Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

For the fiscal year ended September 30, 2003

Commission File Number 000-20835

HEWITT ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Securities registered pursuant to Section 12(g) of the Act:    None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

The aggregate market value of the common stock of Hewitt Associates, Inc. outstanding shares estimated to be held by non-affiliates was $2,455,205,450 as of October 31, 2003, based on a closing price of $25.70. While it is difficult to determine the number of shares owned by affiliates (within the meaning of the term under the applicable regulations of the Securities and Exchange Commission), the registrant believes this estimate is reasonable.

DOCUMENTS INCORPORATED BY REFERENCE

Certain specified portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference in response to Part III, Items 10-14, of this Form 10-K.

Table of Contents

HEWITT ASSOCIATES, INC.

FORM 10-K

For The Fiscal Year Ended

September 30, 2003

INDEX

Table of Contents

PART I

Overview

Hewitt is a leading global provider of human resources outsourcing and consulting services. Our mission is to excel, around the world, at helping our clients and their people succeed together. In fiscal 2003, which marked our 42nd consecutive year of revenue growth, we provided services to more than 2,600 clients. We believe that we are well-positioned to continue our growth in a business environment characterized by a growing recognition of the critical importance of human resources, increasingly complex human resources challenges and rapid technological change.

Since our founding in 1940, we have continuously extended and expanded our human resources service offerings in response to our clients’ needs. Early in our history, we specialized in providing actuarial services for sponsors of retirement plans and executive compensation consulting. These remain core competencies of the firm today. Benefits legislation in the 1970’s and the proliferation of flexible benefits and 401(k) programs in the 1980’s substantially increased companies’ needs for advisory and administrative services related to health and welfare benefits, retirement benefits and compensation programs. In 1991, we introduced the Total Benefit Administration^™ system, which we believe is the first technology platform for outsourcing the administration of the three major benefit service areas using a single, integrated system and database. Following significant investments in technology, infrastructure, and people, and with over twelve years of experience, outsourcing is now our largest business segment.

Of our $2.0 billion of net revenues in 2003, 63% was generated in our outsourcing business and 37% was generated in our consulting business. Our outsourcing business is comprised of three core benefits administration services, our new payroll administration service and our workforce management solution. Our consulting business is comprised of three service areas, including health management, retirement and financial management, and talent and organization consulting.

We believe that our leadership in outsourcing and consulting and our ability to provide integrated solutions across and within both businesses are important competitive advantages. With our full range of services, we are able to leverage the data and knowledge we gain through outsourcing to provide more comprehensive and market-based solutions in our consulting business. Likewise, we utilize the expertise developed through our consulting business to meet the specific objectives of our outsourcing clients through high-value, cost-effective solutions.

Through our outsourcing business, we apply our human resources expertise and employ our integrated technology systems to administer our clients’ human resources programs: benefits, payroll and workforce management. We assume and automate the resource-intensive processes required to administer our clients’ human resources programs, and we provide on-line tools and information that support decision-making and transactions by our clients and their employees. We enable companies to streamline their human resources administration and processes in order to enhance effectiveness and reduce costs, and to employ web-based technologies to automate processes and transactions. With the information and tools that we provide, our clients are able to optimize the return on their benefits, payroll, and human resources investments.

Our 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). Our recent acquisition of Northern Trust Retirement Consulting (“NTRC”) in June 2003 also extends our defined contribution services. Our recent acquisition of Cyborg Worldwide, Inc., the parent of Cyborg Systems, Inc. (“Cyborg”), a global provider of human resources management software and payroll services, 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 outsourcing services include workforce administration, rewards management, recruiting and staffing, performance management, learning and development, and talent management.

To date, we have provided our outsourcing services primarily to companies with complex human resources programs and over 10,000 employees. As of September 30, 2003, we were providing benefit outsourcing services to approximately 270

3

Table of Contents

clients (typically through three-to five-year contracts) representing a total of approximately 410 benefit services, including 61 new services relating to the NTRC acquisition. We define a benefit outsourcing client as a company that has outsourced to us the administration of one or more of the three core benefit services. We define a benefit service as any one of the three benefit administration services that we provide for a client. As a result, for clients who offer health and welfare, defined contribution and defined benefit programs, we have the opportunity to provide three benefit services. We are focused on developing deep client relationships and establishing ourselves as the outsourcing provider of choice across all of our outsourcing services. We have grown our outsourcing revenues by both expanding existing client relationships and adding new clients.

We believe that we will continue to deliver significant growth in our outsourcing business by expanding relationships with existing clients, increasing the penetration of our target outsourcing market, extending our service offerings, addressing the complex and changing needs for health benefit management services, providing outsourcing services to mid-sized companies, establishing new business alliances, and growing our business outside the United States.

Through our consulting business, 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. Our consulting clients include a diverse base of companies, many of which have been clients for a long time. We have grown our consulting revenues by both expanding existing client relationships and adding new clients. Looking back over the last five years, of our 100 largest consulting clients in 1998 (ranked by revenues), 88 are consulting clients today and have been in each of the last five years.

We plan to continue to grow our consulting business by extending services into our existing client base, targeting companies we currently do not serve, continuing to address the complex and changing needs for health benefit management services and growing our business outside the United States.

Industry Background

Human resources outsourcing and consulting have grown rapidly in an increasingly service and knowledge-based economy as companies view the effective management of human capital as critical to optimizing business results. As companies strive to improve profitability and productivity, the effectiveness of human resources expenditures is an area of increased focus. Furthermore, the increasing complexity of human resources processes and programs, the need to develop new or improved programs in response to changing regulations or competitive pressures, and the desire to realize a high return on investments in these programs, all contribute to the rising premium placed on effective human resources.

International Data Corporation, in its Worldwide and U.S. HR Management Services Forecast for 2003-2007, projects total U.S. human resources services spending to grow at a 12.5% compounded annual growth rate from approximately $30 billion in 2002 to more than $54 billion by 2007. This growth projection consists of: (i) a 20.8% compound annual growth rate for human resources business process outsourcing (e.g., hiring, benefits, management, training and development and performance management) from approximately $6 billion in 2002 to $15 billion in 2007; (ii) an 8.4% compound annual growth rate for human resources processing services (e.g., benefits administration and payroll) from approximately $11 billion in 2002 to $17 billion in 2007 and (iii) a 11.4% compound annual growth rate for human resources consulting (e.g., human resources strategy, best practices and process re-engineering, process improvement, organizational, compensation and benefit design) from approximately $13 billion in 2002 to nearly $22 billion in 2007.

Companies are focused on maximizing the return on their human resource investments by structuring human resource programs that meet employee needs and expectations and by delivering those programs efficiently. Companies are recognizing that in order to attract, motivate and retain talented employees, they must provide human resource programs that are viewed as valuable, as well as tools that enable employees to make choices regarding their benefits and to conduct related transactions. At the same time, companies are challenged by rising health care costs, the growing complexity of health and welfare and retirement plans, frequent technological changes, the need to comply with changing regulations and the demands of their employees for choice, information and responsiveness. Consequently, companies are seeking outside assistance with the design, management and administration of their human resource programs.

4

Table of Contents

Benefits administration outsourcing includes transactional functions such as benefits program administration (including providing enrollment materials, recordkeeping and COBRA administration), regulatory compliance, claims management and participant call center management, as well as strategic components such as benefits program design and provider selection. The three primary areas of benefits administration outsourced by companies today are health and welfare, defined contribution and defined benefit programs.

The global business environment is becoming increasingly complex, competitive and technology focused, and employees and employers are demanding more choice and self-management of benefits. The continued shift from a manufacturing-based economy to a service- and knowledge-based economy places a greater premium on a company’s ability to attract, motivate and retain the human capital necessary to generate value. According to the U.S. Bureau of Labor Statistics the estimated number of 25 to 44- year-old U.S. workers is expected to decline from approximately 70 million in 2000 to 68 million by 2010, while the trend of historically low unemployment among college educated professionals (2.9% in 2002) will continue. As a result, we believe competition for talent is expected to become more intense and companies will increasingly seek outside consultants for guidance on human resources issues.

