<PAGE>   1

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K
(MARK ONE)
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                       OR

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

            FOR THE TRANSITION PERIOD FROM __________ TO __________.

                         COMMISSION FILE NUMBER 0-26146

                                HNC SOFTWARE INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                               DELAWARE 33-0248788

    (STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                   IDENTIFICATION NO.)

                5930 CORNERSTONE COURT WEST, SAN DIEGO, CA 92121
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 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
                                (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 [X] No [ ]

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

   The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price as reported on the Nasdaq Stock Market at
February 26, 1999, was approximately $689 million. The number of shares of the
Registrant's Common Stock outstanding at February 26, 1999 was 25,677,535
shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be filed with the Commission on or before April 30, 1998 are
incorporated by reference in Part III of this Annual Report on Form 10-K. With
the exception of those portions that are specifically incorporated by reference
in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed
filed as part of this Report or incorporated by reference herein.

================================================================================

<PAGE>   2


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                    PAGE NO.
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<S>          <C>                                                                                       <C>
                                                   PART I

Item 1.      Business............................................................................       3
Item 2.      Properties..........................................................................      23
Item 3.      Legal Proceedings...................................................................      24
Item 4.      Submission of Matters to a Vote of Security Holders.................................      24

                                                  PART II
Item 5.      Market for the Registrant's Common Equity and Related Stockholder Matters...........      24
Item 6.      Selected Financial Data.............................................................      25
Item 7.      Management's Discussion and Analysis of Financial Condition and Results of Operations     26
Item 7A.     Quantitative and Qualitative Disclosures About Market Risk..........................      36
Item 8.      Financial Statements and Supplementary Data.........................................      36
Item 9.      Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      58

                                                  PART III
Item 10.     Directors and Executive Officers of the Registrant..................................      58
Item 11.     Executive Compensation..............................................................      58
Item 12.     Security Ownership of Certain Beneficial Owners And Management......................      58
Item 13.     Certain Relationships and Related Transactions......................................      58

                                                  PART IV
Item 14.     Exhibits, Financial Statement Schedules and Reports On Form 8-K.....................      59
</TABLE>

ProfitMax(R) is a registered trademark of the Company. CRLink(TM),
CompCompare(TM), ProviderCompare(TM), PMAdvisor(TM), VeriComp(TM), MIRA(TM),
AUTOADVISOR(TM), AUTOLINK(TM), CMDirector(TM), SPYDER(TM), Falcon(TM), Falcon
Expert(TM), Falcon Select(TM), Falcon Debit(TM), Falcon Retail(TM), Falcon
Sentry(TM), Falcon Cheque(TM), Eagle(TM), Capstone(TM), Capstone Decision
Manager(TM), Capstone Strategy Manager(TM), Capstone Strategy Reporter(TM),
ProfitMax Bankruptcy(TM), ProfitMax Profitability(TM), ProfitVision(TM),
SelectProfile(TM), Retek Merchandising System(TM), Retek Data Warehouse(TM),
Retek Active Retail Intelligence(TM), Retek Demand Forecasting(TM), Retek
Replenishment Optimization(TM), Retek Trade Management(TM), Retek Distribution
Management(TM), Retek Store Operations - RF(TM), Retek Behavior Profiling(TM),
Retek E-Store(TM), MatchPlus(TM), SelectCast(TM), SelectResponse(TM),
SelectResource(TM) and SelectPartners(TM) are trademarks of the Company. All
other trademarks or trade names referred to in this Report are the property of
their respective owners.

The latest news and information about the Company can be found on the HNC
Software World Wide Web site: http://www.hncs.com and can also be accessed by
calling our Stockholder Information Line at 1-800-396-8052.

The Company was founded in 1986 under the laws of California and was
reincorporated in June 1995 under the laws of Delaware. The Company's principal
executive offices are located at 5930 Cornerstone Court West, San Diego,
California 92121-3728, and its telephone number is (619) 546-8877. In this
Report, the terms "HNC," the "Company" and the "Registrant" each refer to HNC
Software Inc., a Delaware corporation, and its consolidated subsidiaries and its
predecessors unless the context otherwise requires.





                                       2
<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

   The Company develops, markets and supports predictive software solutions for
leading service industries. These predictive software solutions employ
proprietary neural-network predictive decision engines, profiles, traditional
statistical modeling, business models, expert rules and context vectors to
convert existing data and business experiences into meaningful recommendations
and actions. Just as manufacturing organizations have implemented manufacturing
resource planning ("MRP") software to automate routine transactions, leading
service industries such as the health-care/insurance, financial services and
retail industries are using predictive software solutions to improve
profitability, competitiveness and customer satisfaction.

INDUSTRY BACKGROUND

   Today's competitive business environment has forced many service companies to
increase business efficiency while improving their flexibility and
responsiveness to changing market conditions. Businesses continually seek new
ways to make better decisions by collecting and analyzing data. Consequently,
service companies have made, and continue to make, significant investments in
computer systems designed to gather and electronically store ever increasing
amounts of data. In most cases, these computerized systems automate manual tasks
and activities, resulting in the conversion of significant amounts of corporate
data from paper to electronic form. However, these systems generally do not
synthesize data in ways that help businesses make better real-time decisions.

   Historically, the development of predictive software solutions was inhibited
by the lack of computing standards and effective computational intelligence
techniques. The emergence of client-server standards, including relational
database management systems, the Windows operating system and network
communications protocols, has fostered the increased transmission and
dissemination of electronically stored data within and among businesses. ERP
software systems were developed to automate production, accounting, human
resources and distribution transactions for primarily manufacturing
organizations. These systems manage and store large amounts of diverse business
information, providing continuous and simultaneous availability of information
to geographically dispersed employees, customers and suppliers. However, ERP
systems generally do not provide businesses with the functionality and
flexibility needed to utilize this data to simulate operations and make
real-time decisions and recommendations in diverse and rapidly changing business
environments.

   Several service industries have a particular need to leverage large volumes
of real-time transactional and operational data in order to address systemic
issues that have historically affected profitability, competitiveness and
customer satisfaction. These industries and issues include:

   o  FINANCIAL SERVICES INDUSTRY. Financial institutions know that there is a
      greater risk associated with their customer base than for most other kinds
      of businesses. For example, in credit cards alone in 1997, charge-offs
      were $23.5 billion. Not only must these risks be managed, but also, in the
      age of real-time information, banks must fend off increasing competition
      for their customers. Finding ways to use their transaction data to manage
      the customer relationship is seen as key to customer loyalty and
      profitability.

   o  RETAIL INDUSTRY. In December 1998, the Census Bureau of the Department of
      Commerce estimated the total annual sales for the Retail Trade to be
      approximately $2,696 billion. Rapid changes in consumer buying patterns,
      coupled with competitive pressures, have caused merchants to place
      increased emphasis on predicting consumer demand and managing retail
      inventories. As the market evolves, there is growing need for affordable
      technology to meet the challenges of this fast-paced industry. Evidence of
      this trend can be seen in retailers' shift from legacy systems to a thin
      client, or network computer, environment - thereby addressing the
      increasing demands of the market and reducing the total cost of technology
      ownership.

   o  HEALTHCARE/INSURANCE INDUSTRY. It is estimated that approximately 55.8
      million workers' compensation bills are processed each year. Workers'
      compensation fraud and abuse is currently receiving widespread attention
      in the healthcare/insurance industry. The insurance industry is regulated
      by each state's government and regulations vary from state-to-state.
      Companies must stay abreast of changes in order to remain in compliance.
      HNC Insurance Solutions has a dedicated team of individuals who monitor
      fee schedules and legislation in every state, so we are aware of upcoming
      revisions and can notify our customers to help them stay in compliance. We
      also send updated fee schedule data to our clients every month so their
      system is always up-to-date with the latest repricing rules and
      guidelines.





