included in our results from the acquisition date.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Three Months Ended June 30, 2003 and 2002



Net Revenues



Net revenues were $495 million in the three months ended June 30, 2003, compared to $430 million in the comparable prior year period, an increase of 15%.
Adjusting for the effects of acquisitions and favorable foreign



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currency translations, net revenues grew 5%. Outsourcing net revenues increased by 10% to $304 million in the three months ended June 30, 2003, compared to
$277 million in the prior year. A portion of this growth was due to the addition of revenues from the June 2003 acquisitions of Cyborg and the benefit administration business of the Northern Trust Corporation. Excluding the effects of the Cyborg and
the Northern Trust Corporation benefit administration business, Outsourcing net revenues would have increased 8% quarter over quarter, primarily from the addition of new clients. Consulting net revenues increased by 25% to $191 million in the three
months ended June 30, 2003, compared to $153 million in the prior year, primarily due to the addition of revenues from the actuarial and benefits consulting business of Bacon & Woodrow. A portion of this growth was also due to favorable foreign
currency translation from the strengthening of European currencies relative to the U.S. dollar year over year and consolidation of our Dutch affiliate upon purchase of the remaining interest in that affiliate in the first quarter. Including the
results of Bacon & Woodrow in the prior year quarter and excluding the effects of favorable foreign currency translation and the acquisition of our Dutch affiliate, Consulting net revenues were unchanged between quarters. Increases in retirement
plan and health benefit management consulting were offset by decreases in revenue from our more discretionary consulting services resulting from continued soft demand for such services.



Compensation and Related Expenses



Compensation and related expenses were $319 million for the three months ended June 30, 2003, compared to $272 million for the comparable prior year
period. Prior to May 31, 2002, compensation and related expenses did not include owners compensation as our owners were compensated through distributions of income. In connection with our transition to a corporate structure in June 2002, we
incurred a non-recurring, non-cash $18 million compensation expense resulting from certain owners receiving more than their proportional share of total capital, without offset for those owners who received less than their proportional share in the
conversion of owners capital into common stock, and a non-recurring $8 million compensation expense related to our establishing an owner vacation liability. Had we incurred estimated owner compensation in the prior year quarter of $27 million
and excluded the non-recurring charges, compensation and related expenses would have been $273 million for the three months ended June 30, 2002. As such, on an adjusted basis, compensation and related expenses as a percentage of net revenues would
have been 65% in the current year period and 63% in the prior year period. The increase as a percentage of net revenues is primarily due to increases in our Outsourcing personnel to support the development of our new workforce management service
offering. These increases were offset by our beginning to capitalize approximately $6 million in incremental and direct compensation and related costs associated with implementing new workforce management clients and lower performance-based
compensation as a percentage of net revenues resulting from the continued negative effect of the economy on our clients, and, therefore, on our business and performance relative to internal targets. The net increase in overall compensation and
related expenses after the inclusion of owner compensation and the exclusion of the non-recurring charges in the prior year period was primarily due to cost of living increases, the inclusion of Bacon & Woodrows compensation and related
expenses, increases in our Outsourcing personnel to support the development of the workforce management service offering, and the inclusion of the Northern Trust Corporations benefit administration business and Cyborgs compensation
and related expenses, offset in part by our beginning to capitalize approximately $6 million in incremental and direct compensation and related costs associated with implementing new workforce management clients.



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 $63 million were recorded as initial public offering restricted stock award
expense from June 27, 2002 through June 30, 2003, of which $6 million was recorded in the quarter ended June 30, 2003, and $1 million was recorded for the quarter ended June 30, 2002. The remaining $50 million of estimated unearned compensation will
be recognized evenly through June 27, 2006, and adjusted for payroll taxes and forfeitures as they arise.



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Other Operating Expenses



Other operating expenses were $97 million in the three months ended June 30, 2003 compared to $86 million in the comparable prior year period. As a
percentage of net revenues, other operating expenses remained flat at 20% in the three months ended June 30, 2003 and 2002. The $10 million increase in other operating expenses primarily reflects the inclusion of Bacon & Woodrow since the
acquisition, increased occupancy costs, increased computer maintenance expenses and depreciation and amortization expenses on computer equipment and software, partially offset by lower telecommunication costs in our Outsourcing segment over the
prior-year period.



Selling, General and Administrative Expenses



SG&A expenses were $25 million in the three months
ended June 30, 2003, compared to $21 million in the comparable prior year period. As a percentage of net revenues, SG&A expenses remained flat at 5% in the three months ended June 30, 2003 and 2002. The increase in SG&A expenses of $4
million, primarily reflects the inclusion of Bacon & Woodrow and increased travel and bad debt expense in the current-year quarter. In the prior-year quarter, travel expenses were lower following the events of September 11, 2001.



Other Expenses, Net



Other expenses, net were $4 million in the three months ended June 30, 2003, compared to $3 million in the comparable prior
year period. As a percentage of net revenues, other expenses, net was 1% or less in both the current-year and prior-year quarters. Interest expense was $5 million for the three months ended June 30, 2003, compared to $3 million in the comparable
prior-year period. The increase in interest expense is primarily due to the addition of a full quarter of interest expense on our two new capital leases for office space, which we executed in June 2002. The increase in interest expense was offset by
an increase in interest income from the proceeds of our initial public offering.



Provision for Income Taxes



The provision for
income taxes was $18 million for the three months ended June 30, 2003, compared to $25 million in the comparable prior year period. The decrease in the provision for income taxes for the three months ended June 30, 2003, over the income taxes for
the comparable period is primarily due to the inclusion of one-time charges in the quarter ending June 30, 2002, resulting from the Companys transition to a corporate structure on May 31, 2002, offset by earnings being taxed for only one month
in the third quarter of 2002 as compared to earnings being taxed for the full third quarter of fiscal 2003. Approximately $22 million of the $25 million tax expense for the three months ended June 30, 2002, related to tax liabilities arising both
from a mandatory change in the Companys tax accounting method and from the initial recording of deferred tax assets and liabilities related to temporary differences which resulted from the transition to a corporate structure. The remaining $3
million represents income tax expense arising from earnings between May 31, 2002, and June 30, 2002, while the Company operated as a corporation. The non-recurring, non-cash $18 million compensation expense in 2002 resulting from owners receiving
more than their proportional share of total capital, without offset for those owners who received less than their proportional share in conversion of owners capital into common stock, was not deductible. For the year ending September 30, 2003,
the Company expects to report pre-tax income and, as such, has apportioned the estimated annual income tax provision to each quarter, based on the ratio of each quarters pre-tax income to estimated annual pre-tax income. These estimates
reflect the information available at this time and our best judgment, however, actual annual income or taxes may differ.



