FAIR ISAAC & COMPANY INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

--------------------

FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

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

For the transition period from __________________ to __________________

Commission File Number
0-16439

FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)

DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

200 Smith Ranch Road, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (415) 472-2211

--------------------

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 ____.

The number of shares of Common Stock, $0.01 par value per share,
outstanding on August 9, 2002, was 51,029,373.

1

TABLE OF CONTENTS

Page
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.............................................................. 3

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................. 14

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................ 33

PART II. OTHER INFORMATION

ITEM 6. Exhibits and Reports on Form 8-K.................................................. 35

SIGNATURES ............................................................................. 36

2

PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements

FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and September 30, 2001
(in thousands)
(UNAUDITED) (AUDITED)

June 30, September 30,
2002 2001
--------- ---------

Assets
Current assets:
Cash and cash equivalents $ 42,013 $ 24,608
Short-term investments 16,822 13,800
Accounts receivable, net 55,522 51,619
Unbilled work in progress 28,943 28,452
Prepaid expenses and other current assets 13,408 10,565
Deferred income taxes 6,512 5,217
--------- ---------
Total current assets 163,220 134,261

Investments 60,305 116,143
Property and equipment, net 48,491 49,383
Intangibles, net 8,741 6,530
Deferred income taxes 5,504 5,504
Other assets 3,493 5,192
--------- ---------
Total assets $ 289,754 $ 317,013
========= =========

Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,265 $ 1,415
Accrued compensation and employee benefits 13,619 18,233
Other accrued liabilities 16,609 9,959
Billings in excess of earned revenues 10,247 10,030
--------- ---------
Total current liabilities 42,740 39,637
--------- ---------
Long-term liabilities:
Accrued compensation and employee benefits 4,465 4,755
Other liabilities 394 849
--------- ---------
Total long-term liabilities 4,859 5,604
--------- ---------

Total liabilities 47,599 45,241
--------- ---------

Stockholders' equity:
Common stock 351 233
Paid in capital in excess of par value 130,694 95,875
Retained earnings 241,251 200,737
Less treasury stock, at cost (129,694) (26,446)
Accumulated other comprehensive income (loss) (447) 1,373
--------- ---------
Total stockholders' equity 242,155 271,772
--------- ---------
Total liabilities and stockholders' equity $ 289,754 $ 317,013
========= =========

See accompanying notes to the consolidated financial statements.

3

FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months and three months ended June 30, 2002 and 2001
(in thousands, except per share data)
(Unaudited)

Nine Months Ended Three Months Ended
June 30, June 30,
-------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------

Revenues $ 263,125 $ 242,687 $ 91,014 $ 84,233

Costs and expenses:
Cost of revenues 118,436 110,714 40,724 37,991
Research and development 21,672 21,659 6,894 6,981
Sales, general and administrative 57,004 58,338 20,343 19,279
Amortization of intangibles 1,743 1,575 609 525
--------- --------- --------- ---------
Total costs and expenses 198,855 192,286 68,570 64,776
--------- --------- --------- ---------
Income from operations 64,270 50,401 22,444 19,457
Other income, net 4,439 3,362 616 1,126
--------- --------- --------- ---------
Income before income taxes 68,709 53,763 23,060 20,583
Provision for income taxes 26,625 21,935 8,708 8,231
--------- --------- --------- ---------
Net income $ 42,084 $ 31,828 $ 14,352 $ 12,352
========= ========= ========= =========

Net Income $ 42,084 $ 31,828 $ 14,352 $ 12,352
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses)
during the period (895) (179) 814 (172)
Less: Realized gains previously recognized
in other comprehensive income (974) -- -- --
--------- --------- --------- ---------
Net unrealized gains (losses) (1,869) (179) 814 (172)
Foreign currency translation adjustments 49 (176) 224 (89)
--------- --------- --------- ---------
Other comprehensive income (loss) (1,820) (355) 1,038 (261)
--------- --------- --------- ---------
Comprehensive income $ 40,264 $ 31,473 $ 15,390 $ 12,091
========= ========= ========= =========

Earnings per share:
Diluted $ 1.17 $ 0.93 $ 0.41 $ 0.35
========= ========= ========= =========
Basic $ 1.23 $ 0.97 $ 0.43 $ 0.37
========= ========= ========= =========

Shares used in computing earnings per share:
Diluted 35,832 34,085 35,233 34,956
========= ========= ========= =========
Basic 34,113 32,736 33,629 33,192
========= ========= ========= =========

See accompanying notes to the consolidated financial statements.

4

FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2002 and 2001
(in thousands)
(Unaudited)

Nine Months Ended
June 30,
------------------------------
2002 2001
--------- ---------

Cash flows from operating activities
Net income $ 42,084 $ 31,828
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 20,531 18,555
Gain on sales of investments (1,605) (48)
Share of equity loss and write-off on equity investments 1,055 570
Deferred compensation 748 748
Tax benefit from exercise of stock options 10,781 6,673
Amortization of premium on investments 507 145
Allowance for bad debts 1,059 603
Loss on sale of fixed assets 121 169
Other 10 --
Changes in operating assets and liabilities:
Accounts receivable (3,087) (4,140)
Unbilled work in progress (491) (5,262)
Prepaid expenses and other assets (328) (3,809)
Accounts payable 568 (872)
Accrued compensation and employee benefits (1,463) 1,838
Other accrued liabilities and other liabilities 5,437 (76)
Billings in excess of earned revenues (281) 888
--------- ---------
Net cash provided by operating activities 75,646 47,810
--------- ---------

Cash flows from investing activities
Purchases of property and equipment (17,701) (17,680)
Cash portion of Nykamp acquisition (2,593) --
Purchases of investments (49,800) (97,582)
Proceeds from maturities of investments 7,860 47,862
Proceeds from sales of investments 91,371 --
--------- ---------
Net cash provided by (used in) investing activities 29,137 (67,400)
--------- ---------

Cash flows from financing activities
Principal payments of capital lease obligations -- (338)
Proceeds from the exercise of stock options and
issuance of treasury stock 20,269 25,794
Dividends paid (1,570) (873)
Repurchase of company stock (105,937) (19,841)
Cash paid in lieu of stock for stock-split (140) (49)
--------- ---------
Net cash (used in) provided by financing activities (87,378) 4,693
--------- ---------

Increase (decrease) in cash and cash equivalents 17,405 (14,897)
Cash and cash equivalents, beginning of period 24,608 39,506
--------- ---------
Cash and cash equivalents, end of period $ 42,013 $ 24,609
========= =========

See accompanying notes to the consolidated financial statements.

5

FAIR, ISAAC AND COMPANY, INCORPORATED
Notes to Consolidated Financial Statements

Note 1 General

In management's opinion, the accompanying unaudited consolidated
financial statements for Fair, Isaac and Company, Incorporated (the "Company")
for the nine months and three months ended June 30, 2002 and 2001 have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and include all adjustments (consisting only of normal
recurring accruals unless otherwise stated) that the Company considers necessary
for a fair presentation of its financial position, results of operations, and
cash flows for such periods. However, the accompanying financial statements do
not contain all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. All such financial
statements presented herein are unaudited; however, the September 30, 2001
balance sheet has been derived from audited financial statements. This report
and the accompanying financial statements should be read in connection with the
Company's audited financial statements and notes thereto presented in its Annual
Report on Form 10-K for the fiscal year ended September 30, 2001. Notes that
would substantially duplicate the disclosures in the Company's audited financial
statements for the fiscal year ended September 30, 2001, contained in the 2001
Form 10-K, have been omitted. The interim financial information contained in
this Report is not necessarily indicative of the results to be expected for any
other interim period or for the full fiscal year ending September 30, 2002.

Certain amounts in the financial statements and notes thereto have been
reclassified to conform to 2002 classifications.

Note 2 Earnings Per Share

The following reconciles the numerators and denominators of diluted and
basic earnings per share (EPS):

Nine months ended Three months ended
June 30, June 30,
---------------------------- ----------------------------
(in thousands, except per share data) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------

Numerator - Net income $ 42,084 $ 31,828 $ 14,352 $ 12,352
======== ======== ======== ========

Denominator - Shares:
Diluted weighted-average shares 35,832 34,085 35,233 34,956
Dilutive effect of:
Employee stock options (1,656) (1,349) (1,516) (1,764)
Restrictive securities (63) -- (88) --
-------- -------- -------- --------
Basic weighted-average shares 34,113 32,736 33,629 33,192
======== ======== ======== ========

Earnings per share:
Diluted $ 1.17 $ 0.93 $ 0.41 $ 0.35
======== ======== ======== ========
Basic $ 1.23 $ 0.97 $ 0.43 $ 0.37
======== ======== ======== ========

The computation of diluted EPS for the nine months ended June 30, 2002
and 2001 excludes stock options to purchase 1,161,000 and 414,000 shares of
common stock, respectively. The computation of diluted EPS for the three months
ended June 30, 2002 and 2001 excludes stock options to purchase 1,362,000 and
33,000 shares of common stock, respectively. The shares were excluded because
the

6

exercise prices for the options were greater than the respective average market
price of the common shares and their inclusion would be antidilutive. See Note 9
to these Consolidated Financial Statements for detail on the adjustment in
diluted EPS compared to amounts previously reported in the Company's earnings
release issued on July 18, 2002.

