##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

Form 10-K

|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                           
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the Fiscal Year Ended December 31,
	2001                                              
|          
|OR        
|          
|o          |  | 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 0-26146



---

HNC SOFTWARE INC.

(Exact name of registrant as specified in its
charter)


|                                                                                     |  |                                      
|------------------------------------------------------------------------------------ |  | -------------------------------------
|Delaware                                                                             |  | 33-0248788                           
|(State or other jurisdiction of
	incorporation or organization)                      |  | (I.R.S. Employer
	Identification No.)
|                                                                                    
|5935 Cornerstone Court West,
	San Diego, CA(Address of principal executive
	offices) |  | 92121(Zip Code)                      

Registrants telephone number, including
area code:

(858) 546-8877


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

None


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

Common Stock, $0.001 par value and related
Preferred Stock Purchase Rights


(Title of Class)


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 þ          No o

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

The aggregate market value of the common stock
held by non-affiliates of the Registrant, based on the closing
price as reported on the NASDAQ Stock Market at January 31,
2002 was approximately $577.2 million. The number of shares
of the Registrants Common Stock outstanding at
January 31, 2002 was 35,467,763 shares.

DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Definitive Proxy Statement to be
used for the Registrants 2002 Annual Meeting of
Stockholders is incorporated by reference in Part III of
this Form 10-K.



---






---

TABLE OF CONTENTS



|              |                                                                                               |                    |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- | ------------------ |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|              |                                                                                               | EXECUTIVE OFFICERS
|PART II      
|              | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|              | Item 6. Selected Consolidated Financial Data                                                 
|              | Item 7. Managements Discussion and Analysis of Results of Operations and Financial Condition
|              | Item 7a. Quantitative and Qualitative Disclosures about Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|EXHIBIT LIST 
|EXHIBIT 4.01 
|EXHIBIT 10.07
|EXHIBIT 10.31
|EXHIBIT 10.38
|EXHIBIT 10.45
|EXHIBIT 10.46
|EXHIBIT 21.01
|EXHIBIT 23.01



---



##### Table of Contents



TABLE OF CONTENTS

|         |  |                                                                                                 |  |          |    | 
|-------- |  | ----------------------------------------------------------------------------------------------- |  | -------- | -- | 
|         |  |                                                                                                 |  | Page No.
|         |  |                                                                                                 |  |         
|Part I  
|Item 1.  |  | Business                                                                                        |  |          | 1  | 
|Item 2.  |  | Properties                                                                                      |  |          | 15 | 
|Item 3.  |  | Legal Proceedings                                                                               |  |          | 15 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                            |  |          | 15 | 
|         |  | Executive Officers                                                                              |  |          | 16 | 
|Part II 
|Item 5.  |  | Market for the Registrants Common Equity
	and Related Stockholder Matters                      |  |          | 17 | 
|Item 6.  |  | Selected Consolidated Financial Data                                                            |  |          | 18 | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations          |  |          | 18 | 
|Item 7a. |  | Quantitative and Qualitative Disclosures About
	Market Risk                                     |  |          | 18 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                     |  |          | 19 | 
|Item 9.  |  | Changes in and Disagreements With Accountants on
	Accounting and Financial Disclosure           |  |          | 19 | 
|Part III
|Item 10. |  | Directors and Executive Officers of the Registrant                                              |  |          | 19 | 
|Item 11. |  | Executive Compensation                                                                          |  |          | 19 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management and Related Stockholder Matters |  |          | 20 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                  |  |          | 20 | 
|Part IV 
|Item 14. |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                                |  |          | 20 | 

HNC Software Inc. Trademarks

The following are our registered trademarks:
CardAlert®, CompCompare®, MIRA®, and
ProviderCompare®. The following are also our trademarks:
HNC SoftwareTM, FalconTM, and
RoamExTM. All other trademarks or trade names in this
report are the property of their respective owners.

Our World Wide Web site is located at both
hnc.com and hncs.com, and investor information can be requested
by calling Heidi Flannery, Investor Relations Consultant, at
(858) 799-1311. Information on our Web site is not part of
this Report.

We were founded in 1986 under the laws of
California, and were reincorporated in June 1995 under the laws
of Delaware. Our principal executive offices are located at 5935
Cornerstone Court West, San Diego, California 92121-3728, and
our telephone number is (858) 546-8877.

i



---



##### Table of Contents






PART I

Caution Regarding Forward-Looking
Information

This Annual Report on Form 10-K contains
forward-looking statements based on our current expectations,
estimates and projections about our industry, managements
beliefs and certain assumptions we have made. Words such as
anticipates, expects, plans,
intends, may, will,
should, believes, estimates
or similar expressions identify forward-looking statements.
These statements include, among other things, statements
concerning our anticipated growth strategies, anticipated trends
in our business and the markets that we serve, our expectations
of our future performance and the market acceptance of our
products, our plans for expanding our business, our plans for
product functionality and features and the status of evolving
technologies. In addition, the section entitled Risk
Factors in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations, consists primarily of forward-looking
statements. Forward-looking statements are only predictions
based upon our current expectations about future events. We
cannot guarantee future results, performance or achievements or
that predictions or current expectations will be accurate.

Forward-looking statements are subject to risks,
uncertainties and assumptions that are difficult to predict.
Therefore, our actual results could differ materially and
adversely from those expressed in any forward-looking statements
as a result of various factors. The section entitled Risk
Factors in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations, discusses some of the important risk factors
that may affect us. You should carefully consider those risks.
Investors are cautioned not to place undue reliance on these
forward-looking statements that speak only as of the date of
this report. We undertake no obligation to revise or update any
forward-looking statements for any reason.




Item 1.     Business

Overview

HNC provides high-end analytic and decision
management software applications and tools that enable our
customers to manage their customer interactions and make other
important business choices. Our products analyze large bodies of
data, such as customer transaction histories, and convert this
information into real-time business recommendations. Our
products empower our customers to make millions of
mission-critical customer decisions and respond in real time,
which can improve their financial performance, reduce their
costs and decrease their risk. HNCs customers include both
global and domestic companies in the financial services,
insurance, telecommunications, healthcare and other industries,
as well as government clients.

Market Overview

A variety of economic and political factors
contributed to declines in Information Technology
(IT) expenditures by corporations of all sizes and in all
industries over the last fiscal year. However, these same
constrictions also created an increased demand for software
solutions that generate improved productivity and efficiency. At
the same time, the amount of decision management data available
to corporations has continued to grow exponentially, creating an
additional need and opportunities for advanced technology
solutions that effectively use this information to simplify
analyses and deliver greater returns-on-investment.
Consequently, corporations in the U.S. and many international
markets, including Europe, the Middle East and Africa, as well
as some Asian-Pacific and Latin American countries, are expected
to increase expenditures for enterprise analytics software and
decision management technology.

With continued consolidation in key industries
worldwide, such as financial services, telecommunications and
healthcare, mission-critical IT applications that eliminate
redundancy and deliver full system integration are increasingly
important to corporate profitability and competitiveness. As a
result, increased demand for software solutions based on
industry-standard architectures is expected, both in North
America and abroad. At a time when corporations in all
industries are facing increased competition, IT solutions that
help these companies anticipate their customers needs, lower
risk and better manage expenses will always be in demand.

1



---



##### Table of Contents



Our customers comprise leading Fortune 1000 and
Global 2000 organizations in the financial, insurance,
telecommunications and healthcare industries, as well as
government clients. Within the financial services industry,
HNCs customers include leading corporations on six
continents, including all of the top 10 U.S. credit card issuers
and 17 of the 25 largest credit card issuers worldwide. More
than 100 insurance companies and state insurance
funds  including nine out of the 10 largest
carriers  are HNC customers. HNC has more than 100
wireless and wireline customers worldwide.

HNCs offerings consist of the HNC Critical
Action Platform and three suites of Critical Action
Software  our Efficiency Suite, Risk Suite and
Opportunity Suite.

Critical Action Platform

The HNC Critical Action Platform is a new
software platform technology we are developing in order to
enable our customers to swiftly deploy and install multiple HNC
products while significantly reducing their product
implementation costs. The Critical Action Platform will
incorporate common infrastructure tools and technologies that
can be shared across our Efficiency, Risk and Opportunity Suite
analytic products. These shared technologies will allow us to
reduce our costs to develop and install new applications, thus
permitting us to offer more competitive pricing for our
solutions. By reducing the time, effort and cost associated with
implementation of our analytic products, the Critical Action
Platform is being designed to encourage customers to purchase
multiple products that they can easily deploy on a common
pre-existing platform.

The Critical Action Platform is designed to be an
open, standards-based J2EE platform that will allow our
solutions to easily connect to our customers databases,
legacy and other systems. This platform is designed to bridge
point software solutions and remove barriers to application and
data integration, which will enable companies to implement
business strategies across an enterprise. At the same time it
will also provide a robust decisioning and rules management
technology architecture.

The Critical Action Platform also utilizes neural
networks and layers of advanced science such as optimization
algorithms, context vectors, entity recognition, sophisticated
rules management, and pattern recognition to help predict which
transactions are likely to result in negative activities such as
fraud and payment delinquency, or positive activities including
cross-sell and up-sell opportunities. The platforms
decision support tools enable our customers to analyze
information and make decisions that take advantage of
opportunities while minimizing risks.

The first two products to be released under the
Critical Action Platform architecture, an Opportunity Suite
product and a Falcon Risk Suite product, are scheduled for
release in the third quarter of 2002. We anticipate that
additional products and solutions will be released spanning into
2003.

Critical Action Software Application
Suites

Our Critical Action Software applications utilize
our proprietary core technologies  decision
management technology, free text analysis, neural networks and
decision support tools  to help businesses make the
right decisions at the right time through the right channels.
Our Critical Action Software consists of the following three
suites:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The HNC Efficiency
	Suite.The products in this suite help
	our customers reduce costs and improve the quality of their
	business decisions by automating complex, previously
	labor-intensive decision processes, such as new account
	application and medical claims processing. HNC Efficiency Suite
	applications can improve the efficiency of a companys
	personnel, particularly its executives and managers, by
	automating business policy and streamlining workflows. Our
	software sorts intelligently, makes sophisticated decisions
	based on complex data and all facets of the business,
	automatically takes the critical action needed, or routes
	information to appropriate persons for further review. The
	products in the Efficiency Suite are ideal for handling
	insurance claims, processing new account applications and
	relationship management actions for financial services and
	telecommunications companies.
|
| |  | The HNC Risk Suite.The products in this suite help improve our customers
	profitability by intelligently predicting the accuracy and
	validity of transactions to protect them and their customers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

2



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | from fraud and similar losses. HNC Risk Suite
	applications can analyze millions of customer transactions in
	milliseconds and generate a recommendation for immediate action
	critical to stopping fraud and abuse. These applications also
	detect organized fraud schemes that are too complex and well
	hidden to be identified by other methods. This suite is designed
	to detect and prevent credit and debit payment card fraud,
	identity fraud, telecommunications subscription fraud,
	healthcare fraud, Medicaid and Medicare fraud, and workers
	compensation fraud. It protects merchants, financial
	institutions, insurance companies, telecommunications carriers,
	government agencies and employers. The HNC Risk Suite includes
	applications for predicting bankruptcy, identifying money
	laundering and reducing bad debt.
|
| |  | The HNC Opportunity
	Suite.The products in this suite
	provide our customers opportunities to derive incremental
	revenue by optimizing their marketing decisions and improving
	their interactions with their customers. Our products are
	designed to help our customers with customer acquisition,
	customer retention, product pricing and cross-selling. This
	suite is unique in its ability to use both structured and
	free-form data to intelligently direct actions to the right
	targets for maximum return, based on predicted revenue or
	profitability, including the likelihood of response and
	retention.                                                                                                                                                                                                                        

Strategy

We believe that HNCs core competencies in
the marketplace include the application of advanced science to
data analysis, superior industry-specific knowledge, and the
ability to deliver significantly improved return-on-investment
for our customers. To take advantage of these skills we will
continue to focus on solving vertical-industry business issues,
but we also plan to extend our product line deeper into
customers functional business areas. The HNC Critical
Action Platform is bringing together our highly differentiated
science technologies and expertise into a single, broad
analytical architecture for multiple industries and
applications. With this development, we will be able to deliver
high-quality industry solutions faster and with more flexibility
across enterprises and into new vertical markets. We will
continue ongoing development work to refine and continuously
improve our products under the Critical Action Platform to
address changing technology standards and meet changing market
needs.

Additional components of our growth strategy
include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Further Enhance Our Solution Platform.We will continue to commit capital and
	energy to developing the HNC Critical Action Platform so that
	new applications are integrated seamlessly and can easily
	exchange data with other customer systems. Tools within the
	platform that define business policy will also become easier to
	implement in a greater diversity of business functions. Further
	development work will assure that all analytic models are
	completely self-monitoring and reliable. In addition, we intend
	to continue to expand our new platform technologies and
	applications and identify and pursue opportunities to sell
	product upgrades, as well as our other products, to our current
	customers. By delivering what we refer to as critical actionthrough advanced science,we believe the HNC Critical
	Action Platform has the potential to revolutionize the way
	mission-critical business applications are built for all
	industries HNC serves and to increase the number of our products
	used by our customers.
|
| |  | Penetrate Additional New Vertical Markets.We will continue our efforts to expand
	into new vertical-industry markets and additional application
	segments within existing sectors. By marketing our products to
	our existing customers and expanding our product offerings to
	new high-growth markets such as healthcare and government
	services, we will continue to exploit our total solutions and
	industry expertise. For example, we recently announced the first
	predictive pre-payment fraud detection system for commercial
	healthcare. In addition, in association with PROS Revenue
	Management, we recently applied for a government grant to
	research and develop security systems software for the airline
	industry. We plan to identify and pursue new vertical-industry
	applications at an accelerated pace.                                                                                                                                                                                                                     
|
| |  | Further Expand Global Presence.Despite a recessionary economic
	environment in most international markets throughout 2001, we
	continued to pursue our global expansion strategy by adding key
	sales, support and development personnel with global experience
	in Europe, the Middle East and Africa, as                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

3



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | well as the Asian-Pacific and Latin American
	regions. We will continue to allocate increased resources this
	year to support international expansion as part of our growth
	objectives. By taking advantage of new and existing business
	alliances, we have generated a number of new contracts that
	broaden our presence overseas. In September, we announced a new
	software solution for world financial institutions to help
	protect against the growing problem of money laundering. We also
	signed a contract with one of Brazils largest banks for
	online credit-approval software. In addition, our RoamEx data
	exchange network software will now be embedded in all BellSouth
	Wireless systems in Latin America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Earn Recurring Revenues Through Long-Term
	Contracts.Our software and service
	arrangements are generally structured either with fixed-fee
	licenses with maintenance or with usage-based fees that generate
	recurring revenue streams. We will continue to develop
	usage-based pricing arrangements to provide a combination of
	advantages for our customers: long-term support commitments for
	our mission critical software solutions, periodic model updates,
	ongoing consulting, and flexible, per use pricing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Develop, Build and Strengthen Strategic
	Alliances Globally.We are continuing
	our focus on strategic alliances to broaden distribution for all
	of our technologies and products and help supplement HNCs
	offerings in meeting customers wider product needs. These
	alliances may generally be characterized as:
	(i) traditional reseller or value added resellers (also
	known as VARs) who build custom solutions around HNC products or
	technologies for specific applications, industries or markets;
	(ii) original equipment distributors that embed HNC
	products or technologies in their broader offerings; and
	(iii) hardware and software platform providers, systems
	integrators, implementation partners and consultancies. We
	expect to benefit from these relationships by taking advantage
	of partner customer bases, co-operating in marketing programs to
	increase our visibility in new markets, and jointly building and
	delivering unique, industry leading solutions with premier
	technology and service providers.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Build Robust New Product Development Pipeline.Our customers are constantly seeking
	out new ways to serve their customers better, faster and more
	efficiently. Meeting these needs is at the core of our product
	development efforts. Working both internally and through key
	strategic relationships worldwide, HNC will continue to use its
	advanced science and industry knowledge to deliver innovative
	software solutions that meet our customers changing needs.
	Research and development is always critical to the success of a
	technology-based company, and HNC will continue to dedicate
	significant resources to the development of new industry-leading
	products, services and applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Expand Core Capabilities and Bring New
	Technologies To Our Customers Through
	Acquisitions.While there were many
	opportunities in the last fiscal year to acquire assets on
	attractive terms, we were very selective and conservative in our
	acquisition strategy in 2001. We completed some targeted
	acquisitions that helped provide beachhead positions in new
	markets and gave us access to best-of-breed technologies in
	completing the build out of our Critical Action Platform. In
	August 2001 we acquired certain assets of the Blaze Advisor
	business unit of Brokat Technologies. Blaze Advisor is the
	industry standard for advanced rules management technology. We
	believe that Blaze Advisor will help fill an important need in
	our Critical Action Platform in the area of rules technology,
	while helping us augment our product offerings with a highly
	sophisticated tool that will allow customers to build their own
	decisioning, personalization and workflow applications. In
	September 2001, we also acquired the UK-based marketing services
	provider business unit of Chordiant Software. This acquisition
	is helping us achieve two important goals  it
	expanded our European presence with the addition of several
	important customers, and accelerated the growth of our
	Opportunity Suite group by adding experienced UK-based staff and
	expertise to help deliver our next generation Opportunity Suite
	in the UK and elsewhere in Europe.

Markets, Products and Services

Our Critical Action software applications include
the HNC Efficiency Suite, HNC Risk Suite and HNC Opportunity
Suite. Our products enable domestic and global companies in the
financial, insurance, telecommunications and healthcare
industries and government entities to manage customer
interactions by converting

4



---



##### Table of Contents



data and business experiences into real-time
recommendations. In 2001, we successfully acquired and
integrated a number of acquisitions including ClaimPort, Inc.,
ecDataFlow.com Inc., the Blaze Advisor business unit from Brokat
Technologies and the marketing services business unit from
Chordiant Software Inc., and as a result have expanded our
product offerings, market penetration and ASP delivery channels.


We intend to continue to expand our solution
platform through internal product development initiatives as
well as through strategic acquisitions that deliver product
extensions for existing and new markets.

Efficiency Suite

HNCs Efficiency Suite products and services
include:

|                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                                          |  | Product Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Blaze Advisor From HNC                           |  | Blaze Advisor From HNCis a rules management tool used to
	design, develop, execute and maintain rules-based business
	applications. Its advanced technology can dramatically improve
	the way enterprises manage business applications and processes
	by enabling them to more quickly develop complex applications,
	respond to changing customer needs, implement regulatory
	compliance and reduce the total cost of day-to-day operations.                                                                                               
|                                                
|HNC Connectivity Manager                         |  | HNC Connectivity Manageris a suite of products that allows
	employers and insurance claims administrators to send first
	reports of injury (FROI), subsequent reports of injury (SROI)
	and medical bills to state departments of insurance and
	departments of labor, to comply with statutes that require them
	to submit their data electronically. Available in client/server
	and Web-enabled versions, the products offer injury and
	medical-related document support as well as business edits to
	insure accurate and complete data.
|                                                
|HNC Decision Manager For Financial
	Applications |  | HNC Decision Manager For Financial
	Applicationsis used to process over
	30% of U.S. credit card applications as well as applications for
	auto loans, mortgages, loans and lines of credit around the
	world. HNC Decision Manager combines advanced decisioning and
	modeling technology to detect customer credit risk with a
	flexible architecture for superior application processing speed
	and accuracy.                                                                                                                             
|                                                
|HNC Decision Manager For Medical Bill
	Review    |  | HNC Decision Manager For Medical Bill Reviewis the leading medical bill repricing
	solution for workers compensation injuries and automobile
	medical injuries. The products automated data entry and
	optical character recognition capabilities increase production
	throughput, and assigns the right staff resources to the right
	decisions.                                                                                                                                                                                          
|                                                
|HNC Outsourced Bill Review
	Services             |  | HNC Outsourced Bill Review Servicesprovide turnkey insurance bill review
	administration services at selected locations across the
	country. These branch operations offer expert medical bill and
	preferred provider review for workers compensation and
	auto medical insurance bills, including the additional review of
	complex medical, hospital and surgical bills.                                                                                                                                                                 

5



---



##### Table of Contents



|                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                           |  | Product Description                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|HNC Decision Manager ASP          |  | HNC Decision Manager ASPis a high-speed, high-volume
	decisioning service for the financial, insurance and
	telecommunications industries. It provides the functionality of
	HNC Decision Manager through an application service provider
	(ASP) delivery channel. The solution helps users increase
	new business volume without corresponding increases in headcount
	and IT budget and gives them control over unique decisioning
	processes and policies.
|                                 
|HNC Financial Accounting
	Manager |  | HNC Financial Accounting Managerprovides a suite of economical,
	easy-to-use core accounting solutions designed to help small and
	mid-size financial institutions manage a wide range of
	accounting activities more effectively. HNC offers
	state-of-the-art solutions for general ledger and management
	reporting, accounts payable processing, fixed-assets accounting,
	investment accounting and enterprise information reporting.                   
|                                 
|HNC  MIRA Claims
	Advisor        |  | HNC MIRA Claims Advisoris an automated loss reserving
	software system currently available for workers
	compensation claims. It uses advanced statistical models based
	on workers compensation claims data collected from the
	customer. It helps insurance payors calculate claims reserves by
	providing an accurate, objective and independent method for
	determining the cost and duration of current claims.                                        
|                                 
|HNC RoamEx Roamer Data
	Exchanger |  | HNC RoamEx Roamer Data Exchangerhelps wireless telecommunications
	carriers identify potential fraud by delivering near real-time
	exchange of roamer call records that occur when subscribers roam
	outside a carriers home network. Carriers are able to
	offer roaming to a greater number of their subscribers, thereby
	increasing Average Revenue Per User (ARPU), while reducing the
	risk of fraud when subscribers roam beyond their home network. 

Risk Suite

HNCs Risk Suite products and services
include:

|                             |  |                                                                                                                                                                                                                                                               
|---------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                      |  | Product Description                                                                                                                                                                                                                                           
|                             |  |                                                                                                                                                                                                                                                               
|HNC Application Risk Manager |  | HNC Application Fraud Manageraccurately predicts the likelihood and
	detects the existence of identity deception on various types of
	credit card, home loan and credit line account applications.                                                            
|                            
|HNC CardAlert Fraud Manager  |  | HNC CardAlert Fraud Managerhelps card issuers and Electronic
	Funds Transfer (EFT) network providers combat large-scale
	counterfeit ATM card fraud. HNC CardAlert Fraud Manager delivers
	the advanced warning needed to detect a counterfeit card
	outbreak.

6



---



##### Table of Contents



|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                                   |  | Product Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|CompCompare                               |  | CompCompareis a
	benchmarking database that allows users to generate detailed
	comparative analyses between their claims data and insurance
	industry data. It features online access to HNC Insurance
	Solutions workers compensation database. The product
	is marketed by NCCI (the National Council on Compensation
	Insurance, Inc.) through a joint marketing agreement with HNC.                                                                                                                                                                                                                                                           
|                                         
|ProviderCompare                           |  | ProviderCompareis a
	physician profiling system that compares one physician to a peer
	group of physicians for similar claim populations, identifies
	providers with significantly higher costs, and uses provider
	report cards and treatment pattern analysis to educate providers
	to improve financial outcomes. The product is marketed by NCCI
	through a joint marketing agreement with HNC.                                                                                                                                                                                                                                                 
|                                         
|HNC Consulting Services                   |  | HNC Consulting Servicesoffers access to HNC Softwares
	fraud experts, who consult on initiatives such as authorization
	strategies, fraud prevention strategies, recovery strategies or
	system advancements to help reduce fraud losses quickly.                                                                                                                                                                                                                                                                                                                                                                                                  
|                                         
|HNC Falcon Fraud Manager                  |  | HNC Falcon Fraud Manageris recognized as the leader in global
	payment card fraud detection. HNCs neural networks examine
	transaction, cardholder and merchant data to detect a wide range
	of credit card fraud quickly and accurately.                                                                                                                                                                                                                                                                                                                                                                                                          
|                                         
|HNC Falcon Fraud Manager for
	Merchants   |  | HNC Falcon Fraud Manager for Merchantsis designed for card-not- present
	transactions. It provides online merchants with a fraud and risk
	management solution, enabling companies to approve more good
	transactions, increasing sales and providing better customer
	service. HNC Falcon Fraud Manager is delivered through an ASP
	delivery channel.                                                                                                                                                                                                                                                                                             
|                                         
|HNC Fraud Manager for
	Telecommunications |  | Using advanced science, HNC Fraud Manager for
	Telecommunicationsprovides telecommunications carriers and
	operators with protection from fraud. Unlike rules-based
	systems, HNC Fraud Manager is well suited to stopping complex
	types of fraud such as subscription fraud, internal fraud and
	dealer/agent fraud. It also protects carriers from traditional
	forms of technical fraud, including calling card fraud, cloning,
	clip-on fraud and PBX fraud.                                                                                                                                                                                   
|                                         
|MasterCardTMRiskFinder                    |  | Developed by MasterCard and HNC,
	MasterCardTMRiskFinderuses market-specific
	neural network models that analyze the behavior of individual
	cardholders and merchants and finds fraud patterns where these
	behaviors are similar. To expand the systems ability to
	accurately detect fraud, RiskFinder also leverages HNCs
	proprietary profiling technology to build detailed profiles of
	each individual cardholders spending patterns/ behavior
	that are updated with every new transaction. In addition,
	RiskFinder includes a feature not found in other
	systems  it incorporates highly detailed merchant
	profiles to assess risk.

7



---



##### Table of Contents



|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                                |  | Product Description                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|HNC Payment Optimizer                  |  | HNC Payment Optimizeris a healthcare fraud, abuse and waste
	control solution for Medicare, Medicaid and commercial insurers.
	It detects fraud and abuse patterns of all types across a broad
	range of provider types and program areas. HNC Payment Optimizer
	also adapts to detect fraud and abuse patterns as they emerge
	and evolve, before they can cause massive losses.                                                                                           
|                                      
|HNC Risk Manager for
	Acquirers        |  | HNC Risk Manager for Acquirersuses HNCs neural network models
	and expert rules to identify individual high-risk merchants and
	manage investigative and intervention actions. It pinpoints
	patterns among the independent sites in a chain and recognizes
	merchants who are subject to fraudulent activities such as
	laundering, skimming or employee swindles. As a result,
	acquiring banks can manage risk and profitability while
	improving operational efficiency.
|                                      
|HNC Risk Manager for Money
	Laundering |  | HNC Risk Manager for Money Launderinguses HNCs proven modeling and
	profiling technology to identify key transaction patterns and
	establish baseline behavior at the account, customer and peer
	group levels for individual transaction and comparison
	evaluation. It turns everyday transaction data into money
	laundering insight with a flexible framework that easily
	integrates with existing systems.                                                            

Opportunity Suite

HNCs Opportunity Suite products and
services include:

|                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                          |  | Product Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|HNC Cross-Sell Optimizer         |  | HNC Cross-Sell Optimizeruses advanced algorithms and
	optimization technology to provide our customers unique insights
	on customer database information in significantly shorter
	timeframes. It provides end-to-end campaign management
	functions, including automated execution, interaction with
	third-party vendors, response posting and performance reporting.                                                                                                                                                  
|                                
|HNC Marketing Services
	Provider |  | HNCs Marketing Services Provider (MSP)solution meets marketers need
	for a reliable and quickly implemented direct marketing
	solution. The MSP solution automates and streamlines the complex
	process required to plan, define, execute and analyze
	sophisticated multichannel, multi-stage marketing campaigns. The
	MSP service is built around marketing database design and
	management, and layered with marketing campaign design,
	scheduling and execution.                                                 
|                                
|HNC Profit Manager               |  | HNC Profit Mangeris
	targeted to financial institutions and incorporates an interface
	to users core accounting systems. It ensures the accuracy
	of profitability measurement through matched-maturity funds
	transfer pricing and sophisticated cost-allocation methods,
	including activity-based costing. The system is designed to be
	an integrated component to the users CRM strategy,
	allowing them to target market segments, price financial
	products and stimulate and act on strategic plans for growth.

8



---



##### Table of Contents



|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                     |  | Product Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                           
|HNC Profitability Predictor |  | HNC Profitability Predictoris a predictive algorithm that
	forecasts future cardholder profitability based on transaction
	information. More than a simple credit risk score, this
	algorithm includes revenue potential, risk of delinquency or
	charge off and attrition likelihood; the result is a complete
	picture of profitability. A form of this product also uses
	HNCs proprietary profiling and modeling techniques to
	assess individual cardholders and predict the likelihood that
	they will file for bankruptcy. Through consistent monitoring and
	action, access to account level information and detailed
	transaction data, HNCs neural networks can detect
	otherwise hard-to-identify relationships that indicate a
	potential bankruptcy.
|                           
|HNC Prospecting Optimizer   |  | HNC Prospecting Optimizerhelps our customers acquire new
	customers that will prove most profitable to them throughout the
	relationship. By leveraging proprietary predictive modeling and
	optimization technology, HNC Prospecting Optimizer allows its
	users to balance long-term risk and reward, and identify
	prospects with the greatest economic potential.                                                                                                                                                                                                                                                                                                                                                                                              
|                           
|HNC Strategy Manager        |  | HNC Strategy Managerdelivers a complete customer
	management solution that allows account managers, marketing
	managers and other designated personnel to supervise customer
	management actions from the desktop with a powerful, easy-to-use
	graphical user interface.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Sales & Marketing

We sell and market our software and services
globally through our direct sales organization and our global
channels sales organization, which includes our distribution,
hardware platform, and service and consulting partners. Through
these direct and indirect channels, we are focusing on three key
initiatives to accelerate sales:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | Develop and expand strategic partnerships on a
	global scale;                            
|
| |  | Commit sales and marketing resources
	internationally to accelerate global expansion; and
|
| |  | Leverage our existing customer base to cross-sell
	solutions.                            

Direct Sales.Our
national sales staff is based at our corporate headquarters in
San Diego, California as well as in field offices in California,
Colorado, Connecticut, Florida, Georgia, Illinois, Maryland,
Massachusetts, Missouri, New Jersey, New Mexico, New York, North
Carolina, Ohio, Pennsylvania, Texas and Virginia. Our
international field sales offices are located in the United
Kingdom, France, the Netherlands, Japan, Singapore and Brazil.
To support our sales force, we conduct comprehensive marketing
programs, which include demand generation, public relations,
advertising, seminars, trade shows and industry advisory council
meetings. We sponsor ongoing customer communication programs
including events such as our annual technology conference, Power
2C, and users group meetings. We also sponsor an annual global
sales meeting for our entire sales force. Our sales staff is
generally a relationship and account management model, but also
includes assigned geographic territories.

Service Bureaus.We
have licensed First Data Corporation, Electronic Data Services,
Total Systems and Equifax to act as service bureaus, providing
an alternate channel of distribution for end-users of our HNC
Falcon Fraud Manager product. We have also licensed First Data
as a service bureau for our HNC Falcon Fraud Manager product. We
generally assist our service bureau partners in their sales
efforts, often employing our direct sales force in the process.
These service bureaus pay us monthly usage fees based on the
volume of transactions processed. We also have an outsourced
bill-review service bureau for the insurance industry. This

9



---



##### Table of Contents



insurance service bureau provides both turnkey
bill-review services, as well as the capability to handle
overflow needs of customers through our field locations in
California, Missouri and Texas.


ASP (Application Service Provider).We provide credit-card fraud detection
to e-commerce merchants through our ASP delivery channel. In the
telecommunications market we provide a suite of fraud detection
solutions and decision management solutions through the ASP
channel. For the insurance industry, our EDI/ Network
Connectivity group offers ASP versions of injury-reporting
products.

International and Export
Activity.Revenues derived from
international operations and export sales represented
approximately 18.1%, 19.4% and 23.2% of our total revenues in
2001, 2000 and 1999, respectively. International sales resulted
primarily from Falcon Fraud Manager product sales, as well as
the sale of Reteks products during the first nine months
of 2000, and all of 1999.

We market our products internationally through
three primary regions outside of North America. Those regions
include Europe, Middle East and Africa (EMEA), Asia Pacific
(AP) and Latin America and the Caribbean (LAC). We have
three offices in the EMEA region, located in the United Kingdom,
the Netherlands and France, two offices in the AP region,
located in Japan and Singapore, and one office in the LAC
region, located in Brazil. We also market our products through
various channels, including distributors and resellers. We plan
to continue to expand our operations outside the United States
and enter additional international markets, which will require
significant management attention and financial resources. We
will continue to commit significant time and development
resources to customizing our products for selected international
markets and developing international sales and support channels.
Our efforts to develop international products, databases,
models, and sales and support channels may not be successful.

International sales pose additional inherent
risks, including longer payment cycles, unexpected changes in
regulatory requirements, import and export restrictions and
tariffs, difficulties in staffing and managing foreign
operations, the burden of complying with a variety of foreign
laws, greater difficulty or delay in accounts receivable
collection, potentially adverse tax consequences, and political
and economic instability. Our international sales are primarily
denominated in United States dollars, and a small portion is
denominated in other currencies, primarily those of Western
Europe and Canada. An increase in the value of the United States
dollar relative to foreign currencies could make our products
more expensive and potentially less competitive in foreign
markets. In the future, to the extent our international sales
are denominated in local currencies, foreign currency
translations may contribute to significant fluctuations in our
business, financial condition and results of operations. The
imposition of exchange or price controls or other restrictions
on foreign currencies could also harm our business.

Competition

The market for our advanced solutions is
intensely competitive and is constantly changing. Our
competitors vary in size and scope of the products and services
they offer. We encounter competition from a number of sources,
including:



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Other application software companies, including
	enterprise software vendors;                                                                                            
|
| |  | Management information system departments of
	customers and potential customers, including financial
	institutions, insurance companies and telecommunications
	carriers;
|
| |  | Third-party professional services and consulting
	organizations;                                                                                                         
|
| |  | Internet companies;                                                                                                                                                      
|
| |  | Hardware suppliers that bundle or develop
	complementary software products;                                                                                              
|
| |  | Network and telecommunications switch
	manufacturers, and service providers that seek to enhance their
	value-added services;                                            
|
| |  | Neural network tool suppliers; and                                                                                                                                       
|
| |  | Managed care organizations.                                                                                                                                              

10



---



##### Table of Contents



In the Risk Management market we have experienced
competition from the following companies: Automatic Data
Processing, Inc. (ADP), Insurance Services Organization, Inc.
(ISO), Lightbridge, Inc., and TSI Corp., among others.

In the Opportunity market, we have experienced
competition from the following companies: Computer Associates
International, Inc., Fair, Isaac and Company, and MarketSwitch
Inc., among others.

In the Efficiency market, we have experienced
competition from the following companies: AMDOCS, Inc. Axciom
Inc., CorVel Corp., and Science Applications International
Corporation (SAIC), among others.

Pricing in the
Marketplace.The market for our
products is highly competitive, and we expect to face increasing
pricing pressures from our customers, current competitors and
new market entrants. In particular, increased competition could
cause price reductions or changes in our usage-based pricing. In
addition, competition could negatively impact our ability to
obtain new long-term contracts and renewals of existing
long-term contracts on favorable terms. Any reduction in the
price of our products could harm our business.

Competitive Factors.We believe the principal competitive factors affecting our
markets include: technical performance (for example, accuracy in
detecting credit card fraud or evaluating workers
compensation claims); access to unique proprietary databases;
availability in ASP format; product attributes like
adaptability, scalability, interoperability, functionality and
ease-of-use; product price; customer service and support; the
effectiveness of sales and marketing efforts and our reputation.
Although we believe our products currently compete favorably
with respect to these factors, we may not be able to maintain
our competitive position against current and future competitors.

Some of our current competitors, and many of our
potential competitors, have significantly greater financial,
technical, marketing and other resources than we do, as well as
broader integrated product lines. As a result, they may be able
to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources
to the development, promotion and sale of their products than we
can. They may also possess marketing advantages due to their
ability to offer integrated suites of related products vital to
the customers computing infrastructure. In addition,
current and potential competitors have established or may
establish cooperative relationships among themselves or with
third parties to increase their ability to address the needs of
our prospective customers. It is possible that new competitors
or alliances among competitors may emerge and rapidly gain
significant market share. Also, we rely upon our customers to
provide data, expertise and other support for updating our
models. Our customers, most of which have significantly greater
financial and marketing resources than we do, may compete with
us in the future or otherwise discontinue their relationships
with us, or cease to provide us with critical data or support of
our business, all of which could significantly harm our business.

Customer Service & Support

A high level of continuing maintenance, service
and technical product support is critical to maintaining the
performance of our predictive software solutions. Service and
support are also essential to our objective of developing
long-term relationships with, and obtaining recurring revenues
from, our customers. Our service and support activities relate
to system installation, performance validation and ongoing
consultation on the optimal use of our products.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Model and Rule Updates.Many of our product license agreements
	obligate us to provide periodic data, model and/or rule updates
	to maintain system performance. Our technical personnel often
	assist the customer with installation of updates. We make
	commitments to update models and rules at varying intervals,
	according to both periodically scheduled updates (for example
	quarterly and annually) as well as unscheduled updates, provided
	the customer has met its commitments to provide data to us. The
	choice of data source and data updates are important to
	customers because this data comprises the fundamental building
	blocks used to create accurate predictive models. We provide
	various models built on industry-specific or customer-specific
	data to meet individual application requirements. Customers and
	data suppliers provide us with historical transaction data for
	turnkey models, trend analyses and product updates. This
	combination of proprietary, turnkey, customized and

11



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | user-developed models allows us to offer products
	that solve a broad range of predictive application problems.                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Education.We offer
	comprehensive education and training programs to our customers.
	We provide training associated with many of our products at our
	facilities and at our clients facilities. Fees for
	education and training services are generally included in the
	pricing of usage-priced products, but may be charged separately
	in other cases. In addition, we host an annual customer
	technology conference and Users Group meetings.                                         
|
| |  | Consulting.Our
	consultants are available to work with our customers user
	application groups and information systems organizations.
	Customers buy our consulting services, which range from
	short-term expert consulting and needs analysis to large
	implementations or performance optimization for our products in
	their operating environments. Fees for consulting are generally
	included in the pricing of usage-priced products, but may be
	charged separately in other cases.
|
| |  | Product Support.Our
	product support organization provides technical service in
	support of HNC Software solutions. Customers contact product
	support to resolve issues they experience that they believe may
	relate to our products. Fees for product support are generally
	included along with the pricing of purchased products.                                                                                                                                                      

Technology

At the heart of our analytic and decision
management software solutions lie two critical functions. The
first of these is the ability to predict which individuals are
most likely to exhibit certain critical business transaction
patterns. Examples of these transaction patterns include fraud,
payment delinquency, and probable responsiveness to
cross-sell/up-sell marketing efforts. The second critical
function is the ability to select an appropriate action to
either encourage (in the case of a cross-sell) or discourage (in
the case of delinquency) an individuals predicted
transaction patterns.

Our key technologies are designed to perform one
or both of these critical functions. These technologies include
neural network models, intelligent decision engines, profiles,
traditional statistical models, business models, expert rules
and context vectors. In addition to current technologies, we
strive to develop new and innovative technologies that enable
new or expanded predictive software capabilities. Some of our
longer-term research projects are partially funded through
contracts with the U.S. Government or members of the U.S.
intelligence community.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Neural Network Technology.The term neural network
	refers to a family of nonlinear, statistical modeling
	techniques, which were derived from the work of scientists
	engaged in understanding biological intelligence. While we are
	far from having a complete understanding of biological
	intelligence, the techniques proposed by these scientists have
	proven to be very useful in solving difficult, complex business
	and engineering problems. We have adopted many of these
	techniques in our predictive software solutions.

We use neural network techniques to build models
of complex transaction patterns such as consumer credit card
fraud. These models are created through a process called
training. Training involves exposing a neural
network algorithm to a large data set of examples of transaction
patterns. Often hundreds of thousands to millions of examples
are provided. The neural network processes this data to identify
patterns in the data that are predictive of the transaction
patterns being modeled. Once training is complete, the neural
network uses these learned patterns to predict the probability
that a new individual will exhibit the modeled transaction
patterns. We have developed proprietary high-speed and
parallel-processor boards to accelerate training and execution
of our neural network software.