Nine Months Ended June 30, 2003 and 2002



Net Revenues



Net revenues were $1,453 million in the nine months ended June 30, 2003, compared to $1,243 million in the comparable prior year period, an increase of
17%. Adjusting for the effects of acquisitions and the favorable



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effects of foreign currency translation, net revenues grew 6%. Outsourcing net revenues increased by 10% to $908 million in the nine months ended June 30,
2003, compared to $828 million in the prior year period. A portion of this growth was due to the addition of revenues from the newly acquired Cyborg and the benefit administration business of the Northern Trust Corporation. Excluding the effects of
the Cyborg and the Northern Trust Corporation benefit administration business, Outsourcing net revenues would have increased 9% period over period. For the nine months ended June 30, 2003, approximately two-thirds of our Outsourcing net revenue
growth was from the addition of new clients and approximately one-third of the growth from expanding services with existing clients. Consulting net revenues increased by 31% to $545 million in the nine months ended June 30, 2003 compared to $415
million in the prior year period. Consulting net revenues increased primarily as a result of the June 2002 acquisition of the benefits consulting business of Bacon & Woodrow. A portion of this growth was also due to favorable foreign currency
translation from the strengthening of European currencies relative to the U.S. dollar year over year and consolidation of our Dutch affiliate upon purchase of the remaining interest in that affiliate in the first quarter. Including the results of
Bacon & Woodrow in the prior year period and excluding the effects of the acquisition of our Dutch affiliate and favorable foreign currency translation, Consulting net revenues would have increased by approximately 1% in the first nine months of
2003 over the comparable prior year period. This increase was a result of growth in retirement plan and health benefit management consulting offset by a decrease in net revenue from our more discretionary consulting services over the prior year.



Compensation and Related Expenses



Compensation and related expenses were $942 million in the nine months ended
June 30, 2003, compared to $713 million in the comparable prior year period. Prior to May 31, 2002, compensation and related expenses did not include owners compensation as Hewitt Holdings owners were compensated through distributions of
income. In connection with our transition to a corporate structure in June 2002, we incurred a non-recurring, non-cash $18 million compensation expense resulting from certain owners receiving more than their proportional share of total capital,
without offset for those owners who received less than their proportional share in the conversion of owners capital into common stock, and a non-recurring $8 million compensation expense related to our establishing an owner vacation liability.
Had we incurred estimated owner compensation in the prior year of $108 million and excluded the non-recurring charges, compensation and related expenses would have been $795 million for the nine months ended June 30, 2002. As such, on an adjusted
basis, compensation and related expenses as a percentage of net revenues was 65% in the current year period and would have been 64% in the prior year period. The increase as a percentage of net revenues is primarily due to increases in our
Outsourcing personnel to support the development of our new workforce management service offering. These increases were offset in part by lower performance-based compensation as a percentage of net revenues resulting from the continued negative
effects of the economy on our clients and therefore, our business and performance relative to targets. The net increase in overall compensation and related expenses after the inclusion of owner compensation and the exclusion of the non-recurring
charges in the prior year period was primarily due to cost of living increases, increases from the inclusion of Bacon & Woodrows compensation and related expenses and increases in our Outsourcing personnel to support the growth of benefit
administration outsourcing and workforce management.



Initial Public
Offering Restricted Stock Awards



Since our initial public
offering in June 2002, compensation and related payroll tax expenses of approximately $63 million were recorded as initial public offering restricted stock award expense through June 30, 2003, of which $35 million was recorded in the nine months
ended June 30, 2003, and $1 million was recorded for the nine months ended June 30, 2002. An additional $50 million of estimated unearned compensation will be recognized evenly through June 27, 2006, and adjusted for payroll taxes and forfeitures as
they arise.



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Other Operating Expenses



Other operating expenses were $285 million in the nine months ended June 30, 2003 compared to $260 million in the comparable prior year period. As a
percentage of net revenues, other operating expenses declined to 20% in the nine months ended June 30, 2003, from 21% in the comparable prior year period. The decrease as a percentage of net revenue was primarily the result of revenue growing at a
faster rate than other operating expenses. There was a $25 million increase in other operating expenses which primarily reflects the inclusion of Bacon & Woodrow since the acquisition, increased depreciation and amortization expenses on computer
equipment and software and increased computer maintenance expenses, partially offset by lower telecommunication expenses in our Outsourcing segment over the prior year.



Selling, General and Administrative Expenses



SG&A expenses were $69 million in the nine months ended June 30, 2003, compared to $56 million in the comparable prior
year period, an increase of 23%. As a percentage of net revenues, SG&A expenses remained flat at 5% in the nine months ended June 30, 2003 and 2002. SG&A expenses increased $13 million period over period which primarily reflects the
inclusion of Bacon & Woodrow and increased travel and insurance expense in the current year, partially offset by lower bad debt expense. In the prior year period, travel expenses were lower and bad debt expenses were higher following the events
of September 11, 2001.



Other Expenses, Net



Other expenses, net were $13 million in the nine months ended June 30, 2003,
compared to $12 million in the comparable prior year period. As a percentage of net revenues, other expenses, net was 1% or less in the current year and prior year periods. Interest expense was $15 million for the nine months ended June 30, 2003,
compared to $10 million in the comparable prior year period. The increase in interest expense is primarily due to the addition of a full nine months of interest expense on our two new capital leases for office space, which we executed in June 2002.
Despite the increase in interest expense in the current year, other expenses, net increased only 10% as there was a non-recurring loss in the prior year period related to the expiration of a foreign currency option purchased in connection with the
acquisition of the benefits consulting business of Bacon & Woodrow.