                                       3
<PAGE>   4

   Historically, many companies in the healthcare/insurance, financial services
and retail industries have developed specialized in-house applications to
address these issues. Such applications are generally designed to access large
volumes of operational and transactional data stored on mainframe computers.
However, such systems are expensive, costly to support and maintain, and do not
offer flexible and enterprise-wide access to data. Furthermore, most of these
systems are not designed to meet the need for real-time recommendations and
actions. The widespread adoption of distributed client-server computing has
provided organizations with a much greater ability to access and manipulate
stored information but also has created the need for third-party vendors of
packaged applications software solutions that provide the same degree of
functionality and reliability as traditional in-house applications. These
vendors are able to provide a higher degree of functionality and reliability
than traditional in-house applications by combining the domain knowledge from
their customers and partners with expertise in computational intelligence and
client-server technologies.

THE HNC SOLUTION

   The Company's predictive software solutions enable leading service
industries, such as the healthcare/insurance, financial services and retail
industries, to analyze and act upon operational and transactional data in real
time. HNC's products provide the following benefits:

   Core predictive software technology. The Company's software includes a
variety of computational intelligence technologies such as proprietary
neural-network predictive decision engines, profiles, traditional statistical
modeling, business models, expert rules and context vectors, that can be
customized to specific business applications. Neural networks can be adapted to
changing environments and applications quickly and have proven to be accurate
and effective in real-time operating environments. The Company's neural network
decision engine also includes a user-defined rule-based technology. The neural
networks and rulebases are delivered through software that allows the Company's
products to adapt to many customer-specific business needs without extensive
custom programming.

   Quick payback for customers. The Company's software solutions are designed
for quick customer payback. The Company typically installs its products in two
to six months, and customer payback periods for installation and first year
usage fees are typically less than one year. Payback is rapid because the
software products address applications that have a significant profit impact.
The Company personnel focus not only on the technical integration, but also on
delivering direct benefits to the customer throughout the service contract
period.

   Transaction-based, real-time decision capability. The Company's software can
operate in real time, providing an immediate, situation-specific response to
each customer transaction. For example, the Falcon system for credit/debit card
fraud detection can monitor millions of transactions each day, identify
fraudulent transactions in progress and permit the card issuing bank to withhold
an authorization before the perpetrator completes a purchase. The Falcon system
differs from traditional modeling implementations, which operate in a batch or
off-line mode on a collection of historical transactions.

   Flexible client-server solutions. The Company's solutions can be integrated
into a customer's existing environment or architecture. The Company's products
are available on industry-standard, client-server platforms, including Windows
and UNIX clients, NetWare, Windows NT, UNIX and CICS servers and IBM, Oracle,
Sybase and Informix databases. The Company's application products represent a
complete software solution, including decision models, deployment software,
communications interfaces and GUIs. The Company also supplies systems
integration, ongoing performance analysis, model rebuilding and application
consulting services to help ensure ongoing success for the customer. The Company
believes that this flexible combination of products, services and deployment
platforms represents an advance that enables successful predictive software
system deployment in many business-critical applications.

   Turnkey, customized and user-developed model options. The choice of data
source is important to customers because data are the fundamental building
blocks used to create accurate predictive models. The Company provides various
models built on industry-specific or customer-specific data to meet individual
application requirements. Customers and data suppliers provide the Company with
historical transaction data for turnkey models, trend analyses and product
updates. This combination of proprietary turnkey customized and user-developed
models allows the Company to offer products that solve a broad range of
predictive application problems.





                                       4
<PAGE>   5

HNC'S STRATEGY

   The Company's objective is to be the leading supplier of predictive software
solutions by leveraging its core computational intelligence technology across a
series of product families targeted at specific service industries. The
Company's strategy for achieving this objective contains the following key
elements:

   Maintain and strengthen the Company's position at the core of its customers'
applications infrastructure. Customers rely heavily on HNC's predictive software
solutions to anticipate and react to rapidly changing business conditions. The
Company's core computational intelligence technology serves as a platform upon
which service businesses can deploy and combine the Company's products to manage
and respond to operational and transactional data in real time. Therefore, the
Company attempts to establish a strong position within the applications
infrastructure of its customers. For example, the Company's first predictive
solution product, Falcon, is a credit/debit card fraud detection system for
monitoring individual credit card accounts. By adapting the core technology
developed for Falcon, HNC later introduced ProfitMax, a transaction-based,
real-time credit authorization system that manages the profitability of credit
card portfolios. The Company believes that the opportunity exists for similar
penetration within each of its core vertical markets, including opportunities
such as retail banking within the financial services industry. As another
example, the Company's context vectoring technology could profile visitors to a
financial institution's Web site and send proactive direct e-mails regarding
financial products.

   Leverage core predictive technologies to enter new market segments.
Historically, the Company has applied its core predictive technology to the
domain knowledge of companies it has acquired to introduce new products. For
example, in August 1996, the Company acquired Risk Data, a developer of decision
systems in the workers' compensation industry. By combining HNC Insurance
Solutions, Inc.'s industry expertise with the Company's fraud detection
technology, the Company is developing a VeriComp module that applies predictive
technology to employer fraud in the workers' compensation industry. In addition,
the Company is evaluating opportunities in other data-intensive industries, such
as telecommunications, where predictive software may have the ability to improve
business performance and profitability.

   Earn recurring revenues through long-term contracts. The Company markets many
of its predictive software solutions as an ongoing service that includes
software licenses, decision model updates, application consulting and on-line or
on-site support and maintenance. Since many of the Company's applications are
enhanced by periodic model updates, customers derive significant value from the
Company's ongoing services. In addition, the business-critical nature of many of
the Company's predictive software solutions creates customer demand for
long-term support commitments. Accordingly, the Company's customers typically
pay for this package of software and service with a monthly usage fee and a one
to seven year contract commitment.

   Use strategic relationships to support direct distribution. In each of its
primary markets, the Company uses strategic relationships with system
integrators and third-party service providers to support its direct distribution
efforts. These partners provide varying levels of distribution support, from
lead generation to resale of the Company's products. The Company maintains such
strategic relationships with Electronic Data Systems Corporation ("EDS"),
Intracorp and Marsh McLennan, Inc. in healthcare/insurance, First Data
Corporation and EDS in financial services, and Andersen Consulting and KPMG Peat
Marwick LLP in retail.