Note 3 Cash Flow Statement

Supplemental disclosure of cash flow information:

Nine months ended
June 30,
-------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Income tax payments $ 9,590 $15,588
Interest paid 15 118

Non-cash investing and financing activities:
Issuance of treasury stock to ESOP and ESPP 3,151 2,145
Issuance of common stock for stock split 110 74
Fair value of assets acquired from Nykamp 6,425 --
Liabilities acquired from Nykamp 787 --
Future installment share payments for acquisition
of Nykamp 2,818 --
Bad debts written-off 1,914 603
Sale of investment for supplemental
retirement and savings plan 290 412
Unpaid merger related costs 750 --

Note 4 New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires business combinations initiated after
June 30, 2001 to be accounted for using the purchase method of accounting,
thereby eliminating use of the pooling-of-interest method. It also specifies the
types of acquired intangible assets that are to be recognized and reported
separately from goodwill. SFAS No. 142 requires that goodwill and certain
intangibles with indefinite lives are no longer amortized, but will instead be
tested for impairment at least annually or more frequently if impairment
circumstances arise. SFAS No. 142 is required to be applied starting with fiscal
years beginning after December 15, 2001, with early application permitted in
certain circumstances. The Company is currently evaluating the impact that the
adoption of SFAS No. 142 will have on its financial position and results of its
operations. Amortization of intangibles was approximately $1,743,000 and
$609,000 for the nine months and three months ended June 30, 2002, respectively,
compared to $1,575,000 and $525,000 for the respective corresponding periods of
fiscal year 2001.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, and (or) normal use of the asset. SFAS
No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002, and early application is encouraged. The
Company implemented SFAS No. 143 in its first quarter of fiscal year 2002. The
adoption of SFAS No. 143 did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of

7

Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS No. 144 establishes the accounting model for long-lived assets to be
disposed of by sale and applies to all long-lived assets, including discontinued
operations. It replaces the provisions of APB opinion No. 30, Reporting Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, for
the disposal of segments of a business. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, and early adoption is encouraged. The
Company adopted SFAS No. 144 in its first quarter of fiscal year 2002. The
adoption did not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections. The provision of SFAS No. 145 related to the rescission of SFAS No.
4 are effective for financial statements issued for fiscal years beginning after
May 15, 2002, and the provisions related to SFAS No. 13 are effective for
transactions occurring after May 15, 2002, SFAS No. 145 rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. SFAS No. 145 also rescinds SFAS No. 44, Accounting for Intangible
Assets of Motor Carriers, and amends SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The Company does not expect the adoption to have a
significant impact on the Company.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 revises the accounting
for specified employee and contract terminations that are part of restructuring
activities. Companies will be able to record a liability for a cost associated
with an exit or disposal activity only when the liability is incurred and can be
measured at fair value. Commitment to an exit plan or a plan of disposal
expresses only management's intended future actions and therefore, does not meet
the requirement for recognizing a liability and related expense. This Statement
only applies to termination benefits offered for a specific termination event or
a specified period. It will not affect accounting for the costs to terminate a
capital lease. The Company is required to adopt this statement for exit or
disposal activities initiated after December 31, 2002. The Company does not
expect the adoption to have a significant impact on the Company.

Note 5 Segment Information

Effective October 1, 2001, the Company reorganized into four reportable
segments worldwide to align with the new internal management of its business
operations based on products. The reportable segments are Scoring, Strategy
Machine, Consulting, and Software & Maintenance.

The Scoring segment includes scoring services distributed through major
credit bureaus and through ChoicePoint; the ScoreNet(R) service; the PreScore(R)
services; and insurance bureau scoring services sold through credit bureaus and
ChoicePoint. These products and services were previously reported in the Global
Data Repositories & Processors segment in fiscal year 2001.

The Strategy Machine segment includes the following Strategy
Machine(TM) Solutions: TRIAD(TM) credit account management services distributed
through third-party bankcard processors and Fair, Isaac MarketSmart Decision
System(R) (MarketSmart), LiquidCredit(R), TelAdaptive(TM), consumer services
available through our myFICO.com Web site and strategic alliance partners' Web
sites, List Processing and Strategy Optimization products. Our TRIAD credit
account management services distributed through third-party bankcard processors
were included under the Global Data Repositories & Processors segment in fiscal
year 2001, and the remaining products in this new segment were included in
either the Global Financial Services segment or the Other segment in fiscal
2001.

The Consulting segment includes all consulting services and custom
analytics. In fiscal 2001, custom analytics were included in the Other segment
and most other consulting services were reported in the segment in which the
revenues from the related products and services were reported.

8

The Software & Maintenance segment principally includes TRIAD(TM)
end-user software, StrategyWare(R) and Decision System products. In fiscal 2001,
our TRIAD end-user software, StrategyWare and Decision System products were
included under the Global Financial Services and the Other segments.

The Company's Chief Executive and Operating Officers evaluate segment
financial performance based on segment revenues and operating income. Operating
income is calculated as revenue less expenses such as personnel, facilities,
consulting and travel. Unallocated other income consists mainly of interest
income and net gain on sale of investments. The Company does not evaluate the
financial performance of each segment based on its assets or capital
expenditures.

The segment information for the nine months and three months ended June
30, 2001 has been restated to conform to the fiscal year 2002 presentation.

9

Strategy Software &
(in thousands) Scoring Machine Consulting Maintenance Total
- ------------------------------------------------------------------------------------------------------------------------------------

Nine months ended June 30, 2002
Revenue $ 93,125 $102,322 $ 42,112 $ 25,566 $263,125
======== ======== ======== ======== ========
Operating income $ 46,519 $ 7,356 $ 2,056 $ 8,339 $ 64,270

Unallocated other income, net 4,439
--------
Income before income taxes $ 68,709
========

Depreciation and Amortization $ 5,218 $ 11,209 $ 2,543 $ 1,561 $ 20,531
======== ======== ======== ======== ========

Nine months ended June 30, 2001

Revenue $ 86,885 $101,479 $ 27,822 $ 26,501 $242,687
======== ======== ======== ======== ========
Operating income $ 37,474 $ 6,367 $ 1,761 $ 4,799 $ 50,401

Unallocated other income, net 3,362
--------
Income before income taxes $ 53,763
========

Depreciation and Amortization $ 4,708 $ 10,557 $ 1,762 $ 1,528 $ 18,555
======== ======== ======== ======== ========

Three months ended June 30, 2002

Revenue $ 33,325 $ 34,992 $ 14,364 $ 8,333 $ 91,014
======== ======== ======== ======== ========

Operating income $ 17,783 $ 1,861 $ 527 $ 2,273 $ 22,444

Unallocated other income, net 616
--------
Income before income taxes $ 23,060
========

Depreciation and Amortization $ 1,732 $ 3,845 $ 838 $ 527 $ 6,942
======== ======== ======== ======== ========

Three months ended June 30, 2001

Revenue $ 30,749 $ 36,823 $ 9,181 $ 7,480 $ 84,233
======== ======== ======== ======== ========

Operating income $ 13,251 $ 4,500 $ 1,081 $ 625 $ 19,457

Unallocated other income, net 1,126
--------
Income before income taxes $ 20,583
========

Depreciation and Amortization $ 1,725 $ 3,797 $ 574 $ 477 $ 6,573
======== ======== ======== ======== ========

10

The Company's revenues and percentage of revenues by reportable market
segments are as follows:

Nine Months Ended Nine Months Ended
June 30, 2002 June 30, 2001
------------------------- -----------------------

Scoring $ 93,125 35% $ 86,885 36%
Strategy Machine 102,322 39% 101,479 42%
Consulting 42,112 16% 27,822 11%
Software & Maintenance 25,566 10% 26,501 11%
--------- --- -------- ---
$ 263,125 100% $242,687 100%
========= === ======== ===

Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------- -----------------------

Scoring $ 33,325 37% $ 30,749 37%
Strategy Machine 34,992 38% 36,823 43%
Consulting 14,364 16% 9,181 11%
Software & Maintenance 8,333 9% 7,480 9%
--------- --- -------- ---
$ 91,014 100% $ 84,233 100%
========= === ======== ===

In addition, the Company's revenues and percentage of revenues on a
geographical basis are set out as follows:

Nine Months Ended Nine Months Ended
June 30, 2002 June 30, 2001
------------------------- --------------------------

United States $ 211,765 80% $ 197,425 81%
International 51,360 20% 45,262 19%
--------- --- -------- ---
$ 263,125 100% $242,687 100%
========= === ======== ===

Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------- --------------------------

United States $ 73,022 80% $ 69,741 83%
International 17,992 20% 14,492 17%
--------- --- -------- ---
$ 91,014 100% $ 84,233 100%
========= === ======== ===

Note 6 Acquisition of Nykamp

On December 11, 2001, the Company announced that it was acquiring
substantially all of the assets of Nykamp Consulting Group, Inc. (Nykamp), a
privately-held company based in Chicago. Nykamp provided customer relationship
management strategy and implementation services. The agreement was signed on
December 10, 2001 and the acquisition was completed on December 17, 2001. The
assets acquired and liabilities assumed are recorded at estimated fair values as
determined by the Company's management based on information currently available
and on current assumptions as to future operations. Under the acquisition
agreement, the Company will pay total consideration valued at approximately $5.6
million, including cash and common stock over the next three years. As a result
of the acquisition, assets and liabilities are recorded as follows:

11

(in thousands)
--------------
Current assets acquired $ 2,144
Fixed and other assets acquired 327
Other intangible assets (including trade name, 1,359
non-compete agreement, and customer base,
amortizable between approximately 3 to 5 years)
Goodwill 2,595
-------
Fair value of assets acquired 6,425
Liabilities assumed (787)
-------
Net assets acquired $ 5,638
=======

Note 7 Investments

On June 1, 2000, the Company entered into a joint venture with
MarketSwitch Corporation (MKSW). The Company and MKSW each held a 50% voting
interest in the joint venture, OptiFI, Inc. The Company accounts for the
investment on an equity basis and records its equity share of the joint
venture's operating gain/loss each period. At September 30, 2001, the investment
was valued at $1,076,000 after the Company recorded its cumulative equity share
of the operating loss of the joint venture of $924,000 for fiscal years 2000 and
2001.

