UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

For the transition period from      to     

Commission File Number 0-16439

Fair Isaac Corporation

Registrant’s telephone number, including area code:
612-758-5200

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     The number of shares of common stock outstanding on July 30, 2004 was 70,315,901 (excluding 18,541,032 shares held by the Company as treasury stock).

TABLE OF CONTENTS

i

PART 1 – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

1

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

2

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

3

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

4

FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.

Nature of Business

     Fair Isaac Corporation

     Incorporated under the laws of the State of Delaware, Fair Isaac Corporation is a provider of analytic, software and data management products and services that enable businesses to automate and improve decisions. Fair Isaac Corporation provides a range of analytical solutions, credit scoring and credit account management products and services to banks, credit reporting agencies, credit card processing agencies, insurers, retailers, telecommunications providers, healthcare organizations and government agencies.

     In these condensed consolidated financial statements, Fair Isaac Corporation is referred to as “we,” “us,” “our,” and “Fair Isaac.”

     Principles of Consolidation and Basis of Presentation

     We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q. Consequently, we have not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In our opinion, the accompanying unaudited interim condensed consolidated financial statements in this Form 10-Q reflect all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary for a fair presentation of our financial position and results of operations. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with our audited consolidated financial statements and notes thereto presented in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003. 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 entire fiscal year.

     The condensed consolidated financial statements include the accounts of Fair Isaac and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.

     On February 2, 2004, our Board of Directors declared a three-for-two stock split in the form of a 50% common stock dividend with cash payment in lieu of fractional shares, paid on March 10, 2004 to shareholders of record on February 18, 2004. The share and per share amounts within the accompanying condensed consolidated financial statements and notes have been restated to reflect this stock split.

     On February 2, 2004, our shareholders ratified an amendment to our Restated Certificate of Incorporation to increase the total authorized shares of common stock from 100,000,000 to 200,000,000, which has been reflected in the accompanying condensed consolidated balance sheets.

     Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include, but are not limited to, assessing the following: the recoverability of accounts receivable, goodwill, intangible assets, software development costs and deferred tax assets; the ability to estimate hours in connection with fixed-fee service contracts, the ability to estimate transactional-based revenues for which actual transaction volumes have not yet been received, and the determination of whether fees are fixed or determinable and collection is probable or reasonably assured.

     Certain Condensed Financial Statement Caption Detail

     Income taxes payable totaled $31.0 million and $9.0 million as of June 30, 2004 and September 30, 2003, respectively, and is recorded in other accrued current liabilities within the accompanying condensed consolidated balance sheets.

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FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

     Stock-Based Compensation

     We measure compensation expense for our employee stock-based compensation awards using the intrinsic value method and provide pro forma disclosures of net income and earnings per share as if a fair value method had been applied. Therefore, compensation cost for fixed employee stock awards is measured as the excess, if any, of the quoted market price of our common stock at the grant date over the amount an employee must pay to acquire the stock and is amortized over the related service periods using the straight-line method. Compensation cost for variable employee stock awards is measured as the excess, if any, of the quoted market price of our common stock at the end of the reporting period over the amount an employee must pay to acquire the stock, and the compensation cost is amortized over the related service periods for each vesting date using a graded vesting schedule as required under the provisions of Financial Accounting Standards Board Interpretation (“FIN”) No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. Compensation expense previously recorded for vested variable awards is reversed when the measurement of compensation cost decreases from prior measurements. Compensation expense previously recorded for unvested employee stock-based compensation awards that are forfeited upon employee termination is reversed in the period of forfeiture.

     The following table compares net income and earnings per share as reported to the pro forma amounts that would be reported had compensation expense been recognized for our stock-based compensation plans on a fair value basis. Amounts for the quarter and nine months ended June 30, 2003 below have been revised to reflect the impact of employee stock purchase plan rights and an adjustment to dividend yield.