   Growth through acquisitions. The Company acquired Risk Data Corporation or
Risk Data, Retek Information Systems, Inc. or Retek and CompReview, Inc. or
CompReview in 1996 and 1997, thereby significantly expanding its product
offerings in its target markets. In 1998, HNC acquired Practical Control Systems
or PCS, Financial Technology, Inc. or FTI and the Advanced Telecommunications
Abuse Control System or ATACS product line. The Company expects to continue to
review acquisitions of businesses, products and technologies as a means to
expand its product offerings for existing and new target markets.

MARKETS AND PRODUCTS

   HNC has a broad family of predictive software products that provide specific
solutions for each of the healthcare/insurance, financial services and retail
markets. Revenues from the Company's three target markets each accounted for
approximately one-quarter of the Company's total revenues in 1998. Revenues from
three products, CRLink, Retek Merchandising System and Falcon, accounted for
49.2% of the Company's total revenues in 1998. See "Risk Factors -- Product
Concentration."





                                       5
<PAGE>   6

Healthcare/Insurance

   HNC offers and is developing products in the healthcare/insurance market.
These products are targeted to insurance carriers, insurance providers, managed
care organizations, state insurance funds, third-party administrators and large,
self-insured employers. HNC has developed predictive software solutions that
address the containment of the medical costs of workers' compensation and
automobile accident insurance claims, workers' compensation loss reserving,
workers' compensation fraud, managed care effectiveness and provider
effectiveness. These solutions, CRLink, MIRA, CompCompare, ProviderCompare,
PMAdvisor, VeriComp, AUTOADVISOR, eCM Director and SPYDER allow users the
ability to analyze medical bills, estimate insurance loss reserves, compare
medical treatments and procedures, reduce fraud losses and streamline
operations.

                   HNC HEALTHCARE/INSURANCE INDUSTRY PRODUCTS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
      PRODUCT                           PRODUCT DESCRIPTION
--------------------------------------------------------------------------------
<S>                  <C>
CRLink               CRLink operates as the bill review engine that links all of
                     the critical components of an effective cost containment
                     program to help clients control the cost of workers'
                     compensation, personal injury and other casualty risks.
--------------------------------------------------------------------------------
MIRA                 MIRA uses statistical predictive methods to automatically
                     determine workers' compensation loss reserves based on
                     historical data gathered from insurance carriers,
                     third-party administrators and state insurance funds
                     throughout the United States.
--------------------------------------------------------------------------------
CompCompare          CompCompare enables clients to compare claims costs or the
                     effectiveness of managed care programs by using
                     benchmarking data from HNC's proprietary workers'
                     compensation database.
--------------------------------------------------------------------------------
ProviderCompare      ProviderCompare is a physician profiling product that
                     provides on-line access to HNC's proprietary workers'
                     compensation database. ProviderCompare enables clients to
                     generate a detailed comparative analysis, such as treatment
                     costs, among providers within the same specialty.
--------------------------------------------------------------------------------
PMAdvisor            PMAdvisor enables claim payers to verify that the number of
                     visits and type of treatment for claims involving physical
                     medicine (primarily chiropractic and physical therapy) are
                     appropriate for the diagnosis and severity of the injury
                     and to identify chiropractic and physical therapy claims
                     that exceed appropriate treatment guidelines.
--------------------------------------------------------------------------------
VeriComp             VeriComp is a workers' compensation claimant system
                     designed to assist in identifying claimant behavior that is
                     likely to indicate the presence of fraud or abuse.
--------------------------------------------------------------------------------
AUTOADVISOR          AUTOADVISOR integrates the medical repricing software with
                     a managed care component for the auto medical claims
                     market.
--------------------------------------------------------------------------------
eCM Director         eCM Director allows clients to identify claims that would
                     benefit most from case management and by automating those
                     decisions.
--------------------------------------------------------------------------------
SPYDER               SPYDER is a fraud and abuse containment system for Medicaid
                     and Medicare agencies and commercial insurers, and is
                     designed to detect emerging, as well as known, fraud
                     schemes before they result in extensive losses.
--------------------------------------------------------------------------------
</TABLE>

Financial Services

   The increasing volume of electronic financial transactions requires
business-critical decision-making in real time for applications such as credit
card charge authorization, that carry a substantial risk of consumer and
merchant fraud. The Company's Falcon and ProfitMax product lines are targeted at
bank and private label card issuers and payment processors. Falcon employs a
client/server architecture that consists of an interface into the customer's
legacy system, a decision engine, a cardholder profile database, a case
management database and a fraud workstation.

   The Company estimates that loan underwriting costs in the United States
currently exceed $2.5 billion each year. Competitive pressures including cost
reduction, rapid loan approval and the growth of on-line banking have compelled
lenders to turn to software solutions that can automate loan origination in
order to lower costs, improve customer service and provide remote access to
lending services. The Company's predictive software solution for the loan
origination markets, Capstone, allows lenders such as banks and private label
card issuers, home equity lenders, auto lenders and mortgage lenders to automate
the loan approval decision process.





                                       6
<PAGE>   7

                    HNC FINANCIAL SERVICES INDUSTRY PRODUCTS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
      PRODUCT                        PRODUCT DESCRIPTION
--------------------------------------------------------------------------------
<S>                        <C>
Falcon Product Line        Falcon products are neural network-based solutions
Falcon                     that examine transaction, cardholder and merchant
Falcon Expert              data to detect a wide range of credit and debit card
Falcon Select              fraud. Using predictive software techniques, Falcon
Falcon Debit               captures relationships and patterns that often are
Falcon Retail              missed by traditional methods of detecting suspicious
Falcon Sentry              transactions.
Falcon Cheque
Eagle
--------------------------------------------------------------------------------
Capstone Product Line      Capstone is an intelligent, high-performance new
Capstone Decision Manager  account decision processing solution. Based on expert
Capstone Strategy Manager  rules, Capstone allows users to automate lending
Capstone Strategy Reporter decisions and design, test, implement and track
                           lending policies.
--------------------------------------------------------------------------------
ProfitMax Product Line     ProfitMax provides transaction-based, real-time
ProfitMax Profitability    authorization and action  decisions from within a
ProfitMax Bankruptcy       complete infrastructure for managing the 
                           profitability of credit card portfolios. ProfitMax
                           uses neural networks, expert rules and HNC's
                           cardholder behavior profiling technology to analyze
                           the expected profitability of each account in an
                           issuer's portfolio using the issuer's definition of
                           financial profit. ProfitMax Bankruptcy uses the basic
                           ProfitMax structure to predict the likelihood of
                           cardholder bankruptcy even before the cardholder is
                           delinquent.
--------------------------------------------------------------------------------
ProfitVision               ProfitVision is an enterprise-wide, comprehensive,
                           profitability analysis system. It incorporates an
                           interface to core accounting systems and to help
                           ensure the accuracy of profitability measurement.
--------------------------------------------------------------------------------
SelectProfile              SelectProfile is a predictive customer relationship
                           management service that uses transaction data to
                           automatically segment cardholders for targeted
                           marketing programs.
--------------------------------------------------------------------------------
</TABLE>

Retail

   Although retailers have made significant investments in customer information,
point-of-sale and quick-response ordering systems, these applications often do
not include the forecasting ability required to maximize profitability and
respond to competition through timely "in-store" replenishment, electronic
networking and quick response initiatives. The Company has developed a group of
products that effectively addresses inventory control, merchandise management
and financial control management. These software solutions allow retailers to
build forecasting and marketing models to carry out day-to-day buying and
selling activities, thereby reducing carrying costs for inventories and
improving purchasing, promotion and logistics efficiencies. The target markets
for the Company's retail products are department stores, mass merchandisers and
specialty retail chains in multi-store and multi-warehouse environments with
gross sales in excess of $200 million.