During the quarter ended March 31, 2002, the joint venture wound down
its business operations, reverted certain rights in its intangible assets to
MKSW and the Company, and distributed its remaining assets among its creditors.
Pursuant to a separation agreement signed by MKSW, the Company and the joint
venture, in consideration for the rights assigned pursuant to the separation
agreement, the Company and MKSW agreed to pay to the joint venture the amount of
$5,000 each upon execution of the separation agreement. The Company has no
further obligation to fund the joint venture or to discharge any of its
remaining indebtedness. When the decision was made to wind down the business
operations of the joint venture, the Company wrote off the remaining investment
balance, valued at approximately $210,000 in the quarter ended March 31, 2002
and recorded its share of the equity loss of the joint venture and the
investment write-off under Other income, net.

During the nine months ended June 30, 2002 the Company recorded its
equity share of operating loss from the joint venture of approximately $866,000.

Note 8 Commitments and Contingencies

The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition.

Note 9 Subsequent Events

On August 5, 2002, the Company completed its acquisition of HNC
Software Inc. (HNC), a provider of high-end analytic and decision management
software. Under the merger agreement, the stockholders of HNC will receive 0.519
of a newly issued share of the Company's common stock for each share of HNC, and
the Company will assume outstanding HNC stock options based on the same ratio.
The transaction resulted in the issuance of approximately 18,780,481 shares of
Company common stock and the assumption of options to purchase approximately
3,897,664 shares of Company common stock. Results of operations of HNC will be
included prospectively from the date of acquisition beginning with the Company's
fourth fiscal quarter ending September 30, 2002.

On July 25, 2002 the Company announced that its Board of Directors
authorized a new stock repurchase program to acquire up to 3 million shares of
its outstanding common stock. As of June 30, 2002, the Company had approximately
32.5 million shares outstanding. The program will allow the Company to
repurchase its shares from time to time in the open market and in privately
negotiated transactions.

12

As a result of WorldCom Inc.'s filing for Chapter 11 bankruptcy
protection, the Company has decided to fully reserve against all outstanding
WorldCom receivables as of June 30, 2002. Accordingly, the bad debt allowance
increased by an additional amount of $548,000 compared to the amounts previously
reported in the Company's earnings release issued on July 18, 2002. This
adjustment effectively reduces net income by approximately $336,000, or $0.01
per diluted share compared to the amounts previously reported.

13

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Forward Looking Statements

Certain statements contained in this Report that are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the "Act"). In addition, certain
statements in our future filings with the Securities and Exchange Commission, in
press releases, and in oral and written statements made by us or with our
approval that are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (i) projections of revenue, income or loss,
earnings or loss per share, the payment or nonpayment of dividends, capital
structure and other financial items; (ii) statements of our plans and objectives
by our management or Board of Directors, including those relating to products or
services; (iii) statements of future economic performance; (iv) statements
concerning our merger with HNC Software Inc., expected synergies, execution of
integration plans and increases in shareholder value as a result of the merger;
and (v) statements of assumptions underlying such statements. Words such as
"believes," "anticipates," "expects," "intends," "targeted," and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements. Forward-looking statements
involve risks and uncertainties that may cause actual results to differ from
those in such statements. Factors that could cause actual results to differ from
those discussed in the forward-looking statements include, but are not limited
to, those described in this Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations-Risk Factors, below. Such
forward-looking statements speak only as of the date on which statements are
made, and we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made
to reflect the occurrence of unanticipated events or circumstances. Readers
should carefully review the disclosures and the risk factors described in this
and other documents the Company files from time to time with the Securities and
Exchange Commission, including our Reports on Forms 10-Q, 10-K and 8-K to be
filed by the Company in fiscal year 2002.

Overview

Fair, Isaac and Company, Incorporated (NYSE: FIC) (together with our
consolidated subsidiaries including as of August 5, 2002, HNC Software Inc., the
"Company", which may be referred to as we, us or our) is the leading provider of
creative analytics for predictive modeling and decisioning that unlock value for
people, businesses and industries. Our predictive modeling, decision analysis,
intelligence management and decision engine systems power more than 14 billion
decisions a year. Founded in 1956, we help thousands of companies in over 60
countries acquire customers more efficiently, increase customer value, reduce
risk and credit losses, lower operating expenses and enter new markets more
profitably. Most leading banks and credit card issuers rely on our analytic
solutions, as do many insurers, retailers, telecommunications providers,
healthcare organizations and government agencies. Through the www.myFICO.com Web
site, consumers use our FICO(R) scores, the standard measure of credit risk, to
understand and manage their credit risk profile. Our home page on the Internet
is at www.fairisaac.com. You can learn more about us by visiting that site. The
information on these Web sites is not incorporated by reference into this
Report.

On August 5, 2002, the Company completed its acquisition of HNC
Software Inc. (HNC), a provider of high-end analytic and decision management
software. Under the merger agreement, the stockholders of HNC will receive 0.519
of a newly issued share of the Company's common stock for each share of HNC, and
the Company will assume outstanding HNC stock options based on the same ratio.
The transaction resulted in the issuance of approximately 18,780,481 shares of
Company common stock and the assumption of options to purchase approximately
3,897,664 shares of Company common stock. Results of operations of HNC will be
included prospectively from the date of acquisition beginning with the Company's
fourth fiscal quarter ending September 30, 2002.

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Management is assessing and formulating restructuring plans involving
the termination of certain employees of the Company and the closure of certain
facilities. Management expects to adopt a formal restructuring plan in the
fourth quarter of fiscal 2002 and expects this merger-related charge to be
recorded in that quarter. In addition, the Company will incur charges related to
employee termination payments, payments under an employee retention plan adopted
by HNC in connection with the merger, and other costs related to integration
efforts.

For the third fiscal quarter ended June 30, 2002, revenues were $91.0
million, up 8% from $84.2 million reported in the same period last year. Net
income was $14.4 million, or $0.41 per diluted share, compared with $12.4
million, or $0.35 per diluted share, reported in the third quarter of last
fiscal year. Earnings per share figures reflect the Company's three-for-two
stock split, which took effect June 5, 2002.

For the nine-month period ended June 30, 2002, revenues totaled $263.1
million, compared with $242.7 million for the same period a year ago. Net income
for the nine-month period reached $42.1 million, or $1.17 per diluted share,
compared with $31.8 million, or $0.93 per diluted share, posted in the
corresponding period of last fiscal year.

As a result of WorldCom Inc.'s filing for Chapter 11 bankruptcy
protection, the Company has decided to fully reserve against all outstanding
WorldCom receivables as of June 30, 2002. Accordingly, the bad debt allowance
increased by an additional amount of $548,000 compared to the amounts previously
reported in the Company's earnings release issued on July 18, 2002. This
adjustment effectively reduces net income for the three- and nine-month periods
ended June 30, 2002, by approximately $336,000, or $0.01 per diluted share
compared to the amounts previously reported.

The Company's four reportable segments worldwide are Scoring, Strategy
Machine, Consulting, and Software and Maintenance, which are further described
below.

o Scoring. This segment includes our scoring services
distributed through major credit bureaus, including TransUnion
Corporation, Experian Information Solutions, Inc. and Equifax
Inc., and through ChoicePoint; our ScoreNet service sold
directly to credit grantors which allows credit grantors to
obtain our credit bureau scores and related data from the
credit bureaus on their existing accounts for use in their
account management system or for integration with the services
of a credit card processor; our PreScore services offered
through credit bureaus for large credit card issuers that
contract directly with us for scores to pre-screen prospects
for their mailing solicitations; and insurance bureau scores
sold through credit bureaus and ChoicePoint. These services
primarily generate revenues based on usage. Scoring segment
products were included under the Global Data Repositories &
Processors segment in fiscal year 2001.

o Strategy Machine. Our Strategy Machine Solutions deliver a
complete solution, encompassing software, data, analytics and
operations, for a specific function for the customer. The
lines of products and services in this segment are our
TRIAD(TM)credit account management services distributed
through third-party bankcard processors who include First Data
Resources, Inc., Total System Services, Inc., Certegy, and
Electronic Data Systems, Inc.; Fair, Isaac MarketSmart
Decision System (MarketSmart); LiquidCredit; TelAdaptive;
consumer services available through myFICO.com and strategic
alliance partners' Web sites; List Processing; and Strategy
Optimization. These products and services are generally sold
on a usage basis. Our TRIAD credit account management services
distributed through third-party bankcard processors products
were included under the Global Data Repositories & Processors
segment in fiscal 2001, and the remaining products in this new
segment were included under either the Global Financial
Services segment or the Other segment.

o Consulting. This segment includes revenues from all consulting
services. Revenues in this segment are derived from analytics,
custom applications, data warehousing, integration, and risk
management consulting services. We undertake consulting
engagements primarily with companies that are users of our
analytics, software and netsourced solutions, and with
companies deemed to be attractive prospective clients for
those solutions. Consulting services include building custom
analytic models for clients, advising clients on how to
develop and implement sound analytic solutions, providing
expert analysis of model development and assisting with
successful implementation or repositioning of predictive
modeling within the business for greater effectiveness. These
services are generally offered on an hourly fee basis. In
fiscal 2001, custom analytics products were included in the
Other segment and most other consulting services revenues were
reported in the segment with the associated products and
services.

o Software and Maintenance. This segment is comprised of our
software products that are sold directly to the end user, who
is responsible for installing, operating and supporting them.
The principal software products in this segment are TRIAD(TM)
end-user software, StrategyWare and Decision System products.
These products are generally licensed to a single user on a
fixed-price basis. This segment also includes ongoing
maintenance revenue related to installed software systems. In
fiscal 2001, TRIAD end-user software, StrategyWare and
Decision System products were included under the Global
Financial Services and the Other segments.