Although other statistical methods can be used,
our neural network technology distinguishes itself in its
ability to build highly accurate models more rapidly than other
methods. This provides us with a significant competitive
advantage in developing and deploying products. Further, our
experience with

12



---



##### Table of Contents



neural network technology has led to the
development of proprietary methodologies for applying that
technology to real time, transaction-based business problems.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Transaction Profiling Technology.Many of our products operate on
	transactional data, such as credit card purchase transactions,
	or other types of data that change over time, such as
	workers compensations claims. In their raw form, this data
	is very difficult to use in model building for several reasons.
	First, a single transaction contains very little information
	about the transaction patterns of the individual that generated
	the transaction. Second, transaction patterns change rapidly
	over time. Finally, this type of data can often be incomplete.
	To overcome these data problems, we have developed a set of
	proprietary techniques that transform raw transactional data
	into a format that is suitable for model building. We refer to
	this set of techniques as our profiling technology. As the name
	suggests, our profiling technology accumulates data across
	multiple transactions to create profiles of transaction
	patterns. Although these profiles are unintelligible to humans,
	they provide our neural network models with the information
	needed to predict complex transaction patterns.
|
| |  | Rule-based
	Technology.Predicting transaction
	patterns is only half the battle in determining how to best
	manage or interact with a customer. The other half involves
	optimizing the response or action, given the transaction
	patterns that have been identified and the corresponding
	predicted outcome. To provide this response optimization, many
	of our products combine specially trained neural network models
	with rule-based techniques. Rules provide an effective method of
	capturing and applying such well-defined information as
	marketing strategies, corporate policies, and standard operating
	procedures. We have developed rule engines that operate
	efficiently in a real time, transaction-oriented system. We
	believe our combination of these rule engines with neural
	network models represents a significant technological advantage
	over more traditional approaches to decision automation.                                                                                                                                                                                                             
|
| |  | Context Vector
	Technology.Much of the information
	produced and used by the business world is in the form of text
	documents or similar unstructured data. Context vector
	technology allows such data to be digested and converted
	automatically to a mathematical form that can be used in our
	predictive solutions. Using context vector technology, we can
	automatically search, classify and route text accurately and
	build predictive models from both textual and numerical data.
	When combined with our other technologies, such as neural
	networks and rule-based systems, we believe that context vectors
	allow us to effectively use most forms of business data in
	predictive solutions, provide new data analysis capabilities and
	improve the performance of existing applications.                                                                                                                                                                                                                                                                                                                                      

Dependence on Third Party
Data.Our success depends upon our
ability to enter new markets by successfully developing new
products for those markets on a timely and cost-effective basis.
In order to develop new products, we often require proprietary
customer data for decision model development and system
installation. As a result, completion of new products
(particularly new products for new markets we are entering) may
be delayed until we can extract sufficient amounts of
statistically relevant data to develop the models. During this
development process, we rely on our potential customers in the
new market to provide us with relevant data and to help train
our personnel in the use and meaning of the data in the specific
industry. These relationships also assist us in establishing a
presence and credibility in the new market. These potential
customers, most of which have significantly greater financial
and marketing resources than we do, may compete with us in the
future or otherwise discontinue their relationships with or
support of us, either during development of our products or
later on. If we fail to obtain adequate third-party support for
new product development, our ability to enter new markets could
be impaired.

Intellectual Property.We rely on a combination of patent,
copyright, trademark and trade secret laws and confidentiality
procedures to protect our proprietary rights. We currently own
17 issued United States patents and have 19 United States patent
applications pending. We also have patent applications pending
in a number of other countries. The patents we hold may not be
upheld as valid and may not prevent the development of
competitive products. In addition, patents may never issue on
our pending patent applications or on any future application
that we may submit. We seek to protect our software,
documentation and other written materials under trade secret and
copyright laws. As part of our confidentiality procedures, we
generally enter into invention assignment and proprietary
information agreements with our employees and independent

13



---



##### Table of Contents



contractors and nondisclosure agreements with our
distributors, strategic partners and licensees. We also restrict
access to our source code and limit access to and distribution
of our software, documentation and other proprietary information.


Despite our efforts to protect our proprietary
rights, existing laws and our contractual arrangements provide
only limited protection. Unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult and the
steps we have taken might not prevent unauthorized use of our
technology, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as in the United
States. It may be possible for a third party to copy or
otherwise to obtain and use our products or technology without
authorization, or to develop similar technology independently.

We have developed technologies for research
projects conducted under agreements with various United States
Government agencies or their subcontractors. Although we have
acquired commercial rights to these technologies, the United
States Government typically retains ownership of intellectual
property rights and licenses in the technologies that we develop
under these contracts. In some cases, the United States
Government can terminate our rights to these technologies if we
fail to commercialize them on a timely basis. In addition, under
United States Government contracts, the government may make the
results of our research public, which could limit our
competitive advantage with respect to future products based on
funded research.

In the past, we have received communications from
third parties asserting that our trademarks infringe upon other
parties trademarks, or that data we use is copyrighted by
an independent third party, none of which has resulted in
litigation or material losses to us. We have also been involved
in patent litigation. Given our ongoing efforts to develop and
market new technologies and products, we might receive claims
from other third parties asserting that our products infringe
upon their intellectual property rights. Licenses to disputed
third-party technology or intellectual property rights might not
be available to us on reasonable commercial terms, if at all.
Furthermore, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to
establish the validity of our proprietary rights. Litigation
could result in significant expense to us, and divert the
efforts of our technical and management personnel, whether or
not it is resolved in our favor. As a result of an adverse
ruling in any litigation, we might be required to pay
substantial damages, discontinue the use and sale of infringing
products, expend significant resources to develop non-infringing
technology or obtain licenses to infringing technology. In
addition, a court might invalidate our patents, trademarks or
other proprietary rights.

Research &
Development.Our research and
development expenses were $45.7 million in 2001,
$89.1 million in 2000, and $50.2 million in 1999.
Excluding research and development expenses related to Retek,
and allocated stock-based compensation and Retek spin-off
expenses, our research and development expenses were
$45.6 million in 2001, $39.4 million in 2000, and
$26.4 million in 1999. We believe that our future success
depends on our ability to continually maintain and improve our
core technologies, enhance our existing products, and develop
new products and technologies that meet an expanding range of
markets and customer requirements. We intend to expand our
existing product offerings and to introduce new predictive
software solutions. In the development of new products and
enhancements to existing products, we use our own development
tools extensively. We have traditionally relied primarily on the
internal development of our products.

Based on timing and cost considerations, however,
we have acquired, and in the future may consider acquiring,
technology or products from third parties. For example, we
acquired technology and products in connection with our
acquisitions of WebTrak in 1999, CASA, AIM, Onyx Technologies,
Celerity Technologies, HighTouch, CardAlert and Systems/ Link in
2000, and ClaimPort, ecDataFlow, the Blaze Advisor business
unit, and the MSP business unit of Chordiant in 2001. The
expense associated with acquired technology and products is
separately stated on our financial statements as acquired
in-process research and development and is not included in our
research and development expenses above.

Visionary research has long been a key component
of our business plan. We continually monitor research
developments internal and external to HNC. We sponsor research
programs to develop the ideas that we believe have the most
potential. In some cases, external funding (i.e., government
grants) is used to develop

14



---



##### Table of Contents



initial concepts. One example of this is our
bioinformatics program. Funded by the Defense Advanced Research
Projects Agency, or DARPA, we are developing advanced
computational intelligence algorithms to detect patterns in
genomic and medical literature data. A second example is our
Cortronics program. Originally funded by DARPA, the program is
now fully supported by HNC. The Cortronics project is a
long-term research project focused on developing and applying
computer models of regions of the cerebral cortex to recognize
and associate patterns in text, speech and vision. The objective
of this work is to develop intelligent computing systems that
are much more capable of interacting with and reasoning about
their environments than current systems.


Employees

As of December 31, 2001, we had 1,270
employees, including 490 in product management and engineering,
228 in customer service, 140 in sales and marketing, 212 in
service bureau and 200 in finance, administration and management
information systems. This year we continued our expansion
globally and now have employees in France, Germany, the
Netherlands, and the UK as well as Asia. None of our employees
are represented by a labor union. We have experienced no work
stoppages and believe that our employee relationships are
generally good.

Our success depends to a significant degree upon
the continued focus of our senior management and other key
research, development, sales and marketing personnel. Only a
small number of our employees have employment agreements, and
these agreements may not result in the retention of these
employees. In the past, we have experienced difficulty in
recruiting a sufficient number of qualified technical and sales
employees.




Item 2.     Properties

Our principal administrative, sales, marketing,
support, and research and development facilities are located in
approximately 171,000 square feet of office space in San Diego,
California. We also lease an aggregate of approximately 268,000
square feet of additional office space in the following
locations:

|                                                                                                |  |                                                                                  |  |                                                                                           
|----------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------
| Costa Mesa, California
	 San Jose, California
	 Chicago, Illinois
	 Los Alamos, New Mexico |  |  Irvine, California
	 Denver, Colorado
	 St. Louis, Missouri
	 Dallas, Texas |  |  San Mateo, California
	 Atlanta, Georgia
	 Cranbury, New Jersey
	 Arlington, Virginia

In addition, we maintain several field offices in
the United States in foreign countries. We believe that our
current and anticipated facilities are adequate to meet our
needs for the foreseeable future. We believe that suitable
additional or alternative space will be available in the future
on commercially reasonable terms as needed.




Item 3.     Legal
Proceedings

None.




Item 4.     Submission
of Matters to a Vote of Security Holders

None.

15



---



##### Table of Contents






EXECUTIVE OFFICERS

Pursuant to General Instruction G (3), the
information regarding our executive officers required by
Item 401(b) of Regulation S-K, is listed below in
Part I of this filing.

The following table provides the names, offices,
and ages of each of our executive officers as of
January 31, 2002:

|                    |  |     |    |          |  |                                                           
|------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|John Mutch          |  |     | 45 |          |  | Chief Executive Officer                                   
|Bruce E. Hansen     |  |     | 42 |          |  | President                                                 
|Kenneth J. Saunders |  |     | 40 |          |  | Chief Financial Officer and Secretary                     
|Mary Burnside       |  |     | 54 |          |  | Chief Operating Officer                                   
|Russell C. Clark    |  |     | 33 |          |  | Vice President, Corporate Finance and Assistant
	Secretary
|Roger Ahern         |  |     | 33 |          |  | Vice President, Decision Management                       
|Michael Chiappetta  |  |     | 37 |          |  | Group Vice President, Risk Management                     
|Sean M. Downs       |  |     | 41 |          |  | Group Vice President, Insurance Transaction
	Processing   
|Kyle W. Thomas      |  |     | 40 |          |  | Group Vice President, Global Sales                        

John Mutch has been Chief Executive Officer since
December 1999. He also served as President from December 1999 to
June 2001. Mr. Mutch joined us in July 1997, where he
served initially as Vice President, Marketing until September
1998, and later as President of HNC Insurance Solutions from
September 1998 to December 1999. He was a founder of MVenture
Holdings, Inc., a private equity fund that invests in start-up
technology companies, and served as a general partner from June
1994 to July 1997. From December 1986 to June 1997,
Mr. Mutch held a variety of executive marketing positions
with Microsoft Corporation, including Director of Organization
Marketing. He holds a Bachelors of Science degree in
Applied Economics from Cornell University and a Masters
degree in Business Administration from the University of Chicago

Bruce E. Hansen was appointed President in May
2001. He joined us as President, HNC Financial Solutions in
February 2000. He served as President and Chief Executive
Officer of CASA, a privately held advanced analytical solutions
company that specializes in one-to-one marketing and strategic
risk management solutions, until we completed our acquisition of
CASA during March 2000. He served as Vice President, Marketing
and Business Development at Summit Medical Systems from June
1997 to April 1998, as Senior Vice President and General
Manager, Medical Division of MEDE America Corporation from March
1996 to June 1997 and as Vice President, Marketing of National
Electronics Corporation from April 1995 to March 1996.
Mr. Hansen also served as Vice President, Corporate
Development at The Chase Manhattan Bank from April 1994 to April
1995. He holds a Bachelors of Arts degree in Economics
from Harvard University, and a Masters degree in Business
Administration, economics from the University of Chicago.
Mr. Hansen resigned from the Company in March 2002.

Kenneth J. Saunders was appointed Chief Financial
Officer during December 1999, and Secretary in January 2000.
Mr. Saunders joined us in January 1997 initially serving as
Treasurer until June 1998, as Corporate Controller from June
1998 to January 1999, and then as Vice President, Corporate
Finance and Corporate Controller from January 1999 to December
1999. From January 1992 to December 1996, Mr. Saunders was
employed with Risk Data Corporation, where he served most
recently as Chief Financial Officer. In August 1996, HNC
acquired Risk Data Corporation. From January 1991 to January
1992, he was Vice President of Finance and Administration for
A-Mark Financial Corporation. Mr. Saunders was with Arthur
Andersen from 1984 to 1987. He holds a Bachelors of
Accountancy degree from Widener University and is a Certified
Public Accountant.

Mary Burnside joined us in May 2001 as Chief
Operating Officer. From January 2000 to June 2001, she served as
President and Chief Operating Officer of RealNames Corp., an
Internet infrastructure company. From 1988 to April 1997, she
was employed at Novell, Inc., where she served as Executive Vice
President, Corporate Services from August 1996 to April 1997 and
Executive Vice President and Chief Operating Officer

16



---



##### Table of Contents



from April 1994 to August 1996. She holds a
Bachelor of Arts degree in Geography from the University of
California at Berkeley.


Russell C. Clark joined us as Vice President,
Corporate Finance during January 2000. From August 1990 to
January 2000, Mr. Clark held various positions with
PricewaterhouseCoopers LLPs Technology Industry Group,
most recently as a Senior Manager in the audit and business
advisory services group. He holds a Bachelors degree in
Business Administration with an emphasis in accounting from the
University of Iowa, and is a Certified Public Accountant.

Roger Ahern was appointed Vice President of
Decision Management in May 2001. He also served as Vice
President of Marketing and Product Management for our
Telecommunications Solutions Group from June 2000 to May 2001.
Mr. Ahern was a program manager at Compaq Computer
Corporation from March 1997 to June 2000. From 1992 to March
1997, he was employed with Summit Associates, Inc., where he
served most recently as Chief Technology Officer and a director.
Mr. Ahern holds a Bachelor of Science degree in Business
Administration with a major in Finance and a Master of Science
degree in Information Technology and Decision Systems from San
Diego State University.

Michael Chiappetta was appointed Vice President
of Customer Analytics in May 2001. Since he joined us in 1993,
he has served as Executive Director of Profitability Products in
the HNC Financial Solutions Group, as Vice President of Risk
Products in the Financial Solutions Group and as Vice President
of Risk Management Solutions. He holds Bachelor of Science
degrees in Economics and Physics from Rensselaer Polytechnic
Institute and a Master of Business Administration degree in
Finance from New York University.

Sean M. Downs was appointed Vice President of
Insurance Transaction Processing in May 2001. He also served as
President, HNC Insurance Solutions from June 2000 to May 2001.
Mr. Downs joined us in April 1998, where he initially
served within our HNC Insurance Solutions segment as President,
Workers Compensation until September 1998, as Senior Vice
President, Predictive Software Solutions from September 1998
until August 1999, and then as Senior Vice President, Strategic
Development from September 1999 until May 2000. From February
1990 to March 1998, Mr. Downs was employed with Risk Data
Corporation, where he served most recently as Senior Vice
President, Sales and Marketing. In August 1996, HNC acquired
Risk Data Corporation. From July 1984 to February 1990,
Mr. Downs held various senior management positions with
Republic Health Corporation and Assured Health Care Inc. He
holds a Bachelors of Science Degree in Business
Administration, Finance from San Diego State University.

Kyle W. Thomas joined us in May 2000 as Vice
President of Global Sales. From November 1995 to May 2000,
Mr. Thomas held various positions at ABN AMRO, most
recently as Senior Vice President, Global Sales Head in the
Global Transaction Services department in Amsterdam, the
Netherlands. He holds a Bachelor of Arts degree in Economics
with a minor in Computer Science and Mathematics from New York
University.




PART II






|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
	Equity and Related Stockholder Matters

Our common stock is traded on the NASDAQ National
Market under the symbol HNCS. The following table
provides for the periods indicated the high and low sales prices
of our common stock, presenting both the historical and adjusted
prices for our common stock. The adjusted prices shown below are

17



---



##### Table of Contents



as reported by NASDAQ to give retroactive effect
to the spin-off of our former subsidiary, Retek Inc., by
adjusting the historical prices of our common stock by the Retek
distribution ratio.


|      |                |            |   |          |  |      |   |        |  |  |   |        |  |  |   |        | 
|----- | -------------- | ---------- | - | -------- |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|      |                |            |   |         
|      |                | Historical |   | Adjusted
|      |                |            |   |         
|      |                | High       |   | Low      |  | High |   | Low   
|      |                |            |   |          |  |      |   |       
|2001: |                |            |   |          |  |      |   |        |  |  |   |        |  |  |   |       
|      | First Quarter  |            | $ | 33.500   |  |      | $ | 17.563 |  |  | $ | 33.500 |  |  | $ | 17.563 | 
|      | Second Quarter |            |   | 32.990   |  |      |   | 14.063 |  |  |   | 32.990 |  |  |   | 14.063 | 
|      | Third Quarter  |            |   | 29.360   |  |      |   | 17.280 |  |  |   | 29.360 |  |  |   | 17.280 | 
|      | Fourth Quarter |            |   | 22.840   |  |      |   | 17.000 |  |  |   | 22.840 |  |  |   | 17.000 | 
|     
|2000: |                |            |   |          |  |      |   |        |  |  |   |        |  |  |   |       
|      | First Quarter  |            | $ | 122.500  |  |      | $ | 72.063 |  |  | $ | 24.893 |  |  | $ | 14.644 | 
|      | Second Quarter |            |   | 77.125   |  |      |   | 38.000 |  |  |   | 15.672 |  |  |   | 7.722  | 
|      | Third Quarter  |            |   | 81.813   |  |      |   | 42.000 |  |  |   | 16.625 |  |  |   | 8.535  | 
|      | Fourth Quarter |            |   | 29.688   |  |      |   | 12.375 |  |  |   | 29.688 |  |  |   | 12.375 | 

As of January 31, 2002, there were
approximately 237 holders of record of our common stock.

We have never declared or paid any cash dividends
on our capital stock. However, on September 29, 2000, HNC
distributed 40,000,000 shares of the common stock of Retek,
Inc., a publicly held company, as a dividend to HNCs
stockholders of record as of September 15, 2000. The
dividend distribution ratio would in some cases have resulted in
the distribution of a fractional Retek share to certain HNC
stockholders. To eliminate fractional Retek shares, as an
incidental part of the Retek dividend, HNC paid stockholders
cash in lieu of fractional Retek shares they would otherwise
have received, in an amount representing the fair value of the
eliminated fractional share. We currently anticipate that we
will retain any future earnings for use in our business and do
not anticipate paying any cash dividends in the foreseeable
future. Our bank credit agreement prohibits us from declaring or
paying any cash dividends without the banks consent.






|        |                                      
|------- | -------------------------------------
|Item 6. | Selected Consolidated Financial
	Data

Our selected consolidated financial data for the
five years ended December 31, 2001, is included in this
Report on page F-2.






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Results of Operations and Financial Condition

Our information under the caption
Managements Discussion and Analysis of Financial
Condition and Results of Operations is included in this
Report on pages F-3 through F-33.






|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7a. | Quantitative and Qualitative Disclosures
	about Market Risk

The following discusses our exposure to market
risk related to changes in interest rates, foreign currency
exchange rates and equity prices.

Interest Rate Risk

The fair value of our marketable securities
available for sale at December 31, 2001 was
$209.0 million. The objectives of our investment policy are
the safety and preservation of invested funds, and liquidity of
investments that is sufficient to meet cash flow requirements.
Our policy is to place our cash, cash equivalents, and
investments available for sale with high credit quality
financial institutions, commercial companies, and government
agencies in order to limit the amount of credit exposure. Except
for certain strategic equity investments, it is also our policy
to maintain concentration limits and to invest only in allowable
securities as determined by our management. Our investment
policy also provides that our investment portfolio must not have
an average portfolio maturity of beyond one year and that we
must maintain liquidity positions.

18



---



##### Table of Contents



Investments are prohibited in industries and
speculative activities. Investments must be denominated in
U.S. dollars.


The fair value of our 5.25% Convertible
Subordinated Notes at December 31, 2001 was approximately
$150.0 million. To the extent that general market interest rates
may fluctuate in the future, excluding other factors, the fair
value of such notes could increase or decrease.

Foreign Currency Exchange Rate Risk

We mitigate our foreign currency risks
principally by contracting primarily in U.S. dollars and
maintaining only nominal foreign currency cash balances. Working
funds necessary to facilitate the short term operations of our
subsidiaries are kept in the local currencies in which they do
business, with excess funds transferred to our offices in the
United States for investment. For the year ended
December 31, 2001, approximately 1.0% of our sales were
denominated in currencies other than our functional currency,
which is the U.S. dollar. These foreign currencies are
primarily those of Western Europe and Canada.

Equity Price Risk

We have several equity investments we entered
into for strategic business purposes, and therefore are exposed
to direct equity price risk. We mitigate this risk by monitoring
the financial performance of our investments, which are
primarily in the common stock of privately held, non-public
companies and thus we may be unable to sell or achieve liquidity
in those investments prior to an adverse change in their values.
In addition, the current funding environment for high technology
companies may expose our investments in such companies to
increased risks. During 2000, we recorded a $2.8 million
charge related to the write-down of our investment in Network
Commerce and during 2001 we further recorded charges totaling
$6.0 million related to the write-down of our investments
in Azure Capital Partners L.P., KeyLime Software, Qpass Inc.,
Burning Glass Technologies and Network Commerce. See
Notes 6 and 7 of Notes to the Consolidated Financial
Statements included in this report on pages F-51 through
F-52.






|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary
	Data

Our consolidated financial statements and
footnotes and the report of independent accountants thereon are
included in this report on pages F-34 through F-65.
Supplementary Financial Data are presented in Note 17 of
the Notes to Consolidated Financial Statements included in this
report on page F-64.






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
	Accountants on Accounting and Financial Disclosure

None.




PART III






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
	Registrant

The information required under Item 10 is
incorporated by reference to the information under the captions
Election of Directors and Section 16(a)
Beneficial Ownership Compliance in our Proxy Statement for
our May 2002 annual meeting. Information about our executive
officers is included under the caption Executive
Officers after Item 4 included in this Report on
page 16.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required under Item 11 is
incorporated by reference to the information under the captions
Director Compensation, Executive
Compensation, and Compensation Committee Interlocks
and Insider Participation in our Proxy Statement for our
May 2002 annual meeting.

19



---



##### Table of Contents








|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management

The information required under Item 12 is
incorporated by reference to the information under the caption
Principal Stockholders in our Proxy Statement for
our May 2002 annual meeting.






|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related
	Transactions

The information required under Item 13 is
incorporated by reference to the information under the caption
Related Party Transactions in our Proxy Statement
for our May 2002 annual meeting.




PART IV






|         |                                                                 
|-------- | ----------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K



|             |                                    
|------------ | -----------------------------------
|(a)  (1)-(2) | Financial Statements and Schedules:

The list of consolidated financial statements are
presented in the accompanying Index to Selected Consolidated
Financial Data, the Consolidated Financial Statements and
Supplementary Data included in this Report on page F-1.
These consolidated financial statements are filed as part of
this Report.

All financial statement schedules are omitted
because the required information is not applicable, or because
the information required is included in the consolidated
financial statements and the related notes.



| |     |          
| | --- | ---------
| | (3) | Exhibits:

The exhibits listed on the accompanying
Exhibit Index included in this Report on page F-66 are
filed or incorporated by reference as part of this Report and
the Exhibit Index is incorporated by reference.

(b) During the quarter ended
December 31, 2001, the Registrant filed Reports on
Form 8-K as follows:

Amended Current Report on Form 8-K filed on
October 29, 2001, dated August 15, 2001, reporting
financial statements under Item 7.

20



---



##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.



| |                  
| | -----------------
| | HNC SOFTWARE INC.



| |     |                        
| | --- | -----------------------
| | By: | /s/ KENNETH J. SAUNDERS

| |                                       
| | --------------------------------------
| |                                       
| | Kenneth J. Saunders                   
| | Chief Financial Officer and
	Secretary
| | (Principal Financial Officer)         

Date: March 25, 2002

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                           |  |                                                                                                           |  |                |  |     
|------------------------------------------ |  | --------------------------------------------------------------------------------------------------------- |  | -------------- |  | ----
|                                           |  | Signature                                                                                                 |  | Title          |  | Date
|                                           |  |                                                                                                           |  |                |  |     
|                                          
|/s/ JOHN MUTCHJohn Mutch                   |  | President and Chief Executive Officer,
	Director and Chairman of the Board
	(Principal Executive Officer) |  | March 25, 2002
|                                          
|/s/ KENNETH J. SAUNDERSKenneth J. Saunders |  | Chief Financial Officer and Secretary
	(Principal Financial Officer)                                      |  | March 25, 2002
|                                          
|/s/ RUSSELL C. CLARKRussell C. Clark       |  | Vice President, Corporate Finance and Assistant
	Secretary
	(Principal Accounting Officer)                |  | March 25, 2002
|                                          
|/s/ EDWARD K. CHANDLEREdward K. Chandler   |  | Director                                                                                                  |  | March 25, 2002
|                                          
|/s/ THOMAS F. FARBThomas F. Farb           |  | Director                                                                                                  |  | March 25, 2002
|                                          
|/s/ ALEX W. HARTAlex W. Hart               |  | Director                                                                                                  |  | March 25, 2002
|                                          
|/s/ DAVID Y. CHENDavid Y. Chen             |  | Director                                                                                                  |  | March 25, 2002
|                                          
|/s/ LOUIS A. SIMPSONLouis A. Simpson       |  | Director                                                                                                  |  | March 25, 2002

21



---



##### Table of Contents



HNC SOFTWARE INC.

INDEX TO SELECTED CONSOLIDATED FINANCIAL
DATA,

THE CONSOLIDATED FINANCIAL
STATEMENTS


AND SUPPLEMENTARY DATA


|                                                                                       |                                                                                                                                                  |      |      |      | 
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ---- | ---- | ---- | 
|Description                                                                            |                                                                                                                                                  | Page
|                                                                                       |                                                                                                                                                  |     
|Selected Consolidated Financial Data                                                   |                                                                                                                                                  |      | F-2  |     
|Managements Discussion and Analysis of
	Results of Operations and Financial Condition |                                                                                                                                                  |      | F-3  |     
|Report of Independent Accountants                                                      |                                                                                                                                                  |      | F-34 |     
|Consolidated Financial Statements:                                                     |                                                                                                                                                  |      |      |     
|                                                                                       | Consolidated Balance Sheet as of
	December 31, 2001 and 2000                                                                                     |      |      | F-35 | 
|                                                                                       | Consolidated Statement of Operations for the
	years ended December 31, 2001, 2000 and 1999                                                       |      |      | F-36 | 
|                                                                                       | Consolidated Statement of Cash Flows for the
	years ended December 31, 2001, 2000 and 1999                                                       |      |      | F-37 | 
|                                                                                       | Consolidated Statement of Changes in
	Stockholders Equity and Comprehensive Income (Loss) for
	the years ended December 31, 2001, 2000 and 1999 |      |      | F-38 | 
|                                                                                       | Notes to Consolidated Financial Statements                                                                                                       |      |      | F-39 | 

F-1



---



##### Table of Contents



HNC SOFTWARE INC.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data as of
December 31, 2001 and 2000, and for each of the years in
the three-year period ended December 31, 2001 come from our
audited Consolidated Financial Statements included later in this
report. The selected consolidated financial data as of
December 31, 1999, 1998 and 1997 and for the years ended
December 31, 1998 and 1997 are derived from our audited
financial statements that are not included in this report.
During September 2000, we completed the spin-off of our former
Retek subsidiary. Subsequent to the spin-off, Reteks
results of operations and financial condition were not included
in our results of operations and financial condition, and
consequently the comparability of the data presented below is
impacted. The selected consolidated financial data gives
retroactive effect to the acquisitions of Risk Data, Retek and
CompReview for all periods presented, as we accounted for these
acquisitions as poolings of interests. For a complete
understanding of the following you should read this selected
consolidated financial data in conjunction with
Managements Discussion and Analysis Results of
Operations and Financial Condition and the Consolidated
Financial Statements and related notes included in this Report
on pages F-3 through F-65.

|                          |                                                                                                          |                                       |   |         |   |      |   |          |   |      |   |         |   |  |   |         |  |  |   |         | 
|------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------- | - | ------- | - | ---- | - | -------- | - | ---- | - | ------- | - |  | - | ------- |  |  | - | ------- | 
|                          |                                                                                                          |                                      
|                          |                                                                                                          | Year Ended December 31,              
|                          |                                                                                                          |                                      
|                          |                                                                                                          | 2001                                  |   | 2000    |   | 1999 |   | 1998     |   | 1997
|                          |                                                                                                          |                                       |   |         |   |      |   |          |   |     
|                          |                                                                                                          |                                      
|                          |                                                                                                          | (in thousands, except per share data)
|Consolidated Statement of |                                                                                                          |                                       |   |         |   |      |   |          |   |      |   |         |   |  |   |         |  |  |   |        
|Operations Data:          |                                                                                                          |                                       |   |         |   |      |   |          |   |      |   |         |   |  |   |         |  |  |   |        
|                          | Total revenues                                                                                           |                                       | $ | 226,670 |   |      | $ | 254,884  |   |      | $ | 216,889 |   |  | $ | 178,608 |  |  | $ | 113,735 | 
|                          | Operating income (loss)                                                                                  |                                       |   | (42,523 | ) |      |   | (149,741 | ) |      |   | (6,784  | ) |  |   | 21,026  |  |  |   | 23,040  | 
|                          | Net income (loss)                                                                                        |                                       |   | (36,452 | ) |      |   | (116,418 | ) |      |   | (6,272  | ) |  |   | 10,452  |  |  |   | 17,565  | 
|                          | Basic net income (loss) per share                                                                        |                                       |   | (1.06   | ) |      |   | (4.08    | ) |      |   | (0.25   | ) |  |   | 0.41    |  |  |   | 0.72    | 
|                          | Diluted net income (loss) per share                                                                      |                                       |   | (1.06   | ) |      |   | (4.08    | ) |      |   | (0.25   | ) |  |   | 0.39    |  |  |   | 0.68    | 
|                          | Pro forma net income(1)                                                                                  |                                       |   |         |   |      |   |          |   |      |   |         |   |  |   |         |  |  |   | 15,417  | 
|                          | Pro forma basic net income per share(1)                                                                  |                                       |   |         |   |      |   |          |   |      |   |         |   |  |   |         |  |  |   | 0.64    | 
|                          | Pro forma diluted net income per share(1)                                                                |                                       |   |         |   |      |   |          |   |      |   |         |   |  |   |         |  |  |   | 0.60    | 
|                          | Shares used in computing basic net income
	(loss) per share and basic pro forma net income per share     |                                       |   | 34,509  |   |      |   | 28,529   |   |      |   | 24,969  |   |  |   | 25,362  |  |  |   | 24,275  | 
|                          | Shares used in computing diluted net income
	(loss) per share and diluted pro forma net income per share |                                       |   | 34,509  |   |      |   | 28,529   |   |      |   | 24,969  |   |  |   | 26,650  |  |  |   | 25,681  | 

|                                 |                                                                      |                |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |         | 
|-------------------------------- | -------------------------------------------------------------------- | -------------- | - | ------- |  | ---- | - | ------- |  | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                 |                                                                      |               
|                                 |                                                                      | December 31,  
|                                 |                                                                      |               
|                                 |                                                                      | 2001           |   | 2000    |  | 1999 |   | 1998    |  | 1997
|                                 |                                                                      |                |   |         |  |      |   |         |  |     
|                                 |                                                                      |               
|                                 |                                                                      | (in thousands)
|Consolidated Balance Sheet Data: |                                                                      |                |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |        
|                                 | Cash, cash equivalents and marketable securities
	available for sale |                | $ | 313,725 |  |      | $ | 162,753 |  |      | $ | 234,081 |  |  | $ | 153,340 |  |  | $ | 42,946  | 
|                                 | Total assets                                                         |                |   | 578,026 |  |      |   | 447,741 |  |      |   | 416,421 |  |  |   | 283,914 |  |  |   | 119,877 | 
|                                 | Long-term obligations, less current portion                          |                |   | 151,684 |  |      |   | 16,616  |  |      |   | 104,111 |  |  |   | 101,039 |  |  |   | 239     | 
|                                 | Total stockholders equity                                           |                |   | 387,819 |  |      |   | 382,574 |  |      |   | 249,573 |  |  |   | 153,021 |  |  |   | 103,860 | 



---



|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pro forma net income and net income per share
	reflect a provision for taxes on the income of CompReview, which
	prior to our acquisition was a subchapter S corporation, as if
	CompReview had been liable for corporate income taxes as a C
	corporation for all periods presented.

F-2



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND
ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION


OVERVIEW

On September 29, 2000, HNC spun-off its
former subsidiary Retek, Inc. (Retek) through the distribution
of all Retek shares then owned by HNC. As a result of this
distribution, Retek is no longer affiliated with HNC.

In April 2001, we announced and began to
implement a reorganization that involved realigning our internal
organization from a vertical market orientation to a horizontal
product platform. As a result, we changed our reportable
segments beginning in the second quarter of 2001 to reflect the
new method in which management primarily organizes and evaluates
internal financial information to make operating decisions and
assess performance. Our current reportable segments include our
Efficiency, Risk and Opportunity product suites.

Our revenues and operating results have varied
significantly in the past and in some quarters we have
experienced net losses. We expect fluctuations in our operating
results to continue for the foreseeable future. As a result, we
believe that investors should not rely on period-to-period
comparisons of our financial results as an indication of our
future performance. Further, we derive a substantial portion of
our revenues from our Falcon Fraud Manager, Decision Manager for
Medical Bill Review and Outsourced Bill Review products and
services. Our Falcon Fraud Manager, Decision Manager for Medical
Bill Review and Outsourced Bill Review products and services in
the aggregate accounted for 46.8% of our total revenues in 2001.
Falcon Fraud Manager revenues accounted for 24.9% of total
revenues in 2001 and our combined Decision Manager for Medical
Bill Review products and Outsourced Bill Review services
accounted for 21.9% of total revenues in 2001. We expect these
products and services will continue to 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.

Because our expense levels are based in part on
our expectations regarding future revenues and in the short term
are fixed to a large extent, we may be unable to adjust our
spending in time to compensate for any unexpected revenue
shortfall. We may not be able to achieve or maintain
profitability on a quarterly or annual basis in the future. In
addition, in the past we have acquired several companies and may
continue to do so in the future. During 2000, we completed the
spin-off of our former Retek subsidiary. Such transactions
typically affect the comparability of our historical financial
results. Acquisitions also typically generate significant
charges that decrease our net income, including possible charges
in future fiscal periods. For the third and fourth quarters of
2001, our operating results were below the expectations of
public market analysts and investors. It is possible that this
could occur in some future quarter, which could cause a decline
in the price of our common stock.

This section contains forward-looking statements
about our anticipated future operating expenses, our
expectations for our international operations and about the
assumptions and projections underlying our in-process research
and development expense. Forward-looking statements are subject
to risks and uncertainties. Therefore, our actual results could
differ materially and adversely from those expressed in any
forward-looking statements as a result of various factors,
including, but not limited to, the factors discussed below under
the heading Risk Factors. You should carefully
consider these risks. Investors are cautioned not to place undue
reliance on these forward-looking statements that speak only as
of the date of this report. We undertake no obligation to revise
or update any forward-looking statements for any reason.

F-3



---



##### Table of Contents



RESULTS OF OPERATIONS

Revenues

Our revenues are comprised of license and
maintenance revenues and services and other revenues. Total
revenues for 2001 decreased $28.2 million, or 11.1%, over
2000. Total revenues for 2000 increased by $38.0 million,
or 17.5%, over 1999. Our revenues during 2001, 2000 and 1999 are
summarized as follows, and include Reteks revenues through
the September 29, 2000 spin-off date:

|                            |                                  |                         |         |         |  |      |         |         |  |   |         |         | 
|--------------------------- | -------------------------------- | ----------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                            |                                  |                        
|                            |                                  | Year Ended December 31,
|                            |                                  |                        
|                            |                                  | 2001                    |         | 2000    |  | 1999
|                            |                                  |                         |         |         |  |     
|                            |                                  |                        
|                            |                                  | (in thousands)         
|HNC:                        |                                  |                         |         |         |  |      |         |         |  |   |         |        
|                            | License and maintenance revenues |                         | $       | 168,626 |  |      | $       | 130,834 |  |   | $       | 109,983 | 
|                            | Services and other revenues      |                         |         | 58,044  |  |      |         | 64,135  |  |   |         | 37,747  | 
|                            |                                  |                         |         |         |  |      |         |         |  |   |         |        
|                            |                                  |                         | 226,670 |         |  |      | 194,969 |         |  |   | 147,730 |        
|                            |                                  |                         |         |         |  |      |         |         |  |   |         |        
|Retek:                      |                                  |                         |         |         |  |      |         |         |  |   |         |        
|                            | License and maintenance revenues |                         |         |         |  |      |         | 35,229  |  |   |         | 45,965  | 
|                            | Services and other revenues      |                         |         |        |  |      |         | 24,686  |  |   |         | 23,194  | 
|                            |                                  |                         |         |         |  |      |         |         |  |   |         |        
|                            |                                  |                         |        |         |  |      | 59,915  |         |  |   | 69,159  |        
|                            |                                  |                         |         |         |  |      |         |         |  |   |         |        
|Total Consolidated Revenues |                                  | $                       | 226,670 |         |  | $    | 254,884 |         |  | $ | 216,889 |        
|                            |                                  |                         |         |         |  |      |         |         |  |   |         |        

License and Maintenance
Revenues.We recognize license and
maintenance revenues in several different ways, depending on the
terms on which the software and maintenance are provided.
Revenue from perpetual and short-term periodic licenses of our
software is generally recognized upon delivery.
Transactional-based fees under software license arrangements are
recognized as revenue based on system usage or when fees based
on system usage exceed monthly minimum license fees. Software
maintenance fees are recognized as revenue ratably over the
maintenance periods. Transactional-based fees under network
service or internal hosted software arrangements are recognized
as revenue based on system usage or when fees based on system
usage exceed monthly minimum license fees. Amounts received
under contracts in advance of delivery or performance are
recorded as deferred revenue and are generally recognized within
one year from receipt.

We typically license our software under both
recurring and one-time license pricing models. Recurring sources
of license and maintenance revenues generally include
transactionally-based software license fees, license fees that
recur annually under long-term software license arrangements and
transactional fees derived under network service or internal
hosted software arrangements. Recurring revenues also include
all software maintenance fees. One-time sources of license and
maintenance revenues are typically perpetual or time-based
licenses with upfront, nonrecurring payment terms. To the extent
that our customers license our software products under recurring
or one-time pricing models, our license and maintenance revenues
and gross margins may differ materially from period to period.