Provision for Income Taxes



The provision for
income taxes was $45 million for the nine months ended June 30, 2003, compared to $25 million in the comparable prior year period. The increase in the provision for income taxes for the nine months ended June 30, 2003, over the income taxes for the
comparable period is primarily due to earnings being taxed for the full nine months in fiscal 2003 as compared to earnings being taxed for only one month in the nine months ending June 30, 2002, as a result of the timing of the Companys
transition to a corporate structure and the inclusion of one-time charges in the nine months ending June 30, 2002, resulting from the Companys transition to a corporate structure on May 31, 2002. Approximately $22 million of the $25 million
tax expense for the nine months ended June 30, 2002, related to tax liabilities arising both from a mandatory change in the Companys tax accounting method and from the initial recording of deferred tax assets and liabilities related to
temporary differences which resulted from the transition to a corporate structure. The remaining $3 million represents income tax expense arising from earnings between May 31, 2002, and June 30, 2002, while the Company operated as a corporation. The
non-recurring, non-cash $18 million compensation expense resulting from owners receiving more than their proportional share of total capital, without offset for those owners who received less than their proportional share in conversion of
owners capital into common stock, was not deductible. For the year ending September 30, 2003, we expect to report pre-tax income and as such, have apportioned the estimated income tax provision for the year to each quarter, based on the ratio
of each quarters pre-tax income to estimated annual pre-tax income. These estimates reflect the information available at this time and our best judgment, however, actual annual income or taxes may differ.



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Segment Results



We operate many of the administrative and support functions of our business through centralized shared service operations, an arrangement that we believe
is the most economical and effective means of supporting the Outsourcing and Consulting segments. These shared services include information systems, human resources, general office support and space management, overall corporate management, finance
and legal services. Additionally, we utilize a client development group that markets the entire spectrum of our services and devotes its resources to maintaining existing client relationships. The compensation and related expenses, other operating
expenses, and selling, general and administrative expenses of the administrative and marketing functions are not allocated to the business segments, rather, they are included in unallocated shared costs. The costs of information services and human
resources, however, are allocated to the Outsourcing and Consulting segments on a specific identification basis or based on usage and headcount. Operating income before unallocated shared costs is referred to as segment income throughout
this discussion.



Reconciliation of Segment Results to Total Company Results

(in thousands)



|Business Segments                                   |  | Three Months EndedJune 30, |         | Nine Months EndedJune 30,
|--------------------------------------------------- |  | -------------------------- | ------- | -------------------------
|                                                    |  | 2003                       |         | 2002                     
|Outsourcing (1)                                     |  |                            |         |                          
|Revenues before reimbursements (net revenues)       |  | $                          | 304,095 |                          
|Segment income (1)                                  |  |                            | 59,581  |                          
|                                                    |  |                            |         |                          
|Consulting (2)                                      |  |                            |         |                          
|Revenues before reimbursements (net revenues)       |  | $                          | 190,791 |                          
|Segment income (1)                                  |  |                            | 36,440  |                          
|                                                    |  |                            |         |                          
|Total Company                                       |  |                            |         |                          
|Revenues before reimbursements (net revenues)       |  | $                          | 494,886 |                          
|Reimbursements                                      |  |                            | 12,862  |                          
|                                                    |  |                            |         |                          
|Total revenues                                      |  | $                          | 507,748 |                          
|                                                    |  |                            |         |                          
|Segment income (1)                                  |  | $                          | 96,021  |                          
|Charges not recorded at the Segment level:          |  |                            |         |                          
|One-time charges (3)                                |  |                            |        |                          
|Initial public offering restricted stock awards (4) |  |                            | 5,649   |                          
|Unallocated shared costs (1)                        |  |                            | 41,944  |                          
|                                                    |  |                            |         |                          
|Operating income (1)                                |  | $                          | 48,428  |                          
|                                                    |  |                            |         |                          

---

|(1) |  | Prior to May 31, 2002, owners were compensated through distributions of income. In connection with the Companys transition to a corporate structure on May 31, 2002, owners who
worked in the business became employees and the Company began to record their compensation in compensation and related expenses in arriving at segment income.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | On June 5, 2002, the Company acquired the actuarial and benefits consulting business of Bacon & Woodrow. As such, the results of Bacon & Woodrow have been included in the
Companys Consulting segment results from the acquisition date of June 5, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | In connection with the Companys transition to a corporate structure, the Company incurred one-time charges which included an $8 million non-recurring compensation expenses
related to the establishment of a vacation liability for its former owners, and a $18 million non-recurring, non-cash compensation expense resulting from certain owners receiving more than their proportional share of total capital, without offset
for those owners who received less than their proportional share.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Compensation expense of $6 million and $1 million for the three months ended June 30, 2003 and 2002, respectively, and $35 million and $1 million for the nine months ended June 30,
2003 and 2002, respectively, related to the amortization of the initial public offering restricted stock awards.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Outsourcing



Three Months Ended June 30, 2003 and 2002



Outsourcing net revenues were $304 million in the three months ended June 30, 2003, compared to $277 million in the comparable prior year period, an
increase of 10%. A portion of this growth was due to the addition of revenues from the June 2003 acquisitions of Cyborg and the benefit administration business of the Northern Trust Corporation. Excluding the effects of the Cyborg and the Northern
Trust Corporation benefit administration business, Outsourcing net revenues would have increased 8% quarter over quarter, primarily from the addition of new clients. Our revenue growth rate also reflects pricing pressure on new client services and
renewals as a result of continued softness in the U.S. economy and the competitive environment.



Outsourcing segment income as a percentage of Outsourcing net revenues was 20% in the three months ended June 30, 2003, compared to 22% in the comparable
prior-year period. Prior to May 31, 2002, compensation and related expenses did not include owners compensation as our owners were compensated through distributions of income. Had we incurred estimated owner compensation in the prior-year
quarter, segment income would have been $56 million for the three months ended June 30, 2002. As such, as adjusted to reflect estimated owner compensation expense in the prior-year quarter of $5 million, Outsourcing segment income as a percentage of
Outsourcing net revenues would have been 20% in the prior year quarter. During the quarter ended June 30, 2003, the investments in our workforce management business were offset in part by our beginning to capitalize approximately $6 million in
incremental and direct costs associated with implementing new workforce management clients.



Nine Months Ended June 30, 2003 and 2002



Outsourcing net revenues were $908 million in the nine months ended June 30, 2003, compared to $828 million in the comparable prior year period, an increase of 10%. A portion of this growth was due to the addition of
revenues from the newly acquired Cyborg and benefit administration business of the Northern Trust Corporation. Excluding the effects of the Cyborg and the Northern Trust Corporation benefit administration business, Outsourcing net revenues would
have increased 9% period over period. For the nine months ended June 30, 2003, approximately two-thirds of our Outsourcing net revenue growth was from the addition of new clients with the remainder of the growth from expanding services with existing
clients. Our revenue growth rate also reflects pricing pressure on new client services and renewals as a result of continued softness in the U.S. economy and the competitive environment.