Comparative segment revenues, operating income, and related financial
information for the nine and three months ended June 30, 2002 and the
corresponding periods in fiscal 2001 are set forth in Note 5 to the Consolidated
Financial Statements.

A certification with respect to this report on Form 10-Q by our Chief
Exective Officer and Chief Financial Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002, has been submitted to the Securities and Exchange
Commission (SEC) as additional correspondence accompanying this report.

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RESULTS OF OPERATIONS

Revenues

The following table displays (a) the percentage of revenues represented
by each segment in the nine and three months ended June 30, 2002 and (b) the
percentage change in the amount of revenues within each segment from the
corresponding periods in the prior fiscal year.

Nine Months Three Months
Ended Percentage Ended Percentage
June 30, Change June 30, Change
---------------- ---------- ---------------- ----------
2002 2001 2002 2001
---- ---- ---- ----

Scoring 35% 36% 7% 37% 37% 8%
Strategy Machine 39% 42% 1% 38% 43% (5%)
Consulting 16% 11% 51% 16% 11% 56%
Software & Maintenance 10% 11% (4%) 9% 9% 11%
--- --- --- ---
Total 100% 100% 8% 100% 100% 8%
=== === === ===

The growth in Scoring segment revenues in the nine and three months
ended June 30, 2002, compared to the same period in the prior fiscal year, was
primarily due to increased revenues derived from risk scoring services at the
credit bureaus and the PreScore service. This growth was mainly attributable to
increased marketing efforts directed to credit card issuers and a strong market
for mortgage re-financings.

The net increase in revenues derived from our Strategy Machine segment
in the nine months ended June 30, 2002, compared with the same period in the
prior fiscal year, was due primarily to increased revenues from MarketSmart, our
consumer score services through myFICO.com and strategic alliance partners' Web
sites, our Strategy Optimization offering, and Netsourced TRIAD products, offset
by decreases in List Processing, CreditDesk, and LiquidCredit products. The net
decrease in revenues in our Strategy Machine segment for the three month period
ended June 30, 2002 was principally due to decreased revenues from our List
Processing, CreditDesk, LiquidCredit and Strategy Optimization products,
partially offset by increased revenues from our MarketSmart, myFICO and
strategic partner's Web sites, and Netsourced and Processor TRIAD products.

Compared to the corresponding periods in the prior fiscal year,
consulting revenues grew in the nine and three months ended June 30, 2002,
primarily due to revenues resulting from the acquisition of the Nykamp business
and increased revenues derived from consulting services related to TRIAD,
MarketSmart, Strategy Optimization, Decision System, Processor TRIAD, CRM
Consulting and StrategyWare.

Revenues derived from our Software and Maintenance segment decreased
slightly in the nine months ended June 30, 2002, compared with the corresponding
period in fiscal 2001, due primarily to decreases in revenues from TRIAD,
StrategyWare and maintenance support for retired products. These decreases were
partially offset by increased sales of our Decision System product. Compared to
the corresponding period in the prior fiscal year, Software and Maintenance
revenues grew in the three months ended June 30, 2002, primarily due to
increased revenues derived from our Decision System and StrategyWare products,
partially offset by decreased sales of our TRIAD products and maintenance
support for retired products.

In the first nine months of both fiscal 2002 and 2001, direct revenues
generated from our agreements with TransUnion, Equifax and Experian accounted
for 9%, 10%, and 7% of our revenues, respectively. For the first nine months of
fiscal 2002, total revenues produced through alliances with credit bureaus
increased approximately 13% over the same period in fiscal 2001 and accounted
for approximately 38% of revenues during the period. Revenues generated from
processors accounted for approximately 11% of our revenues in the first nine
months of both fiscal 2002 and 2001.

While we have been successful in extending or renewing our agreements
with credit bureaus and credit card processors in the past, and believe we will
likely be able to do so in the future, the loss of one or more

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such alliances or an adverse change in terms could have a material adverse
effect on our revenues and operating margin.

Revenues derived from clients outside the United States represented
approximately 20% of total revenues in the nine months ended June 30, 2002 and
19% in the corresponding period of the prior fiscal year. During fiscal 2001, we
derived approximately 18% of our revenues from business outside the United
States. Fluctuations in currency exchange rates have not had a significant
effect on revenues to date. In October 2001, we initiated a hedging program by
entering into forward foreign currency contracts with maturity periods of less
than six months, to reduce our exposure to fluctuations in certain foreign
currency translation rates resulting from holding net assets denominated in
foreign currencies. All gains and losses realized on the maturity of forward
foreign currency contracts are reflected in the reporting periods in which they
are realized. All open forward foreign currency contracts existing at the end of
the reporting period are revalued at the respective forward foreign currency
rates prevailing at the end of the reporting period to the maturity dates of the
open contracts. Unrealized revaluation gains/losses on such open contracts are
also reflected in the income statement of the current reporting period. In the
nine months ended June 30, 2002, net realized and unrealized losses of $461,000
on foreign currency net assets and forward foreign currency contracts are
reported under Other income, net; and for the same period of fiscal 2001, net
realized and unrealized losses of $596,000 were reported under cost of revenues,
and the remaining net losses of $198,000 were reported under Other income, net.
The Company believes that foreign exchange does not have a current material
impact to its consolidated financial results.

Expenses

The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues represented by certain line items in our Consolidated
Statements of Income and Comprehensive Income and (b) the percentage change in
the amount of each such line item from the corresponding periods in the prior
fiscal year.

Nine Months Three Months
Ended Percentage Ended Percentage
June 30, Change June 30, Change
------------- ---------- ---------------- ----------
2002 2001 2002 2001
---- ---- ---- ----

Revenues 100% 100% N/A 100% 100% N/A
Costs and expenses:
Cost of revenues 45% 45% 7% 44% 45% 7%
Research and development 8% 9% -- 8% 8% (1%)
Sales, general and administrative 22% 24% (2%) 22% 23% 6%
Amortization of intangibles 1% 1% 11% 1% 1% 16%
---- ---- ---- ----
Total costs and expenses 76% 79% 3% 75% 77% 6%
---- ---- ---- ----
Income from operations 24% 21% 28% 25% 23% 15%
Other income, net 2% 1% 32% 1% 1% (45%)
---- ---- ---- ----
Income before income taxes 26% 22% 28% 26% 24% 12%
Provision for income taxes 10% 9% 21% 10% 10% 6%
---- ---- ---- ----
Net Income 16% 13% 32% 16% 14% 16%
==== ==== ==== ====

Costs and Expenses

Cost of revenues consists primarily of personnel directly involved in
creating, installing and supporting revenue-generating products; travel and
related overhead costs; costs of computer service bureaus; and our payments made
to credit bureaus for scores and for related outside support in connection with
the ScoreNet service. As compared with the same periods a year earlier, the cost
of revenues, as a percentage of revenues, in the nine and three months ended
June 30, 2002, were substantially the same.

Research and development expenses include the personnel and related
overhead costs incurred in development, researching mathematical and statistical
models and developing software tools that are aimed at improving productivity,
profitability and management control. Research and development expenses in the
nine months and three months ended June 30, 2002, as a percentage of revenues,
were substantially consistent with the corresponding periods of fiscal 2001.

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Sales, general and administrative expenses consist principally of
employee salaries and benefits, travel, overhead, advertising and other
promotional expenses, corporate facilities expenses, the costs of administering
certain benefit plans, legal expenses, business development expenses, and the
cost of operating our computer systems. As a percentage of revenues, these
expenses for the nine months ended June 30, 2002 decreased, as compared to the
corresponding period of fiscal 2001, due primarily to lower personnel and
facility costs. For the three months ended June 30, 2002, these expenses as a
percentage of revenues decreased as compared to the corresponding period of
fiscal 2001, but increased in dollars, primarily due to increases in the bad
debt reserve. As a result of WorldCom Inc.'s bankruptcy filing in July 2002, the
Company increased its bad debt allowance by approximately $1 million.

At June 30, 2002 we employed 1,393 persons worldwide, compared with
1,470 employees at June 30, 2001. The decrease in personnel is primarily due to
reductions in staff to achieve cost savings and in anticipation of the merger
with HNC, offset by additions for personnel hired in connection with the
acquisition of assets from Nykamp.

We amortize the intangible assets arising from various acquisitions
over periods ranging from four to fifteen years. Amortization of intangibles was
approximately $1.7 million and $0.6 million for the nine months and three months
ended June 30, 2002, respectively, compared to approximately $1.6 million and
$0.5 million for the respective corresponding periods of fiscal year 2001.

Other income, net

Other income, net consists mainly of interest income from investments,
interest expense, exchange gains/losses from holding foreign currency bank
accounts and forward foreign currency contracts, and other non-operating items.
Compared with the corresponding periods a year earlier, Other income, net
increased in the nine months ended June 30, 2002, primarily due to net gain on
sales of investments of approximately $1.6 million, partially offset by
increased foreign exchange loss of $0.3 million. Other income, net decreased in
the three months ended June 30, 2002 primarily due to decreases in interest
income from lower investment balances and increased foreign exchange loss. In
addition, in the corresponding period of the prior fiscal year, we recorded
operating losses related to an equity investment. See Note 7 to the Consolidated
Financial Statements for additional information on this equity investment of the
Company.