Business Segments

Our two principal business segments are outsourcing and consulting:

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.

Outsourcing

Today, the most significant part of our Outsourcing segment consists of benefits outsourcing services, which includes three principal categories of employee benefit programs:

Building on our experience in benefits outsourcing, we have extended our benefits outsourcing approach and developed a solution for workforce management. Our recent acquisition of Cyborg also expands our service offering to include payroll administration on a stand-alone basis and enables us to provide our clients with a comprehensive range of workforce management solutions. We believe that our infrastructure, strong brand name and human resources market leadership, combined with Cyborg’s underlying software platform, are competitive advantages which enable us to provide strong payroll, workforce management and human resources management solutions.

Outsourcing represented 63% of our net revenues in fiscal 2003. We deliver outsourcing services primarily to organizations with more than 10,000 employees which have complex human resources and benefit programs. During

5

Table of Contents

fiscal 2003, 101 of our outsourcing clients were Fortune 500 companies. Our outsourcing clients typically sign three- to five-year contracts and most of our clients have renewed their contracts with us upon expiration of the initial term.

Through an integrated suite of technologies that span infrastructure, data-warehousing, human resources applications, security, service centers, portals and content management, we provide automated solutions to our clients’ human resources and benefits-related processes that is flexible enough to adapt to a broad range of program complexity and to accommodate the needs of clients ranging in size from less than 1,000 to well over 500,000 employees. Our outsourcing services are designed to help clients eliminate inefficiencies in human resources and benefits delivery to employees, continue to meet business objectives in a changing environment and meet compliance obligations of their human resources and benefits programs. We relieve human resources managers of the resource-intensive day-to-day processes required in the administration of human resources and benefits programs, including recordkeeping, data management, systems integration, and transaction and decision support. We follow a comprehensive process to develop an understanding of our clients’ needs, learn their systems and culture and jointly define their objectives. Our comprehensive approach provides a secure solution to manage employee data, record and manage transactions directed by employees, managers, and human resources professionals and administer human resources, benefits, and payroll processes. In addition, we transmit and transfer data between our clients and both their employees and outside parties (such as health plans, trustees and investment managers). We also provide employers with web-based tools that enable them to report on and analyze the effectiveness and the return on investment in their benefits, compensation, and human resources programs and facilitate project management with us.

Our outsourcing services enable our clients to satisfy their employees’ and managers’ needs for information, decision-making tools and support, and ability to take action related to benefits, payroll, and human resources. We offer our clients’ employees three ways to communicate with us and manage their benefits and human resources programs: Internet, automated voice response system and call centers. This multiple access approach encourages employees’ self-management of their benefits, which in turn helps our clients control and reduce their human resources and benefits costs. Our web-based tools, Your Benefits Resources^™ and HR WorkWays^™, are fully integrated with the Total Benefit Administration^™ and workforce management platforms and provides employees, managers, and human resource professionals with personalized content and fast, accurate, and easy-to-use decision support tools that allow “real-time” management of their human resources and benefits decisions and transactions. Your Benefits Resources^™ also provides employees with seamless integrated interfaces to outside providers of services such as investment advice and health care provider directories. Automated voice response provides participants certain transaction capabilities over the phone. These self-management solutions can be further enhanced through AccessDirect^™, a personalized directory service that enables employees to connect to their human resources and benefits providers and access services. For employees, managers, and human resources professionals who need more assistance with human resources, payroll or benefits issues, we staff our call centers with employees who have received extensive training in issues specific to the client’s programs.

Health and Welfare. Our health and welfare outsourcing services are a natural extension of our health management consulting capabilities. Administering health and welfare benefit programs is an important and complex task for employers who must manage both the rising cost of providing health insurance and employees’ demands for increased choice of health and welfare benefit options. Every year, each company has a period of time (typically three to four weeks) during which employees are required to make decisions regarding their health and welfare options and enroll in programs for the following year. Each employer must communicate its benefit offerings by providing employees with information explaining the available options and answering employees’ questions regarding the various alternatives. Once employees have submitted their choices, the employer must then accurately communicate these choices to provider organizations. For companies managing benefits administration internally, staffing a human resources department with adequate support to effectively and efficiently handle this annual surge of activity is extremely challenging. Furthermore, ongoing health and welfare administration requires managing payroll deduction and status data that determine each participant’s health plan eligibility and transmitting eligibility data to health plans and providers.

Our technology-based delivery model offers employers a cost-effective and efficient solution to their health and welfare benefits administration needs. We are able to manage the annual enrollment process in a seamless manner for the employer and have the ability to clearly communicate to employees their available choices. We also are able to

6

Table of Contents

deliver significant value to our clients outside of the annual enrollment process and in the context of ongoing benefits administration. For example, Hewitt Associates Connections^™, our automated data management and premium payment process, connects us with more than 250 insurance companies and other health plan providers in the United States, Canada and Puerto Rico, facilitating data transfer, resolving quality issues, validating participant eligibility and paying premiums in order to eliminate overpayment to health plans. Additionally, we offer automatic payment of employees’ portion of program costs, providing significant efficiencies to the employer and helping to ensure that contributions to health plans for inactive employees and retirees are appropriately credited. Further, we document and report issues and statistics to assist plan sponsors in driving better plan performance.

Our services are available to employees 24 hours a day, seven days a week. Your Benefits Resources^™ enables employees to enroll in and manage their health and welfare benefits via the Internet. In addition to using Your Benefits Resources^™ to obtain information about the various options available and model their health and welfare benefit costs under various assumptions, employees can also use our automated voice response system or our call centers. Additionally, ProviderDirect, another web-based service, allows employees to identify in-network medical providers by criteria such as specialty, location and gender. Our Participant Advocacy service provides assistance directly to employees regarding the resolution of health plan eligibility, access and claim issues. In addition, in January 2004, we expect to begin providing Health Care Spending Account administration services through the Internet that will provide employees with a paperless way to manage their health care spending accounts and file claims for reimbursements.

Based on our knowledge of the marketplace and the number of employees to whom we provide services, we believe Hewitt is the largest provider of outsourced health and welfare administrative services. As of September 30, 2003, we were providing health and welfare outsourcing services to 143 plan sponsors, of which 2 were related to the recent NTRC acquisition. We believe our experience and expertise in managing complex health and welfare plan administration issues will be a significant factor in the continued growth of this business, especially as plan sponsors continue to focus on managing the cost of multi-option health and welfare programs.

Defined Contribution. Most companies outsource the administration of their defined contribution plans. Defined contribution administration requires management of significant volumes of participant, payroll and investment fund data and transactions, and daily transaction data transmissions between companies and their defined contribution plan trustees and asset managers, as well as daily posting of investment results to employees’ individual defined contribution accounts.

Unlike many of our competitors who provide defined contribution outsourcing services as a means to accumulate plan assets in their proprietary investment funds, we do not manage investments. As a result, we are able to maintain an objective, independent position regarding our clients’ choices of funds to include in their plans. Our focus is on providing reliable, high quality and comprehensive services to both the plan sponsor and to the employee.

Through our Total Benefit Administration^™ system, we maintain and manage defined contribution data for clients, while accommodating clients’ choices of trustees and investment funds. This allows our clients to provide defined contribution programs that their employees value, transfer the administrative burden for these programs and control costs. In addition, we work with researchers at leading academic institutions to analyze the considerable amounts of data we accumulate to identify trends in participant investment behavior. This additional intelligence allows us to help our outsourcing clients refine their strategy for meeting employees’ investment needs.

We provide web-based access 24 hours a day, seven days a week through our Your Benefits Resources^™ site for employees to make various elections and changes to their defined contribution accounts. Employees can also use our automated voice response system or our call centers to ask questions and make various elections and changes. This is appealing to employees who increasingly desire the ability to actively manage their investments. Through integrated Your Benefits Resources^™ capabilities, we also provide employees with access to investment advice from third party vendors and self-directed brokerage account options through our subsidiary, Hewitt Financial Services, and its alliance with Harrisdirect, a leading provider of on-line brokerage services.