                                 HNC RETAIL INDUSTRY PRODUCTS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
      PRODUCT                        PRODUCT DESCRIPTION
--------------------------------------------------------------------------------
<S>                        <C>
Retek Merchandising        The Retek Merchandising System provides inventory
   System                  control, merchandise management and financial control
                           and addresses the definition and management of
                           merchandise at the SKU level and reporting and
                           financial control through stock ledgers.
--------------------------------------------------------------------------------
Retek Data Warehouse       Retek Data Warehouse provides the transaction 
                           infrastructure needed for retailers to plan, buy,
                           move, sell and pay for their merchandise.
--------------------------------------------------------------------------------
Retek Active Retail        Active Retail Intelligence identifies performance
   Intelligence            exceptions and recommends the appropriate corrective
                           action.
--------------------------------------------------------------------------------
Retek Demand Forecasting   Retek Demand Forecasting provides forecasts to 
                           retailers' supply chain planning allocation and
                           replenishment functions and uses predictive causal
                           techniques with automated forecasting and
                           multi-dimensional on-line analysis.
--------------------------------------------------------------------------------
Retek Replenishment        Retek Replenishment Optimization uses optimization
  Optimization             simulations to set up and maintain efficient
                           inventory replenishment systems.
--------------------------------------------------------------------------------
Retek Trade Management     Retek Trade Management enables retailers to better
                           manage and optimize the global import process.
--------------------------------------------------------------------------------
Retek Distribution         Retek Distribution Management automates the entire
  Management               distribution management process, handling processes
                           for yard/trailer management to paperless picking and
                           packing.
--------------------------------------------------------------------------------
</TABLE>





                                       7
<PAGE>   8

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
      PRODUCT                        PRODUCT DESCRIPTION
--------------------------------------------------------------------------------
<S>                          <C>
Retek Store Operations - RF  Retek Store Operations - RF improves customer
                             service and inventory integrity and lowers payroll
                             by linking store employees to corporate databases
                             through radio-frequency guns and a high-speed
                             intranet.
--------------------------------------------------------------------------------
Retek Behavior Profiling     Retek Behavior Profiling evaluates transaction data
                             to uncover highly profitable relationships between
                             products and customers that might otherwise go
                             undetected.
--------------------------------------------------------------------------------
Retek E-Store                Retek E-Store enables retailers to transfer the 
                             success of their retail storefronts into the
                             Internet.
--------------------------------------------------------------------------------
</TABLE>

EMERGING MARKET OPPORTUNITIES

   The Company's experience and technology capabilities in the
healthcare/insurance, financial services and retail markets often lead to new
product ideas and concepts. The Company also evaluates new market opportunities
that arise through its commercial and government contract work. As contracts are
completed, the end products are evaluated for commercialization. For example,
contracts for the Advanced Research Projects Agency, United States Army Research
Laboratory, United States Air Force, Office of Naval Research, DataTimes
Corporation and Tracor Applied Sciences, Inc. generated a context-based text
analysis technology called MatchPlus. This core text analysis technology has
been under development at the Company for the last seven years for Department of
Defense applications. During 1996, the Company formed its Aptex Software Inc.
subsidiary (since merged into HNC) to commercialize the Company's MatchPlus text
analysis technology for emerging markets. Aptex has developed a strategic
partnership with InfoSeek Corporation, an Internet search and navigation
service, to deliver products using this text analysis technology to the Internet
market. To date, four new Internet products have been launched: SelectCast,
SelectResponse, SelectResource and SelectProfile.

   Substantially all of the Company's revenues in recent years have been
attributable to sales of predictive software solutions and services, and these
products and services are currently expected to continue to account for a
substantial amount of the Company's future revenues. The market for predictive
software solutions is still emerging. The rate at which businesses have adopted
the Company's products has varied significantly by market and by product within
each market, and the Company expects to continue to experience such variations
with respect to its target markets and products in the future. The Company has
introduced products for the healthcare/insurance, financial services and retail
markets. The Company has recently announced several new products, including
Falcon Cheque, VeriComp, AUTOADVISOR, eCM Director, SPYDER, Retek Store
Operations - RF, Retek Behavior Profiling, Retek E-Store and SelectProfile. To
date, none of these products has achieved any significant degree of market
acceptance, and there can be no assurance that such products will ever be widely
accepted. Although businesses in the Company's target markets have recognized
the advantages of using predictive software solutions to automate the
decision-making process, many have developed decision automation systems
internally rather than licensing them from outside vendors. There can be no
assurance that the markets for the Company's products will continue to develop
or that the Company's products will be widely accepted, if at all. If the
markets for the Company's new or existing products fail to develop, or develop
more slowly than anticipated, the Company's sales would be negatively impacted,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.

CUSTOMER SERVICE AND SUPPORT

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

   Model and Rule Updates. Most of the Company's product license agreements
include periodic data, model and/or rule updates to maintain system performance.
The Company's technical personnel generally assist the customer with
installation of updates. The Company makes commitments to update models and
rules at varying intervals, from fixed times (such as quarterly and annually) to
unscheduled times, provided the customer has met its commitments to provide data
to the Company.

   Education. The Company offers comprehensive education and training programs
to its customers. The Company provides on-site training services associated with
many of its products. Fees for education and training services are generally
included in usage-priced products, but may be charged separately in other cases.

   Consulting. The Company's consultants are available to work with customers'
user application groups and information systems organizations. Customers that
buy consulting services are usually planning large implementations or want to
optimize performance of





                                       8
<PAGE>   9

the Company's products in their operating environments. Fees for consulting are
generally included in usage-priced products, but may be charged separately in
other cases.

PRICING

   The Company generally establishes prices in one of two ways: usage-based fees
and fixed-fee licenses with maintenance. The Company generally employs
usage-based pricing for its healthcare/insurance products, Falcon and ProfitMax.
Under the usage-based pricing structure, the Company generally provides a
fixed-term software license, software maintenance, model updates (in the case of
HNC-supplied models) and ongoing consulting services in exchange for recurring
revenue based on usage. Usage-based term contracts typically include annual
price index adjustments. In 1998, 1997 and 1996, annual license and maintenance
revenues from these contracts represented 50.8%, 55.2% and 56.1% of HNC's total
revenues, respectively. The Company generally employs fixed-fee license pricing
for Capstone and all of the Company's retail products except Falcon Retail.
Under the fixed-fee license pricing structure, the Company generally licenses
the product for the customer's internal use on a perpetual basis. In most cases,
the user can separately contract for maintenance services on an annual basis.
The Company typically offers early adopter pricing for its usage-based products
to customers that agree to be part of pilot or other early product life cycle
installations. Early adopter pricing might include reduced-fee perpetual
licenses, reduced-fee services or both.