F-4



---



##### Table of Contents



The following table presents our license and
maintenance revenues by segment for 2001, 2000 and 1999:

|                                  |             |                         |         |        |         |      |         |        |         |   |         |        |         | 
|--------------------------------- | ----------- | ----------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                  |             |                        
|                                  |             | Year Ended December 31,
|                                  |             |                        
|                                  |             | 2001                    |         | 2000   |         | 1999
|                                  |             |                         |         |        |         |     
|                                  |             |                        
|                                  |             | (in thousands)         
|License and Maintenance Revenues: |             |                         |         |        |         |      |         |        |         |   |         |       
|                                  | Efficiency  |                         | $       | 77,966 |         |      | $       | 61,212 |         |   | $       | 48,765 |        
|                                  | Risk        |                         |         | 76,659 |         |      |         | 54,298 |         |   |         | 46,946 |        
|                                  | Opportunity |                         |         | 12,659 |         |      |         | 9,144  |         |   |         | 8,987  |        
|                                  | Other       |                         |         | 1,342  |         |      |         | 6,180  |         |   |         | 5,285  |        
|                                  |             |                         |         |        |         |      |         |        |         |   |         |       
|                                  |             | HNC                     |         |        | 168,626 |      |         |        | 130,834 |   |         |        | 109,983 | 
|                                  | Retek       |                         |         |       |         |      |         | 35,229 |         |   |         | 45,965 |        
|                                  |             |                         |         |        |         |      |         |        |         |   |         |       
|                                  |             | $                       | 168,626 |        |         | $    | 166,063 |        |         | $ | 155,948 |       
|                                  |             |                         |         |        |         |      |         |        |         |   |         |       

License and maintenance revenues in 2001
increased by $2.6 million, or 1.5%, compared with 2000.
This increase consisted of a $37.8 million, or 28.9%
increase within HNC, offset by the absence of Retek revenues in
2001, which totaled $35.2 million in 2000. The increase
within HNC was primarily attributable to a $16.8 million,
or 27.4% increase in our Efficiency segment, a
$22.4 million, or 41.2% increase in our Risk segment, and a
$3.5 million, or 38.4% increase in our Opportunity segment,
partially offset by a $4.8 million, or 78.3% decline in
other product revenues. The increase in our Efficiency
segment of $16.8 million was attributable primarily to
$10.0 million of incremental RoamEx revenues, resulting
from a full year of revenues associated with our acquisition of
Systems/ Link in the third quarter of 2000, incremental Decision
Manager ASP product revenues of $5.5 million resulting from
our acquisition of Onyx in the first quarter of 2000,
incremental revenues of $4.5 million associated with our
acquisition of the assets of the Blaze Advisor business unit in
the third quarter of 2001, incremental Connectivity Manager
revenues of $3.5 million resulting from our acquisitions of
ClaimPort and ecDataFlow in the second quarter of 2001 and a
full year of revenues resulting from our Celerity acquisition in
the second quarter of 2000, and an increase of $2.7 million
from one-time Decision Manager for Medical Bill Review revenues,
partially offset by a $7.2 million decline in Decision
Manager for Medical Bill Review transactionally-based revenues
and a $1.6 million decline in Decision Manager for
Financial Applications revenues. The increase in our one-time
Decision Manager for Medical Bill Review revenues was primarily
attributable to four customer pricing changes which converted
existing customer contracts from recurring transactionally-based
fees to one-time fixed fees recognized in full during 2001. The
increase in our Risksegment of $22.4 million was
attributable primarily to incremental CardAlert Fraud Manager
and Fraud Manager for Telecommunications revenues of
$5.9 million, resulting primarily from our acquisitions of
CardAlert and Systems/ Link in the third quarter of 2000, a
$15.5 million increase in Falcon Fraud Manager and Falcon
Fraud Manager for Merchants revenues and a $2.6 million
increase in CompCompare/ ProviderCompare revenues, partially
offset by a $1.7 million decrease in MIRA revenues. The
increase in Falcon Fraud Manager and Fraud Manager for
Telecommunications revenues included revenues related to two
customer license pricing changes which converted existing
customer contracts from recurring transactionally-based fees to
one-time fixed fees that were recognized in full during 2001.
The increase in CompCompare/ Provider Compare revenues was
attributable to a change in customer payment terms from
long-term fixed fee payments to a one-time upfront payment
recognized in full during 2001. The increase in our
Opportunitysegment of $3.5 million was attributable
primarily to a $3.3 million increase in Profitability
Predictor revenues, which included our recognition of revenues
related to termination fees from a customer that sold its credit
card portfolio and therefore no longer had a use for our
product. To the extent that our customers change from paying
license fees on a recurring transactional basis to paying us
one-time license fees, our recurring revenues for future
quarters will decrease. The decrease in our Other segment
revenues of $4.8 million was attributable primarily to a
decline in revenues associated with our former Intelligent
Response product line.

License and maintenance revenues in 2000
increased by $10.1 million, or 6.5%, compared with 1999.
This increase consisted of a $20.9 million, or 19.0%
increase within HNC, offset by a $10.7 million, or 23.4%

F-5



---



##### Table of Contents



decline at Retek. The increase within HNC was
primarily attributable to a $12.4 million, or 25.5%
increase in our Efficiency segment and a $7.4 million, or
15.7% increase in our Risk segment. The increase within our
Efficiencysegment of $12.4 million was attributable
primarily to growth from acquisitions, including incremental
revenues of $12.0 million derived from our Decision Manager
ASP, RoamEx and Connectivity Manager products, and to an
increase in Decision Manager for Medical Bill Review revenues of
$1.6 million, partially offset by a decline in Decision
Manager for Financial Applications of $0.8 million and a
decline in other product revenues of $0.4 million. The
increase within our Risksegment of $7.4 million was
attributable primarily to increased revenues of
$12.0 million derived from our Falcon Fraud Manager and
Falcon Fraud Manager for Merchants products, acquisition-related
growth of $1.4 million derived from CardAlert Fraud Manager
revenues, and other aggregate product growth totaling
$1.5 million, offset by a decline in MIRA product revenues
of $7.5 million resulting from the sale of fewer MIRA
perpetual licenses in 2000 as compared to 1999.


Services and Other
Revenues.Services and other revenues
are comprised of installation and implementation revenues,
remote hosted service operation revenues and revenues which are
derived from consulting contracts, new product development
contracts with commercial customers and, to a lesser extent,
research and development contracts with the United States
Government. Revenue from software installation and
implementation and from contract services is generally
recognized as the services are performed using the percentage of
completion method based on costs incurred to date compared to
total estimated costs at completion. Amounts received under
contracts in advance of performance are recorded as deferred
revenue and are generally recognized within one year from
receipt. Contract losses are recorded as a charge to operations
in the period any losses are first identified. Installation or
setup fees associated with network service and internally hosted
software agreements are recognized ratably over the longer of
the customer contract period or estimated life of the customer
relationship. Remote hosted service fees derived from the review
and repricing of customers medical bills are recognized as
revenue when the processing services are performed.

The following table presents our services and
other revenues by segment for 2001, 2000 and 1999:

|                            |             |                         |        |        |        |      |        |        |        |   |        |        |        | 
|--------------------------- | ----------- | ----------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                            |             |                        
|                            |             | Year Ended December 31,
|                            |             |                        
|                            |             | 2001                    |        | 2000   |        | 1999
|                            |             |                         |        |        |        |     
|                            |             |                        
|                            |             | (in thousands)         
|Service and Other Revenues: |             |                         |        |        |        |      |        |        |        |   |        |       
|                            | Efficiency  |                         | $      | 33,206 |        |      | $      | 41,741 |        |   | $      | 23,422 |       
|                            | Risk        |                         |        | 11,229 |        |      |        | 14,128 |        |   |        | 8,827  |       
|                            | Opportunity |                         |        | 11,241 |        |      |        | 5,538  |        |   |        | 1,000  |       
|                            | Other       |                         |        | 2,368  |        |      |        | 2,728  |        |   |        | 4,498  |       
|                            |             |                         |        |        |        |      |        |        |        |   |        |       
|                            |             | HNC                     |        |        | 58,044 |      |        |        | 64,135 |   |        |        | 37,747 | 
|                            | Retek       |                         |        |       |        |      |        | 24,686 |        |   |        | 23,194 |       
|                            |             |                         |        |        |        |      |        |        |        |   |        |       
|                            |             | $                       | 58,044 |        |        | $    | 88,821 |        |        | $ | 60,941 |       
|                            |             |                         |        |        |        |      |        |        |        |   |        |       

Services and other revenues in 2001 decreased by
$30.8 million, or 34.7%, compared with 2000. This decrease
consisted of a $6.1 million, or 9.5% decrease within HNC,
along with the absence of Retek revenues in 2001, which totaled
$24.7 million in 2000. The decrease within HNC was
primarily attributable to an $8.5 million, or 20.4%
decrease in our Efficiency segment and a $2.9 million, or
20.5% decrease in our Risk segment, partially offset by a
$5.7 million, or 103.0% increase in our Opportunity
segment. The decrease in our Efficiencysegment of
$8.5 million was attributable primarily to a lower volume
of Decision Manager for Financial Applications software
implementations along with a decline in customer bill review
volumes associated with our Outsourced Bill Review Services,
resulting in revenue declines of $6.9 million and
$4.0 million, partially offset by a $1.7 million
increase in Blaze Advisor consulting revenues and other
miscellaneous service revenue increases. The decrease in our
Risksegment of $2.9 million was attributable
primarily to a $0.6 million decline in ProviderCompare/
CompCompare service revenues and a $0.4 million decline in
Falcon Fraud Manager implementation revenues, along with an
aggregate decline in various other Risk segment service and
implementation revenues. The increase in our Opportunitysegment of $5.7 million

F-6



---



##### Table of Contents



was attributable primarily to an increase in
Cross-Sell Optimizer service revenues, relating primarily to a
full year of service revenues in 2001 from CASA, which we
acquired in March of 2000, and also to incremental Marketing
Service Provider revenues of $1.1 million resulting from
our acquisition of the MSP business unit of Chordiant in
September 2001.


Services and other revenues in 2000 increased
$27.9 million, or 45.7%, compared to 1999. This increase
consisted of a $26.4 million, or 69.9% increase within HNC
and a $1.5 million, or 6.4% increase at Retek. The increase
within HNC was primarily attributable to an $18.3 million,
or 78.2% increase in our Efficiency segment, a
$5.3 million, or 60.1% increase in our Risk segment, and a
$4.5 million, or 453.8% increase in our Opportunity
segment. The increase within our Efficiencysegment of
$18.3 million was attributable primarily to an increase in
Decision Manager for Financial Applications software
implementation revenues of $6.1 million along with a
$13.0 million increase in Outsourced Bill Review Service
revenues, including that related to the commencement of
full-scale hosted service operations for a primary customer,
partially offset by other miscellaneous revenue declines
aggregating $0.8 million. The increase in our Risksegment of $5.3 million was attributable primarily to
an increase in ProviderCompare/ CompCompare service revenues of
$3.3 million, an increase in Payment Optimizer development
revenues of $2.1 million and other miscellaneous revenue
increases aggregating $1.8 million, partially offset by a
decline in MIRA and Falcon Fraud Management product installation
revenues of $1.2 million and $0.7 million,
respectively. The increase in our Opportunity segment of
$4.5 million was attributable primarily to a
$3.7 million increase in Cross-Sell Optimizer service
revenues, resulting from our acquisition of CASA in March 2000,
and to a $0.9 million increase in Profit Manager
installation revenues.

Revenues From Non-U.S.
Regions.Revenues derived from
international operations and export sales represented 18.1% of
our total revenues in 2001, 19.4% of our total revenues in 2000
and 23.2% of our total revenues in 1999.

Sales denominated in currencies other than the
U.S dollar represented 1.0%, 4.8% and 5.2% of our total revenues
in 2001, 2000 and 1999. During 2001, the majority of our
international revenues were derived from the sale of our Falcon
Fraud Manager products in Western Europe and Canada. In
September 2001, we acquired the UK-based Marketing Service
Provider business unit of Chordiant Software Inc., and its
revenues during the last three months of the year also
contributed to international revenues. During 2000 and 1999, the
majority of our international revenues were derived from Retek.
We believe that international sales represent a significant
opportunity for revenue growth and anticipate that our
international sales may increase as a percentage of our total
revenue in the future. However, our efforts to develop products,
databases, and models for targeted international markets or in
developing additional international sales and support channels
might not be successful.

Cost of Revenues

License and Maintenance Cost of
Revenues.License and maintenance cost
of revenues primarily consist of expenses for personnel engaged
in customer support, travel to customer sites and documentation
materials. Our license and maintenance cost of revenues totaled
$44.7 million in 2001, $60.5 million in 2000 and

F-7



---



##### Table of Contents



$41.6 million in 1999. The following table
summarizes our license and maintenance cost of revenues, both in
absolute dollars and as a percentage of license and maintenance
revenues:


|                                           |                                    |                         |        |               |        |  |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |      |      |  
|------------------------------------------ | ---------------------------------- | ----------------------- | ------ | ------------- | ------ |  | ---- | ---- | ---- | - | ------ | ------ | ------ |  | ---- | ---- | ---- | - | ------ | ------ | ------ |  | ---- | ---- | ---- | -
|                                           |                                    |                         |        |               |        |  |      |      |      |  
|                                           |                                    | 2001                    |        |               |        |  |      |      |      |  
|                                           |                                    |                         |        |               |        |  |      |      |      |  
|                                           |                                    |                         |        |               |        |  |      |     
|                                           |                                    |                         |        | 2000          |        |  |      |     
|                                           |                                    |                         |        |               |        |  |      |     
|                                           |                                    |                        
|                                           |                                    | Year Ended December 31,
|                                           |                                    |                        
|                                           |                                    |                         |        |              
|                                           |                                    |                         |        | 1999         
|                                           |                                    |                         |        |              
|                                           |                                    |                         |        |               |        | 
|                                           |                                    |                         |        | (in thousands |        | 
|License and Maintenance Cost of
	Revenues: |                                    |                         |        |               |        |  |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     
|                                           | HNC operating segments             |                         | $      | 44,676        |        |  |      | 26.5 | %    |   | $      | 36,666 |        |  |      | 28.0 | %    |   | $      | 34,914 |        |  |      | 31.7 | %   
|                                           | Retek segment                      |                         |        |              |        |  |      |     |      |   |        | 15,059 |        |  |      | 42.7 | %    |   |        | 6,358  |        |  |      | 13.8 | %   
|                                           |                                    |                         |        |               |        |  |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     
|                                           |                                    |                         | 44,676 |               |        |  | 26.5 | %    |      |   | 51,725 |        |        |  | 31.1 | %    |      |   | 41,272 |        |        |  | 26.5 | %   
|Amounts not allocated to segments:         |                                    |                         |        |               |        |  |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     
|                                           | Stock-based compensation expense   |                         |        | 51            |        |  |      | 0.0  | %    |   |        | 2,658  |        |  |      | 1.6  | %    |   |        | 280    |        |  |      | 0.1  | %   
|                                           | Expenses related to Retek spin-off |                         |        |              |        |  |      |     |      |   |        | 6,086  |        |  |      | 3.7  | %    |   |        |       |        |  |      |     |     
|                                           |                                    |                         |        |               |        |  |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     
|                                           |                                    | HNC Consolidated        |        | $             | 44,727 |  |      |      | 26.5 | % |        | $      | 60,469 |  |      |      | 36.4 | % |        | $      | 41,552 |  |      |      | 26.6 | %
|                                           |                                    |                         |        |               |        |  |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     

Our license and maintenance cost of revenues
percentage in 2001 decreased by 9.9% compared to 2000. Of this
decrease, 4.6% was attributable to decreases within our combined
HNC and Retek operating segments and 5.3% of this decrease was
attributable to a decline in stock-based compensation charges
and non-recurring expenditures related to our Retek spin-off.
For a further discussion regarding stock-based compensation
charges and expenditures relating to our Retek spin-off, refer
to the sections entitled Stock-Based Compensation
Expense and Expenses Related to Spin-Off of
Retek below. In 2001, the 4.6% license and maintenance
cost of revenues percentage decline within our operating
segments was attributable to a 1.5% decline at HNC and to the
absence of Retek, which we spun off in September 2000. The
decrease in HNCs license and maintenance cost of revenues
percentage was attributable primarily to the recognition of
incremental license fees associated with customer pricing
changes during 2001, including those related to Falcon Fraud
Manager, Decision Manager for Medical Bill Review, Fraud Manager
for Telecommunications and ProviderCompare/ CompCompare
products, the recognition of Profitability Predictor termination
fees associated with a customer that sold its credit card
portfolio and therefore no longer had a use for our product and
to an increase in RoamEx, Decision Manager ASP and recurring
Falcon Fraud Manager product revenues which have lower
associated costs, partially offset by increased customer support
costs associated with recurring Decision Manager for Medical
Bill Review product revenues.

Our license and maintenance cost of revenues
percentage in 2000 increased by 9.8% compared to 1999. Of this
increase, 4.6% was attributable to increases within our HNC and
Retek operating segments and 5.2% was attributable to our
recognition in 2000 of increased stock-based compensation
charges and non-recurring expenditures relating to our Retek
spin-off. For a further discussion regarding stock-based
compensation charges and expenditures relating to our Retek
spin-off, refer to the sections entitled Stock-Based
Compensation Expense and Expenses Related to
Spin-Off of Retek below. In 2000, the 4.6% license and
maintenance cost of revenues percentage increase within our
operating segments was attributable to a 3.7% decline at HNC,
offset by a 28.9% increase at Retek. The decrease in HNCs
license and maintenance cost of revenues percentage was
attributable primarily to our recognition of one-time,
non-recurring license fees related to Falcon Fraud Manager
product sales, which had minimal associated costs, increased
license and maintenance revenues resulting from acquisitions
with a lower percentage cost increase, including primarily
RoamEx and Decision Manager ASP revenues, and increased revenues
associated with former Intelligent Response e-commerce products
having lower associated costs, partially offset by the sale of
fewer MIRA perpetual licenses, with minimal associated costs, in
2000 versus 1999.

Services and Other Cost of
Revenues.Services and other cost of
revenues consist primarily of personnel and other expenses
associated with providing installation and implementation
services and performing development, consulting, and research
development contracts, and the costs associated with hosted
service operations. Our services and other cost of revenues
totaled $42.5 million in 2001, $72.9 million in 2000
and

F-8



---



##### Table of Contents



$41.3 million in 1999. The following table
summarizes our services and other cost of revenues, both in
dollars and as a percentage of services and other revenues:


|                                     |                                    |                         |        |        |        |      |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |      |      |  
|------------------------------------ | ---------------------------------- | ----------------------- | ------ | ------ | ------ | ---- | ---- | ---- | ---- | - | ------ | ------ | ------ |  | ---- | ---- | ---- | - | ------ | ------ | ------ |  | ---- | ---- | ---- | -
|                                     |                                    |                        
|                                     |                                    | Year Ended December 31,
|                                     |                                    |                        
|                                     |                                    |                         |        |        |        |     
|                                     |                                    | 2001                    |        | 2000   |        | 1999
|                                     |                                    |                         |        |        |        |     
|                                     |                                    |                         |        |        |        |      |      |      |      |  
|                                     |                                    |                         |        |        |        |      |      |      |      |  
|                                     |                                    |                        
|                                     |                                    | (in thousands)         
|Services and Other Cost of Revenues: |                                    |                         |        |        |        |      |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     
|                                     | HNC operating segments             |                         | $      | 42,465 |        |      |      | 73.2 | %    |   | $      | 44,413 |        |  |      | 69.2 | %    |   | $      | 24,291 |        |  |      | 64.4 | %   
|                                     | Retek segment                      |                         |        |       |        |      |      |     |      |   |        | 19,349 |        |  |      | 78.4 | %    |   |        | 16,626 |        |  |      | 71.7 | %   
|                                     |                                    |                         |        |        |        |      |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     
|                                     |                                    |                         | 42,465 |        |        |      | 73.2 | %    |      |   | 63,762 |        |        |  | 71.8 | %    |      |   | 40,917 |        |        |  | 67.1 | %   
|Amounts not allocated to segments:   |                                    |                         |        |        |        |      |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     
|                                     | Stock-based compensation expense   |                         |        |       |        |      |      | 0.0  | %    |   |        | 2,548  |        |  |      | 2.9  | %    |   |        | 354    |        |  |      | 0.6  | %   
|                                     | Expenses related to Retek spin-off |                         |        |       |        |      |      |     |      |   |        | 6,603  |        |  |      | 7.4  | %    |   |        |       |        |  |      |     |     
|                                     |                                    |                         |        |        |        |      |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     
|                                     |                                    | HNC Consolidated        |        | $      | 42,465 |      |      |      | 73.2 | % |        | $      | 72,913 |  |      |      | 82.1 | % |        | $      | 41,271 |  |      |      | 67.7 | %
|                                     |                                    |                         |        |        |        |      |      |      |      |   |        |        |        |  |      |      |      |   |        |        |        |  |      |     

Our services and other cost of revenues
percentage in 2001 decreased by 8.9% compared to 2000. This
decrease was attributable primarily to a decline in stock-based
compensation charges and non-recurring expenditures related to
our Retek spin-off, partially offset by a 1.4% increase in our
combined HNC and Retek operating segments. For a further
discussion regarding stock-based compensation charges and
expenditures relating to our Retek spin-off, refer to the
sections entitled Stock-Based Compensation Expense
and Expenses Related to Spin-Off of Retek below. In
2001, the 1.4% services and other cost of revenues percentage
increase within our operating segments was attributable to a
4.0% increase at HNC, offset by the absence of Retek, which we
spun off in September 2000. The increase in HNCs services
and other cost of revenues percentage was attributable primarily
to the decline in Decision Manager for Financial Applications
software implementation revenues, which have lower associated
costs, increased costs associated with certain Falcon Fraud
Manager implementation projects and reduced cost efficiencies
due to a decline in customer bill review volumes associated with
our Outsourced Bill Review Service operations, partially offset
by an increase in lower cost Cross-Sell Optimizer revenues.

Our services and other cost of revenues
percentage in 2000 increased by 14.4% compared to 1999. Of this
increase, 4.7% was attributable to increases within our combined
HNC and Retek operating segments and 9.7% of this increase was
attributable to our recognition in 2000 of increased stock-based
compensation charges and non-recurring expenditures relating to
our Retek spin-off. For a further discussion regarding
stock-based compensation charges and expenditures relating to
our Retek spin-off, refer to the sections entitled
Stock-Based Compensation Expense and Expenses
Related to Spin-Off of Retek below. In 2000, the 4.7%
services and other cost of revenues percentage increase within
our operating segments was attributable to a 4.8% increase at
HNC and a 6.7% increase at Retek. The increase within HNC was
attributable primarily to the increased use of third party
consultants, who have a higher average cost than internal
resources, in connection with Decision Manager for Financial
Applications software product implementations and to increased
costs associated with Payment Optimizer and ProviderCompare/
CompCompare development work performed during the year,
partially offset by improved cost efficiencies associated with
the growth in our Outsourced Bill Review Service customer base.

Research and Development Expense

Research and development expenses consist
primarily of salaries and other personnel-related expenses,
subcontracted development services, depreciation of development
equipment and supplies. Research and development expenses
included non-cash stock-based compensation expense of
$0.1 million in 2001, $10.6 million in 2000 and
$1.1 million in 1999, and also included nonrecurring
expenses related to the Retek spin-off of $12.9 million in
2000. For a further discussion regarding stock-based
compensation charges and expenditures relating to our Retek
spin-off, refer to the sections entitled Stock-Based
Compensation Expense and Expenses Related to
Spin-Off of Retek below.

F-9



---



##### Table of Contents



Research and development expense decreased from
$89.1 million in 2000 to $45.7 million in 2001,
primarily as a result of our spin-off of Retek in September
2000. Reteks research and development expense in 2000
contributed to $30.1 million (including $3.9 million
in stock-based compensation charges) of our total research and
development expense in 2000. Excluding Reteks research and
development expense in 2000, and further excluding our
stock-based compensation charges in 2001 and 2000 and expenses
related to the Retek spin-off in 2000, our research and
development expenses increased by $6.2 million, or 15.8%,
from 2000 to 2001. This increase was attributable primarily to
an increase in staffing and related costs to support new product
development activities, including those resulting from
acquisitions in 2000 and 2001, and was partially offset by a
reduction in research and development personnel and third-party
development costs associated with certain Efficiency segment
research and development projects.

Research and development expense increased from
$50.2 million in 1999 to $89.1 million in 2000.
Research and development expense included Retek research and
development expense totaling $30.1 million (including
$3.9 million in stock-based compensation charges) in 2000
and $23.6 million (including $1.0 million in
stock-based compensation charges) in 1999. Excluding
Reteks research and development expense in 2000 and 1999,
and further excluding our stock-based compensation charges in
2000 and 1999 and expenses related to the Retek spin-off in
2000, our research and development expenses increased by
$12.9 million, or 48.8%, from 1999 to 2000. This increase
was attributable primarily to an increase in staffing and
related costs to support new product development activities.

Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed, requires capitalization of
software development costs from the time technological
feasibility is established until the product is available for
general release to customers. Based on our product development
process, technological feasibility is not established until
completion of a working model. Costs we incur between completion
of the working model and the point at which a product is ready
for general release have been insignificant. As a result, no
significant software development costs were capitalized through
December 31, 2001. We anticipate that research and
development expenses will increase in dollar amount and could
increase as a percentage of total revenues for the foreseeable
future.

Sales and Marketing Expense

Sales and marketing expenses consist primarily of
salaries and benefits, commissions, travel, entertainment, trade
shows and promotional expenses. Sales and marketing expenses
included non-cash stock-based compensation expense of
$0.1 million in 2001, $4.2 million in 2000 and
$0.4 million in 1999, and also included nonrecurring
expenses related to the Retek spin-off of $5.8 million in 2000.

Sales and marketing expense decreased from
$76.4 million in 2000 to $44.6 million in 2001,
primarily as a result of our spin-off of Retek in September
2000. Reteks sales and marketing expense in 2000
contributed to $30.1 million (including $1.8 million
in stock-based compensation charges) of our total sales and
marketing expense in 2000. Excluding Reteks sales and
marketing expense in 2000, and further excluding our stock-based
compensation charges in 2001 and 2000 and expenses related to
the Retek spin-off in 2000, our sales and marketing expenses
increased by $6.3 million, or 16.6%, from 2000 to 2001.
This increase was attributable primarily to increases in
staffing related to the expansion of direct sales and marketing
staff, including those resulting from our acquisitions in 2000
and 2001. Also contributing to the increase were incremental
costs related to the creation and deployment of a new corporate
branding campaign along with other expenses to support our
acquired businesses, offset by reduced expenditures associated
with public relations, advertising and trade shows period over
period.

Sales and marketing expense increased from
$46.3 million in 1999 to $76.4 million in 2000. Sales
and marketing expense included Retek sales and marketing expense
totaling $30.1 million (including $1.8 million in
stock-based compensation charges) during 2000 and
$20.0 million (including $0.4 million in stock-based
compensation charges) during 1999. Excluding Reteks sales
and marketing expense in 2000 and 1999, and further excluding
our stock-based compensation charges in 2000 and 1999 and
expenses related to the Retek spin-off in 2000, our sales and
marketing expenses increased by $12.0 million, or 45.8%,
from 1999 to 2000. The absolute dollar increase at HNC was
attributable primarily to increases in staffing related to the
expansion

F-10



---



##### Table of Contents



of our direct sales and marketing staff,
including that resulting from acquisitions. Also contributing to
the increases were additional expenses for trade shows,
advertising, corporate marketing programs and other expenses to
support recently acquired businesses.


We expect sales and marketing expenses to
continue to increase in absolute dollars for the foreseeable
future. These expenses could also increase as a percentage of
total revenues as we continue to develop a direct sales force in
international markets and expand our domestic sales and
marketing organization and increase the breadth of our product
lines.

General and Administrative Expense

General and administrative expenses consist
primarily of personnel costs for finance, contract
administration, human resources and general management, as well
as insurance and professional services expenses. General and
administrative expenses included non-cash stock-based
compensation expense of $0.3 million in 2001,
$1.7 million in 2000 and $9.8 million in 1999, and
also included nonrecurring expenses related to the Retek
spin-off of $16.8 million in 2000.

General and administrative expense decreased from
$53.3 million in 2000 to $30.1 million in 2001.
General and administrative expenses included Retek general and
administrative expenses totaling $8.7 million during 2000
(including $1.1 million in stock-based compensation
charges). Excluding Reteks general and administrative
expense in 2000, and further excluding our stock-based
compensation charges in 2001 and 2000 and expenses related to
the Retek spin-off in 2000, our general and administrative
expenses increased by $2.6 million, or 9.7%, from 2000 to
2001. This increase was attributable primarily to additional
staffing and related expenses to support a higher volume of
business, including that relating to our acquisitions in 2000
and 2001, and also to an increase in charges associated with our
provision for doubtful accounts period over period, due to our
assessment of the estimated impact of deteriorating economic
conditions.

General and administrative expense increased from
$33.8 million in 1999 to $53.3 million in 2000.
General and administrative expenses included Retek general and
administrative expenses totaling $8.7 million (including
$1.1 million in stock-based compensation charges) during
2000 and $6.4 million (including $0.2 million in
stock-based compensation charges) during 1999. Excluding
Reteks general and administrative expenses in 2000 and
1999, and further excluding our stock-based compensation charges
in 2000 and 1999 and expenses related to the Retek spin-off in
2000, our general and administrative expenses increased by
$9.4 million, or 53.2%, from 1999 to 2000. This increase
was attributable primarily to additional staffing and related
expenses to support a higher volume of business, resulting in
part from our acquisitions.

Transaction-related Amortization and
Costs

Transaction-related amortization and costs
primarily include acquisition-related amortization of goodwill
and intangible assets during 2001, 2000 and 1999. Additional
costs include $0.8 million related to the write-off of
deferred offering costs during 2000 and $0.6 million
related to the write-off of deferred merger costs during 1999.
Transaction-related amortization and costs increased from
$9.2 million in 1999 to $43.7 million in 2000 and to
$56.6 million in 2001. These year-over-year increases are
primarily attributable to incremental goodwill and intangible
asset amortization charges as a result of our business
acquisitions during 1999, 2000 and 2001, partially offset by the
absence of Retek amortization beginning in the fourth quarter of
2000 as a result of our spin-off of this entity. In accordance
with the amortization provisions of FAS 142 pertaining to
acquisitions consummated after June 30, 2001, we did not
amortize goodwill arising in connection with our acquisition of
the UK-based Marketing Service Provider business of Chordiant
Software Inc. in September 2001 or our acquisition of certain
assets of the Blaze Advisor business unit of Brokat Technologies
in August 2001. Further, as a result of our full adoption of
FAS 142 effective January 1, 2002, we will no longer
amortize goodwill in future periods. Rather, goodwill along with
other intangible assets will be reviewed for impairment in
accordance with FAS 142 on an annual basis, or more
frequently if certain events were to occur. Goodwill
amortization contributed to $37.6 million,
$27.7 million and $4.4 million of total amortization
during 2001, 2000 and 1999.

F-11



---



##### Table of Contents



In-process Research and Development
Expense

2001 Acquisitions

In process research and developments expense was
$0.5 million in 2001, related to a one-time write-off in
connection with the acquisition of certain assets of the Blaze
Advisor business unit (Blaze) from Brokat
Technologies in August 2001.

Blaze Advisors rules management technology
is designed to help large organizations manage complex or
frequently changing business rules. The classification of the
technology as complete or under development was made in
accordance with the guidelines of Statement of Financial
Accounting Standards No. 86, Statement of Financial
Accounting Standards No. 2 and Financial Accounting
Standards Board Interpretation No. 4. At the time of the
acquisition of its assets, Blaze Advisor had a major update of
its product under development with new technologies related to
decision algorithms and various presentation and development
features.

We used an independent appraisal firm to assist
us with our valuation of the fair value of the purchased assets
of Blaze. Fair value is defined as the estimated amount at which
an asset might be expected to be exchanged between a willing
buyer and willing seller assuming the buyer continues to use the
assets in its current operations. This in-process R&D
project was valued through the use of a discounted cash flow
analysis, taking into account projected future cash flows
associated with this project once it achieves technological
feasibility, its stage of completion as of the acquisition date,
and the expected return requirements (i.e. discount rate) for
determining the present value of the projected cash flows. Stage
of completion was estimated by considering the time, cost, and
complexity of tasks completed prior to the acquisition as a
percentage of total time, cost and effort required for the total
project up to achieving technological feasibility.

With respect to the projected financial
information provided to the appraiser, Blaze/ HNC management
prepared a detailed set of projections forecasting revenue for
the Blaze business as well as gross profit and operating profit
margins. These projections were made based on an assessment of
customer needs and the expected pricing and cost structure. In
addition, Blaze/ HNC management provided guidance for
allocations of revenue and expenses between complete and
in-process technology. With respect to the discount rates used
in the valuation approach, the incomplete technology represents
a mix of near and mid-term prospects for the business and
imparts a level of uncertainty to its prospects. A reasonable
expectation of return on the incomplete technology would be
higher than that of completed technology due to these inherent
risks. As a result, the earnings associated with incomplete
technology were discounted at a rate of 24% based upon the
following methodology: The Capital Asset Pricing Model was used
to determine the cost of equity. It combines a risk free rate of
return with an equity risk premium multiplied by a factor,
referred to as Beta, which is based on the performance of common
stock prices of similar publicly traded companies. Employing
these data, the discount rate attributable to the business was
19%, which was used for valuing completed technology. Since
incomplete technology would require a higher return than
completed technology, the valuation report prepared by the
appraiser used a rate of 24% to determine the present value of
the cash flows (in excess of a return on other assets of the
business) attributable to in-process research and development
projects.

2000 Acquisitions

In-process research and development expense was
$7.6 million in 2000, related to one-time write-offs in
connection with the acquisitions of CASA ($1.4 million),
Celerity ($1.1 million), HighTouch ($4.0 million),
Systems/ Link ($0.7 million) and CardAlert
($0.4 million) in 2000.

CASA, acquired in the first quarter of 2000, is
an advanced analytic solutions company that provides account
optimization and precision marketing solutions. Prior to 2000,
CASA primarily sold its Adaptive Dynamic Marketing solutions to
businesses to improve revenue and customer retention. At the
time of acquisition, CASA had a number of new technologies under
development related to account management algorithms and pricing
algorithms, which were estimated at the time of acquisition to
achieve technological feasibility in 2000.

F-12



---



##### Table of Contents



Celerity Technologies, acquired in the second
quarter of 2000, is involved in developing and marketing
electronic data interchange (EDI) solutions for the
workers compensation industry. The company is a developer
and provider of translation software, desktop software, and
value-added network services in support of the claims handling
process. Prior to our acquisition, Celerity Technologies
primarily sold its software and network services to insurance
carriers, third party administrators, managed care
organizations, employers, and medical providers to facilitate
the workers compensation claims handling process. At the time of
acquisition, Celerity Technologies had a number of new
technologies under development related to Web-enabling and EDI
network technologies, which were estimated at the time of
acquisition to achieve technological feasibility in 2000.

HighTouch, acquired in the second quarter of 2000
by Retek, is a provider of customized software and services
relating to customer relationship management (CRM). Prior to our
acquisition, HighTouch primarily sold customized software and
services to a variety of customers in the retail industry. At
the time of acquisition, HighTouch had technology under
development relating to the creation of a fully integrated
standardized off-the-shelf CRM product, which was estimated at
the time of acquisition to achieve technological feasibility in
2000.

Systems/ Link, acquired in the third quarter of
2000, is a software developer that creates data management
solutions for large telecommunications companies. The company
provides applications for real-time data collection, call detail
record exchange, fraud control and prepaid services for
carriers. At the time of acquisition, Systems/ Link had a new
technology under development related to a real-time roamer
record exchange system for enhanced fraud control capabilities,
which was estimated at the time of acquisition to achieve
technological feasibility in 2001.

CardAlert, acquired in the third quarter of 2000,
provides ATM and debit card risk management services to domestic
financial institutions and debit card networks. The
companys accelerated detection technology analyzes daily
ATM transactions for fraudulent activity. Prior to its
acquisition, CardAlert primarily provided fraud detection
services to large domestic debit card networks. At the time of
acquisition, CardAlert had a new technology under development
related to fraud detection for signature-based credit card
activity, which was estimated at the time of acquisition to
achieve technological feasibility in the third quarter of 2001.

We used an independent appraisal firm to assist
us with our valuations of the fair market values of the
purchased assets in connection with these acquisitions. Fair
market value is defined as the estimated amount at which an
asset might be expected to be exchanged between a willing buyer
and willing seller assuming the buyer continues to use the
assets in its current operations. The in-process research and
development projects were valued through the use of a discounted
cash flow analysis, taking into account projected future cash
flows associated with these projects once they achieve
technological feasibility, their stage of completion as of the
acquisition date, and the expected return requirements (i.e.
discount rates) for determining present values of the projected
cash flows. Stages of completion were estimated by considering
time, cost, and complexity of tasks completed prior to the
acquisition as a percentage of total time, cost and effort
required for the total project up to achieving technological
feasibility.

With respect to the projected financial
information provided to our appraiser pertaining to these
acquisitions: CASA prepared a detailed set of projections
forecasting revenue from the new algorithms as well as gross
profit and operating profit margins; Celerity and HNC prepared a
detailed set of projections forecasting revenue from the
Web-enabling and EDI technology as well as gross profit and
operating profit margins; Retek prepared a detailed set of
projections forecasting revenue from the HighTouch CRM
technology as well as gross profit and operating profit margins;
Systems/ Link and HNC prepared a detailed set of projections
forecasting revenue from the real-time roamer record exchange
technology as well as gross profit and operating profit margins;
and CardAlert and HNC prepared a detailed set of projections
forecasting revenue from the credit card fraud detection
technology as well as gross profit and operating profit margins.
These projections were made based on an assessment of customer
needs and the expected pricing and cost structure.

With respect to the discount rates used in the
valuation approach, incomplete technology represents a mix of
near and mid-term prospects for the acquired businesses and
imparts a level of uncertainty as to their

F-13



---



##### Table of Contents



prospects. A reasonable expectation of return on
the incomplete technology would be higher than that of completed
technology due to these inherent risks. As a result, the
earnings associated with incomplete technology were discounted
based upon the following methodologies: The Capital Asset
Pricing Model was used to determine the cost of equity. It
combines a risk free rate of return with an equity risk premium
multiplied by a factor, referred to as Beta, which is based on
the performance of common stock prices of similar publicly
traded companies. Employing these data for CASA, Celerity,
HighTouch, Systems/ Link and CardAlert, the discount rates
attributable to the businesses were 22.0%, 19.3%, 21.2%, 21.0%
and 21.0%, respectively, which were used for valuing completed
technology. Since incomplete technology would require a higher
return than completed technology, the valuation reports prepared
by our appraiser utilized discount rates of 27.0%, 24.3%, 26.2%,
31.0% and 31.0% for CASA, Celerity, HighTouch, Systems/ Link and
CardAlert, respectively, to determine the present value of the
cash flows (in excess of a return on other assets of the
business) attributable to in-process research and development
projects.


1999 Acquisition

In-process research and development expense was
$1.5 million in 1999, related to a one-time write-off in
connection with Reteks acquisition of WebTrak in the
fourth quarter of 1999. At the time of acquisition, certain
WebTrak products were under development. The classification of
the technology as complete or under development was made in
accordance with the guidelines of Statement of Financial
Accounting Standards No. 86, Statement of Financial
Accounting Standards No. 2 and Financial Accounting
Standards Board Interpretation No. 4.

Retek used an independent appraisal firm to
assist in the valuation of the fair market values of the
purchased assets of WebTrak. Fair market value is defined as the
estimated amount at which an asset might be expected to be
exchanged between a willing buyer and willing seller assuming
the buyer continues to use the assets in its current operations.
Retek provided assumptions by product line of revenue, cost of
goods sold and operating expense to the appraiser to assist in
the valuation. The in-process research and development projects
were valued through the use of a discounted cash flow analysis,
taking into account projected future cash flows associated with
these projects once they achieve technological feasibility,
their stage of completion as of the acquisition date, and the
expected return requirements (i.e. discount rates) for
determining present values of the projected cash flows. Stages
of completion were estimated by considering time, cost, and
complexity of tasks completed prior to the acquisition as a
percentage of total time, cost and effort required for the total
project up to achieving technological feasibility. Earnings
associated with WebTraks incomplete technology were
discounted at a rate of 26.4%

Restructuring and Impairment Charges

In April 2001, we announced and began to
implement a reorganization that involved realigning our internal
organization from a vertical market orientation to a horizontal
product platform. This reorganization plan resulted in the
elimination of various redundant corporate resources that
existed in the previous vertical market organization structure.
As a result of this reorganization, we incurred charges of
$3.0 million during 2001, which included severance benefits
for 41 terminated employees, the write-off of certain
capitalized costs associated with internal-use software no
longer being used, and charges for the closure of certain office
locations.