Provision for income taxes

The Company's effective tax rate decreased from 40.8% to 38.75% in the
nine-month period ended June 30, 2002, and from 40.0% to 37.78% in the
three-month period ended June 30, 2002, compared to the same periods in fiscal
2001. The decrease is primarily due to the utilization of valuation allowance
from capital gains, implementation of the "extraterritorial income exclusion"
regime, the availability of research and development tax credits, and revision
of the state tax rate to reflect activities in states with lower tax rates.

Financial Condition

Our working capital increased to approximately $120.5 million at June
30, 2002, from approximately $94.6 million at September 30, 2001 primarily due
to significant increases in cash flow from operating activities, proceeds from
sales and maturities of investments, and proceeds from the exercise of stock
options and issuance of treasury stock, partially offset by the repurchases of
our stock, and the acquisition of assets from Nykamp. See Note 6 to the
Consolidated Financial Statements for additional information on the acquisition
of Nykamp.

Cash and investments decreased to approximately $119.1 million at June
30, 2002 from approximately $154.6 million at September 30, 2001 due to stock
repurchases under our stock repurchase programs.

In fiscal 1999, we initiated a stock repurchase program to purchase up
to 1.5 million shares of our common stock, to be funded by cash on hand. During
our second quarter of fiscal 2002, we completed this repurchase plan. In our
third quarter our Board of Directors authorized a new common stock repurchase
program for up to 1.5 million shares (or 2.25 million shares, after giving
effect to the three-to-two stock split). Under the new program, we repurchased
2.25 million shares of our outstanding common stock for

18

$86.5 million, completing this repurchase program during our third fiscal
quarter. In total, for the nine months ended June 30, 2002 we repurchased 2.57
million shares, giving effect to the stock split, for a total of $105.9 million.

On July 25, 2002, we announced that our Board of Directors had
authorized a new stock repurchase program up to 3 million shares of our
outstanding common stock. The program will allow us to repurchase our shares
from time to time in the open market and in privately negotiated transactions.

We believe that our current cash and cash equivalents, short-term cash
investments and cash expected to be generated from operations will be sufficient
to meet our working capital, capital expenditure, and investment needs for both
the current fiscal year and the foreseeable future.

Critical Accounting Policies and Estimates

We prepare our financial statements in conformity with U.S. generally
accepted accounting principles. These accounting principles require management
to make certain judgments and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. We periodically evaluate our estimates
including those relating to revenue recognition, the allowance for doubtful
accounts, goodwill and other intangible assets, capitalized software development
costs, income taxes and contingencies and litigation. We base our estimates on
historical experience and various other assumptions that we believe to be
reasonable based on the specific circumstances, the results of which form the
basis for making judgments about the carrying value of certain assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates.

We believe the following critical accounting policies involve the most
significant judgments and estimates used in the preparation of our consolidated
financial statements:

Revenue recognition

We recognize software revenue in accordance with the American Institute
of Certified Public Accountants' ("AICPA") Statement of Position 97-2 ("SOP
97-2"), "Software Revenue Recognition" as modified by SOP 98-4 and SOP 98-9, and
in certain instances in accordance with SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." We recognize other
non-software revenue in accordance with the guidance provided by Staff
Accounting Bulletin 101 issued by the SEC.

In most cases, we recognize software license revenue upon delivery,
provided all significant obligations have been met, persuasive evidence of an
arrangement exists, fees are fixed and determinable, collections are probable,
and we are not involved in significant production, customization, or
modification of the software or services that are essential to the functionality
of the software.

If the arrangement involves (1) development of custom scoring systems
or (2) significant production, customization, or modification of software or
service essential to the functionality of the software, the revenue is generally
recognized under the percentage-of-completion method contract accounting.
Progress toward completion is generally measured by achieving certain standards
and objectively verifiable milestones present in each project. In order to apply
the percentage of completion of method, management is required to estimate the
number of hours needed to complete a particular project. As a result, recognized
revenues and profits are subject to revisions as the contract progresses to
completion.

Revenues from multiple element arrangements are allocated to each
element based on the relative fair values of the elements. The determination of
fair value is based on objective evidence that is specific to our business. If
such evidence of fair value for each element of the arrangement does not exist,
all revenue from the arrangement is deferred until such time that evidence of
fair value for each element does exist or until all elements of the arrangement
are delivered. If in a multiple element arrangement, fair value does not exist
for one or more of the delivered elements in the arrangement, but fair value
does exist for all of the undelivered elements, then the residual method of
accounting is applied. Under the residual method, the fair value of the
undelivered elements is deferred, and the remaining portion of the arrangement
fee is recognized as revenue.
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Revenue determined by the percentage-of-completion method in excess of
contract billings is recorded as unbilled work in progress. Such amounts are
generally billable upon reaching certain performance milestones as defined by
individual contracts. Billings received in advance of performance under
contracts are recorded as billings in excess of earned revenues.

Revenues recognized from our credit scoring, data processing, data
management, internet delivery services and consulting are generally recognized
as these services are performed, provided all significant obligations have been
met, persuasive evidence of an arrangement exists, fees are fixed and
determinable, and collections are probable.

Revenues from post-contract customer support, such as maintenance, are
recognized on a straight-line basis over the term of the contract.

Allowance for doubtful accounts

We make estimates regarding the collectibility of our accounts
receivables. When we evaluate the adequacy of our allowance for doubtful
accounts, we closely analyze specific accounts receivable balances, historical
bad debts, customer creditworthiness, current economic trends and changes in our
customer payments terms. Material differences may result in the amount and
timing of expense for any period if we were to make different judgments or
utilize different estimates. If the financial condition of our customers
deteriorates resulting in an impairment of their ability to make payments, or if
payments from customers are significantly delayed, additional allowances might
be required.

Goodwill and other intangible assets

We make judgments about the remaining useful lives of goodwill,
purchased intangible assets and other long-lived assets whenever events or
changes in circumstances indicate an other than temporary impairment in the
carrying value of the assets recorded on our balance sheet. In order to judge
the remaining useful life of an asset, we make various assumptions about the
value of the asset in the future. This may include assumptions about future
prospects for the business that the asset relates to and typically involves
computations of the estimated future cash flows to be generated by these
businesses. Based on these judgments and assumptions, we determine whether we
need to take an impairment charge to reduce the value of the asset stated on our
balance sheet to reflect its actual fair value.

Judgments and assumptions about future values and remaining useful
lives are complex and often subjective. They can be affected by a variety of
factors, including external factors such as industry and economic trends, and
internal factors such as changes in our business strategy and our internal
forecasts. Although we believe the judgments and assumptions we have made in the
past have been reasonable and appropriate, different judgments and assumptions
could materially impact our reported financial results. Different assumptions of
the anticipated future benefits from these businesses would result in greater or
lesser impairment charges, which would affect net income and result in different
amounts on our balance sheet. Beginning next fiscal year, the method for
assessing potential impairments of intangibles will change based on new
accounting rules issued by the FASB.

Capitalized software development costs

We capitalize certain software development costs after establishment of
a product's technological feasibility. Such costs are then amortized over the
estimated life of the related product. Periodically, we compare a product's
unamortized capitalized cost to the product's estimated net realizable value. To
the extent unamortized capitalized costs exceed net realizable value based on
the product's estimated future gross revenues, reduced by the estimated future
costs of completing and disposing of the product, the excess is written off.
This analysis requires us to estimate future gross revenues associated with
certain products, and the future costs of completing and disposing of certain
products. If these estimates change, write-offs of capitalized software costs
could result.

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Income taxes
We use the asset and liability approach to account for income taxes.
This methodology recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax base of assets and liabilities. We then record a valuation allowance
to reduce deferred tax assets to an amount that likely will be realized. We
consider future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance. If we determine
during any period that we could realize a larger net deferred tax asset than the
recorded amount, we would adjust the deferred tax asset to increase income for
the period. Conversely, if we determine that we would be unable to realize a
portion of our recorded deferred tax asset, we would adjust the deferred tax
asset to record a charge to income for the period.

Contingencies and litigation
We are subject to various proceedings, lawsuits and claims relating to
product, technology, labor, shareholder and other matters. We are required to
assess the likelihood of any adverse outcomes and the potential range of
probable losses in these matters. The amount of loss accrual, if any, is
determined after careful analysis of each matter, and is subject to adjustment
if warranted by new developments or revised strategies.

Risk Factors

Although we expect that the recently completed merger between the Company and
HNC will benefit us, we may not realize those benefits because of integration
and other challenges.