Outsourcing segment income as a percentage of Outsourcing net revenues was 20% in the nine months ended June 30, 2003,
compared to 24% in the comparable prior year period. Had we incurred estimated owner compensation of $22 million in the comparable prior year period, segment income would have been $179 million for the nine months ended June 30, 2002. As such, as
adjusted, Outsourcing segment income as a percentage of Outsourcing net revenues would have been 22% in the nine months ended June 30, 2002. The decrease in margin in the nine months ended June 30, 2003 primarily relates to our continued investment
in the development of our workforce management service offering.



Consulting



Three Months Ended June 30, 2003 and 2002



Consulting net revenues were $191 million in the three months ended June 30,
2003, compared to $153 million in the comparable prior-year period, an increase of 25%. This increase primarily reflects the addition of revenues from the actuarial and benefits consulting business of Bacon & Woodrow since the acquisition date
of June 5, 2002. A portion of this growth was also due to favorable foreign currency translation due to the strengthening of European currencies relative to the U.S. dollar and consolidation of our Dutch affiliate upon purchase of the remaining
interest in the first quarter of 2003. Including the results of Bacon & Woodrow in the prior-year quarter, and excluding the effects of the acquisition of our Dutch affiliate and favorable foreign currency translation in the current-year
quarter, Consulting net revenues were unchanged quarter over quarter.



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Increases in retirement plan and health benefit management consulting were offset by a decrease in revenue from our discretionary consulting services
resulting from continued soft demand for such services.



Consulting segment income as a percentage of Consulting net revenues was 19% in the three months ended June 30, 2003, compared to 34% for the comparable prior-year period. Had we incurred estimated owner compensation in the prior-year
quarter, Consulting segment income would have been $38 million for the three months ended June 30, 2002. As such, as adjusted to reflect estimated owner compensation expense in the prior-year period, Consulting segment income as a percentage of
Consulting net revenues would have been 25% in the prior-year quarter. The decrease in the operating margin in the three months ended June 30, 2003, stemmed from lower margins on our more discretionary consulting services resulting from continued
soft demand for those services, offset by higher margins in our European region as a result of the Bacon & Woodrow business, and in health benefit management and retirement plan consulting. During the quarter, we have taken steps to reduce
costs, including headcount reductions, primarily in our more discretionary consulting service areas.



Nine Months Ended June 30, 2003 and 2002



Consulting net revenues were $545 million in the nine months ended June 30, 2003, compared to $415 million in the comparable prior year period, an increase of 31%. This increase primarily reflects the addition of
Bacon & Woodrows benefits consulting business, favorable foreign currency translation due to the strengthening of European currencies relative to the U.S. dollar and consolidation of our Dutch affiliate since December 2002, upon our
purchase of the remaining controlling interest. Including the results of Bacon & Woodrows benefits consulting business in the prior year period, and excluding the effects of the acquisition of our Dutch affiliate and favorable foreign
currency translation, Consulting net revenues would have increased by approximately 1% in the current year period over the prior year period. The net increase was due to increases in retirement plan and health benefit management consulting offset by
a decrease in revenue from our more discretionary consulting services due to continued soft demand for such services.



Consulting segment income as a percentage of Consulting net revenues was 19% in the nine months ended June 30, 2003, compared to 32% for the comparable
prior year period. Had we incurred estimated owner compensation of $57 million in the comparable prior year period, segment income would have been $78 million for the nine months ended June 30, 2002. As such, as adjusted, Consulting segment income
as a percentage of Consulting net revenues would have been 19% in the prior year period. Higher margins in our European region as a result of the Bacon & Woodrow benefits consulting business and in our retirement plan and health benefit
management consulting were offset by lower margins on our more discretionary consulting services due to continued soft demand for those services.



Pro Forma Results of Operations



During fiscal 2002, the Company completed several significant transactions. We completed our transition to a corporate structure in May 2002, and
completed our initial public offering and the acquisition of Bacon & Woodrow in June 2002. The following pro forma results give effect to all three of these transactions as if they occurred on October 1, 2001, the beginning of fiscal 2002, and
exclude any non-recurring adjustments, to allow for comparability. Current year results, as shown in the statement of operations for the three and nine months ended June 30, 2003, include the effects of all three transactions and, as such, are not
shown on a pro forma basis.



The information presented is not
necessarily indicative of the results of operations that might have occurred had the events described above actually taken place as of the dates specified. The pro forma adjustments are based upon available information and assumptions that
management believes are reasonable. This information and the accompanying notes should also be read in conjunction with our Pro Forma Combined Financial Information and combined financial statements and related notes in our Registration
Statement (No. 333-105560) on Form S-3, filed with the Securities and Exchange Commission, and our combined and consolidated financial statements and related notes in our Annual Report on Form 10-K, filed with the Securities Exchange Commission, and
our consolidated and combined financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.



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##### Table of Contents

Hewitt Associates, Inc.

Pro Forma Consolidated and Combined Income Statements

(unaudited)



|                                                                                             |  | Three Months Ended June 30, 2002                       |    
|-------------------------------------------------------------------------------------------- |  | ------------------------------------------------------ | ---
|                                                                                             |  | HewittHistorical                                       |    
|                                                                                             |  | (Dollars in millions, except share and per share data) |    
|Revenues:                                                                                    |  |                                                        |    
|Revenue before reimbursements (net revenues)                                                 |  | $                                                      | 430
|Reimbursements                                                                               |  |                                                        | 9  
|                                                                                             |  |                                                        |    
|Total revenues                                                                               |  |                                                        | 439
|                                                                                             |  |                                                        |    
|Operating expenses:                                                                          |  |                                                        |    
|Compensation and related expenses, excluding initial public offering restricted stock awards |  |                                                        | 272
|Initial public offering restricted stock awards                                              |  |                                                        | 1  
|Reimbursable expenses                                                                        |  |                                                        | 9  
|Other operating expenses                                                                     |  |                                                        | 86 
|Selling, general and administrative expenses                                                 |  |                                                        | 21 
|                                                                                             |  |                                                        |    
|Total operating expenses                                                                     |  |                                                        | 389
|Operating income                                                                             |  |                                                        | 50 
|Other expenses, net                                                                          |  |                                                        | (3 
|                                                                                             |  |                                                        |    
|Income before taxes and owner distributions                                                  |  |                                                        | 47 
|Provision for income taxes                                                                   |  |                                                        | 25 
|                                                                                             |  |                                                        |    
|Income before owner distributions                                                            |  |                                                        |    
|                                                                                             |  |                                                        |    
|Net income                                                                                   |  | $                                                      | 22 
|                                                                                             |  |                                                        |    
|Earnings per share:                                                                          |  |                                                        |    
|basic                                                                                       |  |                                                        |    
|diluted                                                                                     |  |                                                        |    
|Weighted average shares:                                                                     |  |                                                        |    
|basic                                                                                       |  |                                                        |    
|diluted                                                                                     |  |                                                        |    