2. Acquisitions

     London Bridge Software Holdings plc

     On April 26, 2004, our Board of Directors, together with the Board of Directors of London Bridge Software Holdings plc (“London Bridge”), a provider of intelligent business software, announced that they had reached agreement on the terms of a recommended cash offer (the “Offer”) to be made by us and by Hawkpoint Partners Limited on our behalf outside of the United States for the entire issued and to be issued ordinary share capital of London Bridge. The Offer was made on April 30, 2004.

     On May 28, 2004, we announced that valid acceptances of the Offer had been received in respect of a total of approximately 159.6 million London Bridge shares, representing approximately 93.4% of the issued share capital of London Bridge. Accordingly, all conditions related to the Offer were deemed to have been satisfied, and the Offer was declared unconditional by us in all respects. As of June 30, 2004, acceptances in respect of approximately 96% of the issued London Bridge share capital had been received. We are entitled to acquire all remaining outstanding London Bridge shares through compulsory acquisition procedures under U.K. law, which

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FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

we commenced on June 26, 2004. We expect these procedures to be completed in August 2004, at which time we will own 100% of London Bridge’s issued share capital.

     London Bridge delivers solutions for the management of retail debt and deposit origination, collection and recovery and the provision of core banking systems to its target markets. These markets include retail financial services and range from telecommunications, utilities and governmental agencies to other service providers and to the debt collection industry. Our acquisition of London Bridge was consummated principally to incorporate London Bridge’s software and systems for collections and recovery into our existing portfolio, and extend our ability to deliver analytics-driven strategies across the entire credit customer lifecycle. This acquisition was also made to enhance our presence and growth opportunities internationally.

     We accounted for this transaction using the purchase method of accounting. Results of operations of London Bridge have been included in our results prospectively from May 28, 2004.

     Our estimate of the total purchase price is summarized as follows (in thousands):

     The total estimated purchase price was preliminarily allocated as follows (in thousands):

     The estimate of the purchase price above does not reflect the fair value of Fair Isaac options that will be issued in exchange for certain London Bridge options upon the completion of the compulsory acquisition procedures, which we expect to occur in August 2004. The fair value of these options, to be determined by application of the Black-Scholes options pricing model, will result in additional goodwill and a corresponding increase to our paid-in-capital. None of these to-be-issued exchange options will result in future compensation expense.

     The preliminary allocation of the purchase price is pending completion of several elements, including the finalization of our independent appraisal for purposes of the valuation of acquired intangible assets. We do not expect future adjustments to the purchase price to be material. However, there may be material adjustments to the allocation of the purchase price.

     Based on a preliminary valuation, the acquired intangible assets have a weighted average useful life of approximately 7.3 years and are being amortized using the straight-line method over their estimated useful lives as follows: completed technology — six years; and customer contracts and relationships - nine years. Based upon this preliminary valuation, we recorded amortization expense related to London Bridge intangible assets of $0.5 million during the quarter ended June 30, 2004, and our estimate of future amortization expense is $1.6 million for the fourth quarter of fiscal 2004, $6.4 million for each of fiscal 2005 through fiscal 2009, and $10.9 million thereafter. Also, based on this preliminary valuation, no value has been recorded by us to in-process research and development (“IPR&D”). Because this valuation is preliminary, the valuation of intangible assets and their useful lives may change upon completion of the final valuation.

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FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

     Of the preliminary goodwill recorded, we have not yet allocated such to our operating segments, and expect to do so in the fourth quarter of fiscal 2004. None of this goodwill will be deductible for tax purposes.

     During the quarter ended June 30, 2004, in connection with our acquisition of London Bridge, we entered into a forward foreign currency contract to sell £170.0 million for $300.1 million. This contract was entered into to offset exchange rate transaction gains or losses on Great Britain Pounds (“GBP”) cash balances that were held by our wholly-owned acquiring subsidiary, whose functional currency is that of the U.S. Dollar, for the purpose of funding the London Bridge acquisition. We reduced the notional amount of the forward currency contract in connection with the payment of consideration to the selling shareholders, and settled the contract on June 30, 2004, at which time we entered into a new contract to offset the foreign currency exposure related to the remaining GBP cash balance of £8.0 million held by our acquiring subsidiary. During the quarter ended June 30, 2004, we recorded realized and unrealized losses on these contracts totaling $10.3 million, which are included in other income, net in the accompanying condensed consolidated statement of income. These losses were principally offset by foreign currency transaction gains of $9.0 million, which are also included in other income, net.