According to a survey conducted by Plan Sponsor magazine, we are the third largest provider of outsourced defined contribution administration services based on number of employees. Based on our knowledge of the marketplace and number of employees to whom we provide services, we believe we are the largest provider of outsourced defined

7

Table of Contents

contribution administration services that is not also an asset manager. As of September 30, 2003, we were providing defined contribution outsourcing services to 159 plan sponsors of which, 46 were related to the recent NTRC acquisition. While the domestic market for defined contribution outsourcing is relatively well-developed, we believe the international markets offer us opportunities for expansion as employers in many countries outside the United States are beginning to adopt defined contribution plans. We believe our global reach and our strategy to increase our international presence will provide an opportunity to grow this service offering. We believe industry consolidation will provide other opportunities for expansion in this area. For example, in 2002, we partnered with National City Corporation to provide 401(k) administration services, including recordkeeping and customer service, to National City Corporation clients.

Defined Benefit. Most mid-sized and large employers continue to sponsor defined benefit (pension) plans. Pension plans are subject to numerous laws and regulations and the administration of them has historically been extremely complex and paper-intensive, resulting in challenges for employers. Because inaccurate or improper plan administration can have significant adverse consequences, many employers seek third-party providers to administer their plans.

Our defined benefit outsourcing services were a natural extension of the retirement and financial management consulting services that we have provided since our inception. Through our Total Benefit Administration^™ system, we have re-engineered, streamlined and shortened the traditional processing of an employee’s retirement. Our approach relies on a high degree of automation for both calculations and execution of transactions for each participant. Total Benefit Administration^™ includes a database that captures all historical data for current and past employees, enabling employers to accurately apply plan provisions to appropriate participant populations, and often times, for multiple plans. Additionally, for employers who are implementing plan changes, Total Benefit Administration^™ offers an Internet channel that provides employers with decision-making support.

Through Your Benefits Resources^™, we provide employees convenient and easy-to-use web based tools to model their benefits based on various retirement dates, information regarding their retirement options, and the ability to initiate and process their retirement on-line. Employees can also use our automated voice response system to model their benefits. Through our call centers, we provide access to pension counselors who are knowledgeable about employees’ pension programs and options and who can explain the often complex process of how their pension plans work.

Based on our knowledge of the marketplace and the number of employees to whom we provide services, we believe we are the largest provider of outsourced defined benefit administration services. Further, we believe that only a small percentage of organizations have outsourced their defined benefit administration to date. As of September 30, 2003, we were providing defined benefit outsourcing services to 112 plan sponsors, of which, 13 were related to the recent NTRC acquisition. We believe there are growth opportunities for us as we continue to leverage our technology, expertise and experience to bring our defined benefit outsourcing services to companies which have not yet outsourced their defined benefit plans.

Workforce Management. We have built on our experience in outsourcing and consulting to provide our workforce management solution. This service enables our clients to outsource a wide range of human resources administrative functions, including workforce administration, rewards management, recruiting and staffing, performance management, learning and development, and talent management. Through our workforce management solution, we enable companies to streamline their human resources administration and processes in order to enhance effectiveness and reduce costs, and to employ web-based technologies to automate processes and transactions. By outsourcing their human resources functions to us, companies are able to receive improved services and tools for employees, managers and the human resources function without having to continually invest capital and resources to keep pace with rapidly developing human resources technologies and processes. This service is provided through a combination of our own capabilities and alliances with other specialized providers.

In fiscal year 2002, we completed initial implementation work for our first workforce management client, the U.S. operations of Sony Electronics, and successfully launched operations on October 1, 2002. We now have four workforce management clients. For our second workforce management client, a large pharmacy benefits management company, our health and welfare outsourcing services started in November 2002 and our defined benefit and workforce management services started in April 2003. Implementation work is also underway for our

8

Table of Contents

third and fourth workforce management clients. The third client is a healthcare organization and we expect that workforce management services will commence in early fiscal 2004. The fourth client is a global financial services organization and we expect that workforce management services will commence on a global basis in the second half of fiscal 2004. During 2003, we also expanded services for our first client. Our new workforce management offering is an important element of our outsourcing growth strategy.

Payroll. Our acquisition of Cyborg gives us the capability to provide payroll services both through licensing and installing software and through a fully outsourced payroll services model. We believe that the demand for payroll services among large companies is significant and growing, and we expect to provide value to clients by applying the same human resources experience, continuous systems enhancement and process improvement to payroll that we have to our other outsourcing services.

Through our payroll business, we now provide installed human resources management system and payroll software as well as outsourced payroll processing. The range of payroll processing services we offer includes: payroll processing, time and attendance management, tax and other regulatory compliance assistance, and year-end tax and other payroll reporting. We expect to build on our experience in human resources outsourcing to extend the core Cyborg system to offer a fully outsourced payroll model.

As a natural extension of the workforce management outsourcing work we do for Sony, we will also begin providing outsourced payroll services to Sony in December 2003.

Consulting

Consulting represented 37% of our net revenues in fiscal 2003. We offer consulting services to a diverse range of clients. In today’s increasingly service and knowledge-based economy, companies regard the effective management of human capital as critical to the success of their business. Companies recognize that in order to attract, motivate and retain talented employees, they must provide benefits, compensation and other human resources programs that employees view as valuable as well as the tools to enable employees to make choices and conduct related transactions.

To meet this need, we provide a wide array of consulting and actuarial services covering the design, implementation and operation of health and welfare, compensation and retirement plans and broader human resources programs and processes. In addition, we use the information and data we collect and analyze through our outsourcing services to develop consulting approaches that are effective and provide value to our clients.

Our consulting services consist of three principal categories:

Health Management. Increasing health care costs present a challenge for many companies at a time when employees expect broader and more cost-effective health care choices and general economic conditions place demands on employers to reduce spending. We believe we have an opportunity to help employers control these escalating costs and take advantage of the transformation of health and welfare benefits from a managed care to a consumer-driven system in which employees are provided with cost and quality information tools to more effectively manage their use of the health care system. Our health management consultants help clients design comprehensive health and welfare strategies, from the initial philosophical approach to specific benefit plan content that supports our clients’ human resources strategies. We assist our clients in the selection of health plans that balance cost and value and improve employee satisfaction. We also help clients determine which funding approaches (i.e., insured, self-insured, or risk adjusted insured) and employee contribution strategies will best meet their objectives.

9

Table of Contents

We help our clients achieve these goals through our proprietary technology applications and tools that we have developed, including:

Our health management consulting business provided services to approximately 390 clients during fiscal year 2003. We believe we continue to be well-positioned to address the growing, complex and changing needs for health benefit management services through our integrated approach, enabling us to provide high-value, cost-effective solutions to meet the specific objectives of our clients.

Our health management consulting business is closely integrated with our health and welfare benefits outsourcing business to provide a comprehensive solution from strategy and design to delivery and administration of health and welfare benefits. We are able to extract detailed design, demographic and health plan cost data from our outsourcing clients and aggregate the data to provide unique insights for our consulting clients into the quality, cost efficiency and rate structure of nearly every local health plan in the United States. Furthermore, due to our health and welfare outsourcing experience, we are able to design programs that not only meet our clients’ business objectives, but that also can be administered, communicated and delivered efficiently and cost effectively. In addition, for our consulting clients that are also outsourcing clients, we are able to leverage the data and knowledge we accumulate through outsourcing to create efficiencies, speed implementation and execution of strategies and enhance our service offering in providing consulting services to them.

Retirement and Financial Management. Virtually all large companies sponsor retirement plans as part of their overall employee benefit programs–either defined benefit plans, defined contribution plans or a combination of these plans. Many large companies also offer retiree medical and life insurance benefits as part of their overall retirement benefit program. Over the past few decades, the liabilities and assets which underlie these programs have grown considerably, and the regulatory and accounting standards which govern retirement plans have become increasingly complex. Additional services are often needed with respect to retirement plans in the case of significant corporate events or changes such as workforce reductions, early retirement programs, mergers or acquisitions. All of this has contributed to a continuing demand for retirement-related consulting.