---

|(1) |  | Acquisition and incorporation adjustments include the following one-time items that are excluded for pro forma purposes: an $8 million compensation expense for
vacation liability arising from the Companys former owners becoming employees of the Company; an $18 million compensation expense resulting from the requirement to recognize the extent to which certain owners stock allocation was greater
than their proportional share of the capital accounts, without offset for the extent to which certain owners stock allocation is less than their proportional share of the capital accounts; a $22 million non-recurring income tax expense
resulting from a $5 million tax benefit arising from a mandatory change in our tax accounting method and a $27 million net liability arising from the establishment of deferred tax assets and liabilities; a $6 million expense related to the former
Bacon & Woodrow partners purchase of indemnity insurance prior to the acquisition; $1 million of acquisition-related professional service expenses incurred by Bacon & Woodrow; and a $1 million compensation expense reflecting our
assumption of annuity liabilities in
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | connection with the acquisition. Other adjustments include expenses that the Company would have incurred had it been a corporation for the entire period
presented: $30 million of owner compensation expense for both the Companys owners and Bacon & Woodrow partners; $21 million of additional income tax expense had the Company been a taxable entity for the entire period; and $1 million of
amortization of intangible assets created as part of the acquisition of Bacon & Woodrow.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Offering adjustments include compensation expense of $5 million reflecting the amortization of the one-time grant of initial public offering restricted stock awards and the related
income tax benefit of $2 million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On a pro forma
basis, the Companys net revenues were $454 million compared to its actual net revenues of $430 million for the three months ended June 30, 2002. The difference in the net revenues is attributable to the inclusion of the Bacon & Woodrow net
revenues on a pro forma basis for the full period as compared to no Bacon & Woodrow net revenues in the Hewitt historical results since Bacon & Woodrow was acquired on June 5, 2002, and their results were included in actual results from the
acquisition date forward.



On a pro forma basis, the
Companys net income was $27 million compared to its actual net income of $22 million for the three months ended June 30, 2002. The difference is attributable to: (1) the exclusion of non-recurring charges for owner vacation accrual, the
disproportionate share compensation charge, and the $22 million non-recurring income tax expense; (2) the inclusion of owner salaries, benefits, bonuses, and payroll taxes for all periods; (3) the inclusion of an estimated tax expense as if the
Company had been subject to income tax for the entire period; (4) the inclusion of the Bacon & Woodrow operations for all periods, adjusted for non-recurring items, on a pro forma basis; (5) the inclusion of compensation expense for all periods,
reflecting the amortization of the one-time grant of initial public offering awards to employees and the estimated tax benefit related to these awards; (6) the inclusion of amortization expense for the amortization of intangible assets acquired as
part of the Bacon & Woodrow business in pro forma net income; and (7) the inclusion of estimated compensation expense for the assumption of annuity liabilities in connection with the Bacon & Woodrow acquisition.



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Hewitt Associates, Inc.

Pro Forma Consolidated and Combined Income Statements

(unaudited)



|                                                                                             |  | Nine Months Ended June 30, 2002                        |      
|-------------------------------------------------------------------------------------------- |  | ------------------------------------------------------ | -----
|                                                                                             |  | HewittHistorical                                       |      
|                                                                                             |  | (Dollars in millions, except share and per share data) |      
|Revenues:                                                                                    |  |                                                        |      
|Revenue before reimbursements (net revenues)                                                 |  | $                                                      | 1,243
|Reimbursements                                                                               |  |                                                        | 22   
|                                                                                             |  |                                                        |      
|Total revenues                                                                               |  |                                                        | 1,265
|                                                                                             |  |                                                        |      
|Operating expenses:                                                                          |  |                                                        |      
|Compensation and related expenses, excluding initial public offering restricted stock awards |  |                                                        | 713  
|Initial public offering restricted stock awards                                              |  |                                                        | 1    
|Reimbursable expenses                                                                        |  |                                                        | 22   
|Other operating expenses                                                                     |  |                                                        | 261  
|Selling, general and administrative expenses                                                 |  |                                                        | 56   
|                                                                                             |  |                                                        |      
|Total operating expenses                                                                     |  |                                                        | 1,053
|                                                                                             |  |                                                        |      
|Operating income                                                                             |  |                                                        | 212  
|Other expenses, net                                                                          |  |                                                        | (11  
|                                                                                             |  |                                                        |      
|Income before taxes and owner distributions                                                  |  |                                                        | 201  
|Provision for income taxes                                                                   |  |                                                        | 25   
|                                                                                             |  |                                                        |      
|Income before owner distributions                                                            |  |                                                        |      
|                                                                                             |  |                                                        |      
|Net income                                                                                   |  | $                                                      | 176  
|                                                                                             |  |                                                        |      
|Earnings per share:                                                                          |  |                                                        |      
|basic                                                                                       |  |                                                        |      
|diluted                                                                                     |  |                                                        |      
|Weighted average shares:                                                                     |  |                                                        |      
|basic                                                                                       |  |                                                        |      
|diluted                                                                                     |  |                                                        |      