     Seurat Company

     On October 1, 2003, we acquired substantially all of the assets of Seurat Company (“Seurat”) for cash consideration of $5.0 million. Seurat is a provider of solutions and services that help companies target, acquire and retain customers through creative marketing strategies. We accounted for this transaction using the purchase method of accounting. The results of operations of Seurat have been included in the accompanying condensed consolidated statements of income beginning on October 1, 2003. Our allocation of the purchase price, including $0.1 million in acquisition costs, was as follows: (i) $3.6 million was allocated to net tangible assets, consisting principally of receivables and property and equipment, (ii) $1.4 million was allocated to intangible assets, consisting of acquired customer contracts and relationships, and (iii) $0.1 million was allocated to goodwill. The acquired intangible assets have an estimated useful life of five years and are being amortized over this period using the straight-line method. The goodwill was allocated entirely to our Strategy Machine Solutions operating segment, all of which is deductible for tax purposes.

     Unaudited Pro Forma Results of Operations

     The following unaudited pro forma results of operations present the impact of our results of operations for the quarters and nine months ended June 30, 2004 and 2003, as if our London Bridge acquisition had occurred on October 1, 2003 and 2002, respectively.

3.

Other Investment

     As of September 30, 2003, we held an approximate 6.0% ownership interest in Open Solutions, Inc. (“OSI”), a developer of client/server core data processing solutions for community banks and credit unions, that was accounted for using the cost method. The OSI investment was recorded by us at its estimated fair value of $7.5 million in connection with our acquisition of HNC Software Inc. (“HNC”) in fiscal 2002, and was included in other investments as of September 30, 2003. In November 2003, OSI completed an initial public offering of its common stock, at which time we began accounting for it as a marketable equity security. In May 2004, we sold our investment in OSI for net proceeds of $14.1 million, which includes a realized gain of $6.6 million ($4.1 million net of tax) that is included in other income, net, within the accompanying condensed consolidated statements of income for the quarter and nine months ended June 30, 2004.

4.

Amortization of Intangible Assets

     Amortization expense associated with our intangible assets, which has been reflected as a separate operating expense caption

8

FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

within the accompanying condensed consolidated statements of income, consisted of the following:

     Cost of revenues reflects our amortization of completed technology, and selling, general and administrative expenses reflect our amortization of other intangible assets. Intangible assets were $127.6 million and $93.9 million, net of accumulated amortization of $28.8 million and $16.1 million, as of June 30, 2004 and September 30, 2003, respectively.

5.

Restructuring and Merger-Related Expenses

     The following table summarizes activity for the nine months ended June 30, 2004, related to restructuring accruals previously recorded in connection with the August 2002 HNC acquisition, of which $0.9 million and $0.9 million is recorded in other accrued current liabilities as of June 30, 2004 and September 30, 2003, respectively, and $0.7 million and $1.3 million is recorded in other long-term liabilities as of June 30, 2004 and September 30, 2003, respectively, within the accompanying condensed consolidated balance sheets:

     During the nine months ended June 30, 2004, we finalized a plan to exit certain office space acquired in connection with our prior acquisition of NAREX Inc., and accordingly, recorded a lease exit accrual and additional goodwill of $1.7 million, of which $0.4 million and $1.3 million is recorded in other accrued current liabilities and other long-term liabilities, respectively, within the accompanying condensed consolidated balance sheets as of June 30, 2004. We estimate that payments will be made against the liability commencing in September 2004, which is the anticipated exit date.