Our retirement and financial management business, which we refer to as “RFM”, assists clients in three primary activities: (i) developing overall retirement program designs that are aligned with the needs of companies and their employees; (ii) providing the actuarial analysis in support of clients’ plan funding and expensing obligations; and (iii) consulting on asset allocation, investment policies and investment manager evaluation.

There has been significant activity around retirement program redesign, as companies look to simplify plans, better manage overall program costs and risks, and align their program design with their business objectives. Our RFM consultants work with clients to understand their business and workforce strategies, to define their philosophy with respect to retirement programs, and to design programs that reinforce the key messages to their workforce, while also helping to ensure that the programs comply with applicable governmental regulations. To assist in the design process, we have developed a variety of interactive, real-time modeling and analytical tools to help employers understand the effect of program changes on individual employees and to highlight the issues inherent in making an effective transition from one program to another. We measure the competitive position of our clients’ retirement programs using our proprietary Benefit Index^® tool, which calculates the relative value of a company’s benefit program compared to a group of selected companies in the same industry, of similar size or in the same geographic region. We believe Benefit Index^® is the industry benchmark for measuring the relative value of an organization’s retirement program. We also help employers develop individual websites, often with modeling capabilities, to

10

Table of Contents

communicate the details of new retirement programs and often to allow employees to project their own benefits under different assumptions or program choices.

When employers sponsor defined benefit plans or retiree welfare plans, they typically require the services of a qualified actuary. Actuarial relationships tend to be long-standing, ongoing engagements, and actuarial services represent a significant portion of our RFM business. As actuaries for a plan, we calculate the plan’s funded status, the annual cash contribution requirements under applicable governmental requirements, the annual expense impact under applicable accounting standards and other benefit related information for the company’s annual financial statements. In addition to these services, our RFM actuarial consultants provide additional benefit plan services by assisting with the annual budgeting and planning process, preparing financial projections for asset and liability trends (a joint effort with our RFM investment consultants) and providing cost analyses during union negotiations. Our RFM actuarial consultants also assist clients in due diligence investigations and analyses of proposed mergers, asset sales, acquisitions and other corporate restructurings to help our clients understand the implications of such transactions on the liabilities and funded status of the plan, as well as on the future cash contribution and expense trends.

Our RFM investment consultants work with fiduciaries of both defined contribution and defined benefit plans to help them set investment philosophies, determine asset allocations and select asset managers. We also monitor the performance of a large number of asset managers and, since we do not manage assets, we are able to provide clients with objective and independent analysis of investment policies and procedures.

Our RFM consulting business is closely aligned with our defined benefit and defined contribution outsourcing business. With our full range of services, we are able to provide comprehensive retirement program solutions for clients, from strategy and design of retirement plans to actuarial and investment services and administration, communication and implementation of retirement plans. For consulting clients that are also outsourcing clients, we are able to leverage the data and knowledge we accumulate through outsourcing to assist them in developing plan design features and actuarial services better suited to their specific needs.

Our RFM consulting business provided services to approximately 1,680 clients during fiscal year 2003. We expect that our RFM services will continue to contribute to our overall growth, especially as clients have begun to adopt a global outlook and focus on selecting consultants with international capabilities. Over the past several years, we have expanded our global RFM capabilities significantly, through both internal growth and a series of acquisitions and alliances in Canada, France, Germany, Hong Kong, Ireland, Mexico, The Netherlands, Norway, Portugal, Sweden, Switzerland and the United Kingdom.

On June 5, 2002, we acquired the benefits consulting business of Bacon & Woodrow, a leading actuarial and benefits consulting firm in the United Kingdom. We refer you to Note 6 to the consolidated and combined financial statements for additional information on this acquisition. Our increased presence in the United Kingdom, where many of our clients also have significant operations, has enhanced our ability to offer global design, communication, actuarial and investment consulting services.

Talent and Organization Consulting. Our talent and organization consulting business is focused on four primary activities: (i) devising strategies for attracting, developing, motivating, rewarding and retaining the leadership and other talent our clients need to succeed; (ii) providing solutions to the people-related issues arising from organizational change (such as mergers and acquisitions); (iii) helping create and implement customized reward and performance management programs, including annual incentives, stock options and other performance-based plans; and (iv) reducing costs and enhancing our clients’ productivity through more effective human resource functions and processes.

Our services continue to focus on helping our clients address the challenges of finding, managing, engaging and rewarding talented employees and leaders. Meeting these challenges successfully is expected to become even more important as the competition for talent becomes more intense. The U.S. Bureau of Labor Statistics has estimated that the number of 25 to 44-year-old workers is expected to drop from approximately 70 million in 2000 to 68 million by 2010, while the trend of low unemployment among college educated professionals (2.9% in 2002) continues. There are similar trends in other countries globally. We expect competition for qualified people to intensify as the pool for

11

Table of Contents

talent decreases but the need for that talent increases. We believe this trend makes our services that much more valuable and attractive to clients.

Through our numerous talent and rewards tools, data and services, we help companies align their human resources investments with their business objectives, identifying critical human resources practices based on a given business environment, geography and labor force situation. For example, our Total Compensation Measurement^™ and Variable Compensation Measurement^™ tools enable clients to analyze and assess compensation effectiveness and to compare their compensation programs with over 590 companies in the U.S. alone, including approximately 75 of the Fortune 100. We also help clients use focus groups, interviews, surveys and other methods to better understand their workforce, enhance their relationships with their employees and encourage the types of behavior that ensure business success.

Our talent and organization consultants also assist clients with significant human resources issues arising out of events such as mergers and acquisitions, divestitures, initial public offerings, spin-offs, joint ventures and other restructurings. In each of these organizational changes, people play a critical role in determining the ultimate success or failure of the transactions. Our Hewitt Mergers & Acquisitions Management Center^™, a website supporting project management and providing access to technical expertise needs ranging from due diligence to integration, enables seamless collaboration between our clients, consultants and external service providers. Since January 2000, we have provided organizational change services in connection with over 550 transactions, giving us important gateways into companies with whom we have not historically had firm-wide consulting relationships. We expect this number will grow even larger as we target and increase our investment in building new business with large multinationals headquartered outside North America.

Our human resources effectiveness consulting service helps clients reduce human resources operating costs, generate more productivity in the workforce, and drive more effective people-related decisions. Our consultants employ technologies and tools to analyze the activities and costs of the human resources function in order to improve efficiencies, reduce costs and enhance effectiveness of the function.

Our talent and organization consulting business provided services to approximately 900 clients during fiscal year 2003. As companies continue to expand globally and seek assistance in developing and implementing successful organizational change, we anticipate that our services will be in increasing demand. As demographic projections indicate an increasing shortage of talent globally, we also expect that clients will require assistance in creating effective strategies for attracting and retaining talent and for compensating them in a way that is aligned and consistent with broader business objectives.

Our talent and organization consulting business is closely aligned with our workforce management outsourcing services to help clients transform their human resources processes and improve the efficiency and effectiveness of the human resources function. We also provide communication, training and change management services to support this transformation. We believe we will be able to leverage our deep human resources knowledge and consulting experience in this transformation process to benefit additional outsourcing clients in the future.

Client Development

We have an integrated, strategic approach to client development that helps us establish deep, long-term client relationships based on trust and partnership. Unlike many firms, we have had a dedicated group managing this process for more than 30 years.

We view our clients’ human capital management challenges as an integrated whole, and offer solutions to those challenges that bring together our best thinking on health care management, retirement management, talent and organization change, and human resources services delivery. We believe this differentiates us from other providers of either consulting or outsourcing services.