---

|(1) |  | Acquisition and incorporation adjustments include the following one-time items that are excluded for pro forma purposes: an $8 million compensation expense for
vacation liability arising from the Companys former owners becoming employees of the Company; an $18 million compensation expense resulting from the requirement to recognize the extent to which certain owners stock allocation was greater
than their proportional share of the capital accounts, without offset for the extent to which certain owners stock allocation is less than their proportional share of the capital accounts; a $22 million non-recurring income tax expense
resulting from a $5 million tax benefit arising from a mandatory change in our tax accounting method and a $27 million net liability arising from the establishment of deferred tax assets and liabilities; a $6 million expense related to the former
Bacon & Woodrow partners purchase of indemnity insurance prior to the acquisition; $2 million of acquisition-related professional service expenses incurred by Bacon & Woodrow; $4 million of losses incurred on a foreign currency
purchase option related to the acquisition; and
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | a $1 million compensation expense reflecting our assumption of annuity liabilities in connection with the acquisition. Other adjustments include expenses
that the Company would have incurred had it been a corporation for the entire period presented: $120 million of owner compensation expense for both the Companys owners and Bacon & Woodrow partners; $53 million of additional income tax
expense had the Company been a taxable entity for the entire period; $2 million of amortization of intangible assets created as part of the acquisition of Bacon & Woodrow; and $1 million of interest expense on borrowings to fund distributions of
accumulated earnings to Bacon & Woodrows partners.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Offering adjustments include compensation expense of $56 million reflecting the amortization of the one-time grant of initial public offering restricted stock awards and the related
income tax benefit of $22 million.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On a pro
forma basis, the Companys net revenues were $1,334 million compared to its actual net revenues of $1,243 million for the nine months ended June 30, 2002. The difference in the net revenues is attributable to the inclusion of the Bacon &
Woodrow net revenues on a pro forma basis for the full period as compared to no Bacon & Woodrow net revenues in the Hewitt historical results since Bacon & Woodrow was acquired on June 5, 2002, and their results were included in actual
results from the acquisition date forward.



The Companys
net income was $42 million on a pro forma basis compared to its actual net income of $176 million for the nine months ended June 30, 2002. The difference is attributable to: (1) the inclusion of owner salaries, benefits, bonuses, and payroll taxes
for all periods; (2) the inclusion of an estimated tax expense as if the Company had been subject to income tax for the entire period; (3) the exclusion of non-recurring charges for owner vacation accrual, the disproportionate share compensation
charge, and the $22 million non-recurring income tax expense; (4) the inclusion of compensation expense for all periods, reflecting the amortization of the one-time grant of initial public offering awards to employees and the estimated tax benefit
related to these awards; (5) the inclusion of the Bacon & Woodrow operations for all periods, adjusted for non-recurring items, on a pro forma basis; (6) the exclusion of losses incurred on a foreign currency purchase option; (7) the inclusion
of amortization expense for the amortization of intangible assets acquired as part of the Bacon & Woodrow business in pro forma net income; (8) the inclusion of estimated interest expense for borrowings to fund the payment of distributions to
the former partners of Bacon & Woodrow; and (9) the inclusion of estimated compensation expense for the assumption of annuity liabilities in connection with the Bacon & Woodrow acquisition.



Liquidity and Capital Resources



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



|Summary of Cash Flows                                |  | Nine months ended June 30, |         
|---------------------------------------------------- |  | -------------------------- | --------
|(in thousands)                                       |  | 2003                       |         
|                                                     |  | (unaudited)                |         
|Cash provided by:                                    |  |                            |         
|Operating activities                                 |  | $                          | 182,348 
|Cash used in:                                        |  |                            |         
|Investing activities                                 |  |                            | (119,937
|Financing activities                                 |  |                            | (37,550 
|Effect of exchange rates on cash                     |  |                            | 1,574   
|                                                     |  |                            |         
|Net increase (decrease) in cash and cash equivalents |  |                            | 26,435  
|Cash and cash equivalents at beginning of period     |  |                            | 136,450 
|                                                     |  |                            |         
|Cash and cash equivalents at end of period           |  | $                          | 162,885 
|                                                     |  |                            |         



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For the nine months ended June 30, 2003 and 2002, cash provided by operating activities was $182 million
and $271 million, respectively. The decrease in cash flows provided by operating activities between the nine months ended June 30, 2003 and 2002, is primarily due to the inclusion of compensation expenses related to Hewitt Holdings owners and
a provision for corporate income taxes, stemming from our transition to a corporate structure on May 31, 2002. Prior to May 31, 2002, the distributions to Hewitt Holdings owners were paid out of cash flows from financing activities as capital
distributions, and we did not pay corporate income taxes when we operated as a limited liability company. Additionally, the decrease in cash from operating activities in the nine months ended June 30, 2003, over the prior year period was offset by
the distribution of $152 million of client receivables to Hewitt Holdings as part of the Companys transition to a corporate structure in the prior year period.



For the nine months ended June 30, 2003 and 2002, cash used in investing activities was $120 million and $56 million,
respectively. The increase in cash used in investing activities was primarily due to cash paid for acquisitions (see Note 7 to the consolidated financial statements) during the nine months ended June 30, 2003, and increased spending on software
development.



Cash used in financing activities was $38 million
and $256 million, respectively, for the nine months ended June 30, 2003 and 2002. For the nine months ended June 30, 2003, repayments of debt accounted for the majority of the cash used in financing activities, while in the nine months ended June
30, 2002, capital distributions under the former limited liability company structure accounted for $264 million of the cash outflows, offset by short-term borrowings of $52 million.



At June 30, 2003, our cash and cash equivalents were $163 million, as compared to $19 million at June 30, 2002, an increase
of $144 million or 760%. Cash and cash equivalents at June 30, 2003, increased over the prior year primarily due to the receipt of proceeds in July 2002 from our initial public offering in June 2002, and higher earnings and related cash flows from
operating activities in the year since June 30, 2002, offset by repayments of short-term borrowings.



Commitments



Significant ongoing commitments consist primarily of leases and debt.



Prior to fiscal year 2002, the Company entered into certain real estate transactions with Hewitt Holdings and its subsidiaries, Hewitt Properties I LLC, Hewitt Properties II LLC, Hewitt Properties III LLC, Hewitt
Properties IV LLC, Hewitt Properties VII LLC, The Bayview Trust, and Overlook Associates, an equity method investment of Hewitt Holdings. Based on the characteristics of the leases and the nature of the relationships between the Company and Hewitt
Holdings and its subsidiaries, most of the associated leases are classified as operating leases. The investments in the properties owned by these related parties were funded through capital contributions by Hewitt Holdings and third party debt. This
debt is not reflected on the Companys balance sheet as the obligation represented by the debt is not an obligation of, nor guaranteed by, the Company.



During the third quarter of fiscal 2002, we entered into two 15-year capital leases for office space. At inception of the leases, we recorded $89 million
in buildings and long-term debt to reflect the long-term lease obligations. Lease payments are made in monthly installments at 7.33% interest. As of June 30, 2003, the outstanding debt related to these leases was $86 million. One of the leases,
totaling approximately $24 million at June 30, 2003, was with a related party, The Bayview Trust. However, on March 7, 2003, The Bayview Trust sold the building where we leased premises and our lease was assigned to the third-party purchaser of the
building.