   The Company often contracts for installation services associated with its
predictive software solutions. The Company provides user-specific proposals
priced at either fixed-fee levels or on a time and materials basis. In nearly
all cases, travel expenses are billed separately at cost.

   The Company offers contract consulting services. Because of the complexity
associated with predictive software solutions, users often request that the
Company help them to develop models or analyze problems. Also, from time to time
the Company accepts engagements not associated with current product offerings in
order to become more familiar with a new application area and determine the
potential for new product development. Although consulting services are included
with many of the Company's usage-based products, customers may request
additional consulting, often associated with custom modeling.

SALES AND MARKETING

   The Company sells and markets its software and services in North America and
internationally through its direct sales organization, joint marketing and
distribution agreements. The Company's worldwide sales and marketing
organization consisted of 124 employees as of December 31, 1998. The domestic
sales staff is based at the Company's corporate headquarters in San Diego and in
United States field offices in California, Colorado, Connecticut, Georgia,
Minnesota, New York, Pennsylvania, Texas and Virginia. Internationally, the
Company has field sales offices in Australia, Canada, France, Germany, Japan,
Singapore, South Africa and the United Kingdom. To support its sales force, the
Company conducts comprehensive marketing programs, which include direct mail,
public relations, advertising, seminars, trade shows and ongoing customer
communication programs. The sales staff is generally product-based, and each
representative is assigned a geographic territory.

   The Company has licensed First Data Resources, Inc. ("First Data") and EDS to
act as service bureaus to provide an alternate channel of distribution for
end-users to utilize the Falcon product. First Data also licenses ProfitMax as a
service bureau. The Company generally assists its service bureau partners in the
sales effort, often employing the Company's direct sales force in the process.
The Company's sales representatives earn a commission for service bureau sales
in their territory. These service bureaus pay the Company monthly usage fees
based on the volume of transactions processed.

   In 1998, 1997 and 1996, international operations and export sales (including
sales in Canada) represented 23.1%, 18.9% and 17.7% of the Company's total
revenues, respectively. International sales result primarily from Falcon product
sales and sales of retail products. The Company intends to continue to expand
its operations outside the United States and to enter additional international
markets, which will require significant management attention and financial
resources. The Company has committed and continues to commit significant time
and development resources to customizing certain of its products for selected
international markets and to developing international sales and support
channels. There can be no assurance that the Company's efforts to develop
products, databases and models for targeted international markets or to develop
additional international sales and support channels will be successful. The
failure of such efforts, which can entail considerable expense, could have a
material adverse effect on the Company's business, financial condition and
results of operations.





                                       9
<PAGE>   10

   International sales are subject to 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 burdens 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. The Company's international
sales are currently denominated predominantly in United States dollars and a
small portion is denominated in other currencies, primarily those of Western
Europe, Canada and Australia. An increase in the value of the United States
dollar relative to foreign currencies could make the Company's products more
expensive, and therefore potentially less competitive, in foreign markets. In
the future, to the extent the Company's international sales are denominated in
local currencies, foreign currency translations may contribute to significant
fluctuations in the Company's business, financial condition and results of
operations. If for any reason exchange or price controls or other restrictions
on foreign currencies are imposed, the Company's business, financial condition
and results of operations could be materially adversely affected.

   Due in part to the business-critical nature of certain of the Company's
applications, potential customers perceive high risk in connection with adoption
of the Company's products. As a result, customers have been cautious in making
decisions to acquire the Company's products. In addition, because the purchase
of the Company's products typically involves a significant commitment of capital
and may involve shifts by the customer to a new software and/or hardware
platform, delays in completing sales can arise while customers complete their
internal procedures to approve large capital expenditures and test and accept
new technologies that affect key operations. For these and other reasons, the
sales cycle associated with the purchase of the Company's products is typically
lengthy, unpredictable and subject to a number of significant risks over which
the Company has little or no control, including customers' budgetary constraints
and internal acceptance reviews. The sales cycle associated with the licensing
of the Company's products can typically range from 60 days to 18 months. As a
result of the length of the sales cycle and the typical size of customers'
orders, the Company's ability to forecast the timing and amount of specific
sales is limited. A lost or delayed sale could have a material adverse effect on
the Company's business, financial condition and results of operations.

TECHNOLOGY

   The Company seeks to develop innovative products by combining industry and
application knowledge with its core neural-network technology to address
specific market needs. The Company's systems also employ rule-based technology
to implement customer strategy, policy and procedures. These technologies are
incorporated in computer software and hardware architectures, including
client-server hardware, relational databases and object-oriented programming.
The Company intends to continue to develop state-of-the-art technologies to
enhance its current products and broaden development opportunities.

   Neural-Network Technology. Neural networks have predictive power that can be
improved with experience as the historical database increases in size. The term
"neural network" refers to a family of nonlinear, statistical modeling
techniques, sometimes called "computational intelligence." These techniques
distinguish themselves through a process of automated "learning" or "training"
that replaces the time-consuming manual techniques of traditional nonlinear,
statistical modeling. The neural-network architecture itself consists of groups
of "processing elements," or equations with several inputs and a single output.
The output of each element becomes either the input to another element or part
of the dependent output. Each input receives a "weight" or value, in the
equation, which is adjusted during the training process. The actual result from
each training record is compared with the answer from the neural network, and
the weights are adjusted to reduce the error between the two. This process can
become computationally intensive, as millions of training data records must be
processed hundreds or thousands of times. The Company has developed proprietary
high-speed and parallel-processor boards to accelerate training and execution of
its neural-network software. The Company believes that the rapid model
development afforded by its technology provides a competitive advantage in the
development of predictive software solutions.

   Rule-Based Technology. The Company's systems also employ rule-based
technology to implement customer strategy, policy and procedures. The rules are
implemented as part of predictive processes. The Company believes that its
combination of neural networks and rule bases in a single decision engine
represents a significant competitive advantage over more traditional approaches
to decision automation.

   Context Vector Technology. Context vector technology is a way to explore,
analyze and model unstructured textual data. Context vector technology
automatically discovers the underlying structure of free form symbolic data.
This structure enables modeling from data elements previously considered
impossible to include in predictive software applications. Context vector
technology also models behavior. Just as relationships are discovered in
unstructured data, observing electronic transaction behavior identifies
patterns. Compatibility predictions can be made between information, behavior,
people and products. When combined with other HNC technologies, such as neural
networks and rule-based systems, the Company believes that context vectors can
improve the performance





                                       10
<PAGE>   11

of existing applications while opening new market opportunities. Context vector
technology has been demonstrated to increase banner advertising click rates on
the Internet, automate e-mail responses and discover unknown relationships in
credit card transaction data.