     During the quarter and nine months ended June 30, 2004, we expensed merger-related costs totaling $0.8 million in connection with an aborted acquisition, consisting principally of third-party legal, accounting and other professional fees. During the nine months ended June 30, 2003, we incurred merger-related expenses totaling $2.6 million, consisting primarily of retention bonuses earned by HNC employees.

9

FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

6.

Earnings Per Share

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

     The computation of diluted EPS for the quarters ended June 30, 2004 and 2003 excludes options to purchase approximately 3,733,000 and 313,000 shares of common stock, respectively, and for the nine months ended June 30, 2004 and 2003, excludes options to purchase approximately 1,778,000 and 1,644,000 shares of common stock, respectively, because the options’ exercise prices exceeded the average market price of our common stock in these periods and their inclusion would be antidilutive. The computation of diluted EPS for the quarter ended June 30, 2004, and for the nine months ended June 30, 2003, also excludes approximately 4,055,000 shares of common stock issuable upon conversion of our 5.25% Convertible Subordinated Notes (the “Subordinated Notes”), as the inclusion of such shares would have been antidilutive for these periods. The computation of diluted EPS for the quarter and nine months ended June 30, 2004 also excludes approximately 9,101,000 shares of common stock issuable upon conversion of our 1.5% Senior Convertible Notes (the “Senior Notes”), as the conditions for conversion had not been satisfied as of June 30, 2004. The Senior Notes become convertible into shares of Fair Isaac common stock, subject to the conditions described below, at an initial conversion price of $43.9525 per share, subject to adjustments for certain events. The initial conversion price is equivalent to a conversion rate of approximately 22.7518 shares of Fair Isaac common stock per $1,000 principal amount of the Senior Notes. Holders may surrender their Senior Notes for conversion, if any of the following conditions is satisfied: (i) prior to August 15, 2021, during any fiscal quarter, if the closing price of our common stock for at least 20 trading days in the 30 consecutive trading day period ending on the last day of the immediately preceding fiscal quarter is more than 120% of the conversion price per share of our common stock on the corresponding trading day; (ii) at any time after the closing sale price of our common stock on any date after August 15, 2021 is more than 120% of the then current conversion price; (iii) during the five consecutive business day period following any 10 consecutive trading day period in which the average trading price of a Senior Note was less than 98% of the average sale price of our common stock during such 10 trading day period multiplied by the applicable conversion rate; provided, however, if, on the day before the conversion date, the closing price of our common stock is greater than 100% of the conversion price but less than or equal to 120% of the conversion price, then holders converting their notes may receive, in lieu of our common stock based on the applicable conversion rate, at our option, cash or common stock with a value equal to 100% of the principal amount of the notes on the conversion date; (iv) if we have called the Senior Notes for redemption; or (v) if we make certain distributions to holders of our common stock or we enter into specified corporate transactions. The conversion price of the Senior Notes will be adjusted upon the occurrence of certain dilutive events as described in the indenture, which include but are not limited to: (i) dividends, distributions, subdivisions, or combinations of our common stock; (ii) issuance of rights or warrants for the purchase of our common stock; (iii) the distribution to all or substantially all holders of our common stock of shares of our capital stock, evidences of indebtedness or other non-cash assets, or rights or warrants; (iv) the cash dividend or distribution to all or substantially all holders of our common stock in excess of certain levels; and (v) certain merger and acquisition activities.

7. Repurchases of Common Stock

     During the nine months ended June 30, 2004, we repurchased approximately 1.8 million shares of our common stock for an aggregate cost of $68.7 million. The shares were repurchased pursuant to a program approved by our Board of Directors in November 2003.

8. Stock Option Plan

     In November 2003, our Board of Directors approved the adoption of the 2003 Employment Inducement Award Plan (the “Plan”). The Plan reserves 2,250,000 shares of common stock solely for the granting of inducement stock options and other awards, as defined, that meet the “employment inducement award” exception to the New York Stock Exchange’s listing standards requiring shareholder approval of equity-based inducement incentive plans. Except for the employment inducement award criteria, awards under this plan will be generally consistent with those made under our other existing stock option plan.