Our client development employees play an important role in helping us understand and assess our clients’ human resources challenges in the context of their overall business. They also help to formulate comprehensive solutions that account for and incorporate the complete range of human resources strategy, design, implementation,

12

Table of Contents

communication, administration, and customer services in an integrated fashion across and within our outsourcing and consulting businesses.

Our client development employees are responsible for expanding our client base, developing additional business with existing clients and overall client satisfaction. In addition, they are responsible for ensuring that our work is delivered to both our and our clients’ standards and expectations.

The acquisition and management of our client relationships is supplemented and supported by teams of employees from the various disciplines within our business. These employees help us ensure that we have both the proper coverage and appropriate expertise to demonstrate to clients that we have the capabilities required to address the most complex human resources challenges these organizations face.

We serve a diverse client base and do not experience significant industry concentration among our clients. Also, no client represented more than 10% of net revenues in fiscal 2003, 2002 or 2001.

Intellectual Property

We recognize the value of intellectual property in the marketplace and vigorously create, harvest and protect our intellectual property. Our success has resulted in part from our proprietary methodologies, processes, databases and other intellectual property, such as our Total Benefit Administration^™ system, Benefit Index^® and other measurement tools.

To protect our proprietary rights, we rely primarily on a combination of:

We hold no patents and our licenses are ordinary course licenses of software and data. While we have a number of trademarks, including some obtained in the Bacon & Woodrow acquisition, none of our trademarks are material to the operation of our business.

Competition

We operate in a highly competitive and rapidly changing global market and compete with a variety of organizations. In addition, a client may choose to use its own resources rather than engage an outside firm for human resources solutions.

Outsourcing. The principal competitors in our benefits outsourcing business are outsourcing divisions of large financial institutions, such as CitiStreet (a partnership between subsidiaries of State Street and Citigroup), Fidelity Investments, Mellon Financial (through its subsidiary, Mellon HRSolutions), Merrill Lynch, Putnam Investments, T. Rowe Price and the Vanguard Group, and other firms that provide benefits outsourcing services such as Towers Perrin. Some of our payroll competitors include Automatic Data Processing, Ceridian and Paychex while our principal workforce management competitors include some of our benefits outsourcing competitors and companies such as Accenture, Electronic Data Systems and Exult.

Consulting. The principal competitors in our consulting business are consulting firms focused on broader human resources, such as Mercer Human Resource Consulting, Towers Perrin and Watson Wyatt Worldwide. We also face competition from smaller benefits and compensation firms, as well as from public accounting, consulting and insurance firms offering human resources services.

We believe that the principal competitive factors affecting both our outsourcing and consulting businesses are the ability to commit resources and successfully complete projects on a timely and cost-effective basis, our perceived

13

Table of Contents

ability to add value in a cost-effective manner, our employees’ technical and industry expertise, and our professional reputation.

Technology Innovation

We believe that our technological capabilities are an essential component of our strategy to grow our benefits outsourcing business and create new service offerings. As of September 30, 2003, we had approximately 1,600 employees engaged in technology functions including research and development, application development and integration and operations. Technology and telecommunication expenses, excluding related employee compensation, were $193 million in 2003, $180 million in 2002 and $171 million in 2001.

We have a long history of technological innovation. Our strategy is to develop custom solutions through open industry standards when we believe we can develop a better solution than is available in the market, and to integrate existing best-in-class systems when we believe these solutions meet our clients’ needs. We were early adopters of XML-based web services for interaction with our clients, and we develop systems that are adaptable across multiple delivery channels (Internet, automated voice response and call center). We have relationships with a number of our suppliers that allow us to routinely test and evaluate their products while they are still in their development stages and before they are generally available, keeping us on the leading edge of technology-based solutions.

In 1991, we introduced the Total Benefit Administration^™ system, which we believe is the first technology platform for outsourcing the administration of the three major benefit service areas in an integrated fashion. Examples of recent technology-based service enhancements include:

Organizational Structure

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 our transition to a corporate structure on May 31, 2002. We use the term “Hewitt Holdings” to refer to Hewitt Holdings LLC.

We completed our transition to a corporate structure on May 31, 2002. Prior to that time, we operated as a series of related limited liability companies under the control of Hewitt Holdings. In connection with our transition to a corporate structure, Hewitt Associates, Inc. was formed as a subsidiary of Hewitt Holdings and Hewitt Holdings transferred all of its ownership interests in Hewitt Associates LLC to Hewitt Associates, Inc. in exchange for shares of our Class B common stock. Each owner retained an interest in Hewitt Holdings following the transition.

14

Table of Contents

On July 1, 2003, Hewitt Holdings distributed the shares of Class B common stock of Hewitt Associates it held in beneficial ownership on behalf of its owners, with the exception of certain owners resident outside the United States who will continue to hold their shares through Hewitt Holdings. The distribution reduced Hewitt Holdings’ majority interest in Hewitt Associates of approximately 71% at June 30, 2003, to a minority interest of approximately 2% at September 30, 2003. The shares continue to be subject to the same restrictions with respect to transfer and book to market phase-in as they were when the shares were held by Hewitt Holdings. Also, with respect to voting, all Class B and Class C shares continue to be voted in accordance with the majority vote of those Class B and Class C stockholders participating in a preliminary vote of such holders. At September 30, 2003, the number of Class B and Class C shares outstanding totaled 68,024,381 or approximately 69% of common stock outstanding.

For additional information on our organizational structure, please see information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 1, 3 and 4 of the notes to the consolidated and combined financial statements.

Contracts and Insurance

We have contracts with many of our clients that define our responsibilities and limit our liability. In addition, we maintain professional liability insurance that covers the services we provide, subject to applicable deductibles and policy limits.

Employees

As of September 30, 2003, we had approximately 15,000 employees serving our clients through 82 offices in 30 countries, including joint ventures and minority investments. Of these employees, approximately 8,600 employees were in the Outsourcing segment, approximately 3,500 employees were in the Consulting segment and approximately 2,900 employees were in information systems, human resources, client development, overall corporate management, finance and legal services, general office support and space management.

Website Access to Company Reports and Other Information

We make available free of charge through our website, www.hewitt.com, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Our internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

We have adopted a Code of Conduct that applies to all employees as well as our Board of Directors and corporate governance guidelines for our Board of Directors. The Code of Conduct and corporate governance guidelines, as well as the Charters for the two committees of our Board of Directors, the Audit Committee and the Compensation and Leadership Committee, are posted on our website www.hewitt.com. Copies of these documents will be provided free of charge upon written request directed to Investor Relations, Hewitt Associates, Inc. 100 Half Day Road, Lincolnshire, IL 60069.

Our principal executive offices are located in Lincolnshire, Illinois with a mailing address of 100 Half Day Road, Lincolnshire, Illinois 60069. Our Lincolnshire complex comprises 13 buildings on three campuses and approximately 2.4 million square feet. As of September 30, 2003, we had a total of 82 offices in 30 countries and operated 9 additional offices in 8 countries and territories through joint ventures and minority investments. We do not own any significant real property. Substantially all of our office space is leased under long-term leases. We lease most of our office space, including a portion of our principal executive offices in Lincolnshire, Illinois from Hewitt Holdings LLC (and/or subsidiaries thereof). We refer you to Note 15, Related Party Transactions, in the notes to the consolidated and combined financial statements for information on these arrangements. We believe that our existing facilities are adequate for our current needs and that additional space will be available as needed.

15

Table of Contents

We are not engaged in any legal proceeding that we expect to have a material adverse effect on our business, financial condition or results of operations. In the ordinary course of our business, we are routinely audited and subject to inquiries by government and regulatory agencies.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2003.

PART II

Common Stock Market Information

Our Class A common stock is traded on the New York Stock Exchange (NYSE) under the symbol HEW. The following table sets forth the range of high and low sales prices for each quarter since our initial public offering on June 27, 2002.

There is no established public trading market for Hewitt’s Class B or Class C common stock.