During 2000, we recorded an impairment charge of
$1.2 million related to the abandonment of a lease and
associated property and equipment. The impairment charge
consisted of the write-off of the remaining net book value of
abandoned property and equipment that was deemed to have
insignificant remaining value at the time of the disposal, as
well as charges associated with future facility lease cash
obligations, net of estimated sublease income. During 2001, we
recorded an additional charge of $1.2 million associated
with this leased facility, resulting from the default of a
sublease tenant and resultant estimated future net lease costs
expected to be borne by HNC. During 2001, we also committed to
the closure of an additional office facility and recorded
estimated lease exit charges of $0.5 million, consisting of
future facility lease cash obligations, net of estimated
sublease income.

F-14



---



##### Table of Contents



These restructurings and impairments were
consummated in a short period of time and did not have any
adverse impact on our business while they were ongoing. As a
result of these restructurings and impairments through
December 31, 2001, we paid out cash severances totaling
$0.4 million. The remaining aspects of these charges
pertained primarily to the write-off of capitalized software
costs associated with software not being used and office closure
charges, as noted above. The office closure charges were
determined based upon future facility lease cash obligations,
net of estimated sublease income as determined through
consultation with independent lease brokers, plus estimated
lease brokerage fees. With the exception of our contractual
future cash lease commitments associated with abandoned
facilities, no future cash obligations are expected to arise in
connection with these restructurings and impairments.

Interest Income

Interest income totaled $9.1 million in
2001, $12.9 million in 2000 and $6.3 million in 1999.
The decrease in interest income in 2001 as compared to 2000 is
attributable primarily to lower average cash and investment
balances during 2001 as compared to 2000, and also to lower
interest and investment income yields due to market conditions.
The increase in interest income in 2000 compared to 1999 was
attributable primarily to increased interest earned as a result
of higher average cash and investment balances during 2000.

Interest Expense

Interest expense totaled $3.2 million in
2001, $4.2 million in 2000 and $5.7 million in 1999.
The majority of our interest expense during each of these years
relates to our convertible subordinated notes that were
outstanding during these periods (See Note 10 of Notes to
the Consolidated Financial Statements). The decrease in interest
expense in 2001 as compared to 2000 is attributable primarily to
the reduced principal amount of our 4.75% convertible
subordinated notes outstanding during 2001 due to the conversion
of $83.6 million of such notes into our common stock during
September 2000 and to the conversion of the remaining
$16.4 million of such notes during the first quarter of
2001. The decrease was partially offset by increased interest
expense in the third and fourth quarters of 2001 associated with
our newly issued 5.25% convertible subordinated notes
aggregating $150.0 million. The decrease in interest
expense in 2000 compared to 1999 is attributable primarily to
the reduced principal amount of our 4.75% convertible
subordinated notes outstanding during 2000 due to the conversion
of $83.6 million of such notes into our common stock during
the third quarter of 2000, compared to a principal balance of
$100.0 million in 1999.

Expense Related to Debt Conversion

In connection with the conversion of
$83.6 million in 4.75% convertible subordinated notes into
our common stock during 2000, we incurred and paid
$12.7 million in conversion premiums to the note holders,
which we recorded as a debt conversion expense.

Other Expense, Net

Other expense, net totaled $6.2 million in
2001, $3.4 million in 2000 and $0.2 million in 1999.
The increase in other expense, net period over period is
attributable primarily to incremental charges associated with
our write-down of certain equity investments in 2001 and 2000.
During 2000, we recorded a $2.8 million charge related to the
write-down of our investment in Network Commerce and during 2001
we further recorded charges totaling $6.0 million related
to the write-down of our investments in Azure Capital Partners
L.P., KeyLime Software, Qpass Inc., Burning Glass Technologies
and Network Commerce. See Notes 6 and 7 of Notes to the
Consolidated Financial Statements.

Minority Interest in Losses of Consolidated
Subsidiaries

Minority interest in losses of consolidated
subsidiaries totaled $7.6 million in 2000 and $0.7 million
in 1999, and represents other stockholders share of the
losses of our consolidated subsidiaries, including that relating
to Retek in 2000 and 1999. Following our spin-off of Retek in
September 2001, we have had no minority interest ownership in
our consolidated subsidiaries.

F-15



---



##### Table of Contents



Income Taxes

The provision (benefit) for income taxes
totaled $(6.3) million in 2001, $(33.1) million in 2000 and
$0.5 million in 1999.

The differences between the benefit for income
taxes recorded and that computed by applying taxes at statutory
rates during 2001 and 2000 are attributable to the decrease in
our pre-tax loss in these corresponding periods, adjusted to
reflect the decrease of certain non-deductible expenses in 2001
as compared to 2000, including in-process research and
development and stock-based compensation charges, offset by an
increase in non-deductible goodwill amortization in 2001 as well
as the decrease in deductible expenses associated with the
minority interest in losses of consolidated subsidiaries.

The differences between the provision
(benefit) for income taxes recorded and that computed by
applying taxes at statutory rates during 2000 and 1999 are
attributable primarily to the effect of non-deductible expenses,
offset by the effect of Reteks loss attributable to
minority interest stockholders and the generation of tax credit
carryforwards during each of these years. Significant
non-deductible expenses in 2000 included the effect of one-time
in-process research and development write-offs, stock-based
compensation expense, acquisition related amortization, Retek
spin-off costs and debt conversion expense. Significant
non-deductible expenses in 1999 included the effect of a
one-time in-process research and development write-off,
stock-based compensation expense, acquisition related
amortization and stock redemption charges.

Stock-Based Compensation Expense

Within our statement of operations, stock-based
compensation expense has been classified as follows in 2001,
2000 and 1999:

|                           |  |                         |     |      |  |      |        |  |  |   |        | 
|-------------------------- |  | ----------------------- | --- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                           |  |                        
|                           |  | Year Ended December 31,
|                           |  |                        
|                           |  | 2001                    |     | 2000 |  | 1999
|                           |  |                         |     |      |  |     
|                           |  |                        
|                           |  | (in thousands)         
|License and maintenance    |  | $                       | 51  |      |  | $    | 2,658  |  |  | $ | 280    | 
|Services and other         |  |                         |    |      |  |      | 2,548  |  |  |   | 354    | 
|Research and development   |  |                         | 80  |      |  |      | 10,629 |  |  |   | 1,121  | 
|Sales and marketing        |  |                         | 50  |      |  |      | 4,167  |  |  |   | 441    | 
|General and administrative |  |                         | 295 |      |  |      | 1,668  |  |  |   | 9,789  | 
|                           |  |                         |     |      |  |      |        |  |  |   |        | 
|                           |  | $                       | 476 |      |  | $    | 21,670 |  |  | $ | 11,985 | 
|                           |  |                         |     |      |  |      |        |  |  |   |        | 

During 2001, we recorded net stock-based
compensation expense totaling $0.5 million, consisting of
$0.2 million in amortization of unearned stock-based
compensation and $0.3 million in one-time intrinsic value
charges associated with option award modifications made during
the year.

During 2000, we recorded net stock-based
compensation expense totaling $21.7 million, consisting of
$13.8 million in stock-based compensation charges
attributable to our Retek spin-off, which are discussed
separately below, and $7.9 million in additional net
compensation expense. This additional net compensation expense
relates primarily to the amortization of unearned stock-based
compensation of $8.8 million (of which $8.3 million
related to Retek) and also includes additional net compensation
income of $0.9 million, primarily related to the reversal
of compensation expense recorded in 1999 on variable awards, as
a result of a decline in the fair values of these awards during
2000.

During 1999, Retek granted stock options to
employees and directors to purchase Retek common stock at an
exercise price of $10.00 per share when the deemed fair market
value of Reteks common stock was $13.00 per share. As a
result, Retek recorded unearned stock-based compensation
totaling $21.9 million representing the aggregate intrinsic
value of the options on the date of grant. Additionally, during
2000, Retek recorded additional unearned stock-based
compensation totaling $1.8 million related to an employee
option grant having an exercise price below the fair value of
Reteks common stock on the date of grant. Amortization of
Reteks unearned stock-based compensation totaled $1.9
million during 1999 and $8.3 million during the

F-16



---



##### Table of Contents



period from January 1, 2000 through the
Retek spin-off date of September 29, 2000. Reteks
unearned stock-based compensation balance of $13.3 million
at September 29, 2000, net of forfeiture reductions, was
removed from our consolidated equity accounts in connection with
the Retek spin-off.


During 1999, in addition to Reteks
amortization of unearned stock-based compensation as described
above, we recorded stock-based compensation expense totaling
$10.1 million. This compensation expense relates primarily
to stock awards granted to former employees and non-employee
consultants, of which $8.0 million was calculated at intrinsic
value while the remainder related to variable awards measured at
fair value. The intrinsic value charge consisted primarily of a
one-time charge of $6.1 million related to a key employee
severance agreement executed in the fourth quarter of 1999.

The fair values of HNCs variable awards
during 2000 and 1999 were estimated using the Black-Scholes
option pricing model with the following weighted average
assumptions: dividend yield of 0.0% for both years; risk-free
interest rate of 5.02% and 5.23% in 2000 and 1999, respectively;
volatility of 100% for both years; and expected lives from four
months to one year according to the vesting date and subsequent
exercise period of each option grant, and our stock prices on
the various grant dates as well as on December 31, 2000 and
1999.

In August 2000, we accelerated the vesting of 25%
of the outstanding stock options that would have been unvested
as of the September 15, 2000 record date for the spin-off
to afford our option holders the opportunity to participate in
receipt of the Retek share dividend. As a result of this award
modification, we recorded a non-cash stock-based compensation
charge of $6.7 million during the third quarter of 2000 in
accordance with Financial Accounting Standards Board
Interpretation No. 44, or FIN 44. Additionally, as a result
of the proportionate option repricing in connection with the
Retek spin-off, certain options failed to qualify for fixed
accounting treatment under FIN 44. As a result, we recorded
a one-time charge to operations of $7.1 million related to
the modification and cash repurchase of options in connection
with the Retek spin-off.

Expenses Related to Spin-off of
Retek

During 2000, we incurred $48.2 million in
non-recurring expenses associated with our spin-off of Retek,
excluding stock-based compensation charges totaling
$13.8 million that are discussed above. Within our
statement of operations, these expenses were classified as
follows in 2000:

|                           |  |                   |        | 
|-------------------------- |  | ----------------- | ------ | 
|                           |  | Year Ended       
|                           |  | December 31, 2000
|                           |  |                  
|                           |  | (in thousands)   
|License and maintenance    |  | $                 | 6,086  | 
|Services and other         |  |                   | 6,603  | 
|Research and development   |  |                   | 12,880 | 
|Sales and marketing        |  |                   | 5,770  | 
|General and administrative |  |                   | 16,846 | 
|                           |  |                   |        | 
|                           |  | $                 | 48,185 | 
|                           |  |                   |        | 

These expenses consisted primarily of a
$40.4 million charge related to the accrual of cash bonuses
payable to employees and directors who held unvested stock
options as of the record date for the Retek dividend, along with
investment banking, legal, accounting and other non-recurring
costs related to the Retek spin-off.

Segment Contribution Margin

Segment contribution margin in 2001, 2000 and
1999 is reported in Note 13 of the Notes to Consolidated
Financial Statements.

2001 Segment
Contribution Margin Compared to 2000 Segment Contribution
Margin

Segment contribution margin in our Efficiency
segment increased from $38.1 million in 2000 to
$47.4 million in 2001, and as a percentage of revenues
increased from 37.0% to 42.6%. The absolute dollar

F-17



---



##### Table of Contents



increase was attributable to increased segment
revenues and to a decrease in direct segment operating expenses.
The segment contribution margin percentage increase was
attributable primarily to an increase in higher margin RoamEx
and Decision Manager ASP product revenues and to our recognition
of incremental license fees associated with Decision Manager for
Medical Bill Review product customer pricing changes, offset by
a decline in higher margin Decision Manager for Financial
Applications product implementation services, reduced cost
efficiencies due to a decline in customer bill review volumes
associated with our Outsourced Bill Review Service operations
and increased customer support costs associated with recurring
Decision Manager for Medical Bill Review product license
revenues.


Segment contribution margin for our Risk segment
increased from $50.2 million in 2000 to $65.5 million
in 2001, and as a percentage of revenues increased from 73.3% to
74.6%. The absolute dollar increase was attributable to
increased segment revenues, offset by a proportionate increase
in direct segment operating expenses, which yielded a relatively
nominal net contribution margin percentage increase. The segment
contribution margin percentage increase was attributable
primarily to our recognition of incremental license fees
associated with Falcon Fraud Manager, Fraud Manager for
Telecommunications and CompCompare/ ProviderCompare product
customer pricing changes, offset by increased direct segment
costs associated with Falcon Fraud Manager implementation
projects and increased research and development spending on Risk
segment products. We expect that direct segment research and
development costs in the Risk segment will increase in absolute
dollar amount and could increase as a percentage of Risk segment
revenues for the foreseeable future.

Segment contribution margin for our Opportunity
segment increased from $2.6 million in 2000 to
$9.7 million in 2001, and as a percentage of revenues
increased from 17.8% to 40.8%. The absolute dollar increase was
attributable to increased segment revenues, offset by an
increase in direct segment operating expenses. The segment
contribution margin percentage increase was attributable
primarily to our recognition of Profitability Predictor
termination fees associated with a customer that sold its credit
card portfolio and therefore no longer had a use for our product
and an increase in Cross-Sell Optimizer revenues that have lower
associated direct segment costs, primarily from the March 2000
acquisition of CASA.

Segment contribution margin for our Other segment
declined from a $1.2 million positive margin in 2000 to a
$1.9 million negative margin in 2001, and as a percentage
of revenues decreased from 13.9% to negative 52.0%. The absolute
dollar decrease was attributable to decreased segment revenues,
offset by a decrease in direct segment operating expenses. The
segment contribution margin percentage decrease was attributable
primarily to a decrease in our former Intelligent Response
product revenues, offset by reductions in related direct product
costs.

2000 Segment
Contribution Margin Compared to 1999 Segment Contribution
Margin

Segment contribution margin for our Efficiency
segment increased from $21.6 million in 1999 to
$38.1 million in 2000, and as a percentage of segment
revenues increased from 29.9% to 37.0%. The absolute dollar
increase was attributable to increased segment revenues, offset
by an increase in direct segment operating expenses. The segment
contribution margin percentage increase was attributable
primarily to increased cost efficiencies related to the growth
in our Outsourced Bill Review Service customer base along with
higher margins associated with acquired products, including
primarily RoamEx and Decision Manager ASP products, offset in
part by a decrease in Decision Manager for Financial
Applications product implementation margins due to the increased
use of third party consultants, who have a higher average cost
than internal resources. The contribution margin percentage was
also reduced by increased research and development spending on
Efficiency segment products.

Segment contribution margin for our Risk segment
increased from $40.7 million in 1999 to $50.2 million
in 2000, and as a percentage of segment revenues increased from
73.0% to 73.3%. The absolute dollar increase was attributable to
increased segment revenues, offset by an increase in direct
segment operating expenses. Although the overall segment
contribution margin percentage remained relatively flat period
over period, the margin increase was primarily due to the
recognition of non-recurring license fees in 2000 related to
Falcon Fraud Manager product sales, with minimal associated
costs, offset by the sale of fewer MIRA product

F-18



---



##### Table of Contents



perpetual licenses and increased development
costs associated with Payment Optimizer and ProviderCompare/
CompCompare development work performed during the year. The
contribution margin percentage was also reduced by increased
research and development spending on Risk segment products.


Segment contribution margin for our Opportunity
segment decreased from $4.2 million in 1999 to
$2.6 million in 2000, and as a percentage of segment
revenues decreased from 42.5% to 17.8%. The absolute dollar
decrease was attributable to increased segment revenues, offset
by a larger increase in direct segment operating expenses. The
segment contribution margin percentage decrease was attributable
primarily to an increase in Cross-Sell Optimizer service
revenues resulting from our acquisition of CASA in the first
quarter of 2000, which contributed to lower product margins
during most of 2000, and to increased Profit Manager product
development costs.

Segment contribution margin for our Other segment
decreased from $3.0 million in 1999 to $1.2 million in
2000, and as a percentage of segment revenues decreased from
30.6% to 13.9%. The absolute dollar decrease was attributable to
a decline in segment revenues along with an increase in direct
segment operating expenses. The segment contribution margin
percentage decrease was attributable primarily to a decline in
perpetual license revenues associated with various products and
to increased research and development expenditures in 2000
related to our former Intelligent Response product lines.

Critical Accounting Policies

We prepare our consolidated financial statements
in conformity with accounting principles generally accepted in
the United States of America. As such, we are required to make
certain estimates, judgments and assumptions that we believe are
reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the periods
presented. Our significant accounting policies are described in
Note 1 of Notes to the Consolidated Financial Statements on
page F-39 of this report. The significant accounting
policies that we believe are the most critical, because they can
involve a higher degree of judgment and complexity, include the
following:

Revenue Recognition

Our revenue recognition accounting policy is
described in Note 1 of Notes to the Consolidated Financial
Statements. The aspects of our revenue recognition accounting
policy that involve more significant judgments and estimates
include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Software revenue is recognized upon meeting all
	of the following criteria: execution of a written license
	agreement, contract or purchase order; delivery of software
	and/or authorization keys; the license fee is fixed and
	determinable; and collectibility of the proceeds is assessed as
	being probable. Determination of whether license fees are fixed
	and determinable and whether collection of the related proceeds
	is considered probable involves managements judgment. We
	assess whether license fees are fixed and determinable based on
	the payment terms associated with the transaction, including
	consideration of long-term payment terms and other factors when
	necessary. In instances where we determine the fee not to be
	fixed and determinable, we recognize revenue as the fees become
	due. We assess probability of collection based on a number of
	factors, including past transaction history and/or the
	creditworthiness of the customer. If we determine that
	collection of a fee is not probable, we defer recognition of the
	fee and recognize revenue at the time collection becomes
	probable, which is generally upon receipt of cash.
|
| |  | We derive a substantial portion of our revenues
	from transactional-based fees under software license
	arrangements, network service and internally hosted software
	arrangements. Under these arrangements, we recognize revenue
	based on system usage or when fees based on system usage exceed
	monthly minimum amounts. To the extent that our customers do not
	submit monthly or quarterly transaction information to us in
	advance of our revenue cutoff dates, we estimate the amount of
	revenue attributable to such customers based upon our historical
	experience and other relevant factors. Actual fees earned could
	differ from our estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-19



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from software installations and
	implementations and from contract services is generally
	recognized as the services are performed using the percentage of
	completion method based on costs incurred to date compared to
	total estimated costs at completion. Contract losses are
	recorded as a charge to operations in the period any losses are
	first identified. Unbilled accounts receivable are stated at
	estimated realizable value. To the extent that installation,
	implementation and contract services are performed under
	fixed-price arrangements that are accounted for using the
	percentage of completion method, we make estimates regarding the
	cost, scope and duration of each engagement, and to make
	revisions to such estimates in the period in which changes
	become known. If we do not accurately estimate the resources
	required or the scope of work to be performed, or if we do not
	manage our projects properly within the planned periods of time
	or satisfy our obligations under the contracts, then future
	revenues and margins may be significantly and negatively
	impacted or losses on existing contracts may need to be
	recognized.

Allowance for Doubtful Accounts
Receivable

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
concentrations, customer creditworthiness, current economic
trends and changes in our customer payment terms. Material
differences may result in the amount and timing of expenses for
any period if we were to make different judgments or utilize
different estimates.

Impairment of Equity Investments

At December 31, 2001, all of our equity
investments in privately-held companies were being accounted for
under the cost method. We periodically review our investments
for instances where fair value is less than cost and the decline
in value is determined to be other than temporary. If the
decline in value is judged to be other than temporary, the basis
of the security is written down to fair value and the resulting
loss is charged to operations. In evaluating the fair value of
our equity investments our policy includes, but is not limited
to, reviewing each of the entities cash positions, recent
financing valuations, operational performance, revenue and
earnings forecasts, liquidity forecasts and financing needs and
general economic factors, as well as management and ownership
trends. Our evaluation of the fair value of our investment in
these entities is inherently subjective and may contribute to
significant volatility in our reported results of operations
based upon the timing and nature of write-downs recorded.

Business Acquisitions; Valuation of Goodwill
and Other Intangible Assets

Our business acquisitions typically result in the
recognition of goodwill and other intangible assets, and in
certain cases one-time charges associated with the write-off of
in-process research and development, which could affect the
amount of current and future period charges and amortization
expense. The determination of value of these components of a
business combination, as well as associated useful asset lives,
requires management to use its judgement to make various
estimates and assumptions. Estimates using different, but each
reasonable, assumptions could produce significantly different
results.

We continually review the events and
circumstances related to our financial performance and economic
environment for factors that would provide evidence of the
impairment of goodwill. If factors suggesting impairment exist,
we use the market value method to determine the extent of the
impairment. We will adopt the provisions of Statement of
Financial Accounting Standards No. 142 in the first quarter
of 2002, and as a result we will cease to amortize goodwill. In
lieu of amortization, we will be required to perform an initial
impairment review based on the estimated fair value of our
goodwill and intangible assets in 2002 and on a periodic basis
thereafter. We expect to perform the first of the required
impairment tests, as of January 1, 2002, in the first
quarter of 2002. There are many management assumptions and
estimates underlying the determination of an impairment loss,
and estimates using different, but each reasonable, assumptions
could produce significantly different results. Therefore, the
timing and recognition of impairment losses by us in the future,
if any, may be highly dependent upon our estimates and
assumptions. We have not yet determined whether any impairment
loss will result from our initial impairment review in 2002.

F-20



---



##### Table of Contents



Accounting for Income Taxes

We are required to estimate our income taxes in
each of the jurisdictions in which we operate. This process
involves our estimation of actual current tax expense together
with the assessment of temporary differences resulting from
differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included in our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we
believe that recovery is not likely, we must establish a
valuation allowance. Significant management judgment is required
in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. We have recorded a
valuation allowance of $1.3 million as of December 31,
2001, due to uncertainties related to our ability to utilize
some of our deferred tax assets, primarily relating to ordering
rules surrounding foreign tax credit carryforwards. The
valuation allowance is based on our estimates of taxable income
by jurisdiction in which we operate and the period over which
our deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these
estimates in future periods we may need to establish an
additional valuation allowance, which could materially impact
our financial position and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled
$26.6 million in 2001, compared to net cash used in
operating activities of $66.4 million in 2000. Cash
provided by operations during 2001 reflects our net loss of
$36.5 million, reduced by non-cash aspects of our net loss
totaling $63.1 million. Significant non-recurring
operational cash outflows during 2000 included
$12.7 million in debt conversion expense as well as
$40.1 million in cash payments related to bonuses paid and
options repurchased in connection with the Retek spin-off.

Net cash used in investing activities totaled
$154.0 million in 2001, compared to net cash used in
investing activities of $72.7 million in 2000. Cash used in
investing activities during 2001 included $115.1 million in
net purchases of marketable securities, $25.5 million paid
in connection with our business acquisitions, net of cash
acquired, $12.5 million expended for the purchase of
property and equipment and $0.9 million in other net cash
flows used in financing activities.

Net cash provided by financing activities totaled
$162.9 million in 2001, compared to net cash provided by
financing activities of $73.1 million in 2000. Cash
provided by financing activities during 2001 included
$144.6 million in net proceeds from the issuance of
$150.0 million in 5.25% Convertible Subordinated Notes,
$24.6 million in proceeds resulting from stock option
exercises and employee stock purchases under HNC plans,
inclusive of the repayment of stockholder notes, and
$0.5 million in proceeds from the sale of trade accounts
receivable, partially offset by the payment of $6.9 million
in investment banking fees during the first quarter of 2001
related to the Retek spin-off.

As of December 31, 2001, we had
$313.7 million in cash and cash equivalents and marketable
securities. We believe that these balances, including interest
to be earned thereon, and borrowings available under our credit
facility described below will be sufficient to fund our working
and other capital requirements, including potential investments
in other companies and other assets to support the strategic
growth of our business, over the next twelve months. In the
ordinary course of business, we evaluate opportunities to
acquire businesses, products and technologies and we expect to
use our cash to fund these types of activities in the future. In
the event additional needs for cash arise, we may raise
additional funds from a combination of sources including the
potential issuance of debt or equity securities. Additional
financing might not be available on terms favorable to us, or at
all, particularly in light of the recent decline in the capital
markets. If adequate funds were not available or were not
available on acceptable terms, our ability to take advantage of
unanticipated opportunities or respond to competitive pressures
could be limited.

In August and September 2001, we issued
$150.0 million of 5.25% convertible subordinated notes that
mature on September 1, 2008. Interest on the notes is
payable on March 1 and September 1 of each year,
beginning March 1, 2002. The notes are convertible into
shares of our common stock at any time prior to

F-21



---



##### Table of Contents



maturity at a conversion price of $28.80 per
share (subject to certain adjustments), and are subordinated in
right of payment to all existing and future senior indebtedness,
as defined in the indenture. We may redeem the notes on or after
September 5, 2004, or earlier if the price of our common
stock reaches certain levels. If we redeem the notes prior to
September 1, 2007, we will also be required to pay a
redemption premium as prescribed by the indenture. Net cash
proceeds from the issuance of the notes totaled
$144.6 million after deduction of related issuance costs.


We have a $15.0 million revolving line of
credit with a bank through July 11, 2003. During 2001 and
2000, we had no amounts outstanding under this line of credit.
Our agreement with the bank contains covenants that restrict our
ability to pay cash dividends and make loans, advances or
investments without the banks consent. As of
December 31, 2001, we were in compliance with all covenants
under this agreement. Borrowings under this line of credit bear
interest at the rate of LIBOR plus 0.5%, payable monthly. The
applicable interest rate would have been 2.38% at
December 31, 2001. Beginning in 2002, we have adopted an
executive home equity loan program under this line of credit.
Under the program, and at our discretion, the bank will make
loans directly to our employees and we will guarantee the loans.
Our maximum allowable borrowings under this line of credit will
be reduced by the outstanding balance of qualified employee home
equity loans that we guarantee. The maximum amount of employee
home equity loans that we may guarantee at one time is
$4.0 million. Through December 31, 2001, there were no
employee loan guarantees in place.

From time to time, we enter into agreements to
sell an undivided interest in specifically identified trade
accounts receivable to a financial institution for a fee, based
principally upon defined short-term market rates. For further
information, see Note 1 of Notes to the Consolidated
Financial Statements.

We are a limited partner in Azure Capital
Partners L.P., a venture capital investment management fund, and
have invested an aggregate of $2.5 million into this fund
through December 31, 2001. We have committed to invest an
additional $2.5 million into this fund, which we expect to
make in 2002.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations
(FAS 141) and No. 142, Goodwill and
Other Intangible Assets (FAS 142).
FAS 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase
method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to
have indefinite lives will continue to be amortized over their
useful lives (but with no maximum life). The amortization
provisions of FAS 142 applied immediately to goodwill and
intangible assets acquired after June 30, 2001. We will
adopt all other provisions of FAS 142 in the first quarter
of 2002. We have not yet determined the impact that our full
adoption of FAS 142 in the first quarter of 2002 will have
on our consolidated financial position, results of operations or
disclosures.

In October 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144).
FAS 144 requires, among other things, the application of
one accounting model for long-lived assets that are impaired or
to be disposed of by sale. FAS 142 also revises the
accounting for discontinued operations. We will adopt the
provisions of FAS 144 in the first quarter of 2002. We do
not expect the adoption of FAS 144 to have a significant
impact on our consolidated financial position, results of
operations or disclosures.

F-22



---



##### Table of Contents



RISK FACTORS

Our business faces significant risks. The
factors discussed below are cautionary statements that identify
important factors that could cause actual results to differ
materially from those anticipated in the forward-looking
statements in this report and in forward-looking statements we
may make after the date of this report. Additional risks that we
do not yet know of or that we currently think are immaterial may
also impair our business operations.

If any of the events or circumstances
described in the following risks actually occur, our business,
financial condition or results of operations could suffer, and
the trading price of our common stock could decline.

Risks Related to Our Business



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Fluctuations in our revenues and operating
	results might lead to substantial declines in the price of the
	notes and our common stock.

Our revenues and operating results have varied
significantly in the past and in some quarters we have
experienced net losses. We expect fluctuations in our operating
results to continue for the foreseeable future. As a result, we
believe that you should not rely on period-to-period comparisons
of our financial results as an indication of our future
performance. If our revenues or operating results fall below the
expectations of market analysts and investors, the market price
of the notes and our common stock could decline substantially.
Factors that are likely to cause our revenues and operating
results to fluctuate include those discussed in the risk factors
below.

Due to current slowdowns in the economy
generally, we believe that many 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
information technology could have a material adverse effect on
our revenues and operating results. In addition, to the extent
that our customers change from paying license fees on a
recurring transactional basis to paying us one-time license
fees, our recurring revenues and gross margins for future
quarters will decrease, which will reduce our ability to predict
total revenues in future periods. Further, we expect a slight
decline in our total revenues due to our recent discontinuance
of eight of our products.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | We may not be able to forecast our revenues
	accurately because our products have a long and variable sales
	cycle.

We cannot predict the timing of the recognition
of our revenues accurately because the length of our sales
cycles makes it difficult for us to predict the quarter in which
sales to expected customers will occur. The long sales cycle for
our products may cause license revenue and operating results to
vary significantly from period to period. The sales cycle to
license our products can typically range from 60 days to
18 months. Customers are often cautious in making decisions
to acquire our products, because purchasing our products
typically involves a significant commitment of capital, and may
involve shifts by the customer to a new software and/or hardware
platform or changes in the customers operational
procedures. Delays in completing sales can arise while customers
complete their internal procedures to approve large capital
expenditures and test and accept our applications. Consequently,
we face difficulty predicting the quarter in which sales to
expected customers will occur. This has contributed, and we
expect it to continue to contribute, to fluctuations in our
operating results.



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to complete expected sales in
	any given quarter could harm our operating results because of
	the large size of typical orders and our inability to compensate
	for unanticipated revenue shortfalls.

Our sales cycle is subject to a number of
significant risks, including customers budgetary
constraints and internal acceptance reviews, over which we have
little or no control. If sales expected from specific customers
in a particular quarter are not realized in that quarter, we are
unlikely to generate revenue from alternate

F-23



---



##### Table of Contents



sources in time to compensate for the shortfall.
As a result, and due to the relatively large size of a typical
order, a lost or delayed sale could result in revenues that are
lower than expected. Moreover, to the extent that significant
sales occur earlier than anticipated, revenues for subsequent
quarters may be lower than expected. In addition, we may incur
substantial sales and marketing expenses and expend significant
management effort while potential customers are evaluating our
products and before they place an order with us. If the current
economic downturn continues, the sales cycle for our products
may become longer and we may require more resources to complete
sales. If orders for our products are not received as
anticipated, our operating results could be harmed.




| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect to continue to make strategic
	acquisitions, which could put a strain on our resources, cause
	dilution to our stockholders and adversely affect our financial
	results.

During 2000, we completed the acquisition of
seven businesses, one of which was acquired by our former
subsidiary Retek, which we spun off in September 2000. In 2001
we acquired four additional businesses and product lines and to
date in 2002 we have acquired one product line. We believe that
our future growth will depend, in part, upon our ability to
successfully complete future acquisitions of businesses and
technologies. Integrating newly acquired organizations and
technologies into our business could put a strain on our
resources and be expensive and time consuming. In addition, we
may not succeed in integrating acquired businesses or
technologies and may not achieve anticipated revenue and cost
benefits. Further, our acquisition strategy and future
acquisitions could result in any of the following risks:



| |   |                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased competition for acquisition
	opportunities could inhibit our growth and our ability to
	complete suitable acquisitions, and could also increase the
	price we would have to pay to complete acquisitions, which might
	result in dilution to the equity interests of our stockholders;
|
| |  | if we are unable to complete acquisitions
	successfully, we might not be able to successfully develop and
	market products for new industries or for markets with which we
	may not be familiar;                                                                                                
|
| |  | we might not be able to coordinate the diverse
	operating structures, policies and practices of companies we
	acquire or to successfully integrate the employees of the
	acquired companies into our organization and culture, which
	could impair employee morale and productivity;            
|
| |  | despite due diligence reviews, acquired
	businesses may bring with them unanticipated liabilities,
	business or legal risks or operating costs that could harm our
	results of operations or business, reduce or eliminate any
	benefits of the acquisition or require unbudgeted expenses;     
|
| |  | to the extent we acquire businesses or products
	from financially distressed companies, we are subject to
	additional legal risks associated with transactions in that
	context, including potential creditors claims, business
	uncertainties and liabilities not discharged by the seller;   
|
| |  | to the extent we acquire distressed businesses,
	we may need to implement stringent budget and cost-cutting
	measures with these businesses to reduce or avoid losses from
	these acquired businesses;                                                                                          
|
| |  | if we fail to retain the services of key
	employees of acquired companies for significant time periods
	after the acquisition of their companies, we may experience
	difficulty in managing the acquired companys business and
	not realize the anticipated benefits of the acquisition;       
|
| |  | the accounting treatment of acquisitions can
	result in significant acquisition-related accounting charges and
	expenses that can reduce our reported results of operations both
	at the time of the acquisition and in future periods;                                                         
|
| |  | additional acquisitions may require us to issue
	shares of our stock and stock options to owners of the acquired
	businesses, resulting in dilution to our stockholders; and                                                                                                                    
|
| |  | in the current economic environment, we may be
	required to use more cash as consideration for acquisitions,
	which will reduce our working capital.                                                                                                                                            

F-24



---



##### Table of Contents



If we do not adequately address issues presented
by growth through acquisitions, we may not fully realize the
intended benefits, including any financial benefits, of these
acquisitions and may incur increased costs and expenses.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Our expenses are generally fixed, and if we
	fail to meet our revenue forecasts, we will not be able to
	reduce these expenses quickly.

Most of our expenses, such as employee
compensation and rent, are relatively fixed in the short term.
Moreover, our expense levels are based, in part, on our
expectations regarding future revenue levels. As a result, if
total revenues for a particular quarter are below expectations,
we could not proportionately reduce operating expenses for that
quarter. Therefore, this revenue shortfall would have a
disproportionate effect on our expected operating results for
that quarter.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Difficulties in implementing our products
	could harm our revenues and margins.

Our revenues and margins depend in part upon the
timing of implementation of our products and services. In most
sales, we are involved in the installation of our products at
the customer site. We recognize implementation revenue based on
progress achieved toward completion and we recognize
implementation costs as implementation services are performed.
In addition, we do not begin to recognize maintenance revenue
until implementation is complete. However, the timing of the
commencement and completion of the installation process is
subject to factors that may be beyond our control, as this
process requires access to the customers facilities and
coordination with the customers personnel after delivery
of the software. In addition, customers could delay product
implementations. If a product implementation is not completed or
delayed, we might not be able to begin to recognize
implementation revenue or maintenance revenue when expected or
at all. Further, implementation typically involves working with
sophisticated software, computing and communications systems. If
we have difficulties with implementation or do not meet project
milestones in a timely manner and within contracted fee budgets,
we could be obligated to devote more customer support,
engineering and other resources to a particular project. If
customers have difficulty deploying our products or require
significant amounts of support, our costs could increase,
causing increased variability in our operating results.



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to effectively respond to
	changes in our business, our corporate organization will be
	disrupted and we will be diverted from our business
	plan.

Our ability to offer our products and services
successfully in a rapidly evolving market requires an effective
planning and management process. In recent years, we have
experienced changes in our operations that have placed
significant demands on our administrative, operational and
financial resources. These demands, which are expected to
continue to challenge our management and operations, include the
following:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | growth and diversification of our customer base
	into new industries, most recently telecommunications;                                       
|
| |  | development and marketing of our Critical Action
	Technology Platform;                                                                        
|
| |  | expansion of our product lines into new
	technology mediums such as the delivery of services over the
	Internet through an ASP channel;       
|
| |  | increase in the number of our employees; and                                                                                                  
|
| |  | geographic dispersion of our operations and
	personnel, most recently the addition of offices in San Jose,
	California and Brentford, England.

These changes require us to manage an increasing
number of relationships with customers and other third parties,
as well as a larger workforce. In addition, we will need to
adapt our operational and financial control systems, if
necessary, to respond to changes in the size and diversification
of our business, as well as any future acquisitions. If we fail
to manage changes effectively, our employee-related costs and
employee turnover could increase and we could face disruptions
that negatively affect the quality of our products and our
ability to respond to our customers.

F-25



---



##### Table of Contents





| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | If our software products do not achieve
	widespread market acceptance, our business reputation and
	financial performance would suffer.

The rate at which businesses have adopted our
products has varied significantly by market and by product
within each market, and we expect to continue to experience
variations to the degree to which our products are accepted in
our target markets in the future. In particular, the acceptance
of our products may be limited by factors such as:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | the failure of prospective customers to perceive
	value in critical action software solutions;         
|
| |  | the reluctance of our prospective customers to
	replace their existing solutions with our products; and
|
| |  | the emergence of new technologies that could
	cause our products to be less competitive or obsolete.   

We must grow our customer base and generate
repeat and expanded business from our current and future
customers. In some cases, our customers initially make a limited
purchase of our products and services for pilot programs. These
customers may not purchase additional licenses to expand their
use of our products. In addition, as we introduce new versions
of our products or new products, our current customers might not
require the functionality of our new products and might not
ultimately license these products. Because the market for
critical action software is still in a relatively early stage of
development, we cannot accurately assess the size of the market,
and we have limited insight into trends that may emerge and
affect our business. For example, we may have difficulty in
predicting customer needs and new technologies, developing
products that could address those needs and technologies, and
establishing a distribution strategy for these products. We may
also have difficulties in predicting the competitive environment
that will develop.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | 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:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | internally develop new and competitive
	technologies;                                                                                                                
|
| |  | use leading third-party technologies effectively;                                                                                                                    
|
| |  | continue to develop our technical expertise;                                                                                                                         
|
| |  | anticipate and effectively respond to changing
	customer needs;                                                                                                      
|
| |  | time new product introductions in a way that
	minimizes the impact of customers delaying purchases of existing
	products in anticipation of new product releases; and
|
| |  | influence and respond to emerging industry
	standards and other technological changes.                                                                               



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Delays in the development of new products
	or product enhancements could harm our operating results and our
	competitive position.

The development of new, technologically advanced
products is a complex and uncertain process that requires
innovation, highly skilled personnel and accurate anticipation
of technological and market trends. We have previously
experienced significant delays in the development and
introduction of new products and product enhancements, primarily
due to difficulties with model development, which has in the
past required multiple iterations, as well as difficulties with
acquiring data and adapting to particular operating
environments. The length of these delays has varied depending
upon the size and scope of the project and the nature

F-26



---



##### Table of Contents



of the problems encountered. If we are unable to
meet the introduction schedules for our new products or product
enhancements, customers may switch their allegiance to
competitive products or refuse to purchase our software suites,
which would harm our competitive position and our operating
results.




| |                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We derive a substantial portion of our
	revenues from our Falcon Fraud Manager, Decision Manager for
	Medical Bill Review and Outsourced Bill Review products and
	services, and our revenue will decline if the market does not
	continue to accept these products and services.