   The Company's success depends upon its ability to enter new markets by
successfully developing new products for such markets on a timely and
cost-effective basis. The Company's products often require customer data for
decision model development and system installation. As a result, completion of
new products (particularly new products for markets not previously served by the
Company) may be delayed while the Company extracts sufficient amounts of
statistically relevant data and develops the models. During this development
process, the Company relies on its potential customers in the new market to
provide data and to help train the Company's personnel in the use and meaning of
the data in the specific industry. These relationships also assist the Company
in establishing a market presence and credibility in the new market. These
potential customers, most of which have significantly greater financial and
marketing resources than the Company, may compete with the Company in the future
or otherwise discontinue their relationships with or support of the Company,
either during development of the Company's products or thereafter. The failure
by the Company to obtain adequate third-party support for new product
development would have a material adverse effect on the Company's ability to
enter new markets and, consequently, on the Company's business, financial
condition and results of operations. See "Risk Factors -- Risks Associated with
Technological Change and Delays in Developing New Products."

RESEARCH AND DEVELOPMENT

   Research and development expenses were $26.6 million, $21.2 million and $
13.8 million for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company believes that its future success depends in part on its ability to
maintain and improve its core technologies, enhance its existing products and
develop new products that meet an expanding range of markets and customer
requirements. The Company intends to expand its existing product offerings and
to introduce new predictive software solutions. In the development of new
products and enhancements to existing products, the Company uses its own tools
extensively. Until 1996, the Company relied primarily on internal development of
its products. Based on timing and cost considerations, however, the Company has
acquired, and in the future may consider acquiring, technology or products from
third parties. For example, the Company acquired technology and products in
connection with its acquisitions of Risk Data and Retek in 1996, CompReview in
1997 and PCS, FTI and ATACS in 1998.

   The Company performs all quality assurance and develops documentation
internally. The Company intends to continue to support industry standard
operating environments, client-server architectures and network protocols. The
Company's specialists in neural network model development, software engineering,
user interface design, product documentation and quality improvement are
responsible for maintaining and enhancing the performance, quality and usability
of all of the Company's predictive software solutions. The marketing services
organization is responsible for authoring and updating all user documentation
and other publications. See "Risk Factors -- Risks Associated with Technological
Change and Delays in Developing New Products."

   The Company strategically targets its long-term research projects. In
addition to funds allocated for research, the Company receives research
contracts from a range of commercial sources and the United States Government.
Government and commercial contract customers have included the Advanced Research
Projects Agency, United States Air Force, Office of Naval Research and Tracor
Applied Sciences, Inc. The Company believes that these contracts augment its
ability to maintain existing technologies and investigate new technologies that
may or may not become part of its products. The United States Government
typically retains certain intellectual property rights and licenses in the
technologies the Company develops under research contracts directly or
indirectly sponsored by the government, and in some cases can terminate the
Company's rights in such technologies if the Company fails to commercialize them
on a timely basis. Historically, these contracts have not resulted in
development of products contributing to the Company's revenues in the fiscal
year in which the research contract is performed, or in the subsequent fiscal
year.

   The market for the Company's predictive software solutions is characterized
by rapidly changing technology and improvements in computer hardware, network
operating systems, programming tools, programming languages, operating systems
and database technology. The Company's success will depend upon its ability to
continue to develop and maintain competitive technologies, enhance its current
products and develop, in a timely and cost-effective manner, new products that
meet changing market conditions, including evolving customer needs, new
competitive product offerings, emerging industry standards and changing
technology. For example, the rapid growth of the Internet environment creates
new opportunities, risks and uncertainties for businesses, such as HNC, which
develop software solutions that now may have to be designed to operate in
Internet, intranet and other on-line environments. The Company may not be able
to develop and market, on a timely basis, or at all, product enhancements or new
products that respond to changing technologies. The Company has 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





                                       11
<PAGE>   12

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 of the problems
encountered. Any significant delay in the completion of new products, or the
failure of such products, if and when installed, to achieve any significant
degree of market acceptance, would have a material adverse effect on the
Company's business, financial condition and results of operations. Any failure
by the Company to anticipate or to respond adequately to changing technologies,
or any significant delays in product development or introduction, could cause
customers to delay or decide against purchases of the Company's products and
would have a material adverse effect on the Company's business, financial
condition and results of operations.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

   The Company relies on a combination of patent, copyright, trademark and trade
secret laws and confidentiality procedures to protect its proprietary rights.
The Company currently owns eleven issued United States patents and has six
United States patent applications pending. The Company has applied for
additional patents for its Falcon technology in Canada, Europe and Japan and for
its MIRA product in Australia, Canada and Europe. The Company's issued United
States patents expire at dates that range from December 2008 to February 2016.
There can be no assurance that patents will be issued with respect to pending or
future patent applications or that the Company's patents will be upheld as valid
or will prevent the development of competitive products. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. As part of its
confidentiality procedures, the Company generally enters into invention
assignment and proprietary information agreements with its employees and
independent contractors and nondisclosure agreements with its distributors,
corporate partners and licensees, and limits access to and distribution of its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise to obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. In addition, to ensure that customers
will not be adversely affected by an interruption in the Company's business, the
Company places source code for certain of its products into escrow, which may
increase the likelihood of misappropriation or other misuse of the Company's
intellectual property. Moreover, effective protection of intellectual property
rights may be unavailable or limited in certain foreign countries, in which the
Company has done and may do business. Also, the Company has developed
technologies under research projects conducted under agreements with various
United States Government agencies or subcontractors to such agencies. Although
the Company has acquired certain commercial rights to such technologies, the
United States Government typically retains ownership of certain intellectual
property rights and licenses in the technologies developed by the Company under
such contracts, and in some cases can terminate the Company's rights in such
technologies if the Company fails to commercialize them on a timely basis. In
addition, under certain United States Government contracts, the results of the
Company's research may be made public by the government, which could limit the
Company's competitive advantage with respect to future products based on such
research.

   In the past, HNC has received communications from third parties asserting
that the Company's trademarks infringe such other parties' trademarks, or that
data used by the Company is copyrighted by such third party, none of which has
resulted in litigation or material losses to the Company. In November 1998,
Nestor, Inc. filed a complaint against the Company alleging that the Company is
infringing a United States patent issued to Nestor and seeking a declaration
that a United States patent issued to the Company is invalid and seeking damages
and injunctive relief. The complaint also seeks treble compensatory damages,
punitive damages and injunctive relief for alleged violations of the Sherman
Antitrust Act and the Rhode Island Antitrust Act. See "Item 3 - Legal
Proceedings." Given the Company's ongoing efforts to develop and market new
technologies and products, the Company may be subject to claims from other third
parties asserting that the Company's products infringe, or may infringe, their
intellectual property rights. If as a result of any such claims the Company were
precluded from using certain technologies or intellectual property rights,
licenses to such disputed third-party technology or intellectual property rights
might not be available on reasonable commercial terms, if at all. Furthermore,
the Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. Litigation, either as plaintiff or defendant,
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation is resolved in favor of the Company. In the event of an
adverse ruling in any such litigation, the Company 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, and a court might invalidate the Company's patents,
trademarks or other proprietary rights. In the event of a successful claim
against the Company and the failure of the Company to develop or license a
substitute technology, the Company's business, financial condition and results
of operations would be materially and adversely affected.

   As the number of software products increases and the functionality of these
products further overlaps, the Company believes that software developers may
become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time





                                       12
<PAGE>   13

consuming and expensive to defend and could materially and adversely affect the
Company's business, financial condition and results of operations.