Holders Of Record

As of October 31, 2003, there were 789 shareholders of record of our Class A common stock, 38 shareholders of record of our Class B common stock, and 51 shareholders of record of our Class C common stock, as furnished by our Stock Transfer Agent and Registrar, EquiServe. Several brokerage firms, banks and other institutions (“nominees”) are listed once on the shareholders of record listing. However, in most cases, the nominees’ holdings represent blocks of our stock held in brokerage accounts for a number of individual shareholders. As such, our actual number of shareholders is difficult to estimate with precision, but would be higher than the number of registered shareholders of record.

Dividend Policy

We have not paid cash dividends on our common stock. Our board of directors re-evaluates this policy periodically. Any determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements, terms of our financing arrangements and such other factors as the board of directors deems relevant.

16

Table of Contents

The selected financial data set forth below should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated and combined financial statements, notes thereto and other financial information included elsewhere herein.

17

Table of Contents

The following information should be read in conjunction with our consolidated and combined financial statements and related notes, included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management’s expectations. Please see additional risks and uncertainties described below and in the “Notes Regarding Forward-Looking Statements” which appears later in this section.

We use the terms “Hewitt”, “the Company”, “we”, “us”, and “our” to refer to the business of Hewitt Associates, Inc. and its subsidiaries and, with respect to the period prior to May 31, 2002, the date of our transition to a corporate structure, the businesses of Hewitt Associates LLC, its subsidiaries and its then affiliates, Hewitt Financial Services LLC and Sageo LLC (“Hewitt Associates and Affiliates”).

We use the term “Hewitt Holdings’ owner” in this Annual Report on Form 10-K to refer to the individuals who are members of Hewitt Holdings LLC, most of whom are our employees.

All references to years, unless otherwise noted, refer to our fiscal years, which end on September 30. For example, a reference to “2003” or “fiscal 2003” means the twelve-month period that ended September 30, 2003. 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 Annual Report on Form 10-K. 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 6 to our consolidated and combined financial statements for fiscal 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.

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

18

Table of Contents

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 the results of the Outsourcing segment from the acquisition date (see Note 6 to the consolidated and combined financial statements).

On June 15, 2003, the Company acquired substantially all of the assets of Northern Trust Retirement Consulting, 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 results of NTRC are included in the results of the Outsourcing and Consulting segments from the acquisition date (see Note 6 to our consolidated and combined financial statements).

On July 1, 2003, Hewitt Holdings distributed the shares of Class B common stock of Hewitt Associates it held in beneficial ownership on behalf of its owners, with the exception of certain owners resident outside the United States who will continue to hold their shares through Hewitt Holdings. The distribution reduced Hewitt Holdings’ majority interest in Hewitt Associates of approximately 71% at June 30, 2003, to a minority interest of approximately 2% at September 30, 2003. The shares continue to be subject to the same restrictions with respect to transfer and book to market phase-in as they were when the shares were held by Hewitt Holdings. Also, with respect to voting, all Class B and Class C shares continue to be voted in accordance with the majority vote of those Class B and Class C stockholders participating in a preliminary vote of such holders. At September 30, 2003, the number of Class B and Class C shares outstanding totaled 68,024,381 or approximately 69% of common stock outstanding.

On August 6, 2003, owners, former Bacon & Woodrow partners and certain key employees sold 9,852,865 shares of the Company’s Class A common stock in a registered secondary offering. On August 11, 2003, the underwriters exercised their over-allotment option to purchase an additional 1,477,929 shares from the selling stockholders. The offering was initiated pursuant to a request under a registration rights agreement which we and Hewitt Holdings entered into at the time of our initial public offering.

Segments

We have two reportable segments:

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.

Outsourcing

Since we first began providing outsourcing services in 1991, we have made significant investments in technology, personnel and office space to build our capabilities and address market opportunity. To maintain our outsourcing leadership position, we remain committed to making significant ongoing investments in technology, infrastructure, and people, in expanding our business and driving greater efficiencies. With the investments that we have made in

19

Table of Contents

the benefits administration business to date, our recent acquisitions of Cyborg and NTRC and investments in workforce management, we expect to be able to continue to improve our capabilities and attract new clients.

Consulting

In our consulting business, we are engaged by our clients to provide a wide range of human resources services. We experience a high level of recurring work because of our clients’ annual needs for certain of our services, such as actuarial valuations of defined benefit plans and consultation regarding the processes of compensation review and health plan selection and negotiation. Certain of our consulting services, however, support more discretionary or event-driven client activities, including the re-engineering of a client’s human resources policies, corporate restructuring and change (e.g. mergers and acquisitions), and programs and projects designed to improve human resources effectiveness. As we have seen in our business and industry, the demand for these services can be affected by general economic conditions, the financial position of our clients and the particular strategic activities they may be considering, and, therefore, is variable from period to period and difficult for us to predict.

Sageo

In January 2000, Hewitt Holdings’ owners launched a new business, Sageo, with the intention of creating a stand-alone, Internet-based company that would provide a standardized set of health and welfare offerings to companies seeking less complex benefit solutions. By the second half of fiscal 2001, Sageo had achieved reasonable sales success, however, Hewitt Holdings’ owners determined that it was not cost-effective to operate Sageo as a separate company since its stand-alone costs would likely exceed revenues for an extended period of time and because Sageo’s services had become a logical extension of the Hewitt offering.

In the quarter ended September 30, 2001, the decision was made to transition Sageo’s clients from Sageo’s website to the Total Benefit Administration^™ web interface. Stand-alone company expenses were eliminated, Sageo website development spending ceased and the Sageo employees who worked within the stand-alone Sageo operation were terminated or redeployed. At that time, since we had decided to discontinue the use of the Sageo website, we wrote off our remaining investment in the Sageo software (resulting in a $26 million non-recurring charge). Sageo’s clients continue to be served as a fully integrated element of the Outsourcing segment.

We believe that in order to analyze the historical results of our business, it is important to understand the effect that Sageo as a stand-alone operation (which it was during fiscal 2000 and fiscal 2001) had on our financial results.

20

Table of Contents

In fiscal years 2001 and 2000, Sageo’s operating losses were $73 million and $21 million, respectively. In fiscal 2002, during which time Sageo first operated with a significantly reduced cost structure as a part of Hewitt, Sageo contributed $2 million (which includes a $1 million reduction in an accrued liability established during fiscal 2001) to our operating income. In fiscal 2003, incremental operating costs for Sageo were not significant in relation to our Outsourcing segment or total consolidated results. The annual results of Sageo for the years ended September 30, 2002, 2001 and 2000, are included in the following table:

Sageo Historical Financial Results

(in thousands)

Critical Accounting Policies and Estimates

Revenues

Revenues include fees generated from outsourcing contracts and from consulting services provided to our clients. Of our $2.0 billion of net revenues for fiscal 2003, 63% was generated in our Outsourcing segment and 37% was generated in our Consulting segment.

Under our outsourcing contracts, our clients generally agree to pay us an implementation fee and an ongoing service fee. The implementation fee may cover 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). 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

21

Table of Contents

and collectibility of our fee is reasonably assured. Ongoing service fees are generally billed and recognized on a monthly basis, typically based on the number of plan participants and services and often with a minimum monthly fee. Therefore, a weakening of general economic conditions or the financial condition of our clients, which could lead to workforce reductions (and potentially participant reductions), could have a negative effect on our outsourcing revenues. Services provided outside the scope of our outsourcing contracts are typically billed and recognized on a time-and-materials or fixed fee basis.

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

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, with the payment of an early-termination charge. Normally, if a client terminates a contract or project, the client remains obligated to pay for services performed (including any unreimbursed implementation charges).

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. 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.

Deferred Contract Costs and Deferred Contract Revenues

For new outsourcing services, upfront implementation efforts are required to set up a client and their human resource or benefit programs on our systems. The direct implementation or “set up” costs and any upfront set up fees are deferred and recognized into earnings over the life of the outsourcing agreement. Specific, incremental and direct costs of implementation are deferred and recognized as primarily compensation and related expenses evenly over the period between the initiation of ongoing services through the end of the contract term. Implementation fees may be received either upfront or over the ongoing services period in the fee per participant. By deferring the upfront set up fees over the ongoing services period, all set up revenues are recognized evenly over the contract term along with the corresponding deferred contract costs.