Our Falcon Fraud Manager, Decision Manager for
Medical Bill Review and Outsourced Bill Review products and
services in the aggregate accounted for 46.8% of our total
revenues in 2001 compared to 40.3% of our total revenues in
2000. Falcon Fraud Manager accounted for 24.9% of total revenues
in 2001 compared to 16.8% in 2000 and our combined Decision
Manager for Medical Bill Review products and Outsourced Bill
Review services accounted for 21.9% of total revenues in 2001
compared to 23.5% in 2000. We expect these products and services
will continue to 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
Decision Manager for Medical Bill Review products and Outsourced
Bill Review services include the following:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | simplification of state workers
	compensation fee schedules;                                   
|
| |  | changes in the overall payment system or
	regulatory structure for workers compensation claims;
|
| |  | technological change;                                                                           
|
| |  | our inability to obtain or use state fee schedule
	or claims data;                              
|
| |  | saturation of market demand;                                                                    
|
| |  | loss of key customers; and                                                                      
|
| |  | industry consolidation.                                                                         

Demand for, or use of, Falcon Fraud Manager,
could decline as a result of factors that reduce the
effectiveness of fraud detection capabilities. For example,
patterns of credit card fraud might change in a manner that the
Falcon Fraud Manager product line would not detect. In addition,
other methods of credit card fraud prevention such as smart
cards may reduce customers need for the Falcon Fraud
Manager product line. To the extent that credit and other
payment cards cease to be prevailing payment methods, demand for
Falcon Fraud Manager could decrease. Because many Falcon Fraud
Manager customers are banks and related financial institutions,
sales of our Falcon Fraud Manager products are subject to
changes in the financial services industry such as fluctuations
in interest rates and the general economic health of financial
services companies, which affect their capital expenditure
budgets. In addition, the financial services industry tends to
be cyclical, which may result in variations in demand for our
Falcon Fraud Manager products. There is a continuing trend
toward consolidation in the financial services industry, which
has reduced our customer base and may lead to lost or delayed
sales and reduced demand for our Falcon Fraud Manager products.
Industry consolidation also could affect our base of recurring
revenues derived from contracts in which we are paid on a
per-transaction basis, when consolidated customers combine their
operations under one contract with us which, in some cases,
could result in lower payments to us than those previously paid
by our customers separately.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | 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 carriers 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 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.

F-27



---



##### Table of Contents





| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We depend on data to update our statistical
	models, and failure to timely obtain this data could harm the
	performance of our products.

The development, installation and support of our
credit card fraud control and profitability management, loan
underwriting and insurance products require periodic updates of
our statistical models. To develop these updates, 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 predictive
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 these 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 this data. These
assertions, if successful, could prevent us from using the data.
We might not be able to continue to obtain adequate amounts of
statistically relevant data on time, in the required formats or
on reasonable terms and conditions, whether from customers or
commercial suppliers.



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to compete effectively
	with existing or new competitors, our resulting loss of
	competitive position could result in price reductions for our
	products, fewer customer orders and loss of market
	share.

The market for predictive software solutions is
intensely competitive and is constantly changing. Some of our
competitors or potential competitors have substantially greater
financial, technical and marketing resources than we do. These
competitors may be able to respond more rapidly than we can to
new or emerging technologies or changes in customer
requirements. They may also devote greater resources to the
development, promotion and sale of their products than we do. In
addition, they may have the ability to sell products competitive
to ours at lower prices as part of integrated suites of several
related products that are vital to the customers computing
infrastructure. This may cause customers to purchase products of
our competitors that directly compete with our products in order
to acquire other products of the competitor.

Our competitors vary in size and in the scope of
the products and services they offer. We encounter competition
from a number of sources, including:



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | other application software companies, including
	enterprise software vendors;                                                                                            
|
| |  | management information system departments of
	customers and potential customers, including financial
	institutions, insurance companies and telecommunications
	carriers;
|
| |  | third-party professional services and consulting
	organizations;                                                                                                         
|
| |  | Internet companies;                                                                                                                                                      
|
| |  | hardware suppliers that bundle or develop
	complementary software;                                                                                                       
|
| |  | network and telecommunications switch
	manufacturers, and service providers that seek to enhance their
	value-added services;                                            
|
| |  | neural network tool suppliers; and                                                                                                                                       
|
| |  | 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 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.

Increased competition, whether from other
products or new technologies, could result in price reductions,
fewer customer orders, loss of customers, reduced gross margins
and loss of market share, any of which could

F-28



---



##### Table of Contents



negatively impact our business. We expect to face
increasing pricing pressures from our current competitors and
new market entrants. Price reductions could negatively impact
our margins and results of operations. Price competition could
also harm our ability to obtain new long-term contracts and
renewals of existing long-term contracts on favorable terms.


Furthermore, a number of our current and
potential competitors have established or may establish
cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs
of our prospective customers. As a result, new competitors or
alliances among competitors may emerge and rapidly gain
significant market share. We may not be able to compete
effectively against current and potential competitors,
especially those with significantly greater resources and market
leverage.

If we lose
key personnel, we might not be able to manage our business
successfully.

Our future success depends to a significant
degree upon the continued service of members of our senior
management and other key research, development, sales and
marketing personnel. We generally do not have employment
agreements with our employees, and the few employment agreements
we do have with a small number of our employees may not result
in the retention of these employees. As a result, we have lost
and in the future could lose one or more members of the
management team on little or no advance notice. We could also
lose the services of a key employee of a business we acquire
before we have had adequate time to familiarize ourselves with
the operating details of that business and obtain a suitably
experienced replacement. Our future performance will also
depend, in part, upon the ability of our officers to work
together effectively. Our management personnel may not be
successful in carrying out their duties or running our company.
Any dissent among members of management could impair our ability
to make strategic decisions quickly in a rapidly changing market.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | If we do not recruit and retain qualified
	personnel, our ability to execute our business plan would be
	compromised.

Our future success depends upon our ability to
attract, retain and motivate highly skilled employees.
Competition for employees in our industry is intense. We have
historically experienced difficulty in recruiting a sufficient
number of qualified sales and technical employees. In addition,
competitors and other businesses may be successful in attempts
to recruit our key employees, particularly if they can offer
more attractive stock options or other equity compensation
packages. Many of our technical employees possess unique skills
and are not easily replaceable, and loss of technical personnel
could harm our product development efforts. We expect to
continue to experience difficulty in hiring and retaining highly
skilled employees with appropriate qualifications.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Our future results could be harmed by
	economic, political, regulatory and other risks associated with
	international sales.

We intend to continue to expand our operations
outside the United States and to enter additional international
markets, which will require significant management attention and
financial resources. For more mature products, like Falcon Fraud
Manager, we may need to increase our international sales in
order to continue to expand our customer base. We have committed
and continue to commit significant time and development
resources to customizing and adapting our products for selected
international markets, and to developing international sales and
support channels. These international marketing efforts require
us to incur increased sales, marketing, development and support
expenses. If our efforts do not generate additional
international sales on a timely basis, our margins and earnings
would be harmed.

To the extent that our revenues from
international operations represent an increasing portion of our
total revenues, we will be subject to increased exposure to
international risks. As a result, our future results could be
affected by a variety of factors, including:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | changes in foreign currency exchange rates;                                                               
|
| |  | changes in the political or economic conditions
	of a country or region, particularly in emerging markets;

F-29



---



##### Table of Contents





| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | trade protection measures, such as tariffs, EU
	software directives and import or export licensing requirements;
|
| |  | potentially negative consequences from changes in
	tax laws;                                                    
|
| |  | potentially reduced protection for intellectual
	property rights;                                               
|
| |  | difficulty in managing widespread sales
	operations; and                                                        
|
| |  | slower payment cycles from international
	customers.                                                            



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

Many of our customers must comply with a number
of government regulations and other industry standards, and as a
result, many of our key products must also be compliant. For
example, our financial services products are affected by the
Fair Credit Reporting Act, by Regulation B under the Equal
Credit Opportunity Act, by 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. Fannie Mae and
Freddie Mac regulations, among others, for conforming loans,
affect our mortgage services products. Insurance-related
regulations may in the future apply to our insurance products.
If our products fail to comply with existing or future
regulations and standards, our customers or we could be subject
to legal action by regulatory authorities or by third parties,
including actions seeking civil or criminal penalties,
injunctions against our use of data or preventing use of our
products or civil damages. In addition, we may also be liable to
our customers for failure of our products to comply with
regulatory requirements. If state-mandated workers
compensation laws or regulations or state workers
compensation fee schedules are simplified, these changes would
diminish the need for, and the benefit provided by, Decision
Manager for Medical Bill Review products and Outsourced Bill
Review services. In many states, including California, there
have been periodic legislative efforts to reform workers
compensation laws in order to reduce the cost of workers
compensation insurance and to curb abuses of the workers
compensation system. Changes in workers compensation laws or
regulations could adversely affect our insurance products by
making them obsolete, or by requiring extensive changes in these
products to reflect new workers compensation rules. To the
extent that we sell new products targeted to markets that
include regulated industries and businesses, our products will
need to comply with these additional regulations.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | If we fail to protect and preserve our
	intellectual property we could lose an important competitive
	advantage.

Our success and ability to compete substantially
depend upon our internally developed proprietary technologies,
which we protect through a combination of patent, copyright,
trademark and trade secret laws and confidentiality procedures.
We also seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which
afford only limited protection. Despite the measures we take to
protect our intellectual property, it may be possible for a
third party to copy or otherwise to obtain and use our products
or technology without authorization, or to develop similar
technology independently. 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. To ensure that customers
will not be harmed by an interruption in our business, we often
place software source code for our products into escrow, which
may increase the likelihood of misappropriation or other misuse
of our intellectual property. Any disclosure, loss, invalidity
of, or failure to protect, our intellectual property could
negatively impact our competitive position, and ultimately, our
business. We have developed technologies under research projects
conducted under agreements with various United States Government
agencies or subcontractors. Although we have acquired commercial
rights to 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 our contracts with the United States Government, the
results of our research may be

F-30



---



##### Table of Contents



made public by the government, which could limit
our competitive advantage with respect to future products based
on our research.




| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could be subject to claims of
	infringement of third-party intellectual property rights, which
	could result in significant expense and loss of intellectual
	property rights.

In the past, we have received communications from
third parties asserting that our trademarks infringe upon their
trademarks, or that data we use is copyrighted by them, none of
which has resulted in litigation or material losses. We have
also been involved in patent litigation. Given our ongoing
efforts to develop and market new technologies and products, we
may from time to time be served with other claims from third
parties asserting that our products or technologies infringe
their intellectual property rights. Any litigation to determine
the validity of these claims, including claims arising through
our contractual indemnification of our customers and other
business partners against infringement, regardless of their
merit or resolution, would likely be costly and time consuming
and divert the efforts and attention of our management and
technical personnel. We cannot be certain we would prevail in
this litigation given the complex technical issues and
uncertainties inherent in intellectual property litigation. If
this litigation resulted in an adverse ruling, we could be
required to:



| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pay substantial damages;                                                                                                                                                                                                                                                                       
|
| |  | cease the use or sale of infringing products;                                                                                                                                                                                                                                                  
|
| |  | expend significant resources to develop
	non-infringing technology;                                                                                                                                                                                                                            
|
| |  | discontinue the use of certain technology; or                                                                                                                                                                                                                                                  
|
| |  | obtain a license under the intellectual property
	rights of the third party claiming infringement, which license
	may not be available on reasonable terms, or at all. A license,
	if obtained, might require that we pay substantial royalties or
	license fees that would reduce our margins.



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products may have defects, which could
	damage our reputation, decrease market acceptance of our
	products, cause us to lose customers and revenue and result in
	liability to us.

Products as sophisticated as ours are likely to
contain errors or failures when first introduced or as new
versions are released. To the extent that we develop new
products that operate in new environments, such as the Internet,
the possibility for program errors and failures may increase due
to factors including the use of new technologies or the need for
more rapid product development that is characteristic of the
Internet market. In the future, we may experience delays in
releasing new products or product enhancements as problems are
corrected. Errors or defects in our products that are
significant, or are perceived to be significant, could result in
the rejection of our products, damage to our reputation, lost
revenues, diverted development resources and increased service
and support costs and warranty claims. In addition, because our
products are used in business-critical applications, any product
errors or failures may give rise to substantial product
liability claims.

Risks Related to Our Common Stock

Our common
stock price fluctuates and has been volatile.

The market price of our common stock has been,
and will likely continue to be, subject to wide fluctuations.
Many factors could cause the price of our securities to rise and
fall, including:



| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | variations in our quarterly results;                             
|
| |  | announcements of new products by us or our
	competitors;         
|
| |  | acquisitions of businesses or products by us or
	our competitors;
|
| |  | recruitment or departure of key personnel;                       
|
| |  | the gain or loss of significant orders;                          

F-31



---



##### Table of Contents





| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | the gain or loss of significant customers;                                                                       
|
| |  | changes in the estimates of our operating
	performance or changes in recommendations by securities
	analysts; and
|
| |  | market conditions in our industry, the industries
	of our customers and the economy as a whole.                  

In addition, stocks of technology companies have
experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to the operating
performance of these companies. Public announcements by
companies in our industry about, among other things, their
performance, accounting practices or legal problems could cause
the market price of our common stock and our convertible notes
to decline regardless of our actual operating performance.

In the past, securities class action litigation
has often been brought against a company following a period of
volatility in the market price of its securities. We may in the
future be the target of similar litigation. Securities
litigation could result in substantial costs and divert
managements attention and resources.



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our certificate of incorporation and
	Delaware law contain provisions that could discourage or prevent
	a takeover, even if an acquisition would benefit our
	stockholders.

Under our certificate of incorporation, our board
of directors is authorized to issue up to 4,000,000 shares of
preferred stock without any further vote or action by our
stockholders. The rights of the holders of our common stock will
be subject to the rights of the holders of any preferred stock
that we may issue in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock. We
implemented a stockholder rights plan in the first quarter of
2002 and created 1,000,000 shares of Series A Junior
Participating Preferred Stock for issuance upon exercise of the
rights. In addition, Section 203 of the Delaware General
Corporation Law restricts business combinations with any
interested stockholder as defined by the statute.
The statute could make it more difficult for a third party to
acquire us, even if an acquisition would benefit our
stockholders.

Risks Related to our Convertible
Notes



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | If we incur additional indebtedness that is
	senior to the notes, we might not have sufficient assets to pay
	our obligations under the notes.

The indenture under which we issued the notes
does not restrict us or our subsidiaries from incurring
additional debt, including senior indebtedness. It also does not
restrict our ability to pay dividends or issue or repurchase our
securities. If our subsidiaries or we were to incur additional
debt or liabilities, we might not be able to pay our obligations
under the notes.



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we were required to pay off all senior
	indebtedness before we pay the notes, we might not have
	sufficient assets to pay our obligations under the
	notes.

The notes are general unsecured obligations of
HNC and are subordinated in right of payment to all of our
existing and future senior indebtedness. In the event of our
bankruptcy, liquidation or reorganization or upon acceleration
of the notes due to an event of default under the indenture and
in certain other events, our assets will be available to pay
obligations on the notes only after all senior indebtedness has
been paid. The notes are also effectively subordinated to the
liabilities, including trade payables, of our subsidiaries. As
of December 31, 2001, we had no outstanding senior
indebtedness for purposes of the indenture, while our
subsidiaries had approximately $11.3 million of outstanding
indebtedness or other liabilities to which the notes would have
been effectively subordinated. As a result, there may not be
sufficient assets remaining to pay amounts due on any or all of
the outstanding notes. In addition, we will not make any
payments on the notes in the event of payment defaults on our
senior indebtedness or other specified defaults on our
designated senior indebtedness.

F-32



---



##### Table of Contents





| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Our ability to pay our obligations under
	the notes depends in part upon the ability to receive funds from
	our subsidiaries.

We conduct a significant portion of our
operations through subsidiaries. Our cash flow and therefore our
ability to service our debt, including the notes, depends in
part upon the earnings of our subsidiaries and the distribution
of those earnings to us, or upon loans or other payments of
funds to us by our subsidiaries. These subsidiaries are separate
and distinct legal entities, and have no obligation to pay any
amounts due under the notes or to make any funds available to
meet our obligations under the notes, whether by dividends,
distributions, loans or other payments. In addition, any of our
subsidiaries may not be able to pay dividends or distributions
to us or make loans and advances to us due to legal or
contractual restrictions, the earnings of the subsidiary and
various other business considerations. Any right we have to
receive assets of our subsidiaries upon their liquidation or
reorganization, and the right of the note holders to participate
in these assets, is effectively subordinated to the claims of
that subsidiarys creditors, including trade creditors. If
we were recognized as a creditor of one of our subsidiaries, our
claims would be subordinate to any security interests in the
subsidiarys assets and any indebtedness of the subsidiary
that is senior to ours. As a result, if we do not receive funds
from our subsidiaries, we might not have sufficient funds to pay
our obligations under the notes.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | If we are not able to meet the requirements
	to purchase notes upon a change in control, note holders might
	not be repaid.

Upon a change in control, as defined in the
indenture under which we issued the notes, note holders may
require us to purchase all or a portion of their notes. If a
change in control were to occur, we might not have enough funds
to pay the purchase price for all tendered notes. Our credit
facility provides that a change in control constitutes an event
of default. Future credit agreements or other agreements
relating to our indebtedness may also provide that a change in
control constitutes an event of default and additionally may
prohibit the repurchase or redemption of the notes. If a change
in control occurs at a time when we are prohibited from
purchasing the notes, we could seek the consent of our lenders
to purchase the notes or could attempt to refinance this debt.
If we do not obtain a consent, we could not purchase the notes.
Our failure to purchase tendered notes would constitute an event
of default under the indenture, which might constitute a default
under the terms of our other debt. In such circumstances, or if
a change in control would constitute an event of default under
our senior indebtedness, the subordination provisions of the
indenture would limit or prohibit payments to note holders. The
term change in control is limited to certain
specified transactions and may not include other events that
might harm our financial condition. Our obligation to offer to
purchase the notes upon a change in control would not
necessarily protect note holders in the event of a highly
leveraged transaction, reorganization, merger or similar
transaction involving us.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | If a market for the notes is not
	maintained, the trading price of the notes could decline
	significantly.

Since the issuance of the notes, the initial
purchasers have made a market in the notes. However, the initial
purchasers are not obligated to make a market and may
discontinue this market-making activity at any time without
notice. In addition, market-making activity by the initial
purchasers is subject to the limits imposed by the Securities
Act and the Exchange Act. As a result, a market for the notes
may not develop or, if one does develop, it may not be
maintained. If an active market for the notes fails to develop
or be sustained, the trading price of the notes could decline
significantly.

F-33



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders

of HNC Software Inc.


In our opinion, the accompanying consolidated
balance sheet of HNC Software Inc. and the related consolidated
statements of operations, of cash flows and of changes in
stockholders equity and comprehensive income (loss)
present fairly, in all material respects, the financial position
of HNC Software Inc. and its subsidiaries at December 31,
2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.



| |                           
| | --------------------------
| | PRICEWATERHOUSECOOPERS LLP

San Diego, California

January 23, 2002, except as


to Note 16, to which the date is


March 21, 2002


F-34



---



##### Table of Contents



HNC SOFTWARE INC.

CONSOLIDATED BALANCE SHEET

|                                                |                                                                                                                             |                            |         |          |         |   |         |          |         | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | -------- | ------- | - | ------- | -------- | ------- | 
|                                                |                                                                                                                             |                           
|                                                |                                                                                                                             | December 31,              
|                                                |                                                                                                                             |                           
|                                                |                                                                                                                             | 2001                       |         | 2000    
|                                                |                                                                                                                             |                            |         |         
|                                                |                                                                                                                             |                           
|                                                |                                                                                                                             | (in thousands, except per 
|                                                |                                                                                                                             | share amounts)            
|ASSETS                                          |                                                                                                                             |                            |         |          |         |   |         |         
|Current assets:                                 |                                                                                                                             |                            |         |          |         |   |         |         
|                                                | Cash and cash equivalents                                                                                                   |                            | $       | 104,679  |         |   | $       | 69,271   |        
|                                                | Marketable securities available for sale                                                                                    |                            |         | 113,231  |         |   |         | 44,779   |        
|                                                | Trade accounts receivable, net                                                                                              |                            |         | 38,969   |         |   |         | 43,856   |        
|                                                | Deferred income taxes                                                                                                       |                            |         | 22,279   |         |   |         | 15,045   |        
|                                                | Other current assets                                                                                                        |                            |         | 10,656   |         |   |         | 8,652    |        
|                                                |                                                                                                                             |                            |         |          |         |   |         |         
|                                                |                                                                                                                             | Total current assets       |         |          | 289,814 |   |         |          | 181,603 | 
|Marketable securities available for sale        |                                                                                                                             |                            | 95,815  |          |         |   | 48,453  |         
|Equity investments                              |                                                                                                                             |                            | 9,219   |          |         |   | 14,719  |         
|Property and equipment, net                     |                                                                                                                             |                            | 23,785  |          |         |   | 20,826  |         
|Goodwill, net                                   |                                                                                                                             |                            | 75,720  |          |         |   | 96,810  |         
|Intangible assets, net                          |                                                                                                                             |                            | 42,942  |          |         |   | 47,522  |         
|Deferred income taxes                           |                                                                                                                             |                            | 34,761  |          |         |   | 33,844  |         
|Other assets                                    |                                                                                                                             |                            | 5,970   |          |         |   | 3,964   |         
|                                                |                                                                                                                             |                            |         |          |         |   |         |         
|                                                |                                                                                                                             | $                          | 578,026 |          |         | $ | 447,741 |         
|                                                |                                                                                                                             |                            |         |          |         |   |         |         
|LIABILITIES AND STOCKHOLDERS
	EQUITY           |                                                                                                                             |                            |         |          |         |   |         |         
|Current liabilities:                            |                                                                                                                             |                            |         |          |         |   |         |         
|                                                | Accounts payable and accrued liabilities                                                                                    |                            | $       | 29,716   |         |   | $       | 38,675   |        
|                                                | Deferred revenue                                                                                                            |                            |         | 8,807    |         |   |         | 9,876    |        
|                                                |                                                                                                                             |                            |         |          |         |   |         |         
|                                                |                                                                                                                             | Total current liabilities  |         |          | 38,523  |   |         |          | 48,551  | 
|Non-current liabilities                         |                                                                                                                             |                            | 1,684   |          |         |   | 259     |         
|Convertible Subordinated Notes                  |                                                                                                                             |                            | 150,000 |          |         |   | 16,357  |         
|                                                |                                                                                                                             |                            |         |          |         |   |         |         
|                                                |                                                                                                                             | Total liabilities          |         |          | 190,207 |   |         |          | 65,167  | 
|                                                |                                                                                                                             |                            |         |          |         |   |         |         
|Commitments and contingencies (Notes 9 and
	15) |                                                                                                                             |                            |         |          |         |   |         |         
|Stockholders equity:                           |                                                                                                                             |                            |         |          |         |   |         |         
|                                                | Preferred stock, $0.001 par value 
	4,000 shares authorized: no shares issued or outstanding                               |                            |         |         |         |   |         |         |        
|                                                | Common stock, $0.001 par value 
	120,000 shares authorized: 35,432 and 32,286 shares issued and
	outstanding, respectively |                            |         | 35       |         |   |         | 32       |        
|                                                | Common stock in treasury, at cost  49 and
	49 shares, respectively                                                         |                            |         | (3,251   | )       |   |         | (3,251   | )      
|                                                | Paid-in capital                                                                                                             |                            |         | 531,667  |         |   |         | 499,705  |        
|                                                | Accumulated deficit                                                                                                         |                            |         | (140,661 | )       |   |         | (104,209 | )      
|                                                | Notes receivable from stockholders                                                                                          |                            |         |         |         |   |         | (9,049   | )      
|                                                | Unearned stock-based compensation                                                                                           |                            |         | (238     | )       |   |         | (577     | )      
|                                                | Accumulated other comprehensive income (loss)                                                                               |                            |         | 267      |         |   |         | (77      | )      
|                                                |                                                                                                                             |                            |         |          |         |   |         |         
|                                                |                                                                                                                             | Total stockholders equity |         |          | 387,819 |   |         |          | 382,574 | 
|                                                |                                                                                                                             |                            |         |          |         |   |         |         
|                                                |                                                                                                                             | $                          | 578,026 |          |         | $ | 447,741 |         
|                                                |                                                                                                                             |                            |         |          |         |   |         |         

See accompanying notes to consolidated financial
statements.

F-35



---



##### Table of Contents



HNC SOFTWARE INC.

CONSOLIDATED STATEMENT OF OPERATIONS

|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |         |         |  
|--------------------------------------------------------- | ------------------------------------------ | ------------------------------------------ | ------- | ------- | ------- | ---- | -------- | ------- | -------- | - | ------ | ------- | ------- | -
|                                                          |                                            |                                           
|                                                          |                                            | Year Ended December 31,                   
|                                                          |                                            |                                           
|                                                          |                                            | 2001                                       |         | 2000    |         | 1999
|                                                          |                                            |                                            |         |         |         |     
|                                                          |                                            |                                           
|                                                          |                                            | (in thousands, except per share amounts)  
|Revenues:                                                 |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|                                                          | License and maintenance                    |                                            | $       | 168,626 |         |      | $        | 166,063 |          |   | $      | 155,948 |        
|                                                          | Services and other                         |                                            |         | 58,044  |         |      |          | 88,821  |          |   |        | 60,941  |        
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|                                                          |                                            | Total revenues                             |         |         | 226,670 |      |          |         | 254,884  |   |        |         | 216,889 |  
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|Operating expenses:                                       |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|                                                          | License and maintenance(1)                 |                                            |         | 44,727  |         |      |          | 60,469  |          |   |        | 41,552  |        
|                                                          | Services and other(2)                      |                                            |         | 42,465  |         |      |          | 72,913  |          |   |        | 41,271  |        
|                                                          | Research and development(3)                |                                            |         | 45,667  |         |      |          | 89,062  |          |   |        | 50,176  |        
|                                                          | Sales and marketing(4)                     |                                            |         | 44,553  |         |      |          | 76,353  |          |   |        | 46,259  |        
|                                                          | General and administrative(5)              |                                            |         | 30,096  |         |      |          | 53,321  |          |   |        | 33,777  |        
|                                                          | Transaction-related amortization and costs |                                            |         | 56,556  |         |      |          | 43,734  |          |   |        | 9,158   |        
|                                                          | In-process research and development        |                                            |         | 487     |         |      |          | 7,601   |          |   |        | 1,480   |        
|                                                          | Restructuring and impairment charges       |                                            |         | 4,642   |         |      |          | 1,172   |          |   |        |        |        
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|                                                          |                                            | Total operating expenses                   |         |         | 269,193 |      |          |         | 404,625  |   |        |         | 223,673 |  
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|Operating loss                                            |                                            |                                            | (42,523 | )       |         |      | (149,741 | )       |          |   | (6,784 | )      
|Interest income                                           |                                            |                                            | 9,137   |         |         |      | 12,924   |         |          |   | 6,299  |        
|Interest expense                                          |                                            |                                            | (3,167  | )       |         |      | (4,231   | )       |          |   | (5,747 | )      
|Expense related to debt conversion                        |                                            |                                            |        |         |         |      | (12,676  | )       |          |   |       |        
|Other expense, net                                        |                                            |                                            | (6,171  | )       |         |      | (3,378   | )       |          |   | (226   | )      
|Minority interest in losses of consolidated
	subsidiaries |                                            |                                            |        |         |         |      | 7,582    |         |          |   | 722    |        
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|                                                          |                                            | Loss before income tax provision (benefit) |         |         | (42,724 | )    |          |         | (149,520 | ) |        |         | (5,736  | )
|Income tax provision (benefit)                            |                                            |                                            | (6,272  | )       |         |      | (33,102  | )       |          |   | 536    |        
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|                                                          |                                            | Net loss                                   |         | $       | (36,452 | )    |          | $       | (116,418 | ) |        | $       | (6,272  | )
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|Earnings per share:                                       |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|                                                          | Basic net loss per share                   |                                            | $       | (1.06   | )       |      | $        | (4.08   | )        |   | $      | (0.25   | )      
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|                                                          | Diluted net loss per share                 |                                            | $       | (1.06   | )       |      | $        | (4.08   | )        |   | $      | (0.25   | )      
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|Shares used in computing basic net loss per share         |                                            |                                            | 34,509  |         |         |      | 28,529   |         |          |   | 24,969 |        
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        
|Shares used in computing diluted net loss per
	share      |                                            |                                            | 34,509  |         |         |      | 28,529   |         |          |   | 24,969 |        
|                                                          |                                            |                                            |         |         |         |      |          |         |          |   |        |        



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes non-cash stock-based compensation
	expense of $51, $2,658, and $280 in 2001, 2000, and 1999
	respectively. Also includes expenses related to the Retek
	spin-off of $6,086 in 2000.    
|   
|(2) | Includes non-cash stock-based compensation
	expense of $2,548 and $354 in 2000 and 1999 respectively. Also
	includes expenses related to the Retek spin-off of $6,603 in
	2000.                 
|   
|(3) | Includes non-cash stock-based compensation
	expense of $80, $10,629, and $1,121 in 2001, 2000, and 1999
	respectively. Also includes expenses related to the Retek
	spin-off of $12,880 in 2000.
|   
|(4) | Includes non-cash stock-based compensation
	expense of $50, $4,167, and $441 in 2001, 2000, and 1999
	respectively. Also includes expenses related to the Retek
	spin-off of $5,770 in 2000.    
|   
|(5) | Includes non-cash stock-based compensation
	expense of $295, $1,668, and $9,789 in 2001, 2000, and 1999
	respectively. Also includes expenses related to the Retek
	spin-off of $16,846 in 2000.

See accompanying notes to consolidated financial
statements.

F-36



---



##### Table of Contents



HNC SOFTWARE INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |        |         |         |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------------ | ---------------------------------------- | ---------------------------------------------------- | ------ | ------- | -------- | -------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | -
|                                                                                           |                                                                    |                                         
|                                                                                           |                                                                    | Year Ended December 31,                 
|                                                                                           |                                                                    |                                         
|                                                                                           |                                                                    | 2001                                     |                                                      | 2000   |         | 1999    
|                                                                                           |                                                                    |                                          |                                                      |        |         |         
|                                                                                           |                                                                    |                                         
|                                                                                           |                                                                    | (in thousands)                          
|Cash Flows from Operating
	Activities:                                                     |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|Net loss                                                                                   |                                                                    | $                                        | (36,452                                              | )      |         | $        | (116,418 | )       |         | $       | (6,272  | )     
|Adjustments to reconcile net loss to net cash
	provided by (used in) operating activities: |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|                                                                                           | Provision for doubtful accounts                                    |                                          |                                                      | 5,768  |         |          |          | 6,205   |         |         |         | 5,112  |        
|                                                                                           | Depreciation and amortization                                      |                                          |                                                      | 67,749 |         |          |          | 53,045  |         |         |         | 17,583 |        
|                                                                                           | Acquired in-process research and development                       |                                          |                                                      | 487    |         |          |          | 7,601   |         |         |         | 1,480  |        
|                                                                                           | Loss on asset impairments and dispositions                         |                                          |                                                      | 2,097  |         |          |          | 1,172   |         |         |         | 222    |        
|                                                                                           | Other-than-temporary loss on investments                           |                                          |                                                      | 5,988  |         |          |          | 2,750   |         |         |         |       |        
|                                                                                           | Non-cash stock-based compensation expense                          |                                          |                                                      | 476    |         |          |          | 15,896  |         |         |         | 11,985 |        
|                                                                                           | Deferred income tax (benefit) provision                            |                                          |                                                      | (8,875 | )       |          |          | (35,384 | )       |         |         | (4,625 | )      
|                                                                                           | Minority interest in (losses) income of
	consolidated subsidiaries |                                          |                                                      |       |         |          |          | (7,582  | )       |         |         | (722   | )      
|                                                                                           | Changes in assets and liabilities:                                 |                                          |                                                      |        |         |          |          |         |         |         |         |        |        
|                                                                                           |                                                                    | Trade accounts receivable                |                                                      |        | 2,972   |          |          |         | (40,158 | )       |         |        | (35,606 | )      
|                                                                                           |                                                                    | Deferred income taxes                    |                                                      |        | 801     |          |          |         | (291    | )       |         |        | 4,645   |        
|                                                                                           |                                                                    | Other assets                             |                                                      |        | 356     |          |          |         | (8,753  | )       |         |        | (4,635  | )      
|                                                                                           |                                                                    | Accounts payable and accrued liabilities |                                                      |        | (10,029 | )        |          |         | 15,954  |         |         |        | 9,750   |        
|                                                                                           |                                                                    | Deferred revenue                         |                                                      |        | (4,736  | )        |          |         | 39,562  |         |         |        | 5,670   |        
|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|                                                                                           |                                                                    |                                          | Net cash provided by (used in) operating
	activities |        |         | 26,602   |          |         |         | (66,401 | )       |        |         | 4,587   |  
|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|Cash Flows from Investing
	Activities:                                                     |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|Net sales (purchases) of marketable
	securities                                            |                                                                    |                                          | (115,135                                             | )      |         |          | (18,332  | )       |         |         | 7,856   |       
|Equity investments                                                                         |                                                                    |                                          | (250                                                 | )      |         |          | (4,750   | )       |         |         | (17,225 | )     
|Repayment (issuance) of employee loans                                                     |                                                                    |                                          | 1,500                                                |        |         |          | (1,500   | )       |         |         | (200    | )     
|Acquisitions of property and equipment                                                     |                                                                    |                                          | (12,529                                              | )      |         |          | (25,366  | )       |         |         | (16,093 | )     
|Restricted cash  retained portion of
	Blaze purchase price                                |                                                                    |                                          | (2,000                                               | )      |         |          |         |         |         |         |        |       
|Cash paid in business acquisitions, net of cash
	acquired                                  |                                                                    |                                          | (25,542                                              | )      |         |          | (22,773  | )       |         |         | (5,098  | )     
|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|                                                                                           |                                                                    |                                          | Net cash used in investing activities                |        |         | (153,956 | )        |         |         | (72,721 | )       |        |         | (30,760 | )
|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|Cash Flows from Financing
	Activities:                                                     |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|Net proceeds from issuances of HNC common stock                                            |                                                                    |                                          | 15,363                                               |        |         |          | 88,298   |         |         |         | 50,107  |       
|Net proceeds from issuances of Retek common stock                                          |                                                                    |                                          |                                                     |        |         |          | 5,635    |         |         |         | 84,897  |       
|Repurchase of HNC common stock for treasury                                                |                                                                    |                                          |                                                     |        |         |          | (18,616  | )       |         |         | (50,383 | )     
|Spin-off of Retek subsidiary                                                               |                                                                    |                                          |                                                     |        |         |          | (30,463  | )       |         |         |        |       
|Payment of Retek spin-off costs                                                            |                                                                    |                                          | (6,863                                               | )      |         |          |         |         |         |         |        |       
|Proceeds from sales of receivables                                                         |                                                                    |                                          | 500                                                  |        |         |          | 32,585   |         |         |         | 23,711  |       
|Proceeds from repayments of stockholder notes                                              |                                                                    |                                          | 9,281                                                |        |         |          | 3,047    |         |         |         |        |       
|Net proceeds from issuance of Convertible
	Subordinated Notes                              |                                                                    |                                          | 144,628                                              |        |         |          |         |         |         |         |        |       
|Repayment of debt and capital lease obligations                                            |                                                                    |                                          |                                                      |        |         |          | (7,367   | )       |         |         | (78     | )     
|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|                                                                                           |                                                                    |                                          | Net cash provided by financing activities            |        |         | 162,909  |          |         |         | 73,119  |         |        |         | 108,254 |  
|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|Effect of exchange rate changes on cash                                                    |                                                                    |                                          | (147                                                 | )      |         |          | (1,066   | )       |         |         | (8      | )     
|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|Net increase (decrease) in cash and cash
	equivalents                                      |                                                                    |                                          | 35,408                                               |        |         |          | (67,069  | )       |         |         | 82,073  |       
|Cash and cash equivalents at beginning of the
	period                                      |                                                                    |                                          | 69,271                                               |        |         |          | 136,340  |         |         |         | 54,267  |       
|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       
|Cash and cash equivalents at end of the period                                             |                                                                    | $                                        | 104,679                                              |        |         | $        | 69,271   |         |         | $       | 136,340 |       
|                                                                                           |                                                                    |                                          |                                                      |        |         |          |          |         |         |         |         |       

See accompanying notes to consolidated financial
statements.

F-37



---



##### Table of Contents



HNC SOFTWARE INC.