COMPETITION

   The market for predictive software solutions is intensely competitive and
subject to rapid change. Competitors, many of which have substantially greater
financial resources than the Company, vary in size and in the scope of the
products and services they offer. The Company encounters competition from a
number of sources, including (1) other application software companies, including
enterprise software vendors, (2) management information systems departments of
customers and potential customers, including financial institutions, insurance
companies and retailers, (3) third party professional services organizations,
including consulting divisions of public accounting firms, (4) hardware
suppliers that bundle or develop complementary software, (5) network and service
providers that seek to enhance their value-added services, (6) neural-network
tool suppliers and (7) managed care organizations. In the healthcare/insurance
market, the Company has experienced competition primarily from National Council
on Compensation Insurance ("NCCI"), Corporate Systems, Inc. and CSC
Incorporated. In the workers' compensation and medical cost administration
market, the Company has experienced competition from Medicode, Inc.
("MediCode"), Medata, Inc., Embassy Software and a division of Automatic Data
Processing, Inc. ("ADP") with regard to software licensing, and Intracorp and
Corvel Corporation in the service bureau operations market. Additionally, the
Company has faced competition from ADP in the automobile accident medical claims
market. In the financial services market, the Company has experienced
competition from Fair, Isaac & Co., Inc., Cogensys (a subsidiary of Policy
Management Systems Corporation), Federal National Mortgage Association ("Fannie
Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac"), International
Business Machines Corporation ("IBM"), Nestor, Inc., NeuralTech Inc., Neuralware
Inc., PMI Mortgage Services Co., VISA International and others. In the retail
market, the Company has experienced competition from JDA Software Group, Inc.,
SAP AG, PeopleSoft, Inc., IBM, Manugistics Group, Inc. and others. The Company
expects to experience additional competition from other established and emerging
companies, as well as other technologies. For example, the Company's Falcon
product competes against other methods of preventing credit card fraud, such as
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, reduced gross margins and loss of market
share, any of which could materially adversely affect the Company's business,
financial condition and results of operations.

   The Company believes that most of its products are currently priced at a
premium when compared to its competitors' products. The market for the Company's
products is highly competitive, and the Company expects that it will face
increasing pricing pressures from its current competitors and new market
entrants. In particular, increased competition could reduce or eliminate such
premiums and cause further price reductions. In addition, such competition could
adversely affect the Company's ability to obtain new long-term contracts and
renewals of existing long-term contracts on terms favorable to the Company. Any
reduction in the price of the Company's products could materially adversely
affect the Company's business, financial condition and results of operations.

   The Company believes that the principal competitive factors affecting its
market include technical performance (for example, accuracy in detecting credit
card fraud or evaluating workers' compensation claims), access to unique
proprietary databases and product attributes such as adaptability, scalability,
ability to integrate with products produced by other vendors, functionality,
ease-of-use, product reputation, quality, performance, price, customer service
and support, the effectiveness of sales and marketing efforts and HNC
reputation. Although the Company believes that its products currently compete
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.

   Some of the Company's current competitors, and many of the Company's
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company and 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 the Company and may
possess marketing advantages due to their ability to market integrated suites of
related products that are 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 the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly gain significant market share. Also, the
Company relies upon its customers to provide data, expertise and other support
for the ongoing updating of the Company's models. The Company's customers, most
of which have significantly greater financial and marketing resources than the
Company, may compete with the Company in the future or otherwise discontinue
their relationships with or support of the Company. There can be no assurance
that the Company will be able to





                                       13
<PAGE>   14

compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations.

EMPLOYEES

   As of December 31, 1998, the Company had 910 employees, including 438 in
product development and support, 146 in customer service, 124 in sales and
marketing, 78 in service bureau and 124 in finance, administration and MIS. Most
of these employees are located in the United States. None of the Company's
employees are represented by a labor union. HNC has experienced no work
stoppages and believes that its employee relationships are generally good.

   The Company's success depends to a significant degree upon the continued
service of members of the Company's senior management and other key research,
development, sales and marketing personnel. Accordingly, the loss of any of the
Company's senior management or key research, development, sales or marketing
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. Only a small number of employees
have employment agreements with the Company, and there can be no assurance that
such agreements will result in the retention of these employees for any
significant period of time. In addition, the untimely loss of a member of the
management team or a key employee of a business acquired by the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations, particularly if such loss occurred before the Company
has had adequate time to familiarize itself with the operating details of that
business and provide a suitably experienced replacement for such employee. In
the past, the Company has experienced difficulty in recruiting a sufficient
number of qualified sales and technical employees. In addition, competitors may
attempt to recruit the Company's key employees. There can be no assurance that
the Company will be successful in attracting, assimilating and retaining such
personnel. The failure to attract, assimilate and retain key personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.

















                                       14

<PAGE>   15

                                  RISK FACTORS


   This Report (including the following section regarding Risk Factors) contains
forward-looking statements regarding HNC and its business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this Report. Additionally, statements concerning future matters such as the
development of new products, enhancements or technologies, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.

   Although forward-looking statements in this Report reflect the good faith
judgment of HNC's management, such statements can only be based on facts and
factors currently known by HNC. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
in "Risk Factors" below as well as those discussed elsewhere in this Report.
Readers are urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Report. HNC undertakes no
obligation to revise or update any forward-looking statements in order to
reflect any event or circumstance that may arise after the date of this Report.
Readers are urged to carefully review and consider the various disclosures made
in this Report, which attempt to advise interested parties of the risks and
factors that may affect HNC's business, financial condition, results of
operations and prospects.


HNC'S OPERATING RESULTS FLUCTUATE.

   HNC's revenues and operating results have varied significantly in the past
and may do so in the future. Factors that affect HNC's revenues and operating
results include:

o   the degree of acceptance of HNC's products by the markets and industries
    that HNC serves;

o   the historical tendency of HNC to receive, during a given fiscal period, a
    small number of relatively large customer orders, such that failure to
    recognize revenue from any such order in that fiscal period may
    disproportionately and adversely affect HNC's revenues and operating results
    for that fiscal period;

o   customer cancellation of long-term contracts that yield recurring revenues
    or customers' ceasing their use of HNC products for which HNC receives
    recurring, usage-based fees and disputes with customers regarding fees
    payable to HNC;

o   the lengthy sales cycle of most of HNC's products;

o   HNC's ability to successfully and timely develop, introduce and market new
    products and product enhancements;

o   the timing of new product announcements and introductions by HNC and its
    competitors;

o   changes in the mix of HNC's distribution channels;

o   changes in the level of HNC's operating expenses;

o   HNC's ability to achieve progress and fulfill its obligations under
    percentage-of-completion contracts;

o   HNC's success in completing certain pilot installations within contracted
    fee budgets;

o   competitive conditions in the industry;

o   domestic and international economic conditions; and





                                       15
<PAGE>   16

o   market conditions in HNC's targeted markets.