     In connection with our acquisition of Seurat during the quarter ended December 31, 2003, awards for 215,250 shares, net of forfeitures, with a modified exercise price of $35.50 (original exercise price of $39.47) were granted to Seurat employees under the Plan, which are subject to variable plan accounting. No compensation cost was recognized during the nine months ended June 30, 2004 as the quoted market price of our common stock at June 30, 2004 did not exceed this exercise price.

9. Segment Information

     We are organized into the following four reportable segments, to align with the internal management of our worldwide business operations based on product and service offerings:

•

Strategy Machine Solutions. These solutions are industry-tailored applications designed for specific processes such as marketing, account origination, customer account management, fraud and medical bill review, as well as consumer solutions through our my FICO service.

10

FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

•

Scoring Solutions. These include our scoring services distributed through major credit reporting agencies, as well as services through which we provide our credit bureau scores to lenders directly.

•

Professional Services. This segment includes revenues from consulting services and custom engagements, as well as services associated with implementing and delivering our products.

•

Analytic Software Tools. This segment is composed of our analytic software tools sold to businesses for their use in building their own decisioning applications.

     Our Chief Executive Officer evaluates segment financial performance based on segment revenues and operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, consulting, travel, depreciation and amortization. Indirect costs are allocated to the segments generally based on relative segment revenues, fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. Our Chief Executive Officer does not evaluate the financial performance of each segment based on its respective assets or capital expenditures; rather, depreciation and amortization amounts are allocated to the segments from their internal cost centers as described above.

     The following tables summarize segment information for the quarters and nine months ended June 30, 2004 and 2003. Segment information for the quarter and nine months ended June 30, 2003 has been revised to conform to the current segment presentation.

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FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

10.

Related Party Transactions

     During the quarters ended June 30, 2004 and 2003, we recorded revenues in the amount of $0.3 million and $0.2 million, respectively, and during the nine months ended June 30, 2004 and 2003, we recorded revenues in the amount of $1.6 million and $0.7 million, respectively, related to sales of products through Informa GmbH (“Informa”), an equity method investee in which we owned a 33.3% interest through March 31, 2004. Receivables from Informa amounted to $0.4 million and $0.1 million as of June 30, 2004 and September 30, 2003, respectively.

11.

Contingencies

     We are in a dispute with certain customers regarding amounts owed in connection with the sale of several of our products. We also have had claims asserted by former employees relating to compensation and other employment matters. As to these matters, the amount or range of any potential liability cannot be determined with certainty.

     We are involved in various other claims and legal actions arising in the ordinary course of business. We believe that these claims and actions will not result in a material adverse impact to our consolidated results of operations, liquidity or financial condition. However, the amount of the liabilities associated with these claims and actions, if any, cannot be determined with certainty.

12.

Subsequent Events

     In July 2004, our Board of Directors approved the cash redemption of all of our outstanding Subordinated Notes at a redemption price equal to 102.625% of the $150.0 million principal amount of the notes, pursuant to the redemption criteria in the indenture. We

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FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

have provided notice to the holders that we will redeem the notes in September 2004. The redemption of these notes will require a cash outlay of approximately $153.9 million, and will result in our recognition of a loss on redemption of approximately $11.1 million in the fourth quarter of fiscal 2004, representing the excess of the redemption cost over the carrying amount of the notes upon redemption. The estimated loss on redemption excludes other miscellaneous costs of redemption, which will be determinable in September 2004.

     In July 2004, our Board of Directors approved a new common stock repurchase program, which will expire in one year, that will allow us to purchase shares of our common stock from time to time in the open market and in negotiated transactions, for an aggregate amount not to exceed $200.0 million. Through August 6, 2004, we had repurchased 0.7 million shares of our common stock under this program for an aggregate cost of $18.3 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

     Statements contained in this Report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements in our future filings with the Securities and Exchange Commission (“SEC”), 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 statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services; (iii) statements of assumptions underlying such statements; (iv) statements regarding business relationships with vendors, customers or collaborators; and (v) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,” “potential,” “goals,” “strategy,” 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 materially 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors, below. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. 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 we file from time to time with the SEC, including our reports on Forms 10-K, 10-Q and 8-K to be filed in fiscal year 2004.