CONSOLIDATED STATEMENT OF CHANGES IN

STOCKHOLDERS EQUITY AND


COMPREHENSIVE INCOME (LOSS)


|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|----------------------------------------------------------------------- |  | -------------- | ------ | -------------- |  | ------- | -- | ------------ |  | ----------- | ------ | ----------- |  | ------------- | ------- | ------------- |  | ------------- | -------- | ------ |  | ------ | -------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  | Other         |         |               |  |              
|                                                                        |  | Common Stock   |        | Treasury Stock |  |         |    | Earnings     |  | Stockholder |        | Unearned    |  | Comprehensive |         | Total         |  | Comprehensive
|                                                                        |  |                |        |                |  | Paid-in |    | (Accumulated |  | Notes       |        | Stock-based |  | Income        |         | Stockholders |  | Income       
|                                                                        |  | Shares         |        | Amount         |  | Shares  |    | Amount       |  | Capital     |        | Deficit)    |  | Receivable    |         | Compensation  |  | (Loss)        |          | Equity |  | (Loss)
|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |       
|                                                                        |  |               
|                                                                        |  | (in thousands)
|Balance at December 31, 1998                                            |  |                | 25,894 |                |  | $       | 26 |              |  |             |       |             |  | $             |        |               |  | $             | 137,182  |        |  |        | 18,481   |   |  | $ |        |   |  | $ | (2,508  | ) |  | $ | (160   | ) |  | $ | 153,021  |   |  |   |          |  
|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|Purchase of HNC stock for treasury                                      |  |                | (2,266 | )              |  |         | (2 | )            |  |             | 2,266  |             |  |               | (50,381 | )             |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | (50,383  | ) |  |   |          |  
|Common stock options exercised                                          |  |                | 1,916  |                |  |         | 2  |              |  |             | (1,384 | )           |  |               | 30,768  |               |  |               | 16,418   |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 47,188   |   |  |   |          |  
|Common stock issued under Employee Stock Purchase
	Plan                 |  |                | 115    |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 2,808    |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 2,808    |   |  |   |          |  
|Tax benefit from stock option transactions                              |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 16,993   |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 16,993   |   |  |   |          |  
|Unearned stock-based compensation expense                               |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 21,462   |        |  |        |          |   |  |   |         |   |  |   | (19,911 | ) |  |   |        |   |  |   | 1,551    |   |  |   |          |  
|Non-cash stock-based compensation expense                               |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 10,077   |        |  |        |          |   |  |   |         |   |  |   | 1,908   |   |  |   |        |   |  |   | 11,985   |   |  |   |          |  
|Effect of Reteks initial public offering                               |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 69,539   |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 69,539   |   |  |   |          |  
|Common stock issued for PCS earn-out                                    |  |                | 45     |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 1,476    |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 1,476    |   |  |   |          |  
|Unrealized gain on marketable securities, net of
	tax                   |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   | 2,084  |   |  |   | 2,084    |   |  |   | 2,084    |  
|Foreign currency translation adjustment, net of
	tax                    |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   | (417   | ) |  |   | (417     | ) |  |   | (417     | )
|Net loss                                                                |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        | (6,272   | ) |  |   |         |   |  |   |         |   |  |   |        |   |  |   | (6,272   | ) |  |   | (6,272   | )
|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 1999                                            |  |                | 25,704 |                |  | $       | 26 |              |  |             | 882    |             |  | $             | (19,613 | )             |  | $             | 275,955  |        |  | $      | 12,209   |   |  | $ |        |   |  | $ | (20,511 | ) |  | $ | 1,507  |   |  | $ | 249,573  |   |  | $ | (4,605   | )
|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|Common stock options exercised                                          |  |                | 3,324  |                |  |         | 3  |              |  |             | (1,026 | )           |  |               | 32,637  |               |  |               | 64,340   |        |  |        |          |   |  |   | (11,857 | ) |  |   |         |   |  |   |        |   |  |   | 85,123   |   |  |   |          |  
|Purchase of HNC common stock for treasury                               |  |                | (250   | )              |  |         |   |              |  |             | 250    |             |  |               | (18,616 | )             |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | (18,616  | ) |  |   |          |  
|Release of FTI escrow shares into treasury                              |  |                | (49    | )              |  |         |    |              |  |             | 49     |             |  |               | (1,808  | )             |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | (1,808   | ) |  |   |          |  
|Common stock issued under Employee Stock Purchase
	Plan                 |  |                | 106    |                |  |         |    |              |  |             | (106   | )           |  |               | 4,149   |               |  |               | (974     | )      |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 3,175    |   |  |   |          |  
|Effect of common stock issued under Retek
	Employee Stock Purchase Plan |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 3,635    |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 3,635    |   |  |   |          |  
|Tax benefit from stock option transactions                              |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 36,392   |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 36,392   |   |  |   |          |  
|Stock-based compensation expense                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 9,217    |        |  |        |          |   |  |   |         |   |  |   | 6,679   |   |  |   |        |   |  |   | 15,896   |   |  |   |          |  
|Retek initial public offering costs                                     |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | (243     | )      |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | (243     | ) |  |   |          |  
|Spin-off of Retek subsidiary                                            |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | (121,571 | )      |  |        |          |   |  |   |         |   |  |   | 13,255  |   |  |   | 1,594  |   |  |   | (106,722 | ) |  |   |          |  
|Common stock issued in business                                         |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|Acquisitions                                                            |  |                | 1,529  |                |  |         | 1  |              |  |             |        |             |  |               |         |               |  |               | 133,200  |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 133,201  |   |  |   |          |  
|Effect of Retek common stock issued in business
	acquisition            |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 5,432    |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 5,432    |   |  |   |          |  
|Effect of Retek common stock issued in business
	alliance               |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 8,010    |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 8,010    |   |  |   |          |  
|Common stock issued upon conversion of
	Subordinated Notes              |  |                | 1,872  |                |  |         | 2  |              |  |             |        |             |  |               |         |               |  |               | 82,319   |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 82,321   |   |  |   |          |  
|Common stock issued for PCS earn-out                                    |  |                | 50     |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 3,993    |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 3,993    |   |  |   |          |  
|Interest accrued on stockholder notes                                   |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   | (239    | ) |  |   |         |   |  |   |        |   |  |   | (239     | ) |  |   |          |  
|Repayment of stockholder notes                                          |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   | 3,047   |   |  |   |         |   |  |   |        |   |  |   | 3,047    |   |  |   |          |  
|Unrealized loss on marketable securities, net of
	tax                   |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   | (2,112 | ) |  |   | (2,112   | ) |  |   | (2,112   | )
|Foreign currency translation adjustment, net of
	tax                    |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   | (1,066 | ) |  |   | (1,066   | ) |  |   | (1,066   | )
|Net loss                                                                |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        | (116,418 | ) |  |   |         |   |  |   |         |   |  |   |        |   |  |   | (116,418 | ) |  |   | (116,418 | )
|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2000                                            |  |                | 32,286 |                |  | $       | 32 |              |  |             | 49     |             |  | $             | (3,251  | )             |  | $             | 499,705  |        |  | $      | (104,209 | ) |  | $ | (9,049  | ) |  | $ | (577    | ) |  | $ | (77    | ) |  | $ | 382,574  |   |  | $ | (119,596 | )
|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|Common stock options exercised                                          |  |                | 1,047  |                |  |         | 1  |              |  |             |        |             |  |               |         |               |  |               | 11,601   |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 11,602   |   |  |   |          |  
|Common stock issued under Employee Stock Purchase
	Plan                 |  |                | 460    |                |  |         |   |              |  |             |        |             |  |               |         |               |  |               | 3,761    |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 3,761    |   |  |   |          |  
|Tax benefit from stock option transactions                              |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 7,008    |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 7,008    |   |  |   |          |  
|Establishment of deferred tax asset valuation
	allowance                |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | (1,360   | )      |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | (1,360   | ) |  |   |          |  
|Deferred tax assets  Retek spin-off
	adjustment                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | (5,346   | )      |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | (5,346   | ) |  |   |          |  
|Stock-based compensation expense                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               | 137      |        |  |        |          |   |  |   |         |   |  |   | 339     |   |  |   |        |   |  |   | 476      |   |  |   |          |  
|Common stock issued upon conversion of
	Subordinated Notes              |  |                | 1,639  |                |  |         | 2  |              |  |             |        |             |  |               |         |               |  |               | 16,160   |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   | 16,162   |   |  |   |          |  
|Interest accrued on stockholder notes                                   |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   | (232    | ) |  |   |         |   |  |   |        |   |  |   | (232     | ) |  |   |          |  
|Repayment of stockholder notes                                          |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   | 9,281   |   |  |   |         |   |  |   |        |   |  |   | 9,281    |   |  |   |          |  
|Unrealized gain on marketable securities, net of
	tax                   |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   | 491    |   |  |   | 491      |   |  |   | 491      |  
|Foreign currency translation adjustment, net of
	tax                    |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   | (147   | ) |  |   | (147     | ) |  |   | (147     | )
|Net loss                                                                |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        | (36,451  | ) |  |   |         |   |  |   |         |   |  |   |        |   |  |   | (36,451  | ) |  |   | (36,451  | )
|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2001                                            |  |                | 35,432 |                |  | $       | 35 |              |  |             | 49     |             |  | $             | (3,251  | )             |  | $             | 531,666  |        |  | $      | (140,660 | ) |  | $ |        |   |  | $ | (238    | ) |  | $ | 267    |   |  | $ | 387,819  |   |  | $ | (36,107  | )
|                                                                        |  |                |        |                |  |         |    |              |  |             |        |             |  |               |         |               |  |               |          |        |  |        |          |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |          |  

F-38



---



##### Table of Contents



HNC SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(in thousands, except per share
amounts)


Note 1  HNC Software Inc. and our
Significant Accounting Policies

HNC Software
Inc.

HNC is a provider of high-end analytics, decision
management software and tools that enable global companies to
manage customer interactions by converting data and business
experiences into real-time recommendations. In this report, HNC
Software Inc. is referred to as we, our,
and HNC. Our former subsidiary Retek Inc., which we
spun-off to our stockholders in September 2000, is referred to
as Retek.

Principles of
Consolidation and Basis of Presentation

Our consolidated financial statements include our
assets, liabilities, and results of operations, as well as those
of our wholly-owned subsidiaries and Retek, which was a
majority-owned subsidiary prior to its spin-off in September
2000. The ownership of other interest holders in Retek was
reflected as minority interest. All significant inter-company
balances and transactions have been eliminated.

The preparation of financial statements, in
conformity with generally accepted accounting principles,
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.

Certain prior year amounts have been reclassified
to conform to the current year presentation.

Revenue
Recognition

Software revenue is recognized upon meeting all
of the following criteria: execution of a written license
agreement, contract or purchase order; delivery of software
and/or authorization keys; the license fee is fixed and
determinable; and collectibility of the proceeds is assessed as
being probable. For multiple-element agreements, total fees are
allocated to each element based on vendor-specific objective
evidence of fair value or using the residual method when
applicable. Allocated fees are recognized separately for each
element when it is delivered, providing other criteria
referenced above are met. Vendor-specific objective evidence is
generally based on the price charged when an element is sold
separately, or if not yet sold separately, is established by
authorized management. For perpetual license and maintenance
arrangements, vendor-specific objective evidence for maintenance
services is determined based on contractual renewal rates for
those services. For term license and maintenance arrangements,
vendor-specific objective evidence for maintenance services is
also determined based on contractual renewal rates for those
services, and license and maintenance fees are unbundled only if
the maintenance term and renewal rates are considered to be
substantive.

Revenue from perpetual and short-term periodic
licenses of our software is generally recognized upon delivery.
Transactional-based license fees under software license
arrangements are recognized as revenue based on system usage or
when fees based on system usage exceed monthly minimum license
fees.

Software maintenance fees are recognized as
revenue ratably over the maintenance periods.

Revenue from software installation and
implementation and from contract services is generally
recognized as the services are performed using the percentage of
completion method based on costs incurred to date compared to
total estimated costs at completion. Contract losses are
recorded as a charge to operations in the period any losses are
first identified. Unbilled accounts receivable are stated at
estimated realizable value.

Transactional-based fees under network service or
internally hosted software arrangements are recognized as
revenue based on system usage or when fees based on system usage
exceed monthly minimum license fees.

F-39



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Installation or setup fees associated with
network service and internally hosted software agreements are
recognized ratably over the longer of the customer contract
period or estimated life of the customer relationship.

Amounts received under contracts in advance of
performance are recorded as deferred revenue and are generally
recognized within one year from receipt.

Statement of
Operations Data

Within our statement of operations, components of
operating expenditures in 2001, 2000 and 1999 include
stock-based compensation expense and non-recurring expenses
related to our spin-off of Retek that have been classified as
follows:

|                                       |                            |                         |     |      |  |      |        |        |  |   |        |       | 
|-------------------------------------- | -------------------------- | ----------------------- | --- | ---- |  | ---- | ------ | ------ |  | - | ------ | ----- | 
|                                       |                            |                        
|                                       |                            | Year Ended December 31,
|                                       |                            |                        
|                                       |                            | 2001                    |     | 2000 |  | 1999
|                                       |                            |                         |     |      |  |     
|Stock-Based Compensation Expense:      |                            |                         |     |      |  |      |        |        |  |   |        |      
|                                       | License and maintenance    |                         | $   | 51   |  |      | $      | 2,658  |  |   | $      | 280   | 
|                                       | Services and other         |                         |     |     |  |      |        | 2,548  |  |   |        | 354   | 
|                                       | Research and development   |                         |     | 80   |  |      |        | 10,629 |  |   |        | 1,121 | 
|                                       | Sales and marketing        |                         |     | 50   |  |      |        | 4,167  |  |   |        | 441   | 
|                                       | General and administrative |                         |     | 295  |  |      |        | 1,668  |  |   |        | 9,789 | 
|                                       |                            |                         |     |      |  |      |        |        |  |   |        |      
|                                       |                            | $                       | 476 |      |  | $    | 21,670 |        |  | $ | 11,985 |      
|                                       |                            |                         |     |      |  |      |        |        |  |   |        |      
|Expense Related to Spin-Off of
	Retek: |                            |                         |     |      |  |      |        |        |  |   |        |      
|                                       | License and maintenance    |                         |     |      |  |      | $      | 6,086  |  |   |        |       | 
|                                       | Services and other         |                         |     |      |  |      |        | 6,603  |  |   |        |       | 
|                                       | Research and development   |                         |     |      |  |      |        | 12,880 |  |   |        |       | 
|                                       | Sales and marketing        |                         |     |      |  |      |        | 5,770  |  |   |        |       | 
|                                       | General and administrative |                         |     |      |  |      |        | 16,846 |  |   |        |       | 
|                                       |                            |                         |     |      |  |      |        |        |  |   |        |      
|                                       |                            |                         |     |      |  | $    | 48,185 |        |  |   |        |      
|                                       |                            |                         |     |      |  |      |        |        |  |   |        |      

Cash and Cash
Equivalents

Cash and cash equivalents include amounts on
deposit with financial institutions and investments in money
market accounts and commercial paper purchased with maturities
of three months or less from the date of purchase. The carrying
amounts of cash and cash equivalents approximate fair value
because of the short-term maturities of these financial
instruments.

Marketable
Securities

Management determines the appropriate
classification of our investments in marketable debt and equity
securities at the time of purchase, and re-evaluates this
designation at each balance sheet date. We have classified all
of our marketable securities as available for sale
and carry them at fair value with unrealized gains or losses
related to these securities included in other comprehensive
income (loss). Realized gains and losses on the sale of
investments available for sale are determined using the specific
identification method. Losses resulting from other than
temporary declines in fair value are charged to operations.

F-40



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Equity
Investments

Our investments in equity securities of companies
over which we do not have significant influence are accounted
for under the cost method. We use the equity method to account
for our investments in entities over which we have a voting
interest of 20% to 50%, or over which we otherwise have the
ability to exercise significant influence. Under the equity
method, the investment is originally recorded at cost and
adjusted to recognize our share of net earnings or losses of the
investee, limited to the extent of our investment in, advances
to, and financial guarantees for the investee. At
December 31, 2001, all of our equity investments in other
entities were accounted for under the cost method. Management
periodically reviews cost-basis investments for instances where
fair value is less than cost and the decline in value is
determined to be other than temporary. If the decline in value
is judged to be other than temporary, the cost basis of the
security is written down to fair value and the resulting loss is
charged to operations.

Sale of
Receivables

From time to time, we enter into agreements to
sell an undivided interest in specifically identified trade
accounts receivable. We sell these trade accounts receivable to
a financial institution for a fee, based principally upon
defined short-term market rates. Once sold, these receivables
are not included in our trade accounts receivable balance on our
consolidated balance sheet. During 2001, 2000 and 1999, we sold
$500, $32,585 and $23,711 of receivables, respectively. Fees
that we paid related to receivables sold totaled $10, $430 and
$364 during 2001, 2000 and 1999, respectively, and are included
in interest expense in our consolidated statement of operations.
Effective April 1, 2001, we adopted Statement of Accounting
Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities (FAS 140), issued in September
2000 by the Financial Accounting Standards Board. FAS 140
revises the standards for accounting and disclosures for
securitizations and other transfers of financial assets and
collateral. The adoption of this new standard did not have a
significant impact on our consolidated financial position,
results of operations or disclosures.

Property and
Equipment

Property and equipment are recorded at cost less
accumulated depreciation and amortization. Major renewals and
improvements are capitalized, while repair and maintenance costs
are expensed as incurred. Depreciation and amortization charges
are calculated using the straight-line method over the estimated
useful lives of the assets ranging from three to seven years.
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining term of the related
lease. Depreciation and amortization expense related to property
and equipment totaled $10,760, $11,753 and $8,215 during 2001,
2000 and 1999, respectively. The cost and accumulated
depreciation for property and equipment sold, retired or
otherwise disposed of are removed from the accounts and
resulting gains or losses are recorded in operations.

Intangible
Assets and Goodwill

Intangible assets include goodwill, acquired
software development costs, customer base, customer contracts,
assembled work force, covenants not to compete, and trademarks.
These assets resulted from our acquisitions accounted for under
the purchase method of accounting (see Note 4). Amortization
expense

F-41



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

related to intangible assets totaled $56,444,
$42,372 and $8,560 during 2001, 2000 and 1999, respectively. We
amortize these assets using the straight-line method over their
estimated useful lives as follows:

|                                    |  |             
|----------------------------------- |  | ------------
|                                    |  | Estimated   
|                                    |  | Useful Life 
|                                    |  |             
|Goodwill                            |  | 3 to 5 years
|Acquired software development costs |  | 3 to 5 years
|Customer base                       |  | 3 to 5 years
|Customer contracts                  |  | 2 to 3 years
|Assembled work force                |  | 3 to 5 years
|Covenants not to compete            |  | 2 to 3 years
|Trademarks                          |  | 5 years     

We continually review the events and
circumstances related to our financial performance and economic
environment for factors that would provide evidence of the
impairment of enterprise-level goodwill. If such factors exist,
suggesting impairment, we use the market value method to
determine the extent of the impairment. We will adopt the
provisions of FAS 142 in the first quarter of 2002 (see
New Accounting Pronouncements below).

Software
Development Costs

Development costs of software to be licensed or
sold that are incurred from the time technological feasibility
is established until the product is available for general
release to customers are capitalized and reported at the lower
of cost or net realizable value. Through December 31, 2001,
no significant development costs were incurred after
technological feasibility was reached.

Internal-Use
Software

Costs incurred to develop internal-use software
during the application development stage are also capitalized
and reported at the lower of cost or net realizable value.
Application development stage costs generally include costs
associated with internal-use software configuration, coding,
installation and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also
capitalized whereas costs incurred for maintenance and minor
upgrades and enhancements are expensed as incurred.

Long-lived
Assets

We assess potential impairments to our long-lived
and intangible assets when there is evidence that events or
changes in circumstances indicate that the carrying amount of an
asset may not be recovered. An impairment loss is recognized
when the undiscounted cash flows expected to be generated by an
asset (or group of assets) is less than its carrying amount. Any
required impairment loss would be measured as the amount by
which the assets carrying value exceeds its fair value,
and would be recorded as a reduction in the carrying value of
the related asset and a charge to operations.

Income
Taxes

Current income tax expense is the amount of
income taxes expected to be payable for the current year, prior
to the recognition of benefits from stock option deductions. A
deferred income tax asset or liability is computed for the
expected future impact of differences between the financial
reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax
credit carry-forwards. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount

F-42



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

more likely than not to be realized
in future tax returns. Tax rate changes and tax credit
reinstatements are reflected in income during the period the
changes are enacted.

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 loss and net
loss per common share as if a fair value method had been
applied. Therefore, compensation cost for employee stock awards
is measured as the excess, if any, of the fair value of our
common stock at the grant date over the amount an employee must
pay to acquire the stock. Compensation expense is amortized over
the related service periods using the accelerated methodology
prescribed by Financial Accounting Standards Board
Interpretation No. 28. Compensation expense for awards that
are forfeited is reversed against compensation expense in the
period of forfeiture.

Stock-based awards issued to non-employees are
accounted for using a fair value method and are marked to fair
value at each period end until the earlier of the date at which
a performance commitment has been obtained or the awards are
fully vested. Fair value of stock-based awards is determined
using the Black-Scholes option pricing model with weighted
average assumptions for dividend yield, risk-free interest rate,
expected volatility, and contractual life.

Net Loss Per
Common Share

Basic and diluted net loss per common share are
computed as net loss divided by the weighted-average number of
common shares outstanding during the period. For the computation
of diluted net loss per common share, the weighted-average
number of common shares outstanding excludes common stock
equivalents, because their inclusion would be anti-dilutive.

The conversion of our 5.25% Convertible
Subordinated Notes (see Note 10) outstanding during 2001
into 1,835 common shares were not included in the computation of
diluted net loss per common share, as their effect in this
period would have been anti-dilutive. Additionally, the
conversion of our 4.75% Convertible Subordinated Notes (see
Note 10) outstanding during 2000 and 1999 into 3,512 and
2,230 common shares, respectively, were not included in the
computation of diluted net loss per common share, as their
effect in such periods would be anti-dilutive.

For 2001, 2000 and 1999, weighted average options
to purchase shares of common stock and Employee Stock Purchase
Plan equivalents of 1,860, 2,260 and 6,547 shares of common
stock, respectively, were not included in the computation of
diluted net loss per common share as their effect in these
periods would be anti-dilutive.

Foreign
Currency Translation

The financial statements of our international
operations have been translated into U.S. dollars using
period-end exchange rates for assets and liabilities and average
exchange rates during the period for revenues and expenses.
Cumulative translation gains and losses are excluded from
results of operations and recorded as a separate component of
other comprehensive income (loss). Gains and losses resulting
from foreign currency transactions (transactions denominated in
a currency other than our entitys local currency) are
recorded in operations.

Comprehensive
Income (Loss)

Comprehensive income (loss) is the change in
our equity (net assets) during each period from transactions and
other events and circumstances from non-owner sources. It
includes net income (loss), foreign currency translation
adjustments and unrealized gains and losses, net of tax, on our
investments in marketable securities.

F-43



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Concentration
of Risk

Our financial instruments that potentially expose
us to concentrations of risk consist primarily of cash and cash
equivalents, marketable securities and accounts receivable,
which are generally not collateralized. Our policy is to place
our cash, cash equivalents, and marketable securities with high
credit quality financial institutions, commercial companies and
government agencies in order to limit the amount of credit
exposure. We enter into software license and installation
agreements and commercial development contracts primarily with
large customers in the services industries (financial, insurance
and telecommunications). We do not require collateral from our
customers, but our credit extension and collection policies
include analyzing the financial condition of potential
customers, establishing credit limits, monitoring payments, and
aggressively pursuing delinquent accounts. We maintain
allowances for potential credit losses.

Segment
Reporting

Our operating segments are presented consistently
with the way that our management organizes and evaluates
financial information for making internal operating decisions
and assessing performance. Certain prior year segment
information has been reclassified to conform to the current year
presentation (see Note 13).

Advertising
and Promotion Costs

Advertising and promotion costs are expensed as
incurred. Advertising and promotion costs totaled $3,033, $8,006
and $3,651 in 2001, 2000 and 1999, respectively, and are
included in sales and marketing expense in our consolidated
statement of operations.

New
Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations
(FAS 141) and No. 142, Goodwill and
Other Intangible Assets (FAS 142).
FAS 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase
method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to
have indefinite lives will continue to be amortized over their
useful lives (but with no maximum life). The amortization
provisions of FAS 142 applied immediately to goodwill and
intangible assets acquired after June 30, 2001. We will
adopt all other provisions of FAS 142 in the first quarter
of 2002. We have not yet determined the impact that our full
adoption of FAS 142 in the first quarter of 2002 will have
on our consolidated financial position, results of operations or
disclosures.

In October 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144).
FAS 144 requires, among other things, the application of
one accounting model for long-lived assets that are impaired or
to be disposed of by sale. FAS 144 also revises the
accounting for discontinued operations. We will adopt the
provisions of FAS 144 in the first quarter of 2002. We do
not expect the adoption of FAS 144 to have a significant
impact on our consolidated financial position, results of
operations or disclosures.

Note 2  Initial Public Offering and
Spin-Off of Retek Inc.

On September 10, 1999, Retek filed a
registration statement with the Securities and Exchange
Commission relating to an initial public offering of
Reteks common stock. The offering was consummated in
November 1999. In the offering, Retek sold 6,325 shares of
its common stock. Prior to the offering, we transferred to Retek
all of the shares of our wholly owned subsidiary, Retek
Information Systems, Inc.

F-44



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On August 7, 2000, HNCs board of
directors declared a dividend of all of the shares of Retek
common stock held by HNC, or 40,000 shares, to complete the
spin-off of our Retek subsidiary. We received a private letter
ruling from the Internal Revenue Service that HNCs
dividend of its shares of Retek common stock would be tax-free
to HNC and our stockholders for U.S. federal income tax
purposes. This dividend was paid on September 29, 2000 to
all HNC stockholders of record as of September 15, 2000
using a distribution ratio of approximately 1.243 shares of
Retek common stock for each share of HNC common stock held. Cash
was paid in lieu of fractional shares. The shares of Retek
common stock that we distributed in the Retek spin-off
constituted all the Retek shares owned by HNC and represented
approximately 83.9% of Reteks outstanding shares as of the
September 29, 2000 distribution date. As a result of our
distribution of our Retek common shares, Retek is no longer
affiliated with HNC. In connection with this spin-off, we
eliminated net assets totaling $121,213 from our consolidated
balance sheet, including cash and cash equivalents of $30,463.
Additionally, we eliminated the minority interest associated
with Retek of $14,491 and net equity totaling $106,722.

In connection with the spin-off of our Retek
subsidiary, we accelerated the vesting of 25 percent of the
outstanding HNC stock options that would have been unvested as
of the September 15, 2000 record date in order to afford
our option holders the opportunity to participate in receipt of
the dividend. Additionally, we offered option holders the
opportunity to exercise a portion of their vested options prior
to the record date through the issuance of secured, full
recourse promissory notes payable to HNC (the Stockholder
Notes). The Stockholder Notes bear interest at the rate of
10.0% per annum, and are collateralized by the underlying shares
of stock. Loans totaling $11,857 were originally extended to
option holders. At December 31, 2000, stockholder notes
receivable totaled $9,049, net of repayments, and have been
recorded as a reduction to stockholders equity. Such notes
were repaid in 2001. In connection with the Retek dividend, we
also adjusted the exercise price of all HNC stock options that
were outstanding immediately following payment of the dividend.
The adjusted stock option exercise prices were calculated by
multiplying the pre-dividend option exercise price by the price
of HNC common stock immediately after payment of the dividend,
and dividing that product by the price of HNC common stock
immediately before payment of the dividend. The vesting
acceleration of HNC stock options and the adjustment to HNC
stock option exercise prices that were greater than the closing
price of HNC common stock on September 29, 2000 resulted in
stock-based compensation charges (see Note 14).

Because the adjustment to the exercise price of
HNC options described above was less than the change in value of
unvested HNC stock options resulting from the Retek
distribution, we paid cash bonuses to employees and directors
who held unvested stock options as of the record date, and
recorded a related charge to operations in the amount of
$40,427. These bonuses were paid out in October 2000 and January
2001.

Note 3  Company Reorganization and
Impairment Charges

In April 2001, we announced and began to
implement a reorganization that involved realigning our internal
organization from a vertical market orientation to a horizontal
product platform. This reorganization plan resulted in the
elimination of various redundant corporate resources that
existed in the previous vertical market organization structure.
As a result of this reorganization, we incurred charges of
$2,960 during 2001, which included severance benefits for 41
terminated employees, the write-off of certain capitalized costs
associated with internal-use software no longer being used, and
charges for the closure of certain office locations.

During 2000, we recorded an impairment charge of
$1,172 related to the abandonment of a lease and associated
property and equipment. The impairment charge consisted of the
write-off of the remaining net book value of abandoned property
and equipment that was deemed to have insignificant remaining
value at the time of the disposal, as well as charges associated
with future facility lease cash obligations, net of estimated
sublease income. During 2001, we recorded an additional charge
of $1,157 associated with this leased facility,

F-45



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

resulting from the default of a sublease tenant
and resultant estimated future net lease costs expected to be
borne by HNC. During 2001, we also committed to the closure of
an additional office facility and recorded estimated lease exit
charges of $525, consisting of future facility lease cash
obligations, net of estimated sublease income.

Restructuring, impairment and related charges
expensed during the 2001 and 2000 were comprised of the
following:

|                    |  |         |       |         |  |       |       |      |  |           |       |  |  |   |       |  |  |   |       | 
|------------------- |  | ------- | ----- | ------- |  | ----- | ----- | ---- |  | --------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                    |  | 2000    |       | 2001    |  |       |       |      |  | Remaining
|                    |  | Expense |       | Expense |  | Total |       | Used |  | Accrual  
|                    |  |         |       |         |  |       |       |      |  |          
|Employee separation |  | $       |      |         |  | $     | 345   |      |  | $         | 345   |  |  | $ | 345   |  |  | $ |      | 
|Facilities charges  |  |         | 294   |         |  |       | 2,010 |      |  |           | 2,304 |  |  |   | 553   |  |  |   | 1,751 | 
|Asset impairments   |  |         | 878   |         |  |       | 2,097 |      |  |           | 2,975 |  |  |   | 2,975 |  |  |   |      | 
|Other               |  |         |      |         |  |       | 190   |      |  |           | 190   |  |  |   | 190   |  |  |   |      | 
|                    |  |         |       |         |  |       |       |      |  |           |       |  |  |   |       |  |  |   |       | 
|                    |  | $       | 1,172 |         |  | $     | 4,642 |      |  | $         | 5,814 |  |  | $ | 4,063 |  |  | $ | 1,751 | 
|                    |  |         |       |         |  |       |       |      |  |           |       |  |  |   |       |  |  |   |       | 

No restructuring or impairment charges were
recorded in 1999. As of December 31, 2001, the remaining
accrual of $1,751 consists primarily of future facility lease
cash obligations, net of estimated sublease income, and other
accrued expenses. Such facility lease commitments extend through
2004.

Note 4  Acquisitions

In September 2001, we acquired the UK-based
Marketing Service Provider business unit of Chordiant Software
Inc., in exchange for approximately $2,000 in cash. The MSP
business unit provides marketing campaign and other customer
data management services to its customers. We applied the
purchase method of accounting for this acquisition, which
resulted in a purchase price of $2,413, of which $1,566 was
allocated to identified intangibles and goodwill as follows:
$448 to customer contracts and $1,118 to goodwill. We applied
FAS 142 in the recording of goodwill and identifiable
intangibles. Accordingly, goodwill related to the acquisition of
the Chordiant business unit will not be amortized. The goodwill
and intangibles were reviewed for impairment in accordance with
APB Opinion No. 17, Intangible Assets through
December 31, 2001, prior to the adoption of FAS 142 in
its entirety in 2002.

In August 2001, we acquired certain assets of the
Blaze Advisor business unit of Brokat Technologies in exchange
for approximately $18,500 in cash and the assumption of certain
liabilities. Blaze Advisors rules management technology is
designed to help large organizations manage complex or
frequently changing business rules. We applied the purchase
method of accounting for this acquisition, which resulted in a
purchase price of $21,751. The purchase price included $2,000 in
restricted cash retained by HNC to provide recourse for
potential future indemnification obligations of Brokat to HNC
and $1,500 in assumed severance obligations, along with accrued
acquisition costs. The release date of the restricted cash to
Brokat is expected to occur not later than August 2002, subject
to reduction by indemnification obligations of Brokat to HNC, if
any. The excess of the purchase price over net liabilities
assumed was $22,093, of which $487 was allocated to in-process
research and development and $21,606 was allocated to identified
intangibles and goodwill as follows: $10,247 to software
development costs, $1,525 to customer contracts, $364 to patents
and trademarks, and $9,470 to goodwill. We applied FAS 142
in the recording of goodwill and identifiable intangibles.
Accordingly, goodwill related to the acquisition of Blaze will
not be amortized. The goodwill and intangibles were reviewed for
impairment in accordance with APB Opinion No. 17,
Intangible Assets through December 31, 2001,
prior to the adoption of FAS 142 in its entirety in 2002.

In June 2001, we acquired two workers
compensation compliance-reporting products and related customer
base from ecDataFlow.com Inc. (ecDataFlow) in
exchange for approximately $3,600 in cash. From ecDataFlow, we
acquired OASIS, a client/ server EDI connectivity program for
transmitting injury

F-46



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reports, medical bills, and insurance claims, and
NIIDS, an ASP-based connectivity product that integrates with
OASIS. We applied the purchase method of accounting to this
acquisition, which resulted in a purchase price of $3,682, all
of which was allocated to identified intangible assets and
goodwill as follows: $850 to customer base, $200 to covenants
not to compete, and $2,632 to goodwill.

In April 2001, we acquired ClaimPort, Inc.
(ClaimPort) in exchange for approximately $3,200 in
cash. ClaimPort is an electronic data interchange vendor
providing Web-enabled workers compensation injury
reporting and proof of coverage services for insurance carriers,
third party administrators, self-insured employers and state
agencies that support workers compensation insurance
claims processing. We applied the purchase method of accounting
to this acquisition, which resulted in a purchase price of
$3,474. The excess of this amount over the net liabilities
assumed was $3,988, all of which was allocated to intangible
assets and goodwill as follows: $220 to assembled workforce,
$354 to customer base, $56 to software development costs, and
$3,258 to goodwill.

In September 2000, we acquired all of the
outstanding stock and other securities of Systems/ Link
Corporation (Systems/ Link) in exchange for the
issuance of 634 shares of our common stock, including 40
underlying shares associated with stock options we exchanged,
and $5,512 in cash. We placed 142 of the shares issued and
$1,275 of the cash portion of the purchase price into escrow, to
secure indemnification obligations of the former Systems/ Link
stockholders. Systems/ Link is a software developer that creates
data management solutions for large telecommunications
companies, providing applications for real-time data collection,
call detail record exchange, fraud control and prepaid services
to carriers. We applied the purchase method of accounting for
the acquisition of Systems/ Link, which resulted in a purchase
price of $42,549. The excess of this amount over the net
liabilities assumed was $56,416, of which $730 was allocated to
in-process research and development and $55,686 was allocated to
identified intangible assets and goodwill as follows: $17,060 to
software development costs, $1,710 to customer base, $2,758 to
assembled workforce, $310 to trademarks, $370 to covenants not
to compete, and $33,478 to goodwill.

In September 2000, we acquired all of the
outstanding stock and other securities of CardAlert Services,
Inc. (CardAlert) in exchange for the issuance of
208 shares of our common stock. We placed 42 of the shares
issued into escrow to secure indemnification obligations of the
former CardAlert stockholders, which we released fully in 2001.
CardAlert provides ATM and debit card risk management services
to domestic financial institutions and debit card networks. We
applied the purchase method of accounting for the acquisition of
CardAlert, which resulted in a purchase price of $12,608. The
excess of this amount over the net liabilities assumed was
$12,976, of which $421 was allocated to in-process research and
development and $12,555 was allocated to identified intangible
assets and goodwill as follows: $1,659 to software development
costs, $1,220 to customer base, $1,141 to assembled workforce,
$240 to covenants not to compete, and $8,295 to goodwill.

In May 2000, Retek acquired all of the
outstanding stock and other securities of HighTouch
Technologies, Inc. (HighTouch) in exchange for the
issuance of 389 shares of Reteks common stock and
$18,000 in cash. HighTouch is a provider of customized software
and services relating to customer relationship management. Retek
applied the purchase method of accounting for the acquisition of
HighTouch, which resulted in a purchase price of $26,308. The
excess of this amount over the net liabilities assumed was
$30,558, of which $4,000 was allocated to in-process research
and development and $26,558 was allocated to identified
intangible assets and goodwill as follows: $4,800 to software
development costs, $900 to customer base, $520 to assembled
workforce, $1,000 to covenants not to compete, and $19,338 to
goodwill.

In April 2000, we acquired all of the outstanding
stock and other securities of Celerity Technologies, Inc.
(Celerity) in exchange for the issuance of 220
shares of our common stock and $2,400 in cash. We placed 33 of
the shares issued into escrow to secure indemnification
obligations of the former Celerity shareholders, which we
released fully in 2001. Celerity develops and markets electronic
data interchange solutions for the workers compensation
industry. We applied the purchase method of accounting for the
acquisition of

F-47



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Celerity, which resulted in a purchase price of
$18,591. The excess of this amount over the net liabilities
assumed was $20,769, of which $1,050 was allocated to in-process
research and development and $19,719 was allocated to identified
intangible assets and goodwill as follows: $860 to software
development costs, $1,510 to customer base, $710 to assembled
workforce, $100 to contracts, $200 to covenants not to compete,
and $16,339 to goodwill.

In March 2000, we acquired all of the outstanding
stock and other securities of Onyx Technologies, Inc.
(Onyx) in exchange for the issuance of 382 shares of
our common stock, including 30 underlying shares associated with
stock options we exchanged, and $1,500 in cash. We placed 105 of
the shares issued and $450 of the cash portion of the purchase
price into escrow to secure indemnification obligations of the
former Onyx shareholders. We fully released all cash and shares
from escrow during 2000 and 2001. Onyx is a provider of online
data access and customer acquisition analysis for
telecommunications, financial and retail service companies. We
applied the purchase method of accounting for the acquisition of
Onyx, which resulted in a purchase price of $49,555, of which
$3,500 represented our initial 1999 investment in Onyx. The
excess of this amount over the net liabilities assumed of
$51,163 was allocated to identified intangible assets and
goodwill as follows: $10,060 to software development costs,
$3,700 to customer base, $504 to assembled workforce, $920 to
covenants not to compete, and $35,979 to goodwill.

In March 2000, we acquired all of the outstanding
stock and other securities of the Center for Adaptive Systems
Applications, Inc. (CASA) in exchange for the
issuance of 226 shares of our common stock, including 80
underlying shares associated with stock options we exchanged.
CASA is an advanced analytics solutions company that develops
and markets account optimization and precision marketing
solutions. We placed 38 of the shares issued into escrow to
secure indemnification obligations of the former CASA
stockholders, which we fully released in 2001. We applied the
purchase method of accounting for the acquisition of CASA, which
resulted in a purchase price of $23,756. The excess of this
amount over the net liabilities assumed was $27,260, of which
$1,400 was allocated to in-process research and development and
$25,860 was allocated to identified intangible assets and
goodwill as follows: $6,395 in software development costs, $898
to customer base, $700 to assembled workforce, $642 in
contracts, $340 to covenants not to compete, and $16,885 to
goodwill.

In March 2000, we acquired all of the outstanding
stock and other securities of Adaptive Systems Applications,
Inc. (AIM) in exchange for 9 shares of our common
stock, including 0.4 underlying shares associated with stock
options we exchanged. AIM provides marketing process automation,
campaign execution software, and client-to-vendor data
management to direct marketers of enhancement services. We
applied the purchase method of accounting for the acquisition of
AIM, which resulted in a purchase price of $1,656, of which $750
represents our initial 1999 investment in AIM. The excess of
this amount over the net liabilities assumed of $1,785 was
allocated to identified intangible assets and goodwill as
follows: $300 to assembled workforce, $300 to covenants not to
compete, and $1,185 to goodwill.

In October 1999, Retek acquired WebTrak Limited
(WebTrak) for a cash payment of $5,333 and the
issuance of a $2,667 convertible note, which was subsequently
converted into shares of Retek common stock. WebTrak is a United
Kingdom company that develops, markets and sells
business-to-business products that enable users to publish and
share a critical path on the Internet, and allow Web-based
collaboration to improve the new product design and development
process. The application of the purchase method of accounting
for the acquisition resulted in an excess of cost over net
liabilities assumed of $8,131, of which $1,480 was allocated to
in-process research and development and $6,651 was allocated to
identified intangible assets and goodwill as follows: $4,940 to
software development costs, $180 to customer base, $240 to
assembled workforce, $80 to trademarks, $1,150, to covenants not
to compete, and $61 to goodwill.

In-process research and development recorded in
connection with the above-mentioned purchase transactions
represents the present value of the estimated after-tax cash
flows expected to be generated by purchased technologies that,
as of the acquisition dates, had not yet reached technological
feasibility. The cash

F-48



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

flow projections for revenues were based on
estimates of relevant market sizes and growth factors, expected
industry trends, the anticipated nature and timing of new
product introductions, product sales cycles and the estimated
life of each products underlying technology. Estimated
operating expenses and income taxes were deducted from estimated
revenue projections to arrive at estimated after-tax cash flows.
Projected operating expenses include costs of revenues,
marketing and selling expenses, general and administrative
expenses, and research and development, including estimated
costs to maintain the products once they have been introduced
into the market and are generating revenue. We made our
assessment of whether acquired technologies in these
acquisitions were complete or under development in accordance
with the guidelines prescribed by Statement of Financial
Accounting Standards No. 86, Statement of Financial
Accounting Standards No. 2, and Financial Accounting
Standards Board Interpretation No. 4.