On August 5, 2002, we completed the acquisition of HNC, previously
announced on April 29, 2002. Our failure to meet the challenges involved in
successfully integrating the operations of the Company and HNC or otherwise to
realize any of the anticipated benefits of the recently completed merger,
including anticipated cost savings, could seriously harm our results of
operations. Realizing the benefits of the recently completed merger will depend
in part on the continued integration of the two companies' products,
technologies, operations, and personnel. Although we have made progress in
combining the companies since the merger was completed, the continued
integration of the companies is a complex, time-consuming and expensive process
that, even with proper planning and implementation, could significantly disrupt
our business. In many recent mergers, especially mergers involving technology
companies, merger partners have experienced difficulties integrating the
combined businesses, and we have not previously faced an integration challenge
as substantial as the one presented by the recently completed merger. The
challenges involved in this integration include the following:

o continuing to persuade employees that the business cultures of
the Company and HNC are compatible, maintaining employee
morale and retaining key employees;

o managing a workforce over expanded geographic locations;

o demonstrating to the customers of the Company and to the
customers of HNC that the merger will not lower client service
standards, interfere with business focus, adversely affect
product quality or alter current product development plans;

o consolidating and rationalizing corporate IT and
administrative infrastructures;

o combining product offerings;

o coordinating sales and marketing efforts to effectively
communicate our capabilities to current and prospective
customers;

o coordinating and rationalizing research and development
activities to enhance introduction of well-designed new
products and technologies;

o preserving marketing or other important relationships of both
the Company and HNC and resolving potential conflicts that may
arise;

o minimizing the diversion of management attention from other
ongoing business concerns; and

21

o coordinating and combining overseas operations, relationships
and facilities, which may be subject to additional constraints
imposed by local laws and regulations.

We may not successfully integrate the operations of the Company and HNC
in a timely manner, or at all. Moreover, we may not realize the anticipated
benefits or synergies of the merger to the extent, or in the time frame,
anticipated. The anticipated benefits and synergies relate to cost savings
associated with anticipated restructurings and other operational efficiencies,
greater economies of scale and revenue growth opportunities through expanded
markets and cross-sell opportunities. However, these anticipated benefits and
synergies are based on projections and assumptions, not actual experience, and
assume a successful integration.

In order to be successful, we must continue to retain and motivate key
employees, which will be more difficult in light of uncertainty following the
recently completed merger, and failure to do so could seriously harm our
operating results.

The market for highly skilled employees is limited, and the loss of key
employees could have a significant negative impact on our operations. Employee
retention may be a particularly challenging issue in connection with the
recently completed merger. Although the HNC board of directors designed and
adopted a retention program to provide key HNC employees with financial
incentives to remain with the Company for relatively short time periods after
the closing of the merger on August 5, 2002, there still is significant risk
that we will not be able to retain these HNC employees in the short or long
term. Our employees may experience uncertainty about their future roles with the
Company, even after our strategies are announced or executed. This circumstance
may hurt our ability to attract and retain key management, marketing and
technical personnel. We also must continue to motivate employees and keep them
focused on our strategies and goals. This task may be particularly difficult due
to the potential distractions of continued integration and morale challenges
posed by workforce reductions after completion of the merger.

Charges to earnings resulting from the application of the purchase method of
accounting may cause the market value of our common stock to decline.

In accordance with United States generally accepted accounting
principles, we will account for the merger using the purchase method of
accounting. Under the purchase method of accounting, we will allocate the total
estimated purchase price to HNC's net tangible assets, amortizable intangible
assets, intangible assets with indefinite lives and in-process research and
development, based on their fair values as of the date of completion of the
merger on August 5, 2002. We will record the excess of the purchase price over
those fair values as goodwill. We will expense approximately $39 to $40 million
of the estimated purchase price allocated to in-process research and development
in the fourth quarter. We will incur additional depreciation and amortization
expense over the useful lives of certain of the net tangible and intangible
assets acquired in connection with the merger. Annual amortization of intangible
assets is currently estimated at $13 to $14 million, as compared to our
amortization expense for such items during our most recent completed fiscal year
of $2.1 million. In addition, to the extent the value of goodwill or intangible
assets with indefinite lives becomes impaired in the future, we may be required
to incur material charges relating to the impairment of those assets. These
depreciation, amortization, in-process research and development and potential
impairment charges could seriously harm our results of operations.

We may incur significant liabilities and merger-related charges resulting from
integration of the two companies following the recently completed restructuring.

Our management is in the process of assessing the costs associated with
integration, and estimates that there will be between $15 and $16 million of
merger-related and restructuring costs in the fourth quarter of our fiscal year
2002. However, liabilities ultimately will be recorded for severance, retention
or relocation costs related to HNC employees, costs of vacating some facilities,
or other costs associated with ceasing certain activities of HNC. In addition,
we may incur merger-related charges in subsequent quarters for severance or
relocation costs related to our employees, costs of vacating some facilities, or
other costs associated with ceasing certain activities of the Company. These
liabilities and charges may be significant and could seriously harm our
operating results in future periods.

22

Customer uncertainties related to the recently completed merger could harm our
businesses and results of operations.

In response to ongoing uncertainty following the recently completed
merger, our customers may delay or defer purchasing decisions or elect to switch
to other suppliers. In particular, prospective customers could be reluctant to
purchase our products due to uncertainty about the direction of our product
offerings and our willingness to support and service existing products.
Prospective and current clients may worry about how integration of the two
companies' technologies may affect current and future products. To the extent
that the recently completed merger creates uncertainty among those persons and
organizations contemplating product purchases such that one large customer, or a
significant group of smaller customers, delays, defers or changes purchases, our
results of operations would be seriously harmed. Further, we may have to make
additional customer assurances and assume additional obligations to address our
customers' uncertainty about the direction of our products and related support
offerings. Accordingly, our quarterly results of operations could be
substantially below expectations of market analysts, potentially decreasing our
stock price.

Our effective tax rate after the recently completed merger is uncertain, and any
increase in tax liability would harm our operating results.

The impact of the recently completed merger on our overall effective
tax rate is uncertain. Although we will attempt to optimize our overall
effective tax rate, it is difficult to predict our effective tax rate following
the recently completed merger. The combination of the operations of the Company
and HNC may result in an overall effective tax rate that is higher than our
currently reported tax rate, and it is possible that our combined effective tax
rate on a consolidated basis may exceed the average of the pre-merger separate
tax rates of the Company and HNC.

We may not be able to sustain the revenue growth rates previously experienced by
the Company individually.

We cannot assure you that we will experience the same rate of revenue
growth following the recently completed merger as the Company experienced
individually because of the difficulty of maintaining high percentage increases
as the base of revenue increases. If our revenue does not increase at or above
the rate analysts expect, the trading price for our common stock may decline.

Since our revenues will depend, to a great extent, upon general economic
conditions and, more particularly, upon conditions in the consumer credit,
financial services and insurance industries, a downturn in any of those
industries will harm our results of operations.

During fiscal 2001, approximately 87% of our revenues were derived from
sales of products and services to the consumer credit, financial services and
insurance industries. A downturn in the consumer credit, the financial services
or the insurance industry, including a downturn caused by increases in interest
rates or a tightening of credit, among other factors, could harm our results of
operations. Since 1990, while the rate of account growth in the U.S. bankcard
industry has been slowing and many of our large institutional clients have
merged and consolidated, we have generated most of our revenue growth from our
bankcard-related scoring and account management businesses by cross-selling our
products and services to large banks and other credit issuers. As this industry
continues to consolidate, we may have fewer opportunities for revenue growth due
to changing demand for our products and services that support clients' customer
acquisition programs. In addition, industry consolidation could affect the base
of recurring revenues derived from contracts in which we are paid on a
per-transaction basis if consolidated customers combine their operations under
one contract. We cannot assure you that we will be able effectively to promote
future revenue growth in our businesses.

In addition, a softening of demand for our decisioning solutions caused
by a weakening of the economy generally may result in decreased revenues or
lower growth rates. Due to the current slowdown in the economy generally, we
believe that many of our existing and potential customers are reassessing or
reducing their planned technology investments and deferring purchasing
decisions. As a result, there is increased uncertainty with respect to our
expected revenues. Further delays or reductions in business spending for
business analytics could seriously harm our revenues and operating results.

23

Quarterly revenues and operating results have varied in the past and this
unpredictability may continue in the future and could lead to substantial
declines in the market price for out common stock.

Our revenues and operating results varied in the past and, with respect
to our recently acquired subsidiary HNC Software, have resulted in net losses in
some quarters. Future fluctuations in our operating results are possible.
Consequently, we believe that you should not rely on period-to-period
comparisons of financial results as an indication of future performance. Our
future operating results may fall below the expectations of market analysts and
investors, and in this event the market price of our common stock would likely
fall. In addition, most of our operating expenses will not be affected by
short-term fluctuations in revenues; thus, short-term fluctuations in revenues
may significantly impact operating results. Moreover, to the extent that several
customers of HNC have recently changed from paying license fees on a recurring
transactional basis to paying one-time license fees, its recurring revenues and
gross margins for future quarters may decrease from historical performance.
Factors that will affect our revenues and operating results include the
following:

o variability in demand from our existing customers;

o the lengthy and variable sales cycle of many products;

o consumer dissatisfaction with, or problems caused by, the
performance of our products;

o the relatively large size of orders for our products and our
inability to compensate for unanticipated revenue shortfalls;

o the timing of new product announcements and introductions in
comparison with our competitors;

o the level of our operating expenses;

o changes in competitive conditions in the consumer credit,
financial services and insurance industries;

o fluctuations in domestic and international economic
conditions;

o our ability to complete large installations on schedule and
within budget;

o acquisition-related expenses and charges; and

o timing of orders for and deliveries of software systems.

We derive a substantial portion of our revenues from a small number of products
and services, and our revenue will decline if the market does not continue to
accept these products and services.

We expect that revenues from some or all of our Falcon(TM) Fraud
Manager, Decision Manager for Medical Bill Review and Outsourced Bill Review
products and services, and agreements with TransUnion, Equifax and Experian will
account for a substantial portion of our total revenues for the foreseeable
future. Our revenue will decline if the market does not continue to accept these
products and services. Factors that might affect the market acceptance of these
products and services include the following:

o changes in the business analytics industry;

o technological change;

o our inability to obtain or use state fee schedule or claims
data in our insurance products;

o saturation of market demand;

24

o loss of key customers;

o industry consolidation;

o factors that reduce the effectiveness of or need for fraud
detection capabilities; and

o reduction of the use of credit and other payment cards as
payment methods.