As of September 30, 2003 and 2002, net deferred contract costs in excess of deferred contract revenues totaled $22 million and $1 million, respectively. We have reclassified deferred contract costs and deferred contract revenues to show the gross amounts separately on the consolidated balance sheets. In prior periods, both short-term and long-term portions of deferred costs and revenues were recorded in prepaid expenses and other current assets, non-current other assets, advanced billings to clients and other long-term liabilities. As a result of the reclassification, total net assets and liabilities did not change, however, total assets and total liabilities and shareholders’ equity increased by equal amounts, or approximately $117 million and $128 million as of September 30, 2003 and 2002, respectively. Additionally, at September 30, 2003, a small portion of the deferred contract revenues includes deferred revenue on payroll software maintenance agreements.

Deferred contract costs and deferred contract revenues were the following at interim reporting dates (in thousands):

22

Table of Contents

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 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 period.

Goodwill and Other Intangible Assets

On October 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. 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 years ended September 30, 2003, 2002 and 2001, 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 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 stock-based compensation, we refer you to Note 17 to the consolidated and combined financial statements.

23

Table of Contents

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.

As of September 30, 2003, nonqualified stock options to acquire a total of 7,791,989 shares of Class A common stock were outstanding. Had we determined compensation cost for the stock options granted using the fair value method as set forth under SFAS No. 123, during fiscal 2003 and 2002, we would have recorded approximately $5.4 million and $1.1 million, respectively, in additional expense, and reported net income of $89 million and $189 million, respectively. The net earnings per basic and diluted share for the year ended September 30, 2003 would have been $0.94 and $0.92, 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 ($0.05) for the year ended September 30, 2003. For fiscal 2002, the net loss applicable to common stockholders for the period from May 31, 2002 through September 30, 2002, would have been $24 million and the net loss per basic and diluted share would have been ($0.28). The difference between the net loss per share as reported and the net loss per share under the provisions of SFAS No. 123 would have been ($0.01) in 2002.

In December 2002, approximately 2,059,301 shares, constituting 36% of our outstanding restricted stock awards, vested, which included 91,458 restricted stock units that converted to Class A common stock and additional paid-in capital. 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 September 30, 2003, 2,437,611 shares of restricted stock and 173,998 restricted stock units remain unvested. The related deferred compensation expense of $46 million will be recognized as compensation expense evenly over the remaining vesting periods 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.

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.

24

Table of Contents

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.

Provision for Income Taxes

Prior to May 31, 2002, taxes on income earned by the combined predecessor limited liability companies 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 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.

Income Before Taxes and Owner Distributions and Net Income

Prior to May 31, 2002, we operated as a group of affiliated limited liability companies and recorded income before taxes and owner distributions in accordance with accounting principles generally accepted in the United States. 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.

25

Table of Contents

Historical Results of Operations

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

26

Table of Contents

Fiscal Years Ended September 30, 2003, 2002 and 2001

Revenues

Net revenues were $1,982 million in 2003, $1,716 million in 2002 and $1,476 million in 2001. Net revenues increased by 15% in 2003 and by 16% in 2002. Adjusting for the effects of acquisitions and the favorable effects of foreign currency translation, net revenues grew 5% in 2003 and 13% in 2002. Outsourcing net revenues increased by 12% to $1,247 million in 2003, by 17% to $1,115 million in 2002, and by 19% to $952 million in 2001. Excluding the effects of the acquisitions of Cyborg and NTRC in 2003, Outsourcing net revenues increased 9% in 2003. Revenue growth in our outsourcing business in 2002 and 2003, was from increased participant volume through the expansion of services with existing and new clients. Growth in 2003 was offset in part by lower pricing on new client services and renewals. In 2003, we saw continued softness in the U.S. economy and a more competitive environment for outsourcing services. Consulting net revenues increased by 22% to $734 million in 2003, by 15% to $601 million in 2002, and by 10% to $524 million in 2001. Consulting net revenues in 2003 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 of 2003. Adjusted for the effects of these acquisitions and favorable foreign currency translation, Consulting net revenues were flat in 2003 and increased 6% in 2002. Growth in retirement plan and health benefit management consulting in 2002 and 2003 was offset by declines in demand for our more discretionary consulting services in 2002 and to a greater extent in 2003. In 2001, we experienced growth across the entire spectrum of our consulting services, including significant growth in international operations.

Compensation and Related Expenses

Compensation and related expenses were $1,269 million in 2003, $1,015 million in 2002 and $838 million in 2001. These expenses increased by 25% in 2003, by 21% in 2002 and by 17% in 2001. Please note that 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. Additionally, the acquisitions of Bacon & Woodrow, Cyborg and NTRC increased compensation expense in 2002 and 2003 and the Sageo business contributed $34 million of compensation expense in 2001. The net increase in overall compensation and related expenses in 2003 over 2002 after the inclusion of estimated owner compensation and the exclusion of the non-recurring charges in 2002, was primarily due to the inclusion of Bacon & Woodrow’s compensation and related expenses, cost of living increases, increases in employee headcount from 2003 acquisitions, and increases in Outsourcing personnel to support the growth of benefit administration outsourcing and workforce management. Adjusting for the effects the acquisitions, Sageo, the incorporation one-time charges, and including estimated owner compensation of $108 million and $147 million in 2002 and 2001, respectively, compensation and related expenses as a percentage of net revenues was 64% for 2003 and 2002 and 65% in 2001.

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 $67 million were recorded as initial public offering restricted stock award expense from June 27, 2002 through September 30, 2003, of which $39 million was recorded in 2003 and $28 million in 2002. The increase in the initial public offering restricted stock award expense in 2003 related to the timing of the vesting of the awards. The remaining $46 million of unearned compensation will be recognized evenly through June 27, 2006, and adjusted for payroll taxes and forfeitures as they arise.

27

Table of Contents

Other Operating Expenses

Other operating expenses were $396 million in 2003, $358 million in 2002, and $337 million in 2001. These expenses increased by 11% in 2003, by 6% in 2002, and by 10% in 2001. Other operating expenses included increased costs from acquisitions in 2002 and 2003 and Sageo expenses of $9 million in 2001. The $38 million increase in other operating expenses in 2003 primarily reflects the inclusion of Bacon & Woodrow since the date of acquisition as well as the inclusion of acquisitions made by the Company in 2003, increased depreciation and amortization expenses on buildings, computer equipment and software and increased computer maintenance expenses. These increases were partially offset by lower telecommunications expenses in our Outsourcing segment as compared to fiscal 2002. There was a $20 million increase in other operating expenses in 2002 from 2001, which primarily reflects the inclusion of Bacon & Woodrow since the acquisition on June 5, 2002, along with increased spending in technology and maintenance expense in Outsourcing, offset in part by lower depreciation expenses on computer equipment and lower software maintenance expenses. Adjusting for the effects of the acquisitions in 2002 and 2003 and Sageo in 2001, other operating expenses as a percentage of net revenues was 20% in 2003 and 2002 and 22% in 2001. The decrease as a percentage of net revenues in 2002 was primarily the result of revenue growing at a faster rate than other operating expenses and our leveraging prior technology and occupancy costs to support expanded and new business.

Selling, General and Administrative Expenses

SG&A expenses were $100 million in 2003, $76 million in 2002, and $88 million in 2001. These expenses increased by 31% in 2003, decreased by 14% in 2002 and increased by 16% in 2001. SG&A expenses included increased costs and amortization of intangible assets from acquisitions in 2002 and 2003 and Sageo expenses of $14 million in 2001. SG&A expenses increased $24 million in 2003 from 2002, which primarily reflects the inclusion of Bacon & Woodrow since the acquisition as well as the inclusion of the 2003 acquisitions from their respective acquisition dates, and increased travel and insurance expense in 2003. There was a $2 million increase in SG&A expenses in 2002, after excluding the effects of Sageo in 2001, which primarily reflects the operations of Bacon & Woodrow since the acquisition on June 5, 2002, offset in part by lower client-related and internal travel-related expenses. Travel expenses were lower in 2002 following the events of September 11, 2001. Adjusting for the effects of the acquisitions in 2002 and 2003 and Sageo in 2001, SG&A expenses as a percentage of net revenues was 5% in 2003 and 2002 and 6% 2001.