RESULTS OF OPERATIONS

Overview

     Fair Isaac Corporation (NYSE: FIC) (together with its consolidated subsidiaries, the “Company,” which may also be referred to in this report as “we,” “us,” “our,” and “Fair Isaac”) is a leader in enterprise decision management, providing analytic, software and data management products and services that enable businesses to automate and improve their decisions. Our predictive modeling, decision analysis, intelligence management, decision management systems and consulting services power billions of customer decisions each year. We help companies acquire customers more efficiently, increase customer value, reduce fraud and credit losses, lower operating expenses and enter new markets more profitably. Most leading banks and credit card issuers rely on our solutions, as do many insurers, retailers, telecommunications providers, healthcare organizations and government agencies. We also serve consumers through online services that enable people to purchase and understand their FICO® scores, the standard measure of credit risk, to manage their financial health. In May 2004, we acquired London Bridge Software Holdings plc (“London Bridge”), a provider of intelligent business software.

     Most of our revenues are derived from the sale of products and services within the consumer credit, financial services and insurance industries, and during the quarter and nine months ended June 30, 2004, 78% of our revenues were derived from within these industries. A significant portion of our remaining revenues is derived from the telecommunications, healthcare and retail industries, as well as the government sector. Our clients utilize our products and services to facilitate a variety of business processes, including customer marketing and acquisition, account origination, credit and underwriting risk management, fraud loss prevention and control, and client account and policyholder management. A significant portion of our revenues is derived from transactional or unit based software license fees, annual license fees under long-term software license arrangements, transactional fees derived under scoring, network service or internal hosted software arrangements, and annual software maintenance fees. The recurrence of these revenues is, to a significant degree, dependent upon our clients’ continued usage of our products and services in their business activities. The more significant activities underlying the use of our products in these areas include: credit and debit card usage or active account levels; lending acquisition, origination and account management activity; workers’ compensation and automobile medical injury insurance claims; and wireless and wireline calls and subscriber levels. Approximately 83% and 80% of our revenues during the quarters ended June 30, 2004 and 2003, respectively, and 81% of our revenues during the nine months ended June 30, 2004

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and 2003, were derived from arrangements with transactional or unit based pricing. We also derive revenues from other sources which generally do not recur and include, but are not limited to, perpetual or time-based licenses with upfront payment terms, non-recurring professional service arrangements and gain-share arrangements where revenue is derived based on percentages of client revenue growth or cost reductions attributable to our products.

     Within the consumer credit and financial services sectors there has recently been a sizable amount of industry consolidation. Several of our customers have announced consolidation plans in recent periods. As a result of this consolidation, our future revenues may decline; however, due to the long-term customer arrangements we have with many of our customers, we view current consolidation in our customer base as unlikely to have a material effect on our near term future results.

     One measure used by management as an indicator of our business performance is the volume of new bookings achieved. We define a “new booking” as estimated future contractual revenues, including agreements with perpetual, multi-year and annual terms. New bookings values may include: (i) estimates of variable fee components such as hours to be incurred under new professional services arrangements and customer account or transaction activity for agreements with transactional-based fee arrangements, (ii) additional or expanded business from renewals of contracts, and (iii) to a lesser extent, previous customers that have attrited and been re-sold only as a result of a significant sales effort. In the quarter ended June 30, 2004, we achieved new bookings of $78.6 million, including 16 deals with bookings values of $1 million or more. Of the deals over $1 million, five had bookings values over $3 million. In comparison, new bookings in the quarter ended June 30, 2003 were $78.4 million, including 22 deals with bookings values over $1 million, of which two had bookings values over $3 million.