We will continue to depend upon major contracts with credit bureaus, and our
future revenue could decline if the terms of these relationships change.

We will continue to derive a substantial portion of our revenues from
contracts with the three major credit bureaus. These contracts, which normally
have a term of five years or less, accounted for approximately 22% of our
revenues in fiscal 2001. If we are unable to renew any of these contracts on the
same or similar terms, our revenues and results of operations would be harmed.

Our revenue growth could decline if any major customer cancels, reduces or
delays a purchase of our products.

Most of our customers are relatively large enterprises, such as banks,
insurance companies, healthcare firms, retailers and telecommunications
carriers. Our future success will depend upon the timing and size of future
licenses, if any, from these customers and new customers. Many of our customers
and potential customers are significantly larger than we are and may have
sufficient bargaining power to demand reduced prices and favorable nonstandard
terms. The loss of any major customer, or the delay of significant revenue from
these customers, could reduce or delay our recognition of revenue.

Our ability to increase our revenues will depend to some extent upon introducing
new products and services, and if the marketplace does not accept these new
products and services, our revenues may decline.

We will have a significant share of the available market in our Scoring
segment and for certain services in our Strategy Machine(TM) segment
(specifically, account management services at credit card processors), and in
the market for credit card fraud detection software through our Falcon products.
To increase our revenues, we must enhance and improve existing products and
continue to introduce new products and new versions of existing products that
keep pace with technological developments, satisfy increasingly sophisticated
customer requirements and achieve market acceptance. We believe much of our
future growth prospects will rest on our ability to continue to expand into
newer markets for our products and services, such as direct marketing,
insurance, small business lending, retail, telecommunications, personal credit
management, the design of business strategies using Strategy Optimization
technology and internet services. These areas are relatively new to our product
development and sales and marketing personnel, and completely new to some
personnel integrated as a result of the merger. Products that we plan to market
in the future are in various stages of development. We cannot assure you that
the marketplace will accept these products. If our current or potential
customers are not willing to switch to or adopt our new products and services,
our revenues will decrease.

Defects, failures and delays associated with our introduction of new products
could seriously harm our business.

Significant undetected errors or delays in new products or new versions
of products, especially in the area of customer relationship management, may
affect market acceptance of our products and could harm our business, results of
operations or financial position. If we were to experience delays in
commercializing and introducing new or enhanced products, if our customers were
to experience significant problems with implementing and installing our
products, or if our customers were dissatisfied with our products' functionality
or performance, our business, results of operations or financial position could
be harmed. In the past, we have experienced delays while developing and
introducing new products and product enhancements, primarily due to difficulties
developing models, acquiring data and adapting to particular operating
environments. Errors or defects in our products that are significant, or are
perceived to be significant, could

25

result in the rejection of our products, damage to our reputation, lost
revenues, diverted development resources, potential product liability claims and
increased service and support costs and warranty claims.

If we fail to keep up with rapidly changing technologies, our products could
become less competitive or obsolete.

In our markets, technology changes rapidly, and there are continuous
improvements in computer hardware, network operating systems, programming tools,
programming languages, operating systems, database technology and the use of the
internet. If we fail to enhance our current products and develop new products in
response to changes in technology or industry standards, our products could
rapidly become less competitive or obsolete. For example, the rapid growth of
the internet environment creates new opportunities, risks and uncertainties for
businesses, such as ours, which develop software that must also be designed to
operate in internet, intranet and other online environments. Our future success
will depend, in part, upon our ability to:

o internally develop new and competitive technologies;

o use leading third-party technologies effectively;

o continue to develop our technical expertise;

o anticipate and effectively respond to changing customer needs;

o initiate new product introductions in a way that minimizes the
impact of customers delaying purchases of existing products in
anticipation of new product releases; and

o influence and respond to emerging industry standards and other
technological changes.

New product introductions and pricing strategies by our competitors could
decrease our product sales and market share, or could pressure us to reduce our
product prices in a manner that reduces our margins.

We may not be able to compete successfully against our competitors, and
this inability could impair our capacity to sell our products. The market for
business analytics is new, rapidly evolving and highly competitive, and we
expect competition in this market to persist and intensify. Our competitors vary
in size and in the scope of the products and services they offer, and include:

o in-house analytics departments;

o credit bureaus;

o computer service providers;

o regional risk management, marketing, systems integration and
data warehousing competitors;

o application software companies, including enterprise software
vendors;

o management information system departments of our customers and
potential customers, including financial institutions,
insurance companies and telecommunications carriers;

o third-party professional services and consulting
organizations;

o internet companies;

o hardware suppliers that bundle or develop complementary
software;

o network and telecommunications switch manufacturers, and
service providers that seek to enhance their value-added
services;

26

o neural network tool suppliers; and

o managed care organizations.

We expect to experience additional competition from other established
and emerging companies, as well as from other technologies. For example, our
Falcon Fraud Manager and Falcon (TM) Fraud Manager for Merchants products
compete against other methods of preventing credit card fraud, such as credit
card activation programs, credit cards that contain the cardholder's photograph,
smart cards and other card authorization techniques. Many of our anticipated
competitors have greater financial, technical, marketing, professional services
and other resources than we do. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements.
They may also be able to devote greater resources than we can to develop,
promote and sell their products. Many of these companies have extensive customer
relationships, including relationships with many of our current and potential
customers. Furthermore, new competitors or alliances among competitors may
emerge and rapidly gain significant market share. If we are unable to respond as
quickly or effectively to changes in customer requirements as our competition,
our ability to expand our business and sell our products will be negatively
affected. Our competitors may be able to sell products competitive to ours at
lower prices individually or as part of integrated suites of several related
products. This ability may cause our customers to purchase products of our
competitors that directly compete with our products. Price reductions by our
competitors could negatively impact our margins and results of operations, and
could also harm our ability to obtain new long-term contracts and renewals of
existing long-term contracts on favorable terms.

Any failure to recruit and retain additional qualified personnel could hinder
our ability to successfully manage our business.

Our future success will likely depend in large part on our ability to
attract and retain experienced sales, research and development, marketing,
technical support and management personnel. The complexity of our products
requires highly trained customer service and technical support personnel to
assist customers with product installation and deployment. The labor market for
these persons is very competitive due to the limited number of people available
with the necessary technical skills and understanding. We have experienced
difficulty in recruiting qualified personnel, especially technical and sales
personnel, and we may need additional staff to support new customers and/or
increased customer needs. We may also recruit and employ skilled technical
professionals from other countries to work in the United States. Limitations
imposed by federal immigration laws and the availability of visas could hinder
our ability to attract necessary qualified personnel and harm our business and
future operating results. There is a risk that even if we invest significant
resources in attempting to attract, train and retain qualified personnel, we
will not succeed in our efforts, and our business could be harmed.

We will continue to rely upon proprietary technology rights, and if we are
unable to protect them, our business could be harmed.

Our success will depend, in part, upon our proprietary technology and
other intellectual property rights. To date, we have relied primarily on a
combination of copyright, patent, trade secret, and trademark laws, and
nondisclosure and other contractual restrictions on copying and distribution to
protect our proprietary technology. Because the protection of our proprietary
technology is limited, our proprietary technology could be used by others
without our consent. In addition, patents may not be issued with respect to our
pending or future patent applications, and our patents may not be upheld as
valid or may not prevent the development of competitive products. Any
disclosure, loss, invalidity of, or failure to protect our intellectual property
could negatively impact our competitive position, and ultimately, our business.
We cannot assure you that our means of protecting our intellectual property
rights in the United States or abroad will be adequate or that others, including
our competitors, will not use our proprietary technology without our consent.
Furthermore, litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and financial
condition.

In addition, prior to the merger, HNC developed technologies under
research projects conducted under agreements with various United States
government agencies or subcontractors. Although HNC acquired commercial rights
to
27

these technologies, the United States government typically retains ownership of
intellectual property rights and licenses in the technologies developed by us
under these contracts, and in some cases can terminate our rights in these
technologies if we fail to commercialize them on a timely basis. Under these
contracts with the United States government, the results of research may be made
public by the government, limiting our competitive advantage with respect to
future products based on our research.

We may be subject to possible infringement claims that could harm our business.

With recent developments in the law that permit patenting of business
methods, we expect that products in the industry segments in which we will
compete, including software products, will increasingly be subject to claims of
patent infringement as the number of products and competitors in our industry
segments grow and the functionality of products overlaps. We will have to defend
claims made against our products, and such claims may require us to:

o incur significant defense costs or substantial damages;

o cease the use or sale of infringing products;

o expend significant resources to develop or license a
substitute non-infringing technology;

o discontinue the use of some technology; or

o obtain a license under the intellectual property rights of the
third party claiming infringement, which license may not be
available or might require substantial royalties or license
fees that would reduce our margins.

Security is important to our business, and breaches of security, or the
perception that e-commerce is not secure, could harm our business.

Internet-based, business-to-business electronic commerce requires the
secure transmission of confidential information over public networks. Several of
our products are accessed through the internet, including our new consumer
services accessible through the www.myfico.com website. Consumers using the
internet to access their personal information will demand the secure
transmission of such data. Security breaches in connection with the delivery of
our products and services, including our netsourced products and consumer
services, or well-publicized security breaches affecting the internet in
general, could significantly harm our business, operating results and financial
condition. We cannot be certain that advances in computer capabilities, new
discoveries in the field of cryptography, or other developments will not
compromise or breach the technology protecting the networks that access our
netsourced products, consumer services and proprietary database information.