The following table summarizes in the aggregate,
for all purchase acquisitions during 2001, 2000 and 1999, the
goodwill and identified intangible assets recorded:

|                   |                                     |                         |        |        |  |      |         |        |  |   |       |       | 
|------------------ | ----------------------------------- | ----------------------- | ------ | ------ |  | ---- | ------- | ------ |  | - | ----- | ----- | 
|                   |                                     |                        
|                   |                                     | Year Ended December 31,
|                   |                                     |                        
|                   |                                     | 2001                    |        | 2000   |  | 1999
|                   |                                     |                         |        |        |  |     
|Goodwill           |                                     | $                       | 16,478 |        |  | $    | 131,499 |        |  | $ | 61    |      
|                   |                                     |                         |        |        |  |      |         |        |  |   |       |      
|Intangible Assets: |                                     |                         |        |        |  |      |         |        |  |   |       |      
|                   | Acquired software development costs |                         |        | 10,303 |  |      |         | 40,834 |  |   |       | 4,940 | 
|                   | Customer base                       |                         |        | 1,204  |  |      |         | 9,938  |  |   |       | 180   | 
|                   | Assembled Workforce                 |                         |        | 220    |  |      |         | 6,633  |  |   |       | 240   | 
|                   | Other                               |                         |        | 2,537  |  |      |         | 4,422  |  |   |       | 1,230 | 
|                   |                                     |                         |        |        |  |      |         |        |  |   |       |      
|                   |                                     |                         | 14,264 |        |  |      | 61,827  |        |  |   | 6,590 |      
|                   |                                     |                         |        |        |  |      |         |        |  |   |       |      
|Total              |                                     | $                       | 30,742 |        |  | $    | 193,326 |        |  | $ | 6,651 |      
|                   |                                     |                         |        |        |  |      |         |        |  |   |       |      

The unaudited pro forma results of operations
below present the impact on our results of operations as if the
Chordiant, Blaze, ecDataFlow.com and ClaimPort acquisitions had
occurred on January 1, 2000, and as if the Systems/ Link,
CardAlert, HighTouch, Celerity, Onyx, CASA and AIM acquisitions
had occurred on January 1, 1999, instead of on their
respective acquisition dates:

|                                     |  |                         |         |             |  |            |         |             |  |            |          |             |  |   |          |   |  |   |         |   |  |   |         |  
|------------------------------------ |  | ----------------------- | ------- | ----------- |  | ---------- | ------- | ----------- |  | ---------- | -------- | ----------- |  | - | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                     |  |                        
|                                     |  | Year Ended December 31,
|                                     |  |                        
|                                     |  |                         |         |             |  |           
|                                     |  | 2001                    |         | 2000        |  | 1999      
|                                     |  |                         |         |             |  |           
|                                     |  |                         |         | Proforma    |  |            |         | Pro Forma   |  |            |          | Pro Forma  
|                                     |  | Historical              |         | Combined    |  | Historical |         | Combined    |  | Historical |          | Combined   
|                                     |  |                         |         |             |  |            |         |             |  |            |          |            
|                                     |  |                         |         | (Unaudited) |  |            |         | (Unaudited) |  |            |          | (Unaudited)
|Total revenues                       |  | $                       | 226,670 |             |  | $          | 243,948 |             |  | $          | 254,884  |             |  | $ | 307,014  |   |  | $ | 216,889 |   |  | $ | 239,690 |  
|Total net loss                       |  |                         | (36,452 | )           |  |            | (67,893 | )           |  |            | (116,418 | )           |  |   | (181,858 | ) |  |   | (6,272  | ) |  |   | (6,868  | )
|Basic and diluted net loss per share |  | $                       | (1.06   | )           |  | $          | (1.97   | )           |  | $          | (4.08    | )           |  | $ | (6.37    | ) |  | $ | (0.25   | ) |  | $ | (0.26   | )

F-49



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 5  Composition of Certain
Financial Statement Captions

|                                                        |          |              |        |        |  |   |        |        | 
|------------------------------------------------------- | -------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                                        |          |             
|                                                        |          | December 31,
|                                                        |          |             
|                                                        |          | 2001         |        | 2000  
|                                                        |          |              |        |       
|Trade accounts receivable, net:                         |          |              |        |        |  |   |        |       
|                                                        | Billed   |              | $      | 38,378 |  |   | $      | 41,860 | 
|                                                        | Unbilled |              |        | 5,598  |  |   |        | 5,593  | 
|                                                        |          |              |        |        |  |   |        |       
|                                                        |          |              | 43,976 |        |  |   | 47,453 |       
|Less allowance for doubtful accounts and sales
	returns |          |              | (5,007 | )      |  |   | (3,597 | )     
|                                                        |          |              |        |        |  |   |        |       
|                                                        |          | $            | 38,969 |        |  | $ | 43,856 |       
|                                                        |          |              |        |        |  |   |        |       

Unbilled accounts receivable represent revenue
recorded in excess of amounts billable pursuant to contract
provisions and generally become billable at contractually
specified dates or upon the attainment of milestones. Unbilled
amounts are expected to be realized within one year. During
2001, 2000, and 1999, we reserved $5,768, $6,205, and $5,112,
wrote off $5,084, $3,661, and $1,049 and recovered $148, $104,
and $0 of our allowance for doubtful accounts and sales returns,
respectively. During 2001 and 2000, we also increased our
allowance for doubtful accounts by $578 and $300, respectively,
for amounts recorded in connection with acquisitions.
Additionally, in connection with the spin-off of Retek on
September 29, 2000, we removed Reteks allowance for
doubtful accounts and sales returns of $5,787 from our
consolidated balance sheet.

|                                               |                                     |              |         |         |   |   |         |         |  
|---------------------------------------------- | ----------------------------------- | ------------ | ------- | ------- | - | - | ------- | ------- | -
|                                               |                                     |             
|                                               |                                     | December 31,
|                                               |                                     |             
|                                               |                                     | 2001         |         | 2000   
|                                               |                                     |              |         |        
|Property and equipment, net:                   |                                     |              |         |         |   |   |         |        
|                                               | Computer equipment and software     |              | $       | 45,998  |   |   | $       | 34,389  |  
|                                               | Furniture and fixtures              |              |         | 9,706   |   |   |         | 8,312   |  
|                                               | Leasehold improvements              |              |         | 5,060   |   |   |         | 4,897   |  
|                                               |                                     |              |         |         |   |   |         |        
|                                               |                                     |              | 60,764  |         |   |   | 47,598  |        
|Less accumulated depreciation and amortization |                                     |              | (36,979 | )       |   |   | (26,772 | )      
|                                               |                                     |              |         |         |   |   |         |        
|                                               |                                     | $            | 23,785  |         |   | $ | 20,826  |        
|                                               |                                     |              |         |         |   |   |         |        
|Goodwill, net:                                 |                                     |              |         |         |   |   |         |        
|                                               | Goodwill                            |              |         | 142,531 |   |   |         | 126,053 |  
|                                               | Less accumulated amortization       |              |         | (66,811 | ) |   |         | (29,243 | )
|                                               |                                     |              |         |         |   |   |         |        
|                                               |                                     | $            | 75,720  |         |   | $ | 96,810  |        
|                                               |                                     |              |         |         |   |   |         |        
|Intangible assets, net:                        |                                     |              |         |         |   |   |         |        
|                                               | Acquired software development costs |              |         | 51,841  |   |   |         | 41,538  |  
|                                               | Customer base                       |              |         | 11,139  |   |   |         | 9,935   |  
|                                               | Assembled work force                |              |         | 6,999   |   |   |         | 6,779   |  
|                                               | Other                               |              |         | 6,803   |   |   |         | 4,266   |  
|                                               |                                     |              |         |         |   |   |         |        
|                                               |                                     |              | 76,782  |         |   |   | 62,518  |        
|                                               | Less accumulated amortization       |              |         | (33,840 | ) |   |         | (14,996 | )
|                                               |                                     |              |         |         |   |   |         |        
|                                               |                                     | $            | 42,942  |         |   | $ | 47,522  |        
|                                               |                                     |              |         |         |   |   |         |        

F-50



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                           |  |              |        |      |  |   |        | 
|------------------------------------------ |  | ------------ | ------ | ---- |  | - | ------ | 
|                                           |  |             
|                                           |  | December 31,
|                                           |  |             
|                                           |  | 2001         |        | 2000
|                                           |  |              |        |     
|Accounts payable and accrued liabilities:  |  |              |        |      |  |   |        | 
|Accounts payable                           |  | $            | 6,356  |      |  | $ | 5,712  | 
|Accrued payroll and related benefits       |  |              | 7,313  |      |  |   | 16,539 | 
|Accrued interest payable                   |  |              | 2,753  |      |  |   | 260    | 
|Accrued external costs related to spin-off |  |              |       |      |  |   | 6,913  | 
|Retained portion of Blaze purchase price   |  |              | 2,000  |      |  |   |       | 
|Income taxes payable                       |  |              | 3,140  |      |  |   | 2,662  | 
|Other                                      |  |              | 8,154  |      |  |   | 6,589  | 
|                                           |  |              |        |      |  |   |        | 
|                                           |  | $            | 29,716 |      |  | $ | 38,675 | 
|                                           |  |              |        |      |  |   |        | 

The carrying amounts of accrued liabilities
approximate fair value because of the short-term maturities of
these financial instruments.

Note 6  Marketable
Securities

At December 31, 2001 and 2000, our
investments in marketable securities were as follows:

|                                     |  |                   |         |            |  |            |     |       |  |   |   |  |  |   |         | 
|------------------------------------ |  | ----------------- | ------- | ---------- |  | ---------- | --- | ----- |  | - | - |  |  | - | ------- | 
|                                     |  |                  
|                                     |  | December 31, 2001
|                                     |  |                  
|                                     |  | Amortized         |         | Unrealized |  | Unrealized |     | Fair 
|                                     |  | Cost              |         | Gains      |  | Losses     |     | Value
|                                     |  |                   |         |            |  |            |     |      
|U.S. government and federal agencies |  | $                 | 113,457 |            |  | $          | 137 |       |  | $ |  |  |  | $ | 113,594 | 
|U.S. corporate debt                  |  |                   | 92,097  |            |  |            | 797 |       |  |   |  |  |  |   | 92,894  | 
|Foreign corporate debt               |  |                   | 2,544   |            |  |            | 14  |       |  |   |  |  |  |   | 2,558   | 
|                                     |  |                   |         |            |  |            |     |       |  |   |   |  |  |   |         | 
|                                     |  | $                 | 208,098 |            |  | $          | 948 |       |  |   |  |  |  | $ | 209,046 | 
|                                     |  |                   |         |            |  |            |     |       |  |   |   |  |  |   |         | 

|                                     |  |                   |        |            |  |            |     |       |  |   |   |  |  |   |        | 
|------------------------------------ |  | ----------------- | ------ | ---------- |  | ---------- | --- | ----- |  | - | - |  |  | - | ------ | 
|                                     |  |                  
|                                     |  | December 31, 2000
|                                     |  |                  
|                                     |  | Amortized         |        | Unrealized |  | Unrealized |     | Fair 
|                                     |  | Cost              |        | Gains      |  | Losses     |     | Value
|                                     |  |                   |        |            |  |            |     |      
|U.S. government and Federal agencies |  | $                 | 59,841 |            |  | $          | 13  |       |  | $ |  |  |  | $ | 59,854 | 
|U.S. corporate debt                  |  |                   | 30,765 |            |  |            | 111 |       |  |   |  |  |  |   | 30,876 | 
|U.S. corporate equity                |  |                   | 250    |            |  |            |    |       |  |   |  |  |  |   | 250    | 
|Foreign corporate debt               |  |                   | 2,500  |            |  |            | 2   |       |  |   |  |  |  |   | 2,502  | 
|                                     |  |                   |        |            |  |            |     |       |  |   |   |  |  |   |        | 
|                                     |  | $                 | 93,356 |            |  | $          | 126 |       |  |   |  |  |  | $ | 93,482 | 
|                                     |  |                   |        |            |  |            |     |       |  |   |   |  |  |   |        | 

At December 31, 2001 and 2000, all foreign
corporate debt investments were denominated in U.S. dollars.

During 2000, we assessed the impairment in value
of our $3,000 investment in Network Commerce Inc. to be other
than temporary and, accordingly, we wrote this investment down
to $250 as of December 31, 2000, representing the aggregate
fair value of our investment in this entity based on the closing
market price of this publicly traded security on
December 31, 2000. During 2001, we assessed another other
than temporary impairment in value of this investment and wrote
it down to $12, representing the aggregate fair value of our
investment in this entity based on the closing market price of
this security on June 30, 2001. As a result of these
write-downs, we recorded losses in 2001 and 2000 of $238 and
$2,750, respectively, that are included in other expense, net in
our statement of operations.

F-51



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 7  Equity
Investments

During 2001, we assessed the impairment in value
of our investments in Burning Glass Technologies, Keylime
Software and Qpass Inc. to be other than temporary and,
accordingly, we wrote down such investments by $1,000, $2,000
and $2,000, respectively. Our assessment of the impairment in
these investments was based upon current market conditions,
liquidity and financing issues, and other business factors
specific to these entities. The losses associated with these
investment write-downs are included in other expense, net, in
our statement of operations. Prior to their write-down, we
accounted for these investments using the cost method. Our
original investment in Burning Glass Technologies was made in
2000 while our original investments in Keylime Software and
Qpass Inc. were made in 1999.

In July 2000, we became a limited partner in
Azure Capital Partners L.P., a venture capital investment
management fund, through an initial investment of $2,250. We
invested an additional $250 into this fund during 2001 and have
committed to invest an additional $2,500 into this fund, which
will likely be made in 2002. Our commitment to this fund will
not exceed 2% of total fund ownership. This investment is being
accounted for using the cost method. During 2001, we assessed
the impairment in value of our investment in this fund to be
other than temporary and, accordingly, we wrote it down by $750
to $1,750. Our assessment of the impairment in this investment
was based principally on investment data provided by the fund
managers, including reserve estimates provided by the fund. The
loss associated with this investment write-down is included in
other income (expense), net, in our statement of operations.

In March 2000, we invested $1,500 to maintain our
approximate 6% ownership interest in Open Solutions Inc.
(OSI). In April 1999, we had previously invested
$5,969 to purchase an approximate 6% interest in OSI. OSI is a
developer of client/server core data processing solutions for
community banks and credit unions. This investment is being
accounted for using the cost method.

At December 31, 2001, our remaining equity
investments include our $1,750 investment in the Azure Capital
Partners Venture Fund and our $7,469 investment in OSI.

Note 8  Credit Agreement

We have a Credit Agreement with a financial
institution that provides for a $15,000 revolving line of credit
through July 11, 2003. During 2001 and 2000, we had no
amounts outstanding under this revolving line of credit. The
agreement contains covenants that restrict our ability to pay
cash dividends and make loans, advances or investments without
the banks consent. As of December 31, 2001, we were
in compliance with all covenants under this agreement.
Borrowings under this agreement bear interest at the rate of
LIBOR plus 0.5%, payable monthly. The applicable interest rate
would have been 2.38% at December 31, 2001. Beginning in
2002, our maximum allowable borrowings under this facility will
be reduced by the outstanding balance of qualified employee home
equity loans made directly by the financial institution to our
employees and guaranteed by us, if any and at our discretion,
pursuant to an executive home equity loan guarantee program that
we have adopted. The maximum amount of employee home equity
loans that we may guarantee at one time is $4,000. Through
December 31, 2001, there were no employee loan guarantees
in place.

F-52



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 9  Operating Leases

At December 31, 2001 we are obligated
through 2007 under non-cancelable operating leases for our
facilities and equipment as follows:

|           |  |                |        |               |  |               |        |   |  |   |        | 
|---------- |  | -------------- | ------ | ------------- |  | ------------- | ------ | - |  | - | ------ | 
|           |  |                |        |               |  | Net Future   
|           |  | Future Minimum |        | Less Sublease |  | Minimum Lease
|           |  | Lease Payments |        | Income        |  | Payments     
|           |  |                |        |               |  |              
|2002       |  | $              | 8,126  |               |  | $             | (858   | ) |  | $ | 7,268  | 
|2003       |  |                | 5,525  |               |  |               | (777   | ) |  |   | 4,748  | 
|2004       |  |                | 2,809  |               |  |               | (65    | ) |  |   | 2,744  | 
|2005       |  |                | 2,259  |               |  |               |       |   |  |   | 2,259  | 
|2006       |  |                | 867    |               |  |               |       |   |  |   | 867    | 
|After 2006 |  |                | 470    |               |  |               |       |   |  |   | 470    | 
|           |  |                |        |               |  |               |        |   |  |   |        | 
|           |  | $              | 20,056 |               |  | $             | (1,700 | ) |  | $ | 18,356 | 
|           |  |                |        |               |  |               |        |   |  |   |        | 

Our corporate headquarters lease provides for
scheduled rent increases and an option to extend the lease for
five years with changes to the terms of the lease agreement and
a refurbishment allowance. Rent expense under operating leases
totaled $7,232, $8,520 and $6,172 during 2001, 2000 and 1999,
respectively, net of sublease income of $1,002, $555 and $1,286,
respectively.

Note 10  Convertible Subordinated
Notes

In August and September 2001, we issued $150,000
of 5.25% Convertible Subordinated Notes (the 2001
Notes) that mature on September 1, 2008. Interest on
the 2001 Notes is payable on March 1 and September 1
of each year, beginning March 1, 2002. The 2001 Notes are
convertible by the holders into shares of our common stock at
any time prior to maturity at a conversion price of $28.80 per
share (subject to certain adjustments), and are subordinated in
right of payment to all existing and future senior indebtedness,
as defined in the indenture governing the 2001 Notes. We may
redeem the 2001 Notes on or after September 5, 2004, or
earlier if the price of our common stock reaches certain levels.
If we redeem the 2001 Notes prior to September 1, 2007, we
will also be required to pay a redemption premium as prescribed
by the indenture. Net cash proceeds from the issuance of the
2001 Notes totaled $144,628 after deduction of related issuance
costs including commissions, which we have capitalized and are
amortizing to interest expense over the term of the 2001 Notes.

In March 1998, we completed an offering of
$100,000 of 4.75% Convertible Subordinated Notes (the 1998
Notes), due on March 1, 2003. The 1998 Notes were
originally convertible into our common stock at any time prior
to the close of business on the maturity date at a conversion
rate of 22.30 shares per $1,000 principal amount of the 1998
Notes (equivalent to a conversion price of $44.85 per share). We
also had the right to redeem the 1998 Notes, in whole or in
part, on or after March 6, 2001, at specified redemption
prices (plus accrued interest). This offering resulted in net
proceeds to us of $97,000 after the payment of
underwriters commissions but before the deduction of
offering expenses. During 2000, $83,643 of the 1998 Notes were
converted into HNC common stock at the original conversion rate.
In connection with these note conversions, we issued 1,872
shares of our common stock. Additionally, we paid $12,676 in
conversion premiums to the converting note holders, which we
recorded as a debt conversion charge. As of December 31,
2000, $16,357 of the 1998 Notes remained outstanding. In
connection with the spin-off of our Retek subsidiary, the
indenture governing the 1998 Notes required an adjustment to the
conversion price of the remaining outstanding 1998 Notes. This
conversion price was based upon a formula that calculated an
adjusted conversion rate using the relative per common share
values of HNC and Retek as of the date of the spin-off. As a
result of this adjustment, the remaining 1998 Notes became
convertible into our common stock

F-53



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

at a conversion rate of 100.20 shares per $1,000
principal amount of the 1998 Notes (equivalent to a conversion
price of $9.98 per share). In March 2001, all remaining
outstanding 1998 Notes were converted into 1,639 shares of our
common stock.

Cash amounts paid for interest related to both
the 2001 and 1998 Notes totaled $380, $4,750 and $4,750 during
2001, 2000 and 1999 respectively. The aggregate fair value of
the 2001 Notes at December 31, 2001 approximated their
carrying amount of $150,000, as determined based upon quoted
PORTAL market prices.

Note 11  Treasury, Common and
Preferred Stock

During 2000, we repurchased 250 shares of our
outstanding common stock for treasury at a cost of $18,616.
During 1999, we repurchased 2,266 shares of our outstanding
common stock for treasury at a cost of $50,383.

Our Board of Directors is authorized to issue up
to 4,000 shares of preferred stock and to determine the rights,
preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by
the stockholders. The rights of common stockholders will be
superceded by the rights of any preferred stock holders, if
preferred stock is issued in the future.

Note 12  Income Taxes

The income tax provision (benefit) is
summarized as follows:

|          |         |                         |        |        |   |      |         |         |   |   |     |        |  
|--------- | ------- | ----------------------- | ------ | ------ | - | ---- | ------- | ------- | - | - | --- | ------ | -
|          |         |                        
|          |         | Year Ended December 31,
|          |         |                        
|          |         | 2001                    |        | 2000   |   | 1999
|          |         |                         |        |        |   |     
|Current:  |         |                         |        |        |   |      |         |         |   |   |     |       
|          | Federal |                         | $      |       |   |      | $       |        |   |   | $   | 3,869  |  
|          | State   |                         |        | 643    |   |      |         | 196     |   |   |     | 1,042  |  
|          | Foreign |                         |        | 1,960  |   |      |         | 2,282   |   |   |     | 250    |  
|         
|Deferred: |         |                         |        |        |   |      |         |         |   |   |     |       
|          | Federal |                         |        | (5,165 | ) |      |         | (33,899 | ) |   |     | (3,958 | )
|          | State   |                         |        | (3,710 | ) |      |         | (1,681  | ) |   |     | (694   | )
|          | Foreign |                         |        |       |   |      |         |        |   |   |     | 27     |  
|          |         |                         |        |        |   |      |         |         |   |   |     |       
|          |         | $                       | (6,272 | )      |   | $    | (33,102 | )       |   | $ | 536 |       
|          |         |                         |        |        |   |      |         |         |   |   |     |       

Income before income tax provision
(benefit) was taxed under the following jurisdictions:

|         |  |                         |         |      |  |      |          |   |  |   |        |  
|-------- |  | ----------------------- | ------- | ---- |  | ---- | -------- | - |  | - | ------ | -
|         |  |                        
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2001                    |         | 2000 |  | 1999
|         |  |                         |         |      |  |     
|Domestic |  | $                       | (48,323 | )    |  | $    | (154,945 | ) |  | $ | (6,521 | )
|Foreign  |  |                         | 5,599   |      |  |      | 5,425    |   |  |   | 785    |  
|         |  |                         |         |      |  |      |          |   |  |   |        |  
|         |  | $                       | (42,724 | )    |  | $    | (149,520 | ) |  | $ | (5,736 | )
|         |  |                         |         |      |  |      |          |   |  |   |        |  

F-54



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of the income tax provision
(benefit) to the amount computed by applying the statutory
federal income tax rate to income before income tax provision
(benefit) is summarized as follows:

|                                                      |  |                         |         |      |  |      |         |   |  |   |        |  
|----------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                      |  |                        
|                                                      |  | Year Ended December 31,
|                                                      |  |                        
|                                                      |  | 2001                    |         | 2000 |  | 1999
|                                                      |  |                         |         |      |  |     
|Amounts computed at statutory federal rate            |  | $                       | (14,953 | )    |  | $    | (52,332 | ) |  | $ | (2,008 | )
|State income taxes, net of federal benefit            |  |                         | (1,904  | )    |  |      | (965    | ) |  |   | 226    |  
|Non-deductible debt conversion expense                |  |                         |        |      |  |      | 4,437   |   |  |   |       |  
|Non-deductible spin-off expense                       |  |                         |        |      |  |      | 4,820   |   |  |   |       |  
|Tax credit carryforwards generated                    |  |                         | (2,462  | )    |  |      | (1,005  | ) |  |   | (642   | )
|Non-deductible stock redemption compensation
	expense |  |                         |        |      |  |      |        |   |  |   | 543    |  
|Non-deductible acquired technology and
	amortization  |  |                         | 13,169  |      |  |      | 12,110  |   |  |   | 1,947  |  
|Minority interest in Retek                            |  |                         |        |      |  |      | (2,654  | ) |  |   | (253   | )
|Stock-based compensation                              |  |                         |        |      |  |      | 1,910   |   |  |   | 407    |  
|Other, net                                            |  |                         | (122    | )    |  |      | 577     |   |  |   | 316    |  
|                                                      |  |                         |         |      |  |      |         |   |  |   |        |  
|Income tax provision (benefit)                        |  | $                       | (6,272  | )    |  | $    | (33,102 | ) |  | $ | 536    |  
|                                                      |  |                         |         |      |  |      |         |   |  |   |        |  

During 2001, 2000 and 1999, we realized certain
tax benefits related to nonqualified and incentive stock options
in the amounts of $7,006, $36,392 and $16,993, respectively. The
tax benefits from these stock option tax deductions were
credited directly to paid-in capital.

Deferred tax assets (liabilities) are
summarized as follows:

|                                                         |                         |              |         |        |  |   |         |        | 
|-------------------------------------------------------- | ----------------------- | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                                                         |                         |             
|                                                         |                         | December 31,
|                                                         |                         |             
|                                                         |                         | 2001         |         | 2000  
|                                                         |                         |              |         |       
|Net operating loss carryforwards                         |                         | $            | 53,688  |        |  | $ | 54,953  |       
|Tax credit carryforwards                                 |                         |              | 11,194  |        |  |   | 5,713   |       
|Allowance for doubtful accounts                          |                         |              | 2,020   |        |  |   | 1,431   |       
|Deferred tax liabilities related to purchase
	accounting |                         |              | (11,410 | )      |  |   | (18,159 | )     
|Stock-based compensation                                 |                         |              |        |        |  |   | 741     |       
|Other                                                    |                         |              | 2,866   |        |  |   | 4,210   |       
|                                                         |                         |              |         |        |  |   |         |       
|                                                         | Subtotal                |              |         | 58,358 |  |   |         | 48,889 | 
|Deferred tax asset valuation allowance                   |                         |              | (1,318  | )      |  |   |        |       
|                                                         |                         |              |         |        |  |   |         |       
|                                                         | Net deferred tax assets |              | $       | 57,040 |  |   | $       | 48,889 | 
|                                                         |                         |              |         |        |  |   |         |       

During 2001, we established a valuation allowance
of $1,318 on certain of our deferred tax assets with an
offsetting entry to additional paid-in capital because of
uncertainty regarding their realization. The valuation allowance
is primarily due to the ordering rules on the use of foreign tax
credits that require net operating loss carryforwards, including
those generated from exercises of employee stock options, and
current year foreign tax credits to be utilized before foreign
tax credit carryforwards may be utilized. These ordering rules,
combined with the relatively short five-year carryforward period
for foreign tax credits, make it more likely than not that some
of our foreign tax credit carryforwards will not be utilized
before they expire. If utilized, the tax benefit of these
deferred assets will be recognized as a credit to
stockholders equity in the period of utilization. During
2001, we also recorded a $5,344 reduction to deferred tax assets
with an offsetting reduction to additional paid-in capital
resulting from the finalization of the allocation of certain
Retek tax attributes in connection with the filing of our
consolidated income tax return for calendar year 2000.

F-55



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 2001, we had gross federal
and state net operating loss carryforwards totaling $137,956 and
$94,042, respectively. The gross federal net operating loss
carryforwards include $9,542 that expires from 2005 to 2010. The
balance will expire from 2018 to 2021. The gross state net
operating loss carryforwards include $49,751 of gross California
net operating loss carryforwards that expire from 2002 to 2006.

At December 31, 2001, we also had $3,399 of
federal research credit carryforwards that expire from 2002 to
2021, $2,378 of state research credit carryforwards that have no
expiration dates, $5,113 of foreign tax credit carryforwards
that expire from 2002 to 2006, and federal and state alternative
minimum tax credits of $299 and $5, respectively, that have no
expiration dates. Some of the acquired net operating loss and
research credit carryforwards are subject to annual limitations.
Should a substantial change in our ownership occur, as defined
by the Tax Reform Act of 1986, there will be additional annual
limitations on our utilization of net operating loss and tax
credit carryforwards.

We paid $2,026, $484 and $6,312 of income taxes,
net of refunds received, during 2001, 2000, and 1999
respectively.

Note 13  Segment
Information

In April 2001, we announced and began to
implement a reorganization that involved realigning our internal
organization from a vertical market orientation to a horizontal
product platform. As a result, our reportable segments were
changed to reflect the new method in which management primarily
organizes and evaluates internal financial information to make
operating decisions and assess performance, based upon the
product suites of our Critical Action Technology Platform.
Segment information for the years ended December 31, 2000 and
1999 has been restated to conform to our current segment
presentation.

Our Critical Action Technology Platform consists
of our Efficiency, Risk and Opportunity Suites. Our Efficiency
Suite enables companies to make instant, automated decisions
regarding customer applications for loans, credit or services,
including the ability to identify and determine customer
creditworthiness. This allows companies to simultaneously reduce
costs and increase the speed of the customer acquisition
process. In addition, it allows companies to process large
quantities of applications and claims in real time through
multiple acquisition and delivery channels. Our Risk Suite
enables companies to analyze the risks associated with
acquiring, managing and retaining customers by analyzing
patterns in customer transactions, and includes analysis of
fraud, churn and bad debt. Our Opportunity Suite enables
companies to analyze the opportunities associated with
acquiring, managing and retaining customers by analyzing
patterns in customer transactions. The Opportunity Suite can
maximize customer profitability by providing cross-sell and
up-sell activities and focusing marketing efforts on more
profitable customers. Additionally, our Other
segment category includes our Advanced Technology Solutions
group, which primarily conducts research and development for the
United States Government and other internally funded projects,
as well as other miscellaneous products. Retek, which we
spun-off to stockholders effective September 29, 2000, is
also presented separately below.

We do not identify or allocate our assets by
operating segment. Accordingly, segment asset information is not
disclosed.

F-56



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Segment revenues and contribution margins for
2001, 2000 and 1999 are as follows:

|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                                                      |  |                         
|                                                                                      |  | Years Ended December 31,
|                                                                                      |  |                         
|                                                                                      |  | 2001                     |          | 2000 |  | 1999
|                                                                                      |  |                          |          |      |  |     
|Efficiency Suite                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Total revenues                                                                        |  |                          | 111,172  |      |  |      | 102,953  |   |  |   | 72,187  |  
|Direct segment operating expenses(1)                                                  |  |                          | (63,785  | )    |  |      | (64,842  | ) |  |   | (50,623 | )
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Segment contribution margin                                                           |  | $                        | 47,387   |      |  | $    | 38,111   |   |  | $ | 21,564  |  
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Risk Suite                                                                            |  |                          |          |      |  |      |          |   |  |   |         |  
|Total revenues                                                                        |  |                          | 87,888   |      |  |      | 68,426   |   |  |   | 55,773  |  
|Direct segment operating expenses(1)                                                  |  |                          | (22,371  | )    |  |      | (18,251  | ) |  |   | (15,047 | )
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Segment contribution margin                                                           |  | $                        | 65,517   |      |  | $    | 50,175   |   |  | $ | 40,726  |  
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Opportunity Suite                                                                     |  |                          |          |      |  |      |          |   |  |   |         |  
|Total revenues                                                                        |  |                          | 23,900   |      |  |      | 14,682   |   |  |   | 9,987   |  
|Direct segment operating expenses(1)                                                  |  |                          | (14,160  | )    |  |      | (12,062  | ) |  |   | (5,745  | )
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Segment contribution margin                                                           |  | $                        | 9,740    |      |  | $    | 2,620    |   |  | $ | 4,242   |  
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Other                                                                                 |  |                          |          |      |  |      |          |   |  |   |         |  
|Total revenues                                                                        |  |                          | 3,710    |      |  |      | 8,908    |   |  |   | 9,783   |  
|Direct segment operating expenses(1)                                                  |  |                          | (5,639   | )    |  |      | (7,671   | ) |  |   | (6,791  | )
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Segment contribution margin                                                           |  | $                        | (1,929   | )    |  | $    | 1,237    |   |  | $ | 2,992   |  
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Total segment contribution margin                                                     |  | $                        | 120,715  |      |  | $    | 92,143   |   |  | $ | 69,524  |  
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Reconciliation to operating loss:                                                     |  |                          |          |      |  |      |          |   |  |   |         |  
|Total segment margin                                                                  |  | $                        | 120,715  |      |  | $    | 92,143   |   |  | $ | 69,524  |  
|Indirect operating expenses(2)                                                        |  |                          | (101,077 | )    |  |      | (82,677  | ) |  |   | (51,367 | )
|Retek operating loss, excluding non-cash And
	non-recurring charges included below(3) |  |                          |         |      |  |      | (36,845  | ) |  |   | (2,318  | )
|Stock-based compensation expense                                                      |  |                          | (476     | )    |  |      | (21,670  | ) |  |   | (11,985 | )
|Expense related to spin-off of Retek                                                  |  |                          |         |      |  |      | (48,185  | ) |  |   |        |  
|Transaction-related amortization and costs                                            |  |                          | (56,556  | )    |  |      | (43,734  | ) |  |   | (9,158  | )
|In-process research and development                                                   |  |                          | (487     | )    |  |      | (7,601   | ) |  |   | (1,480  | )
|Restructuring and impairment charges                                                  |  |                          | (4,642   | )    |  |      | (1,172   | ) |  |   |        |  
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Total operating loss                                                                  |  | $                        | (42,523  | )    |  | $    | (149,741 | ) |  | $ | (6,784  | )
|Interest income                                                                       |  |                          | 9,137    |      |  |      | 12,924   |   |  |   | 6,299   |  
|Interest expense                                                                      |  |                          | (3,167   | )    |  |      | (4,231   | ) |  |   | (5,747  | )
|Expense related to debt conversion                                                    |  |                          |         |      |  |      | (12,676  | ) |  |   |        |  
|Other expense, net                                                                    |  |                          | (6,171   | )    |  |      | (3,378   | ) |  |   | (226    | )
|Minority interest in losses of consolidated
	subsidiaries                             |  |                          |         |      |  |      | 7,582    |   |  |   | 722     |  
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  
|Loss before income taxes                                                              |  | $                        | (42,724  | )    |  | $    | (149,520 | ) |  | $ | (5,736  | )
|                                                                                      |  |                          |          |      |  |      |          |   |  |   |         |  

F-57



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



---



|    |                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Direct segment operating expenses include direct
	costs such as direct labor costs related to product research and
	development, sales, and marketing activities, direct support and
	installation costs, and other product-specific costs of sales.
	Direct costs reflect only direct controllable expenses
	associated with each segments line of business.
|   
|(2) | Indirect operating expenses consist of costs not
	directly attributable to a segment, such as general and
	administrative expenses, corporate marketing expenses,
	depreciation and amortization, facilities expenses, information
	technology overhead costs, and other indirect, non-product
	specific costs.                                               
|   
|(3) | Includes Retek revenues of $0, $59,915 and
	$69,159 for the years ended December 31, 2001, 2000 and
	1999, respectively.                                                                                                                                                                                                                                      

During 2001, 2000 and 1999, one product in the
Risk Suite segment accounted for 24.9%, 16.8% and 15.4% of our
total revenues, respectively. During those same periods,
revenues from licenses and services related to one product in
the Efficiency Suite segment accounted for 21.9%, 23.5% and
20.9% of our total revenues, respectively. During 1999, one
product in the Retek segment accounted for 10.1% of our total
revenues.

Revenue and long-lived assets by geographical
area are summarized as follows:

|                              |               |                         |   |         |         |      |   |         |         |  |   |         |         | 
|----------------------------- | ------------- | ----------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                              |               |                        
|                              |               | Year Ended December 31,
|                              |               |                        
|                              |               | 2001                    |   | 2000    |         | 1999
|                              |               |                         |   |         |         |     
|Revenue by geographical area: |               |                         |   |         |         |      |   |         |         |  |   |        
|                              | United States |                         | $ | 185,714 |         |      | $ | 205,361 |         |  | $ | 166,505 |        
|                              | Foreign       |                         |   | 40,956  |         |      |   | 49,523  |         |  |   | 50,384  |        
|                              |               |                         |   |         |         |      |   |         |         |  |   |        
|                              |               | Total revenue           |   | $       | 226,670 |      |   | $       | 254,884 |  |   | $       | 216,889 | 
|                              |               |                         |   |         |         |      |   |         |         |  |   |        

|                                        |               |                         |   |         |         |  |   |         |         | 
|--------------------------------------- | ------------- | ----------------------- | - | ------- | ------- |  | - | ------- | ------- | 
|                                        |               |                        
|                                        |               | December 31,           
|                                        |               |                        
|                                        |               | 2001                    |   | 2000   
|                                        |               |                         |   |        
|Long-lived assets by geographical area: |               |                         |   |         |         |  |   |        
|                                        | United States |                         | $ | 146,177 |         |  | $ | 168,963 |        
|                                        | Foreign       |                         |   | 2,240   |         |  |   | 159     |        
|                                        |               |                         |   |         |         |  |   |        
|                                        |               | Total long-lived assets |   | $       | 148,417 |  |   | $       | 169,122 | 
|                                        |               |                         |   |         |         |  |   |        

Our foreign revenues are derived from export
sales out of the Unites States as well as sales generated
directly by our foreign offices. Our total foreign revenues,
derived primarily from Western Europe, Japan and Canada,
represented 18.1%, 19.4% and 23.2% of total revenues in 2001,
2000 and 1999, respectively.

Note 14  Stock Compensation
Plans

We apply the intrinsic value method of accounting
for our stock-based compensation. Had compensation cost for our
stock-based compensation awards been determined based on the
fair value at the grant dates of

F-58



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

awards, our net loss and basic and diluted pro
forma net loss per common share would have increased to the pro
forma amounts indicated below:

|                                             |             |                         |   |         |   |      |   |          |   |  |   |         |  
|-------------------------------------------- | ----------- | ----------------------- | - | ------- | - | ---- | - | -------- | - |  | - | ------- | -
|                                             |             |                        
|                                             |             | Year Ended December 31,
|                                             |             |                        
|                                             |             | 2001                    |   | 2000    |   | 1999
|                                             |             |                         |   |         |   |     
|Net loss:                                    |             |                         |   |         |   |      |   |          |   |  |   |        
|                                             | As reported |                         | $ | (36,452 | ) |      | $ | (116,418 | ) |  | $ | (6,272  | )
|                                             | Pro forma   |                         | $ | (79,938 | ) |      | $ | (230,171 | ) |  | $ | (43,583 | )
|Basic and diluted net loss per common share: |             |                         |   |         |   |      |   |          |   |  |   |        
|                                             | As reported |                         | $ | (1.06   | ) |      | $ | (4.08    | ) |  | $ | (0.25   | )
|                                             | Pro forma   |                         | $ | (2.32   | ) |      | $ | (8.07    | ) |  | $ | (1.75   | )

HNC Software
Inc. Sponsored Plans

We administer several employee benefit plans,
both active and inactive. Our active plans include our 1995
Equity Incentive Plan, our 1995 Directors Stock Option Plan, our
1995 Employee Stock Purchase Plan, our 1998 Stock Option Plan,
and our 2001 Equity Incentive Plan. Our inactive plans include
our original 1987 Stock Option Plan and various plans that we
acquired in conjunction with our acquisitions. These assumed
plans were amended to convert their respective options into HNC
options as of the respective acquisition or merger dates. While
subsequent to the assumption of these plans the acquired
employees participated in our own stock option plans and are
subject to our plans terms and conditions, options issued
prior to the acquisition or merger dates are subject to their
respective plan terms and conditions. Our inactive plans are not
discussed herein. For purposes of the discussion regarding our
active plans below, fair market value means the
closing price of our common stock on the NASDAQ National Market
on the grant date.

Our 1995 Directors Stock Option Plan
(Directors Plan), as amended, provides for the
issuance of up to 600 nonqualified stock options to our outside
directors. Under the provisions of the Directors Plan,
nonqualified options to purchase a minimum of 16 and a maximum
of 40 shares of our common stock are granted to outside
directors upon their respective dates of becoming members of the
Board of Directors, and nonqualified options to purchase 16
shares of our stock will be granted on each anniversary date.
Options under the Directors Plan are to be granted at the fair
market value of the stock at the grant date and vest at specific
times over a four-year period. As of December 31, 2001, 187
shares remained available for future grant under this plan.

Our 1995 Equity Incentive Plan (Incentive
Plan) as amended, provides for the issuance of up to 9,338
shares of our common stock in the form of nonqualified or
incentive stock options, restricted stock or stock bonuses.
Nonqualified stock options and restricted stock may be awarded
at a price not less than 85% of the fair market value of the
stock at the date of the award. Incentive stock options must be
awarded at a price not less than 100% of the fair market value
of the stock at the date of the award. Options granted under the
Incentive Plan may have a term of up to ten years. We have the
discretion to provide for restrictions, and the lapse of
restrictions, in respect of restricted stock awards. Prior to
August 1, 2001, options typically vested at the rate of 25%
of the total grant per year over a four-year period; however,
beginning August 1, 2001, options granted typically vest at
the rate of 25% of the total grant after the first year and
thereafter on a monthly ratable basis over three years. We may,
at our discretion, implement a different vesting schedule with
respect to any new stock option grant. At December 31,
2001, 504 shares remained available for future grant under this
plan.

Our 1998 Stock Option Plan (1998
Plan), as amended, provides for the issuance of up to
2,980 shares of our common stock in the form of nonqualified
stock options to our employees, officers, consultants and
independent advisors. Options granted under the 1998 Plan may
have a term of up to ten years and through August 1, 2001
typically vested at the rate of 25% of the total grant per year
over a four-year period. Beginning

F-59



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

August 1, 2001 options granted under this
plan typically vest at the rate of 25% of the total grant after
the first year and thereafter on a monthly ratable basis over
three years; however, we may, at our discretion, implement a
different vesting schedule with respect to any new stock option
grant. At December 31, 2001, 825 shares remained available
for future grant under this plan.