     Management regards the volume of new bookings achieved, among other factors, as an important indicator of future revenues, but they are not comparable to, nor should they be substituted for, an analysis of our revenues, and they are subject to a number of risks and uncertainties, including those described in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors, below, concerning timing and contingencies affecting product delivery and performance. Although many of our contracts have fixed non-cancelable terms, some of our contracts are terminable by the client on short notice or without notice. Accordingly, we do not believe it is appropriate to characterize all of our new bookings as backlog that will generate future revenue.

     Our revenues derived from clients outside the United States continue to grow, and may in the future grow more rapidly than our revenues from domestic clients. International revenues totaled $110.3 million and $96.4 million during the nine months ended June 30, 2004 and 2003, respectively, representing 21% of total consolidated revenues in each of these periods. International revenues totaled $35.1 million and $34.4 million during the quarters ended June 30, 2004 and 2003, respectively, representing 20% and 21% of total consolidated revenues in each of these periods. While international revenues grew during the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003, the percentage of international revenues to total revenues declined nominally. However, as a result of our acquisition of London Bridge in late May 2004, we expect that a larger percentage of total revenues will be derived from international clients beginning in our fourth quarter ended September 30, 2004. In addition to clients acquired via our acquisitions, we believe that our international growth is a product of successful relationships with third parties that assist in international sales efforts and our own increased sales focus internationally, and we expect that the percentage of our revenues derived from international clients will increase in the future.

     We acquired Spectrum Managed Care, Inc. (“Spectrum”) in December 2002, NAREX Inc. (“NAREX”) in July 2003, Diversified HealthCare Services, Inc. (“Diversified HealthCare Services”) in September 2003, Seurat Company (“Seurat”) in October 2003, and London Bridge in May 2004. Results of operations from these acquisitions are included prospectively from the date of acquisition. As a result of these acquisitions, our financial results during the quarter and nine months ended June 30, 2004, are not directly comparable to those during the quarter and nine months ended June 30, 2003 or other quarters prior to any of these acquisitions.

     Our reportable segments are: Strategy Machine Solutions, Scoring Solutions, Professional Services and Analytic Software Tools. Although we sell solutions and services into a larger number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance. Comparative segment revenues, operating income, and related financial information for the quarters and nine months ended June 30, 2004 and 2003 are set forth in Note 9 to the accompanying condensed consolidated financial statements.

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Revenues

     The following table sets forth certain summary information on a segment basis related to our revenues for the fiscal periods indicated. Segment information for the quarter and nine months ended June 30, 2003 has been revised to conform to the current segment presentation.

     Quarter Ended June 30, 2004 Revenues Compared to Quarter Ended June 30, 2003 Revenues

     The increase in total revenues from the quarter ended June 30, 2003 to the quarter ended June 30, 2004 included a $13.7 million increase in revenues that resulted from our NAREX, Diversified HealthCare Services, Seurat and London Bridge acquisitions in fiscal 2003 and 2004.

     Strategy Machine Solutions segment revenues increased primarily due to a $4.0 million increase in revenues from our account management solutions, a $2.4 million increase in revenues from our consumer solutions, a $1.3 million increase in revenues from our fraud solutions and a $1.2 million increase in revenues from our marketing solutions, partially offset by a $0.2 million net decrease in revenues from our other strategy machine solutions. The increase in account management solutions revenues was attributable primarily to increases in volumes under transactional-based agreements, including transactional-based revenues derived from our London Bridge and NAREX acquisitions in May 2004 and July 2003, respectively, and an increase in maintenance revenues derived from our London Bridge acquisition, partially offset by a decline in revenues relating to a prior year non-recurring perpetual license for our strategies. The increase in consumer solutions revenues was attributable primarily to an increase in revenues derived from our myFICO.com and strategic alliance partners due to increased customer volumes and higher average selling prices. The increase in fraud solutions revenues was attributable primarily to an increase in active accounts and merchant transaction volumes, principally due to growth in our customer base, and to the cross-selling of additional fraud products to our existing customer base. The increase in marketing solutions revenues was attributable primarily to an increase in customer transaction volumes resulting from our Seurat acquisition in October 2003, partially offset by a decrease in service revenues from our existing customer base.