Our computer and telecommunications equipment
installment notes and capitalized leases are secured by the related equipment. The amounts due are payable over three- to five-year terms and are payable in monthly or quarterly installments at various interest rates ranging from 5.8%-to-8.0%. At
June 30, 2003, the outstanding



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balance on the equipment financing agreements was $6 million. Our debt consists primarily of lines of credit, term notes, and equipment financing
arrangements. We have two unsecured line of credit facilities. The 364-day facility expires on September 26, 2003, and provides for borrowings up to $70 million. The three-year facility expires on September 27, 2005, and provides for borrowings up
to $50 million. Borrowings under either facility accrue interest at LIBOR plus 52.5-to-72.5 basis points or the prime rate, at our option and are repayable upon demand or at expiration of the facility. Quarterly facility fees ranging from 10-to-15
basis points are charged on the average daily commitment under both facilities. If the aggregate utilization under both facilities exceeds 50% of the aggregate commitment, an additional utilization fee, based on the aggregate utilization, is
assessed at a rate of 0.125% per annum. At June 30, 2003, there was no outstanding balance on either facility.



We had an unsecured multi-currency line of credit that permitted borrowings of up to $10 million through February 28, 2003, at an interbank multi-currency
interest rate plus 75 basis points. All outstanding balances on the unsecured multi-currency line of credit were repaid in full at the expiration of the facility on February 28, 2003. In addition, Hewitt Bacon & Woodrow Ltd., our U.K.
subsidiary, has an unsecured British Pound Sterling line of credit permitting borrowings up to £20 million until July 30, 2003, and £17 million thereafter until expiration of the facility on January 31, 2004, at a current rate of 4.78%.
As of June 30, 2003, the outstanding balance was £14 million, equivalent to approximately $24 million, and is repayable upon demand or at expiration of the facility. There was other foreign debt outstanding at June 30, 2003 totaling
approximately $9 million, pursuant to local banking relationships in over a half-dozen countries. In total, the outstanding balance on the line of credit and other foreign debt was $33 million as of June 30, 2003.



On March 7, 2003, we entered into a contract with a lender to guarantee
borrowings of our subsidiaries up to $13 million in multiple currency loans and letters of credit to replace our unsecured multi-currency line of credit, which we repaid in February 2003. There is no fixed termination date on this contract. This
contract allows Hewitt subsidiaries to secure financing at rates based on Hewitts creditworthiness, however, the terms and conditions of the financing with the lender have not been finalized. On March 17, 2003, our subsidiary, the Lincolnshire
Insurance Company, obtained a $6 million letter of credit under this contract. There were no borrowings under the contract or draws against the letter of credit as of June 30, 2003.



We have issued unsecured senior term notes to various financial institutions consisting primarily of insurance companies
totaling $147 million as of June 30, 2003. Of this amount, $10 million bears interest at 7.65% and is repayable in October 2005; $15 million bears interest at 7.90% and is repayable in October 2010; $15 million bears interest at 7.93% and is
repayable in June 2007; $10 million bears interest at 8.11% and is repayable in June 2010; $12 million bears interest at 7.94% and is repayable in four annual installments from March 2004 to March 2007; $35 million bears interest at 8.08%, and is
repayable in five annual installments beginning in March 2008; and $50 million bears interest at 7.45%, and is repayable in five annual installments beginning May 2004.



A number of our debt agreements contain financial and other covenants including, among others, covenants restricting our
ability to incur indebtedness and create liens, to sell the assets or stock of a collateralized subsidiary, and to pay dividends or make distributions to Hewitt Holdings owners which would result in a default. Our debt agreements also contain
covenants requiring Hewitt Associates LLC and its affiliates to maintain a minimum level of tangible net worth ($144 million as of June 30, 2003) and net worth ($216 million as of September 30, 2002), to maintain interest rate coverage of at least
2.00-to-1.00 and to maintain a leverage ratio not to exceed 2.25-to-1.00. At June 30, 2003, we were in compliance with the terms of our debt agreements.



In connection with the initial public offering, we raised approximately $219 million in net proceeds after offering expenses. Of the $219 million of total
net proceeds received, $52 million was used to repay the outstanding balance on our line of credit, $8.3 million was used to pay income taxes resulting from our transition to a corporate structure, and the balance was retained for general corporate
purposes and working capital.



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.



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Self-Insurance



The Company has established a captive insurance subsidiary as a cost-effective way to self-insure against certain business risks and losses. To date, the
captive has not issued any policies to cover any of the Companys insurance exposures, however, the Company has contributed $5 million in cash and secured $6 million of additional regulatory capital in the form of a letter of credit. The
Company may, from time to time, choose to self-insure a portion of its professional liability exposure through use of this captive subsidiary.



New Accounting Pronouncements



In November 2002, the FASBs Emerging Issues Task Force reached consensus on EITF No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables.EITF No. 00-21 addresses the accounting treatment for arrangements that provide the delivery or performance of multiple products or services where the delivery of a product, system or performance of services may occur at different
points in time or over different periods of time. EITF No. 00-21 requires the separation of the multiple deliverables that meet certain requirements into individual units of accounting that are accounted for separately under the appropriate
authoritative accounting literature. EITF No. 00-21 is applicable to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating the requirements and impact of this issue on its consolidated
results of operations and financial position.



In January 2003,
the FASB issued FASB Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities,to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 changes
that by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. The adoption of FIN No. 46 is not expected to have a material impact on our consolidated financial statements.



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. As a result, these statements speak only as of the date they were made.