Our 2001 Equity Incentive Plan (2001
Plan) provides for the issuance of up to 1,400 shares of
our common stock in the form of nonqualified or incentive stock
options, restricted stock or stock bonuses. All options granted
must be awarded at a price not less than 100% of the fair market
value of the stock at the date of the award. Options granted
under the Incentive Plan may have a term of up to ten years. We
have the discretion to provide for restrictions, and the lapse
of restrictions, in respect of restricted stock awards. Options
typically vest at the rate of 25% of the total grant after the
first year and thereafter on a monthly ratable basis over three
years; however, we may, at our discretion, implement a different
vesting schedule with respect to any new stock option grant. At
December 31, 2001, 829 shares remained available for future
grant under this plan.

Our 1995 Employee Stock Purchase Plan
(Stock Purchase Plan), as amended, provides for the
issuance of a maximum of 1,527 shares of common stock. Each
purchase period, eligible employees may designate between 2% and
10% of their cash compensation, up to legally permitted amounts,
to be deducted from their compensation for the purchase of
common stock under the Stock Purchase Plan. The purchase price
of the shares under the Stock Purchase Plan is equal to 85% of
the lesser of the fair market value per share on the first day
of the twelve-month offering period or the last day of each
six-month purchase period. During 2001, 2000 and 1999, 459, 106
and 115 shares of our common stock were issued under the Stock
Purchase Plan at an average price of $8.19, $29.55 and $24.46
per share, respectively. As of December 31, 2001, 280
shares were reserved for future issuance under the Stock
Purchase Plan.

Option transactions under HNCs plans during
the three years ended December 31, 2001 are summarized as
follows:

|                                     |                           |        |       |          |   |  |       |       | 
|------------------------------------ | ------------------------- | ------ | ----- | -------- | - |  | ----- | ----- | 
|                                     |                           |        |       | Weighted
|                                     |                           |        |       | Average 
|                                     |                           |        |       | Exercise
|                                     |                           | Shares |       | Price   
|                                     |                           |        |       |         
|Outstanding at December 31, 1998     |                           |        | 6,474 |          |   |  | 29.84 |      
|                                     | Options granted           |        |       | 3,845    |   |  |       | 33.67 | 
|                                     | Options exercised         |        |       | (1,916   | ) |  |       | 24.68 | 
|                                     | Options canceled          |        |       | (2,368   | ) |  |       | 32.11 | 
|                                     |                           |        |       |          |   |  |       |      
|Outstanding at December 31, 1999     |                           |        | 6,035 |          |   |  | 33.03 |      
|                                     | Options granted/exchanged |        |       | 3,747    |   |  |       | 69.84 | 
|                                     | Options exercised         |        |       | (3,227   | ) |  |       | 29.76 | 
|                                     | Options canceled          |        |       | (1,249   | ) |  |       | 47.57 | 
|                                     |                           |        |       |          |   |  |       |      
|Outstanding at September 29, 2000(a) |                           |        | 5,306 |          |   |  | 57.60 |      
|                                     | Options granted           |        |       | 1,559    |   |  |       | 17.46 | 
|                                     | Options exercised         |        |       | (98      | ) |  |       | 12.44 | 
|                                     | Options canceled          |        |       | (848     | ) |  |       | 10.92 | 
|                                     |                           |        |       |          |   |  |       |      

F-60



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                 |                   |        |       |          |   |  |       |       | 
|-------------------------------- | ----------------- | ------ | ----- | -------- | - |  | ----- | ----- | 
|                                 |                   |        |       | Weighted
|                                 |                   |        |       | Average 
|                                 |                   |        |       | Exercise
|                                 |                   | Shares |       | Price   
|                                 |                   |        |       |         
|Outstanding at December 31, 2000 |                   |        | 5,919 |          |   |  | 12.88 |      
|                                 | Options granted   |        |       | 2,791    |   |  |       | 22.79 | 
|                                 | Options exercised |        |       | (1,050   | ) |  |       | 10.86 | 
|                                 | Options canceled  |        |       | (1,200   | ) |  |       | 15.50 | 
|                                 |                   |        |       |          |   |  |       |      
|Outstanding at December 31, 2001 |                   |        | 6,460 |          |   |  | 17.00 |      
|                                 |                   |        |       |          |   |  |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | On September 29, 2000, in connection with
	the spin-off of Retek, we adjusted the exercise price of all
	outstanding stock options in accordance with the distribution
	ratio discussed in Note 2. The weighted average exercise
	price of options outstanding at September 29, 2000 after
	consummation of the spin-off was $11.21.

The fair value of each option grant under our HNC
plans was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average
assumptions for grants during 2001, 2000 and 1999, respectively:
dividend yield of 0.0% for all three years; risk-free interest
rates of 4.36%, 6.21% and 5.47%; expected volatilities of 100%
for all three years; and expected lives of 4.4, 4.1 and
4.1 years. The weighted average fair value of options
granted under HNC plans during 2001, 2000 and 1999 was $16.54,
$37.61 and $23.15, respectively. The fair value of the
employees purchase rights issued pursuant to the Stock
Purchase Plan were estimated using the Black-Scholes option
pricing model with the following weighted average assumptions
during 2001, 2000 and 1999, respectively: dividend yield of 0.0%
for all three years; risk-free interest rates of 3.29%, 6.18%
and 4.98%; expected volatilities of 100% for all three years;
and an expected life of 6 months for all three years. The
weighted average fair value of those purchase rights granted in
2001, 2000 and 1999 was $11.91, $7.29 and $16.66, respectively.

Employee stock options exercisable under
HNCs plans at December 31, 2001, 2000 and 1999 were
1,298, 900, and 986, respectively. The following table
summarizes information about employee stock options outstanding
at December 31, 2001 under HNCs plans:

|                |                  |                     |  |                     |       |          |  |                |      |          |  |   |       |  |  |  |       |  |  |   |       | 
|--------------- | ---------------- | ------------------- |  | ------------------- | ----- | -------- |  | -------------- | ---- | -------- |  | - | ----- |  |  |  | ----- |  |  | - | ----- | 
|                |                  |                     |  |                    
|                |                  | Options Outstanding |  | Options Exercisable
|                |                  |                     |  |                    
|                |                  |                     |  | Weighted            |       |          |  |               
|                |                  | Number              |  | Average             |       | Weighted |  | Number         |      | Weighted
|                |                  | Outstanding At      |  | Remaining           |       | Average  |  | Exercisable At |      | Average 
|Range of        |                  | December 31,        |  | Contractual         |       | Exercise |  | December 31,   |      | Exercise
|Exercise Prices |                  | 2001                |  | Life (In Years)     |       | Price    |  | 2001           |      | Price   
|                |                  |                     |  |                     |       |          |  |                |      |         
|                | $ 0.03 to $ 7.25 |                     |  |                     | 838   |          |  |                | 6.56 |          |  | $ | 5.88  |  |  |  | 303   |  |  | $ | 6.03  | 
|                | 7.26      11.14  |                     |  |                     | 857   |          |  |                | 5.63 |          |  |   | 9.08  |  |  |  | 260   |  |  |   | 9.01  | 
|                | 11.15      16.25 |                     |  |                     | 875   |          |  |                | 5.91 |          |  |   | 14.81 |  |  |  | 244   |  |  |   | 14.96 | 
|                | 16.26      18.10 |                     |  |                     | 1,087 |          |  |                | 5.87 |          |  |   | 17.25 |  |  |  | 171   |  |  |   | 17.64 | 
|                | 18.11      20.80 |                     |  |                     | 859   |          |  |                | 5.96 |          |  |   | 19.40 |  |  |  | 155   |  |  |   | 19.46 | 
|                | 20.81      23.31 |                     |  |                     | 914   |          |  |                | 6.17 |          |  |   | 22.63 |  |  |  | 135   |  |  |   | 22.87 | 
|                | 23.32      29.75 |                     |  |                     | 822   |          |  |                | 6.36 |          |  |   | 26.27 |  |  |  | 30    |  |  |   | 25.26 | 
|                | 29.81      33.50 |                     |  |                     | 208   |          |  |                | 6.18 |          |  |   | 30.99 |  |  |  | 0     |  |  |   | 0     | 
|                |                  |                     |  |                     |       |          |  |                |      |          |  |   |       |  |  |  |       |  |  |   |       | 
|                | 0.03      33.50  |                     |  |                     | 6,460 |          |  |                | 6.06 |          |  |   | 17.00 |  |  |  | 1,298 |  |  |   | 13.64 | 
|                |                  |                     |  |                     |       |          |  |                |      |          |  |   |       |  |  |  |       |  |  |   |       | 

Retek Inc.
Sponsored Plans

During 1999, Retek adopted the 1999 Equity
Incentive Plan, the 1999 Director Stock Option Plan and the
Employee Stock Option Exchange Program, under which options to
purchase common stock in our former

F-61



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

subsidiary Retek had been granted. During 1999,
Retek also adopted the 1999 Employee Stock Purchase Plan, which
provides for the issuance of Reteks common stock to
eligible employee participants at a purchase price equal to 85%
of the lesser of the fair market value per share on the first
day of the two-year offering period and the date of purchase. As
a result of our September 2000 spin-off of Retek, HNC is no
longer affiliated with any Retek stock compensation plans.

During the period from January 1, 2000
through the Retek spin-off date of September 29, 2000, 464
shares of Retek common stock were issued under Reteks
employee stock purchase plan at an average price of $12.75 per
share. No shares were issued under this plan during 1999. Option
activity under Reteks option plans during 1999 and during
the period from January 1, 2000 through the spin-off date,
is summarized as follows:

|                                     |                  |        |       |          |   |  |       |       | 
|------------------------------------ | ---------------- | ------ | ----- | -------- | - |  | ----- | ----- | 
|                                     |                  |        |       | Weighted
|                                     |                  |        |       | Average 
|                                     |                  |        |       | Exercise
|                                     |                  | Shares |       | Price   
|                                     |                  |        |       |         
|Outstanding at December 31, 1998     |                  |        |      |          |   |  |      |      
|                                     | Options granted  |        |       | 7,416    |   |  |       | 10.38 | 
|                                     | Options canceled |        |       | (5       | ) |  |       | 10.00 | 
|                                     |                  |        |       |          |   |  |       |      
|Outstanding at December 31, 1999     |                  |        | 7,411 |          |   |  | 10.38 |      
|                                     | Options granted  |        |       | 1,496    |   |  |       | 27.82 | 
|                                     | Options canceled |        |       | (247     | ) |  |       | 19.93 | 
|                                     |                  |        |       |          |   |  |       |      
|Outstanding at September 29, 2000(a) |                  |        | 8,660 |          |   |  | 13.06 |      
|                                     |                  |        |       |          |   |  |       |      



---



|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As a result of the Retek spin-off, HNC has no
	further affiliation with Reteks plans or underlying
	options, including those outstanding as of the
	September 29, 2000 spin-off date.

The fair value of each option granted under
Reteks plans was estimated on the date of grant using the
Black-Scholes option pricing model and the following weighted
average assumptions used for grants during the period from
January 1, 2000 through the September 29, 2000
spin-off date and during 1999, respectively: dividend yield of
0.0% for both years; risk-free interest rates of 5.12% and
5.47%; expected volatility of 130% and 100%; and expected lives
of 4.4 and 4.1 years. The weighted average fair value of
options granted under Retek plans during the period from
January 1, 2000 through September 29, 2000, and during
1999, was $24.49 and $7.62, respectively. The fair value of the
employees purchase rights issued pursuant to Reteks
stock purchase plan in 2000 were estimated using the
Black-Scholes option pricing model with the following weighted
average assumptions: dividend yield of 0.0%; risk-free interest
rate of 5.50%; expected volatility of 130%; and an expected life
of 6 months. The weighted average fair value of those purchase
rights granted was $8.33.

Stock-Based
Compensation

During 2001, we recorded net stock-based
compensation expense totaling $0.5 million, consisting of
$0.2 million in amortization of unearned stock-based
compensation and $0.3 million in one-time intrinsic value
charges associated with option award modifications made during
the year.

During 2000, we recorded net stock-based
compensation expense totaling $21,670, consisting of $13,762 in
stock-based compensation charges attributable to our Retek
spin-off, which are discussed separately below, and $7,908 in
additional net compensation expense. This additional net
compensation expense relates primarily to the amortization of
unearned stock-based compensation of $8,772 (of which $8,266
related to Retek) and also includes additional net compensation
income of $864, primarily related to the reversal of

F-62



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

compensation expense recorded in 1999 on variable
awards, as a result of a decline in the fair values of these
awards during 2000.

During 1999, Retek granted stock options to
employees and directors to purchase Retek common stock at an
exercise price of $10.00 per share when the deemed fair
market value of Reteks common stock was $13.00 per
share. As a result, Retek recorded unearned stock-based
compensation totaling $21,886 representing the aggregate
intrinsic value of the options on the date of grant.
Additionally, during 2000, Retek recorded additional unearned
stock-based compensation totaling $1,750 related to an
employee option grant having an exercise price below the fair
value of Reteks common stock on the date of grant.
Amortization of Reteks unearned stock-based compensation
totaled $1,908 during 1999 and $8,266 during the
period from January 1, 2000 through the Retek spin-off date
of September 29, 2000. Reteks unearned stock-based
compensation balance of $13,255 at September 29, 2000,
net of forfeiture reductions, was removed from our consolidated
equity accounts in connection with the Retek spin-off.

During 1999, in addition to Reteks
amortization of unearned stock-based compensation as described
above, we recorded stock-based compensation expense totaling
$10,077. This compensation expense relates primarily to stock
awards granted to former employees and non-employee consultants,
of which $7,972 was calculated at intrinsic value while the
remainder related to variable awards measured at fair value. The
intrinsic value charge consisted primarily of a one-time charge
of $6,064 related to a key employee severance agreement
executed in the fourth quarter of 1999.

The fair values of HNCs variable awards
during 2000 and 1999 were estimated using the Black-Scholes
option pricing model with the following weighted average
assumptions: dividend yield of 0.0% for both years;
risk-free interest rate of 5.02% and 5.23% in 2000 and 1999,
respectively; volatility of 100% for both years; and expected
lives from four months to one year according to the vesting date
and subsequent exercise period of each option grant, and our
stock prices on the various grant dates as well as on
December 31, 2000 and 1999.

In August 2000, we accelerated the vesting of
25 percent of the outstanding stock options that would have
been unvested as of the September 15, 2000 record date to
afford our option holders the opportunity to participate in
receipt of the Retek share dividend. As a result of this award
modification, we recorded a non-cash stock-based compensation
charge of $6,688 during the third quarter of 2000 in
accordance with Financial Accounting Standards Board
Interpretation No. 44 (FIN 44).
Additionally, as a result of the proportionate option repricing
in connection with the Retek spin-off, certain options failed to
qualify for fixed accounting treatment under FIN 44. As a
result, we recorded a one-time charge to operations of
$7,074 related to the modification and cash repurchase of
options in connection with the Retek spin-off.

Note 15  Contingencies

Various claims arising in the course of business,
seeking monetary damages and other relief, are pending. We
believe that these claims will not result in a material negative
impact on our results of operations, liquidity or financial
condition. However, the amount of the liability associated with
these claims, if any, cannot be determined with certainty.

Note 16  Subsequent
Events

In January 2002, we acquired the Virdix software
product line from Trajecta, Inc., a wholly owned subsidiary of
Pavilion Technologies Inc., for a cash purchase price of $6,000
plus additional cash consideration if certain financial
performance criteria are met with respect to this product during
the twelve-month period following the acquisition. Virdix is an
integrated analytics framework for data visualization and
optimization modeling that enables businesses to develop the
most optimal actions to take to maximize lifetime customer value.

F-63



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On February 26, 2002, our Board of Directors
adopted a stockholder rights plan designed to protect the
long-term value of HNC for its stockholders during any future
unsolicited acquisition attempt. Under the rights plan, the
Board declared a dividend of one preferred share purchase right
for each share of the Companys common stock outstanding on
March 21, 2002 and further directed the issuance of one
such right with respect to each share of our common stock that
is issued after that date, except in certain circumstances.

In March 2002, we executed an asset purchase
agreement with ieWild, Inc. (ieWild) pursuant to
which we purchased all of ieWilds right, title and
interest associated with its ieTargetsoftware product
and all related documentation and intellectual property rights
for a cash purchase price of $1,000. ieTargetis a
software platform that enables businesses to allocate large
volumes of consumer financial products, as well as consumer
merchandise, to retail consumers for the purpose of executing
cross sell campaigns through telemarketing or direct mail. The
asset purchase agreement was executed concurrent with the
execution of a settlement agreement whereby the Company and
ieWild agreed to fully dismiss and release all claims against
each other pertaining to previously filed lawsuits. In May 2001,
we had filed a lawsuit against ieWild for, among other things,
trade secret misappropriation and inducing breach of contract
based on allegations that certain of our former employees have
provided ieWild with certain of our intellectual property, and
in June 2001 ieWild had filed a cross-complaint against us
seeking attorneys fees and alleging that our action was
brought in bad faith.

Note 17  Quarterly Financial
Information (Unaudited)

Summarized quarterly financial information for
2001 and 2000 is as follows:

|                                        |  |                                 |         |         |  |         |         |         |  |       |         |   |  |   |         |   |  |   |         |  
|--------------------------------------- |  | ------------------------------- | ------- | ------- |  | ------- | ------- | ------- |  | ----- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                        |  |                                
|                                        |  | Year Ended December 31, 2001(1)
|                                        |  |                                
|                                        |  | First                           |         | Second  |  | Third   |         | Fourth  |  | Total
|                                        |  | Quarter                         |         | Quarter |  | Quarter |         | Quarter |  | Year 
|                                        |  |                                 |         |         |  |         |         |         |  |      
|                                        |  |                                
|                                        |  | (In Thousands)                 
|Revenues                                |  | $                               | 53,970  |         |  | $       | 59,022  |         |  | $     | 59,127  |   |  | $ | 54,551  |   |  | $ | 226,670 |  
|Gross Profit                            |  |                                 | 32,226  |         |  |         | 36,789  |         |  |       | 37,724  |   |  |   | 32,739  |   |  |   | 139,478 |  
|Operating loss                          |  |                                 | (10,186 | )       |  |         | (10,221 | )       |  |       | (10,015 | ) |  |   | (12,101 | ) |  |   | (42,523 | )
|Net loss                                |  |                                 | (15,938 | )       |  |         | (6,008  | )       |  |       | (6,488  | ) |  |   | (8,018  | ) |  |   | (36,452 | )
|Basic and diluted net loss per share(a) |  | $                               | (0.48   | )       |  | $       | (0.17   | )       |  | $     | (0.18   | ) |  | $ | (0.23   | ) |  | $ | (1.06   | )

|                                        |  |                                    |         |         |  |         |         |         |  |       |         |   |  |   |         |   |  |   |          |  
|--------------------------------------- |  | ---------------------------------- | ------- | ------- |  | ------- | ------- | ------- |  | ----- | ------- | - |  | - | ------- | - |  | - | -------- | -
|                                        |  |                                   
|                                        |  | Year Ended December 31, 2000(2)(3)
|                                        |  |                                   
|                                        |  | First                              |         | Second  |  | Third   |         | Fourth  |  | Total
|                                        |  | Quarter                            |         | Quarter |  | Quarter |         | Quarter |  | Year 
|                                        |  |                                    |         |         |  |         |         |         |  |      
|                                        |  |                                   
|                                        |  | (In Thousands)                    
|Revenues                                |  | $                                  | 54,564  |         |  | $       | 67,432  |         |  | $     | 77,812  |   |  | $ | 55,076  |   |  | $ | 254,884  |  
|Gross Profit                            |  |                                    | 26,896  |         |  |         | 35,349  |         |  |       | 43,543  |   |  |   | 33,609  |   |  |   | 139,397  |  
|Operating loss                          |  |                                    | (20,992 | )       |  |         | (30,462 | )       |  |       | (85,363 | ) |  |   | (12,924 | ) |  |   | (149,741 | )
|Net loss                                |  |                                    | (12,215 | )       |  |         | (20,145 | )       |  |       | (78,519 | ) |  |   | (5,539  | ) |  |   | (116,418 | )
|Basic and diluted net loss per share(a) |  | $                                  | (0.47   | )       |  | $       | (0.75   | )       |  | $     | (2.71   | ) |  | $ | (0.17   | ) |  | $ | (4.08    | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Results of operations in 2001 include: i) a
	$0.5 million charge related to the write-off of in-process
	research and development in the third quarter; ii) a
	$4.9 million charge related to the write-down of our
	investments in Azure Capital Partners L.P, Keylime Software,
	Qpass, Inc., and Burning Glass Technologies in the third
	quarter; iii) a $3.0 million restructuring charge in
	connection with a corporate reorganization in the second
	quarter; and iv) a $1.7 million impairment charge
	associated with leased facilities in the third quarter.

F-64



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Results of operations in 2000 include: i) charges
	of $1.4 million, $5.0 million and $1.2 million
	related to the write-off of in-process research and development
	in the first, second and third quarters, respectively; ii)
	$12.7 million in non-recurring debt conversion expense and
	$48.2 million in non-recurring Retek spin-off charges in
	the third quarter; and iii) a $2.8 million charge relating
	to the write-down of our investment in Network Commerce and a
	$1.2 million impairment charge related to the abandonment
	of a lease and associated property and equipment in the fourth
	quarter.
|   
|(3) | Results of operations in 2000 exclude
	Reteks results of operations in the fourth quarter, as a
	result of our spin-off of Retek on September 29, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(4) | Net loss per share is computed independently for
	each of the quarters presented. Therefore, the sum of the
	quarterly net loss amounts per share do not equal the total for
	the year.                                                                                                                                                                                                                                                                                                                                                                                                                             

F-65



---



##### Table of Contents



HNC SOFTWARE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






EXHIBIT LIST

|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 2.01 |             |  | Agreement and Plan of Reorganization dated as of
	March 9, 2000 among the Registrant, ONYX Technologies, Inc.
	and FW2 Acquisition Corp. Pursuant to Item 601(b)(2)
	of Regulation S-K, certain schedules have been omitted but
	will be furnished supplementally to the Commission upon request.
	(Incorporated by reference to Exhibit 2.01 to
	Registrants Form 8-K filed March 27, 2000.)                             
|        | 2.02 |             |  | Agreement and Plan of Merger among Retek Inc.,
	HT Acquisition, Inc., HighTouch Technologies, Inc. and
	Kipling Investments Labvan Limited dated as of April 17,
	2000. Pursuant to Item 601(b)(2) of Regulation S-K,
	certain schedules have been omitted but will be furnished
	supplementally to the Commission upon request. (Incorporated by
	reference to Exhibit 2.01 to Registrants
	Form 8-K filed May 25, 2000.)
|        | 2.03 | **          |  | Agreement and Plan of Reorganization dated as of
	September 7, 2000 among Registrant, Systems/ Link Corporation
	and SLC Merger Corp. Pursuant to Item 601(b)(2) of
	Regulation S-K, certain exhibits and schedules have been
	omitted but will be furnished supplementally to the Commission
	upon request. (Incorporated by reference to Exhibit 2.01 to
	Registrants Form 8-K, as amended, filed
	September 22, 2000.) 
|        | 2.04 |             |  | Asset Purchase Agreement dated as of
	August 15, 2001 between the Registrant and Brokat
	Technologies, Inc. Pursuant to Item 601(b)(2) of
	Regulation S-K, certain exhibits and schedules have been
	omitted but will be furnished supplementally to the Commission
	upon request. (Incorporated by reference to Exhibit 2.01 to
	Registrants Form 8-K filed August 30, 2001.)                                            
|        | 3.01 |             |  | Registrants Restated Certificate of
	Incorporation filed with the Secretary of State of Delaware on
	June 13, 1996. (Incorporated by reference to
	Exhibit 3(i).04 to Registrants Form 10-Q for the
	quarter ended June 30, 1996.)                                                                                                                                                                                       
|        | 3.02 |             |  | Certificate of Amendment to Registrants
	Restated Certificate of Incorporation filed with the Secretary
	of State of Delaware on June 12, 2000. (Incorporated by
	reference to Exhibit 4.08 to Registrants
	Form S-8 Registration Statement, File No. 333-40344,
	filed June 28, 2000.)                                                                                                                                  
|        | 3.03 |             |  | Certificate of Designations specifying the terms
	of the Series A Junior Participating Preferred Stock.
	(Incorporated by reference to Exhibit 3.03 to
	Registrants Registration Statement on Form 8-A filed
	March 7, 2002.)                                                                                                                                                                                             
|        | 3.04 |             |  | Registrants Bylaws, as amended through
	December 6, 2001. (Incorporated by reference to
	Exhibit 4.03 to Registrants Form S-3
	Registration Statement, File No. 333-72804, as amended
	February 5, 2002.)                                                                                                                                                                                                                
|        | 4.01 | *           |  | Form of Specimen Certificate for
	Registrants Common Stock.                                                                                                                                                                                                                                                                                                                                                               
|        | 4.02 |             |  | Indenture, dated as of August 24, 2001,
	between Registrant and State Street Bank and Trust Company of
	California, N.A., as Trustee. (Incorporated by reference to
	Exhibit 4.04 to Registrants Form S-3
	Registration Statement, File No. 333-72804, filed
	November 6, 2001.)                                                                                                                                          
|        | 4.03 |             |  | Registration Rights Agreement, dated as of
	August 24, 2001, between Registrant and Credit Suisse First
	Boston Corporation, Goldman, Sachs & Co. and U.S. Bancorp
	Piper Jaffray Inc. (Incorporated by reference to
	Exhibit 4.05 to Registrants Form S-3
	Registration Statement, File No. 333-72804, filed
	November 6, 2001.)                                                                                         
|        | 4.04 |             |  | Form of Note for Registrants 5.25%
	Convertible Subordinated Note due September 1, 2008.
	(Included in Exhibit 4.02.)                                                                                                                                                                                                                                                                                                     
|        | 4.05 |             |  | Rights Agreement dated as of March 6, 2002,
	between Registrant and EquiServe Trust Company, N.A., as Rights
	Agent. (Incorporated by reference to Exhibit 4.01 to
	Registrants Registration Statement on Form 8-A filed
	March 7, 2002.)                                                                                                                                                                                 

F-66



---



##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                       
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 4.06  |             |  | Form of Right Certificate. (Included in
	Exhibit 4.05.)                                                                                                                                                                                                                               
|        | 10.01 |             |  | Registrants 1987 Stock Option Plan and
	related documents. (Incorporated by reference to
	Exhibit 10.01 to Registrants Form S-1
	Registration Statement, as amended, File No. 33-91932 (the
	IPO S-1.)(1)                                                                         
|        | 10.02 |             |  | Registrants 1995 Equity Incentive Plan, as
	amended through March 30, 2000. (Incorporated by reference
	to Exhibit 4.01 to Registrants Form S-8
	Registration Statement, File No. 333-40344, filed
	June 28, 2000.)(1)                                                              
|        | 10.03 |             |  | Form of 1995 Equity Incentive Plan Stock Option
	Agreement and Stock Option Exercise Agreement. (Incorporated by
	reference to Exhibit 10.02 to Registrants
	Form S-4 Registration Statement, File No. 333-64527,
	as amended December 21, 1998.)(1)                                 
|        | 10.04 |             |  | Registrants 2001 Equity Incentive Plan and
	related form of Stock Option Agreement. (Incorporated by
	reference to Exhibit 4.01 to Registrants
	Form S-8 Registration Statement, File No. 333-62492,
	filed June 7, 2001.)(1)                                                       
|        | 10.05 |             |  | Registrants 1995 Directors Stock Option
	Plan, as amended through April 30, 2000. (Incorporated by
	reference to Exhibit 4.05 to Registrants
	Form S-8 Registration Statement, File No. 333-40344,
	filed June 28, 2000.)(1)                                                        
|        | 10.06 |             |  | Form of 1995 Directors Stock Option Plan Option
	Agreement and Stock Option Exercise Agreement. (Incorporated by
	reference to Exhibit 10.01 to Registrants
	Form 10-Q for the quarter ended June 30, 1999)(1)                                                                       
|        | 10.07 | *           |  | Registrants 1995 Employee Stock Purchase
	Plan, as amended through January 1, 2002.(1)                                                                                                                                                                                               
|        | 10.08 |             |  | Registrants 1998 Stock Option Plan, as
	amended through September 1, 2000 and related form of
	option agreement. (Incorporated by reference to
	Exhibit 4.05 to Registrants Form S-8
	Registration Statement, File No. 333-45442, filed
	September 8, 2000.)(1)                     
|        | 10.09 |             |  | Aptex Software Inc. 1996 Equity Incentive Plan
	assumed by Registrant. (Incorporated by reference to
	Exhibit 4.03 to Registrants Form S-8
	Registration Statement, File No. 333-71923, filed
	February 5, 1999.)(1)                                                                 
|        | 10.10 |             |  | Form of Aptex Software Inc. 1996 Equity Incentive
	Plan Stock Option Agreement and Stock Option Exercise Agreement.
	(Incorporated by reference to Exhibit 4.04 to
	Registrants Form S-8 Registration Statement, File
	No. 333-71923, filed February 5, 1999.)(1)                    
|        | 10.11 |             |  | Practical Control Systems Technologies, Inc. 1998
	Stock Option Plan assumed by Registrant. (Incorporated by
	reference to Exhibit 4.03 to Registrants
	Form S-8 Registration Statement, File No. 333-50623,
	filed April 21, 1998.)(1)                                              
|        | 10.12 |             |  | Form of Practical Control Systems Technologies,
	Inc. 1998 Stock Option Plan Stock Option Agreement and Stock
	Option Exercise Agreement. (Incorporated by reference to
	Exhibit 4.04 to Registrants Form S-8
	Registration Statement, File No. 333-50623, filed
	April 21, 1998.)(1)
|        | 10.13 |             |  | Advanced Information Management Solutions, Inc.
	Stock Option Plan assumed by Registrant. (Incorporated by
	reference to Exhibit 4.01 to Registrants
	Form S-8 Registration Statement, File No. 333-33952,
	filed April 4, 2000.)(1)                                                 
|        | 10.14 |             |  | Form of Advanced Information Management
	Solutions, Inc. Stock Option Agreement. (Incorporated by
	reference to Exhibit 4.02 to Registrants
	Form S-8 Registration Statement, File No. 333-33952,
	filed April 4, 2000.)(1)                                                          
|        | 10.15 |             |  | ONYX Technologies, Inc. 1999 Stock Plan assumed
	by Registrant. (Incorporated by reference to Exhibit 4.03
	to Registrants Form S-8 Registration Statement, File
	No. 333-33952, filed April 4, 2000.)(1)                                                                            
|        | 10.16 |             |  | Form of ONYX Technologies, Inc. Stock Option
	Agreement. (Incorporated by reference to Exhibit 4.04 to
	Registrants Form S-8 Registration Statement, File
	No. 333-33952, filed April 4, 2000.)(1)                                                                                   

F-67



---



##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                         
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.17 |             |  | The Center for Adaptive Systems Applications,
	Inc. 1995 Stock Option Plan assumed by Registrant. (Incorporated
	by reference to Exhibit 4.05 to Registrants
	Form S-8 Registration Statement, File No. 333-33952,
	filed April 4, 2000.)(1)                                                                           
|        | 10.18 |             |  | Forms of The Center for Adaptive Systems
	Applications, Inc. Stock Option Agreements. (Incorporated by
	reference to Exhibit 4.06 to Registrants
	Form S-8 Registration Statement, File No. 333-33952,
	filed April 4, 2000.)(1)                                                                                       
|        | 10.19 |             |  | eHNC Inc. 1999 Equity Incentive Plan, as amended,
	assumed by Registrant. (Incorporated by reference to
	Exhibit 4.01 to Registrants Form S-8
	Registration Statement, File No. 333-41388, filed
	July 13, 2000.)(1)                                                                                                   
|        | 10.20 |             |  | Forms of eHNC Inc. Stock Option Agreements and
	Stock Option Exercise Agreements under the eHNC Inc. 1999 Equity
	Incentive Plan. (Incorporated by reference to Exhibit 4.02
	to Registrants Form S-8 Registration Statement, File
	No. 333-41388, filed July 13, 2000.)(1)                                            
|        | 10.21 |             |  | eHNC Inc. 1999 Executive Equity Incentive Plan
	assumed by Registrant. (Incorporated by reference to
	Exhibit 4.03 to Registrants Form S-8
	Registration Statement, File No. 333-41388, filed
	July 13, 2000.)(1)                                                                                                      
|        | 10.22 |             |  | Forms of eHNC Inc. Stock Option Agreements and
	Stock Option Exercise Agreements under the eHNC Inc. 1999
	Executive Equity Incentive Plan. (Incorporated by reference to
	Exhibit 4.04 to Registrants Form S-8
	Registration Statement, File No. 333-41388, filed
	July 13, 2000.)(1)                                 
|        | 10.23 |             |  | Systems/ Link Corporation 1999 Stock Option Plan
	assumed by Registrant and related forms of agreements.
	(Incorporated by reference to Exhibit 4.04 to
	Registrants Form S-8 Registration Statement, File
	No. 333-45442, filed September 8, 2000.)(1)                                                                
|        | 10.24 |             |  | Employment Agreement dated December 13, 1999
	between the Registrant and John Mutch. (Incorporated by
	reference to Exhibit 10.26 to Registrants
	Form 10-K, as amended, for the year ended December 31,
	1999.)(1)                                                                                                    
|        | 10.25 |             |  | Employment Agreement dated December 13, 1999
	between Registrant and Kenneth J. Saunders. (Incorporated
	by reference to Exhibit 10.27 to Registrants
	Form 10-K, as amended, for the year ended December 31,
	1999.)(1)                                                                                               
|        | 10.26 |             |  | Employment Agreement dated April 11, 2001
	between Registrant and Mary Burnside. (Incorporated by reference
	to Exhibit 10.02 to Registrants Form 10-Q for
	the quarter ended June 30, 2001.)(1)                                                                                                                       
|        | 10.27 |             |  | Form of Indemnity Agreement entered into by
	Registrant with each of its directors and executive officers.
	(Incorporated by reference to Exhibit 10.08 to the
	IPO S-1.)(1)                                                                                                                                            
|        | 10.28 |             |  | Loan and Security Agreement by and among
	Registrant and John Mutch and Teresa Mutch, dated as of
	May 31, 2000. (Incorporated by reference to
	Exhibit 20.02 to Registrants Form 10-Q, as
	amended, for the quarter ended June 30, 2000.)(1)                                                                          
|        | 10.29 |             |  | Loan and Security Agreement by and among
	Registrant and Bruce Hansen and Jody Hansen, dated as of
	June 2, 2000. (Incorporated by reference to
	Exhibit 20.03 to Registrants Form 10-Q, as
	amended, for the quarter ended June 30, 2000.)(1)                                                                         
|        | 10.30 |             |  | First Amendment to Loan and Security Agreement by
	and among Registrant and Bruce Hansen and Jody Hansen, effective
	as of December 1, 2000. (Incorporated by reference to
	Exhibit 10.31 to Registrants Form 10-K, as
	amended, for the year ended December 31, 2000.)(1)                                             
|        | 10.31 | *           |  | Letter Agreement dated January 2, 2002
	between Bruce E. Hansen and the Registrant.(1)                                                                                                                                                                                                                                  
|        | 10.32 |             |  | Employee Option Exercise Assistance documents
	used under Registrants option plans, consisting of forms
	of Secured Full Recourse Promissory Note, Stock Pledge Agreement
	and related documents. (Incorporated by reference to
	Exhibit 10.01 to Registrants Form 10-Q for the
	quarter ended September 30, 2000.)(1)

F-68



---



##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                            
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.33 |             |  | Amended Employee Option Exercise Assistance
	documents, consisting of forms of Secured Full Recourse
	Promissory Note, Stock Pledge Agreement and related documents.
	(Incorporated by reference to Exhibit 10.33 to
	Registrants Form 10-K, as amended, for the year ended
	December 31, 2000.)(1)       
|        | 10.34 |             |  | Strategic Partnership Agreement dated as of
	October 23, 2000, between Registrant and GeoTrust, Inc., as
	amended by Amendment No. 1 dated March 6, 2001.
	(Incorporated by reference to Exhibit 10.35 to
	Registrants Form 10-K, as amended, for the year ended
	December 31, 2000.)                     
|        | 10.35 |             |  | Office Building Lease dated as of
	December 1, 1993, as amended effective February 1,
	1994 and June 1, 1994, between Registrant and PacCor
	Partners. (Incorporated by reference to Exhibit 10.09 to
	the IPO S-1.)                                                                                       
|        | 10.36 |             |  | Credit Agreement dated as of July 11, 1997,
	between Registrant and Wells Fargo Bank, National Association.
	(Incorporated by reference to Exhibit 10.02 to
	Registrants Form 10-Q, as amended, for the quarter
	ended June 30, 1997.)                                                                    
|        | 10.37 |             |  | Fourth Amendment to Credit Agreement dated as of
	July 11, 2001 between Registrant and Wells Fargo Bank,
	National Association. (Incorporated by reference to
	Exhibit 10.03 to Registrants Form 10-Q for the
	quarter ended June 30, 2001.)                                                              
|        | 10.38 | *           |  | Fifth Amendment to Credit Agreement dated as of
	January 11, 2002 between Registrant and Wells Fargo Bank,
	National Association.                                                                                                                                                                          
|        | 10.39 |             |  | Lease Agreement dated as of June 17, 1996,
	between Registrant and Williams Properties I, LLC & Williams
	Properties II, LLC. (Incorporated by reference to
	Exhibit 10.12 to Registrants Form 10-K, as
	amended, for the year ended December 31, 1996.)                                                  
|        | 10.40 |             |  | Office Building Lease dated June 17, 1993,
	between Linsco/ Private Ledger Corp. and PacCor Partners and
	Assignment of the lease to the Registrant. (Incorporated by
	reference to Exhibit 10.17 to Registrants Annual
	Report on Form 10-K, as amended, for the year ended
	December 31, 1997.)         
|        | 10.41 |             |  | First Amendment to Lease Agreement between
	Williams Properties I, LLC and Williams Properties II, LLC and
	the Registrant dated June 17, 1996, amended
	October 28, 1997. (Incorporated by reference to
	Exhibit 10.16 to Registrants Form S- 4
	Registration Statement, as amended, File No. 333-64527.)
|        | 10.42 |             |  | Second Amendment to Lease between the Registrant
	and W9/ PC Real Estate Limited Partnership dated as of
	April 13, 1998. (Incorporated by reference to
	Exhibit 10.17 to Registrants Form S-4
	Registration Statement, as amended, File No. 333-64527.)                                                  
|        | 10.43 |             |  | Industrial Lease dated as of October 2,
	1998, between the Registrant and The Irvine Company.
	(Incorporated by reference to Exhibit 99.01 to
	Registrants Registration Statement on Form S-8, File
	No. 333-71923, filed February 5, 1999.)                                                              
|        | 10.44 |             |  | Multi-Tenant Industrial Lease between LBA VF-1,
	LLC and eHNC. (Incorporated by reference to Exhibit 10.01
	to Registrants Form 10-Q for the quarter ended
	March 31, 2000.)                                                                                                                              
|        | 10.45 | *           |  | Industrial Building Lease between the Registrant
	and Coppell Commerce Center, Ltd dated as of December 13,
	2000.                                                                                                                                                                                         
|        | 10.46 | *           |  | Sublease Agreement between the Registrant and
	Federal Insurance Company dated as of October 31, 2001.                                                                                                                                                                                                     
|        | 21.01 | *           |  | List of Registrants subsidiaries.                                                                                                                                                                                                                                                                         
|        | 23.01 | *           |  | Consent of PricewaterhouseCoopers LLP,
	Independent Accountants.                                                                                                                                                                                                                                           

F-69



---



##### Table of Contents





---

|  |                
|- | ---------------
|* | Filed herewith.



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**  | Confidential treatment has been granted for
	portions of this exhibit. These portions have been omitted from
	this exhibit and have been filed separately with the Commission.
|   
|(1) | Management contract or compensatory plan or
	arrangement.                                                                                                                     

F-70