We may incur risks related to acquisitions or significant investment in
businesses.

We have made in the past, and may make in the future, acquisitions of,
or significant investments in, businesses that offer complementary products,
services and technologies. Any acquisitions or investments will be accompanied
by the risks commonly encountered in acquisitions of businesses. Such risks
include:

o the possibility that we will pay more than the acquired
companies or assets are worth;

o the difficulty of assimilating the operations and personnel of
the acquired businesses;

o the potential product liability associated with the sale of
the acquired companies' products;

o the potential disruption of our ongoing business;

o the potential dilution of our existing stockholders and
earnings per share;

o unanticipated liabilities, legal risks and costs;

28

o the distraction of management from our ongoing business; and

o the impairment of relationships with employees and clients as
a result of any integration of new management personnel.

These factors could harm our business, results of operations or
financial position, particularly in the event of a significant acquisition.

If our products do not comply with government regulations that apply to us or to
our customers, we could be exposed to liability or our products could become
obsolete.

Legislation and governmental regulation inform how our business is
conducted. Both our core businesses and our newer consumer initiatives are
affected by regulation. Significant regulatory areas include:

o federal and state regulation of consumer report data and
consumer reporting agencies, such as the Fair Credit Reporting
Act, or FCRA;

o regulation designed to insure that lending practices are fair
and non-discriminatory, such as the Equal Credit Opportunity
Act;

o privacy law, such as provisions of the Financial Services
Modernization Act of 1999; and the Health Insurance
Portability and Accountability Act of 1996;

o regulations governing the extension of credit to consumers and
by Regulation E under the Electronic Fund Transfers Act, as
well as non-governmental VISA and MasterCard electronic
payment standards;

o Fannie Mae and Freddie Mac regulations, among others, for our
mortgage services products;

o insurance regulations related to our insurance products; and

o consumer protection laws, such as federal and state statutes
governing the use of the internet and telemarketing.

In connection with our core activities, these statutes will continue,
to some degree, to directly govern our operations. For example, the Financial
Services Modernization Act restricts our use and transmittal of nonpublic
personal information, grants consumers opt out rights, requires us to make
disclosures to consumers about our collection and use of personal information
and governs when and how we may deliver credit score explanation services to
consumers. Many foreign jurisdictions relevant to our business will also
regulate our operations. For example, the European Union's Privacy Directive
creates minimum standards for the protection of personal data. In addition, some
EU member states have enacted protections which go beyond the requirements of
the Privacy Directive. We will be subject to the risk of possible regulatory
enforcement actions if we fail to comply with any of the statutes governing our
operations.

Additionally, existing regulation and legislation is subject to change
or more restrictive interpretation by enforcement agencies, and new restrictive
legislation might pass. For example, new legislation might restrict the sharing
of information by affiliated entities, mandate providing credit scores to
consumers, or narrow the permitted uses of consumer report data. Currently, the
permitted uses of consumer report data in connection with customer acquisition
efforts are governed primarily by the FCRA, whose federal preemption provisions
effectively expire in 2004. Unless extended, this expiration could lead to
greater state regulation, increasing the cost of customer acquisition activity.
State regulation could cause financial institutions to pursue new strategies,
reducing the demand for our products. In addition, in many states, including
California, there have been periodic legislative efforts to reform workers'
compensation laws in order to reduce workers' compensation insurance costs and
to curb abuses of the workers' compensation system. Simplifying state workers'
compensation laws, regulations or fee schedules could diminish the need for, and
the benefits provided by our Decision Manager for Medical Bill Review products
and Outsourced Bill Review services.

29

Any changes to existing regulation or legislation, new regulation or
legislation, or more restrictive interpretation of existing regulation could
harm our business, results of operations and financial condition. Finally,
governmental regulation influences our current and prospective clients'
activities, as well as their expectations and needs in relation to our products
and services. For example, our clients include credit bureaus, credit card
processors, telecommunications companies, state and federally chartered banks,
savings and loan associations, credit unions, consumer finance companies,
insurance companies and other consumer lenders, all of which are subject to
extensive and complex federal and state regulations, and often international
regulations. Moreover, industries of our future clients may also be subject to
extensive regulations. We must appropriately design products and services to
function in regulated industries or risk liability to our customers for our
products' non-compliance.

Failure to obtain data from our clients to update and re-develop or to create
new models could harm our business.

To develop, install and support our products, including consumer
credit, financial services, predictive modeling, decision analysis, intelligence
management, credit card fraud control and profitability management, loan
underwriting and insurance products, we will require periodic updates of our
statistical models. We must develop or obtain a reliable source of sufficient
amounts of current and statistically relevant data to analyze transactions and
update our models. In most cases, these data must be periodically updated and
refreshed to enable our products to continue to work effectively in a changing
environment. We do not own or control much of the data that we require, most of
which are collected privately and maintained in proprietary databases.
Generally, our customers agree to provide us the data we require to analyze
transactions, report results and build new predictive models. If we fail to
maintain good relationships with our customers, or if they decline to provide
such data due to legal privacy concerns or a lack of permission from their own
customers, we could lose access to required data and our products might become
less effective. In addition, our Decision Manager for Medical Bill Review
products use data from state workers' compensation fee schedules adopted by
state regulatory agencies. Third parties have previously asserted copyright
interests in these data. These assertions, if successful, could prevent us from
using the data. Any interruption of our supply of data could seriously harm our
business, financial condition or results of operations.

Our operations outside the United States subject us to unique risks that may
harm our results of operations.

A growing portion of our revenues is derived from international sales.
During fiscal 2001, approximately 18% of our revenues were derived from business
outside the United States. As part of our growth strategy, we plan to continue
to pursue opportunities outside the United States. Accordingly, our future
operating results could be negatively affected by a variety of factors arising
out of international commerce, some of which are beyond our control. These
factors include:

o the general economic and political conditions in countries
where we sell our products and services;

o incongruent tax structures;

o difficulty in staffing our operations in various countries;

o the effects of a variety of foreign laws and regulations;

o import and export licensing requirements;

o longer payment cycles;

o potentially reduced protection for intellectual property
rights;

o currency fluctuations;

o changes in tariffs and other trade barriers; and

30

o difficulties and delays in translating products and related
documentation into foreign languages.

We cannot assure you that we will be able to successfully address each
of these challenges in the near term.

Additionally, some of our business will be conducted in currencies
other than the U.S. dollar. Foreign currency transaction gains and losses are
not currently material to our financial position, results of operations or cash
flows. However, an increase in our foreign revenues could subject us to
increased foreign currency transaction risks in the future.

31

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk Disclosures

The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates, foreign currency exchange rates and equity
security price risk. We do not use derivative financial instruments for
speculative or trading purposes.

Interest Rate Sensitivity

We maintain an investment portfolio consisting mainly of income
securities with an average maturity of less than five years. These
available-for-sale securities are subject to interest rate risk and will fall in
value if market interest rates increase. We have the ability to hold our fixed
income investments until maturity, and therefore we would not expect our
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on our securities portfolio.
We believe that our foreign currency and equity risks are not material.

The following table presents the principal amounts and related
weighted-average yields for our fixed rate investment portfolio at June 30, 2002
and September 30, 2001:

June 30, 2002 September 30, 2001
---------------------------- ---------------------------
Book/Market Average Book/Market Average
(in thousands) Value Yield Value Yield
- -------------- ----------- ------- ----------- -------

Cash and cash equivalents $ 36,713 1.91% $ 16,918 2.87%
Short-term investments 16,822 1.88% 13,800 2.57%
Long-term investments 56,348 3.40% 110,709 3.78%
-------- --------
$109,883 2.67% $141,427 3.55%
======== ========

Forward Foreign Currency Contracts

Beginning October 2001, the Company initiated a hedging program to
manage its foreign currency exchange rate risk on existing foreign currency
receivable and bank balances by entering into forward contracts to sell or buy
foreign currency. At month end foreign currency receivable and cash balances are
remeasured into the functional currency of the reporting entity at current
market rates. The change in value from this remeasurement is then reported as a
foreign exchange gain or loss for that period and the resulting gain or loss on
the forward contract mitigates the exchange rate risk of the associated assets.
All of the Company's forward foreign currency contracts have maturity periods of
less than six months. Such derivative financial instruments are subject to
market risk.

The following table summarizes the Company's outstanding forward foreign
currency contracts, by currency, with contract amounts representing the expected
payments to be made under these instruments as of June 30, 2002:

32

June 30, 2002
-------------------------------------------
Contract Amount
--------------------------
Foreign Fair Value
(in thousands) Currency US$ US$
- -------------- -------- ------- -------
Sell foreign currency:
EURO (EUR) EUR 1,000 $ 988 $ 983
Japanese Yen (YEN) YEN 25,000 209 209
British Pound (GBP) GBP 1,800 2,743 2,736
------- -------
$ 3,940 $ 3,928
======= =======

33

PART II - OTHER INFORMATION

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

(a) N/A

(b) Reports on Form 8-K:

The Company filed Form 8-K on April 29, 2002, announcing the signing of
a merger agreement with HNC Software Inc., a provider of high-end
analytic and decision management software.

34

SIGNATURES

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

FAIR, ISAAC AND COMPANY, INCORPORATED

DATE: August 14, 2002

By /s/ Kenneth J. Saunders
-------------------------------------------
Vice President and Chief Financial Officer

DATE: August 14, 2002

By /s/ Henk J. Evenhuis
-------------------------------------------
Vice President, Finance

35