Our actual results may differ from the forward-looking statements for many reasons, including:



| |  |  | The actions of our competitors could adversely impact our results.
| | - |  | ------------------------------------------------------------------



| |  |  | A prolonged economic downturn could have a material adverse effect on our results.
| | - |  | ----------------------------------------------------------------------------------



| |  |  | 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, our business may be
negatively affected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to successfully manage and integrate acquired companies.
| | - |  | --------------------------------------------------------------------



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



| |  |  | Our ability to recruit, retain and motivate employees and to compete effectively.
| | - |  | ---------------------------------------------------------------------------------



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| |  |  | 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, our business may be negatively
affected.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Tightening insurance markets may reduce available coverage and result in increased premium costs and/or higher self retention of risks.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The loss of key employees may damage or result in the loss of client relationships.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Our global operations and expansion strategy entail complex management, foreign currency, legal, tax and economic risks.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | The profitability of our engagements with clients may not meet our expectations.
| | - |  | --------------------------------------------------------------------------------



For a more detailed discussion of our risk factors, see the information under the heading Risk Factors in our
Registration Statements on Form S-3 (File No. 333-105560) filed with the Securities Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise.



|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risks
|------- |  | -----------------------------------------------------------



We are exposed to market risk primarily from changes in interest rates and foreign currency exchange rates. Historically, we have not entered into hedging
transactions, such as foreign currency forward contracts or interest rate swaps, to manage this risk due to our low percentage of foreign debt and restrictions on our fixed rate debt. However, in August 2001, we purchased a £150 million
foreign currency option to offset the foreign currency risk associated with the then planned purchase of the benefits consulting business of Bacon & Woodrow. This instrument expired in May 2002. We do not hold or issue derivative financial
instruments for trading purposes. We are not currently a party to any hedging transaction or derivative financial instrument.



Interest rate risk



We are exposed to interest rate risk primarily through our portfolio of cash and cash equivalents, which is managed for safety of principal and liquidity.
We invest our portfolio of cash equivalents in the highest rated money market investments and continuously monitor the investment ratings. The investments are subject to inherent interest rate risk as investments mature and are reinvested at current
market interest rates.



At June 30, 2003, 100% of our long-term
debt was at a fixed rate. Our short-term debt with a variable rate consisted of our unsecured line of credit, which has an interest rate of LIBOR plus 52.5-to-72.5 basis points or the prime rate, at our option. As of June 30, 2003, there was no
outstanding balance on our unsecured line of credit. In addition, Hewitt Bacon & Woodrow Ltd., the Companys U.K. subsidiary, has an unsecured British Pound Sterling line of credit permitting borrowings of up to £20 million until July
30, 2003 and £17 million thereafter until expiration of the facility on January 31, 2004, at a current rate of 4.78%. As of June 30, 2003, the outstanding balance was £14 million, equivalent to approximately $24 million, and is repayable
upon demand or at expiration of the facility. There is other foreign debt outstanding at June 30, 2003, totaling approximately $9 million, pursuant to local banking relationships in over a half-dozen countries. In total, the outstanding balance on
the line of credit and other foreign debt was $33 million as of June 30, 2003.



Our foreign subsidiaries maintained debt with an effective interest rate of 4.73% and 4.46% during the three and nine months ended June 30, 2003, respectively. A one percentage point increase would have increased our
interest expense by approximately $0.1 million and $0.2 million for the three and nine months ended June 30, 2003. We also maintain an invested cash portfolio which earned interest at an effective rate of 1.34% and 1.67% during the three and nine
months ended June 30, 2003, respectively. A one percentage point increase would have increased our interest income by approximately $0.5 million and $1.1 million for the three and nine months



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##### Table of Contents

ended June 30, 2003, respectively. The net effect of a one percentage point change would have been approximately $0.4 million and $0.9 million in additional
income from an increase in the rate (additional expense from a decrease in the rate) for the three and nine months ended June 30, 2003, respectively.



Our fixed rate debt consists of our unsecured senior term notes. At June 30, 2003, a 10 percent decrease in the levels of interest rates with all other
variables held constant would result in an increase in the fair market value of our fixed rate debt of $2.9 million. At June 30, 2003, a 10 percent increase in the levels of interest rates with all other variables held constant would result in a
decrease in the fair market value of our fixed rate debt of $2.8 million.



Foreign exchange risk



For both the three and
nine month period ended June 30, 2003, revenues from U.S. operations as a percent of total revenues were 83%. Foreign currency net translation gain was $15 million for the three month period ended June 30, 2003. Foreign currency net translation gain
was $19 million for the nine month period ended June 30, 2003. We do not enter into any foreign currency forward contracts for speculative or trading purposes.



Operating in international markets means that we are exposed to movements in these foreign exchange rates, primarily the British pound sterling and the
Euro. Approximately 11% and 10% of our net revenues for the three and nine months ended June 30, 2003, respectively, were from the United Kingdom. Approximately 3% of our net revenues for the three and nine months ended June 30, 2003, were from
countries whose currency is the Euro. Changes in these foreign exchange rates would have the largest impact on translating our international operations results into U.S. dollars. A 10% change in the average exchange rate for the British pound
sterling for the three and nine months ended June 30, 2003, would have impacted our pre-tax net operating income by approximately $0.5 million and $0.3 million, respectively. A 10% change in the average exchange rate for the Euro for the three and
nine months ended June 30, 2003, would have impacted our pre-tax net operating income by less than $0.1 million in both periods.



|Item 4. |  | Controls and Procedures
|------- |  | -----------------------



Evaluation of disclosure controls and procedures.



Our chief executive officer and our chief financial officer have concluded, based on their evaluation within 90 days before the filing date of this
Quarterly Report, that the Companys disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) are effective to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



Changes in internal controls.



There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures subsequent to the date of the previously mentioned evaluation.



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##### Table of Contents

Part II.    Other Information



|ITEM 1. |  | Legal Proceedings
|------- |  | -----------------



The Company is occasionally subject to lawsuits and claims arising out of the normal conduct of business. Management does not expect the outcome of
pending claims to have a material adverse affect on the business, financial condition or results of operations of the Company.



|ITEM 6. |  | Exhibits and Reports on Form 8-K
|------- |  | --------------------------------



| | a. |  | Exhibits.
| | -- |  | ---------



| | 10.1 |  | Amended and Restated Registration Rights Agreement between Hewitt Holdings LLC and Hewitt Associates Inc. (incorporated by reference to Exhibit 10.3 to Hewitt Associates,
Inc.s Registration Statement on Form S-3, as amended, Registration No. 333-105560).
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.2 |  | Stockholders Agreement by and among Hewitt Associates, Inc., Hewitt Holdings LLC and the Covered Persons signatory thereto, dated as of July 1, 2003 (incorporated by reference
to Exhibit 10.31 to Hewitt Associates, Inc.s Registration Statement on Form S-3, as amended, Registration No. 333-105560).
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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)
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Reports on Form 8-K filed during the quarter.
| | -- |  | ---------------------------------------------



Current Report on Form 8-K dated May 5, 2003 (date of earliest event reported), furnished on May 9, 2003, with respect to the Companys earnings
release for the three and six months ended March 31, 2003.



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



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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:  July 29, 2003 |  |  | 
|                     |  |  | 



44