     Scoring Solutions segment revenues increased primarily due to an increase in revenues derived from risk scoring services at the credit reporting agencies, resulting principally from increased sales of scores for prescreening and on-line activities. During the quarters ended June 30, 2004 and 2003, revenues generated from our agreements with Equifax, TransUnion and Experian, collectively accounted for approximately 21% and 19%, respectively, of our total company revenues, including revenues from these customers that are recorded in our other segments.

     Professional Services segment revenues increased primarily due to an increase in model development, software implementation, and business consulting revenues, including revenues derived from our London Bridge and Seurat acquisitions in May 2004 and

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October 2003, respectively.

     Analytic Software Tools segment revenues decreased primarily due to a decrease in sales of perpetual licenses for our analytic decision tools products.

     Nine Months Ended June 30, 2004 Revenues Compared to Nine Months Ended June 30, 2003 Revenues

     The increase in total revenues from the nine months ended June 30, 2003 to the nine months ended June 30, 2004 included a $33.1 million increase in revenues that resulted from our five acquisitions in fiscal 2003 and 2004.

     Strategy Machine Solutions segment revenues increased primarily due to a $10.7 million increase in revenues from our account management solutions, a $5.9 million increase in revenues from our fraud solutions, a $5.6 million increase in revenues from our consumer solutions, a $4.7 million increase in revenues from our insurance and healthcare solutions and a $4.7 million increase in revenues from our marketing solutions, partially offset by a $2.1 million decrease in revenues from our originations solutions. The increase in account management solutions revenues was attributable primarily to increases in both perpetual license sales and transactional volumes under transactional-based agreements, including perpetual and transactional-based revenues derived from our London Bridge acquisition in May 2004 and transactional-based revenues derived from our NAREX acquisition in July 2003, partially offset by a decline in revenues relating to a prior year non-recurring perpetual license for our strategies. The increase in fraud solutions revenues was attributable primarily to an increase in active accounts and merchant transaction volumes, principally due to growth in our customer base, and to the cross-selling of additional fraud products to our existing customer base. The increase in consumer solutions revenues was attributable primarily to increases in revenues derived from our myFICO.com and strategic alliance partners due to increased customer volumes and higher average selling prices. The increase in insurance and healthcare solutions revenues was attributable primarily to an increase in customer medical bill review volumes resulting from our Diversified acquisition in September 2003, partially offset by a decline in bill review volumes associated with our existing customer base, including that related to the loss of a significant customer, as well as lower claims volumes at some of our key customers. The increase in marketing solutions revenues was attributable primarily to an increase in customer transaction volumes resulting from our Seurat acquisition in October 2003, partially offset by a decrease in service revenues from our existing customer base. The decrease in origination solutions revenues was attributable primarily to a decline in origination product perpetual license sales.

     Scoring Solutions segment revenues increased primarily due to an increase in revenues derived from risk scoring services at the credit reporting agencies, resulting from increased sales of scores for prescreening, account review, and on-line activities. During the nine months ended June 30, 2004 and 2003, revenues generated from our agreements with Equifax, TransUnion and Experian, collectively accounted for approximately 20% and 19%, respectively, of our total company revenues, including revenues from these customers that are recorded in our other segments.

     Professional Services segment revenues increased primarily due to an increase in model development and business consulting revenues, including revenues derived from our London Bridge and Seurat acquisitions in May 2004 and October 2003, respectively.

     Analytic Software Tools segment revenues increased primarily due to an increase in sales of perpetual licenses for our analytic decision tools and model development software products.

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Operating Expenses and Other Income (Expense)

     The following table sets forth certain summary information related to our operating expenses and other income (expense) for the fiscal periods indicated.