Non-Recurring Software Charge

In the three months ended September 30, 2001, the decision was made to transition Sageo’s clients from Sageo’s website to the Total Benefit Administration^™ web interface. Stand-alone company expenses were eliminated and Sageo website development spending ceased. At that time, since we had decided to discontinue the use of the Sageo website, we wrote off our remaining investment in the Sageo software, resulting in a $26 million non-recurring charge, and terminated or redeployed the Sageo employees who worked within the stand-alone Sageo operation.

Other Expenses, Net

Other expenses, net were $17 million in 2003, $17 million in 2002, and $3 million in 2001. As a percentage of net revenues, other expenses, net was 1% or less in all three years. Interest expense was $20 million in 2003, $16 million in 2002, and $16 million in 2001. The increase in interest expense in 2003 over 2002 is primarily due to the addition of a full year of interest expense on our two new capital leases for office space, which we executed in the third quarter of 2002. Interest expense remained flat in 2002 from 2001 despite a portion of our short-term debt being repaid with proceeds from the initial public offering because of the two new office capital leases and their related interest expense. In 2002, other expenses, net also included a loss from a foreign currency option contract purchased in connection with our acquisition of the benefits consulting business of Bacon & Woodrow which expired in 2002. In 2001, other expenses, net included a $5 million gain on an investment related to stock that we received in connection with the demutualization of an insurance company and sold in 2001.

28

Table of Contents

Provision for Income Taxes

The provision for income taxes was $66 million for the year ended September 30, 2003, compared to $33 million in 2002. The increase in the provision for income taxes in 2003, is primarily due to earnings being taxed for the full year in 2003 as compared to only four months in 2002, as a result of the timing of the Company’s transition to a corporate structure on May 31, 2002 and related one-time charges in June 2002. Approximately $22 million of the $33 million tax expense for fiscal 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 $11 million represents income tax expense arising from earnings between May 31, 2002, and September 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.

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, overall corporate management, finance and legal services, general office support and space management. 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, human resources and the direct client delivery activities provided by the client development function are, however, 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.

29

Table of Contents

Reconciliation of Segment Results to Total Company Results

(in thousands)

30

Table of Contents

Outsourcing

Fiscal Years Ended September 30, 2003, 2002 and 2001

Outsourcing net revenues were $1,247 million in 2003, $1,115 million in 2002, and $952 million in 2000. Net revenues increased by 12% in 2003, by 17% in 2002, and by 19% in 2001. Revenue growth in 2003 was due, in part, to the addition of revenues from the newly acquired Cyborg and NTRC. Excluding the effects of the acquisitions, Outsourcing net revenues increased 9% in 2003. In 2003, approximately one-half of our organic Outsourcing net revenue growth was from the addition of new clients and the other half from expanding services with existing clients. Increased participant volume was offset in part by lower pricing on new client services and renewals as we saw continued softness in the U.S. economy and a more competitive environment for outsourcing services. Approximately one-quarter of our net revenue growth in 2002 was a result of adding new clients with the remainder of the growth from expanding servicing with existing clients.

Outsourcing segment income, before the non-recurring software charge in 2001, as a percentage of outsourcing net revenues was 20% in 2003, 24% in 2002, and 17% in 2001. Excluding the effects of the acquisitions in 2003 and Sageo’s $73 million of operating losses in 2001 and including estimated owner compensation of $22 million and $32 million in 2002 and 2001, respectively, segment income as a percentage of Outsourcing net revenues was 20%, 22% and 19% in 2003, 2002 and 2001, respectively. The decrease in margin in 2003 from 2002 primarily relates to our continued investment in the development of our workforce management service offering. The margin improvement in 2002 over 2001 reflects the leveraging of our technology and occupancy costs, as well as efforts to improve efficiencies with current clients.

Consulting

Fiscal Years Ended September 30, 2003, 2002 and 2001

Consulting net revenues were $734 million in 2003, $601 million in 2002, and $524 million in 2001. Net revenues increased by 22% in 2003, by 15% in 2002, and 10% in 2001. 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 of 2003. Adjusting for the effects of these acquisitions and favorable foreign currency translation, Consulting net revenues remained flat in 2003 and increased 6% in 2002. Growth in retirement plan and health benefit management consulting in 2002 and 2003 was offset by declines in demand for our more discretionary consulting services in 2002 and to a greater extent in 2003. In 2001, we did experience growth across the entire spectrum of our consulting services, including significant growth in international operations.

Consulting segment income as a percentage of consulting net revenues was 19% in 2003, 27% in 2002 and 32% in 2001. Adjusting for effects of the acquisitions in 2003 and 2002 and including estimated owner compensation of $57 million and $79 million in 2002 and 2001, respectively, segment income as a percentage of Consulting net revenues was 19%, 16% and 15% in 2003, 2002 and 2001, respectively. The increase in margins between 2003 and 2002 is primarily due to an increase in retirement plan and health benefit consulting services over our more discretionary consulting services which were down due to continued soft demand for those services in 2002 and 2003.

31

Table of Contents

Quarterly Results

The following tables set forth the unaudited quarterly financial data for the periods indicated. The information for each of these periods has been prepared on the same basis as the audited consolidated and combined financial statements and, in our opinion, reflects all adjustments consisting only of normal recurring adjustments necessary to present fairly our financial results. Operating results for previous periods do not necessarily indicate results that may be achieved in any future period. Amounts are in millions, except per share information.

32

Table of Contents

Seasonality and Inflation

Revenues and income vary over the fiscal year. Within our Outsourcing segment, we generally experience a seasonal increase in our fiscal fourth and first quarter revenues because our clients’ benefit enrollment processes typically occur during the fall. In contrast, within our Consulting segment, we typically experience a seasonal peak in the third and fourth fiscal quarters which reflects our clients’ business needs for these services. We believe inflation has had little effect on our results of operations during the past three years.

Pro Forma Results of Operations

During fiscal 2002, we 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 had occurred on October 1, 2001, the beginning of fiscal 2002, and exclude any non-recurring adjustments, to allow for comparability. Fiscal year 2001 pro forma results have not been presented as supplemental information as we believe those results are not comparable to the current year results primarily because of the Sageo operating losses incurred in 2001 and because the consulting business of Bacon & Woodrow that we acquired in June 2002 did not operate as a stand alone business for the majority of fiscal year 2001 (see Note 6 to the consolidated and combined financial statements for pro forma Bacon & Woodrow results). We believe that pro forma fiscal 2002 results provide more meaningful information for comparison with fiscal 2003 results. Current year results, as shown in the consolidated and combined statement of operations for the year ended September 30, 2003, include the effects of all three transactions and, as such, are not shown on a pro forma basis.

The Bacon & Woodrow historical results in the following pro forma combined and consolidated income statements reflect Bacon & Woodrow’s results prior to the acquisition on June 5, 2002. As such, for the year ended September 30, 2002, the historical results for Bacon & Woodrow reflect approximately eight months of Bacon & Woodrow’s results prior to the acquisition. The historical results of Hewitt for fiscal 2002 include Bacon & Woodrow’s results since June 5, 2002.

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. The “Pro Forma Combined and Consolidated Income Statements” and accompanying notes should be read in conjunction with our Pro Forma Results of Operations and our financial statements and the related notes in our Registration Statement (No. 333-105560) on Form S-3 filed with the Securities and Exchange Commission in connection with our secondary offering and our consolidated and combined financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

33

Table of Contents

Hewitt Associates, Inc.

Pro Forma Combined and Consolidated Income Statements

(unaudited)