   In addition, license agreements entered into during a quarter may not meet
HNC's revenue recognition criteria. Therefore, even if HNC meets or exceeds its
forecast of aggregate licensing and other contracting activity, it is possible
that HNC's revenues would not meet expectations. Furthermore, HNC's operating
results may be affected by factors unique to certain of its product lines. For
example, HNC derives a substantial and increasing portion of its revenues from
its retail products, which are generally priced as "perpetual" license
transactions in which HNC receives a one-time license fee. HNC recognizes these
fees as revenue upon delivery of the software and acceptance by the customer.
Thus, failure to complete a perpetual license transaction during a fiscal
quarter would have a disproportionate adverse impact on HNC's operating results
for that quarter.

   HNC expects fluctuations in its operating results to continue for the
foreseeable future. Consequently, HNC believes that period-to-period comparisons
of its financial results should not be relied upon as an indication of future
performance. Because HNC's expense levels are based in part on its expectations
regarding future revenues and in the short term are fixed to a large extent, HNC
may be unable to adjust its spending in time to compensate for any unexpected
revenue shortfall. Accordingly, HNC may not be able to maintain profitability on
a quarterly or annual basis in the future. Due to the foregoing factors, it is
possible that in some future quarter HNC's operating results will be below the
expectations of public market analysts and investors. In that event, the price
of HNC's common stock and, in turn, the price of HNC's 4.75% convertible
subordinated notes due 2003, would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

THE SALES CYCLE FOR HNC PRODUCTS IS LENGTHY AND UNPREDICTABLE.

   Due in part to the business-critical nature of certain of HNC's applications,
potential customers perceive high risk in connection with adoption of HNC's
products. As a result, customers have been cautious in making decisions to
acquire HNC's products. In addition, because the purchase of HNC's products
typically involves a significant commitment of capital and may involve shifts by
the customer to a new software and/or hardware platform, delays in completing
sales can arise while customers complete their internal procedures to approve
large capital expenditures and test and accept new technologies that affect key
operations. For these and other reasons, the sales cycle associated with the
purchase of HNC's products is typically lengthy, unpredictable and subject to a
number of significant risks over which HNC has little or no control, including
customers' budgetary constraints and internal acceptance reviews. The sales
cycle associated with the licensing of HNC's products can typically range from
60 days to 18 months. As a result of the length of the sales cycle and the
typical size of customers' orders, HNC's ability to forecast the timing and
amount of specific sales is limited. A lost or delayed sale could have a
material adverse effect on HNC's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Sales and Marketing."

HNC MUST INTEGRATE RECENTLY ACQUIRED BUSINESSES AND MAY ACQUIRE BUSINESSES IN
THE FUTURE.

   Between August 1996 and August 1998, HNC acquired five businesses and
purchased one product line. HNC acquired Risk Data and Retek in 1996, CompReview
in 1997 and PCS and FTI in 1998. Also in 1998, HNC purchased the ATACS product
line and the minority interest in Aptex. HNC believes that its future growth
depends, in part, upon the success of these and possible future acquisitions.
HNC may not successfully identify, acquire on favorable terms or integrate such
businesses, products, services or technologies. HNC may in the future face
increased competition for acquisition opportunities, which may inhibit HNC's
ability to complete suitable acquisitions and increase the costs of completing
acquisitions. The acquisitions of Risk Data, Retek, CompReview, PCS and FTI,
Aptex, and the ATACS product line, as well as other potential future
acquisitions, will require HNC to successfully manage and integrate the acquired
businesses, which may be located in diverse geographic locations. Acquiring
other businesses also requires HNC to successfully develop and market products
to new industries and markets with which HNC may not be familiar. It also
requires HNC to coordinate, and possibly change, the diverse operating
structures, policies and practices of the acquired companies and to integrate
the employees of the acquired companies into HNC's organization and culture.
Failure of HNC to successfully integrate and manage acquired businesses, to
retain their employees, and to successfully address new industries and markets
associated with acquired businesses, would have a material adverse effect on
HNC's business, financial condition and results of operations. The accounting
treatment of acquisitions can also affect HNC's reported results of operations.
For example, the acquisition of PCS resulted in an accounting charge of
approximately $1.8 million in the quarter ended March 31, 1998. The acquisitions
of FTI and ATACS resulted in an accounting charge of approximately $4.3 million
in the quarter ended June 30, 1998. Any other future acquisitions that may be
accounted for as purchases may result in charges that adversely affect HNC's
earnings. Additional acquisitions may also





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<PAGE>   17

involve the issuance of shares of HNC's stock to owners of acquired businesses,
resulting in dilution in the percentage of HNC's stock owned by other
stockholders. See "Business -- HNC's Strategy."

GROWTH PLACES A SIGNIFICANT STRAIN ON HNC'S BUSINESS.

   In recent years, HNC has experienced changes in its operations that have
placed significant demands on HNC's administrative, operational and financial
resources. The growth in HNC's customer base and expansion of its product
functionality, together with its acquisition of other businesses and their
employees and expansion of its product line into new markets, have challenged
and are expected to continue to challenge HNC's management and operations,
including its sales, marketing, customer support, research and development and
finance and administrative operations. HNC's future performance will depend in
part on its ability to successfully manage change, both in its domestic and
international operations, and to adapt its operational and financial control
systems, if necessary, to respond to changes in its business and to facilitate
the integration of acquired businesses with HNC's operations. The failure of
HNC's management to effectively respond to and manage growth could have a
material adverse effect on HNC's business, financial condition and results of
operations.

HNC'S NEW PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.

   The market for predictive software solutions is still emerging. The rate at
which businesses have adopted HNC's products has varied significantly by market
and by product within each market, and HNC expects to continue to experience
such variations with respect to its target markets and products in the future.
HNC has introduced products for the healthcare/insurance, financial services and
retail markets. The Company has recently announced several new products,
including Falcon Cheque, VeriComp, AUTOADVISOR, eCM Director, SPYDER, Retek
Store Operations - RF and SelectProfile. To date, none of these products has
achieved any significant degree of market acceptance, and such products may
never be widely accepted. Although businesses in HNC's target markets have
recognized the advantages of using predictive software solutions to automate the
decision-making process, many have developed decision automation systems
internally rather than licensing them from outside vendors. The markets for
HNC's products may not continue to develop, and HNC's products may not be
accepted. If the markets for HNC's new or existing products fail to develop, or
develop more slowly than anticipated, HNC's sales would be negatively impacted,
which would have a material adverse effect on HNC's business, financial
condition and results of operations. See "Business -- Emerging Market
Opportunities."

HNC MUST KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES.

   In the markets served by HNC, technology changes rapidly and computer
hardware, network operating systems, programming tools, programming languages,
operating systems and database technology are constantly being improved. HNC's
success will depend upon its ability to continue to develop and maintain
competitive technologies, enhance its current products and develop, in a timely
and cost-effective manner, new products that meet changing market conditions. In
particular, HNC must respond to evolving customer needs, new competitive product
offerings, emerging industry standards and changing technology. For example, the
rapid growth of the Internet environment creates new opportunities, risks and
uncertainties for businesses, such as HNC, which develop software solutions that
now may have to be designed to operate in Internet, intranet and other on-line
environments. HNC may not be able to develop and market, on a timely basis, or
at all, product enhancements or new products that respond to changing
technologies. HNC has 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 of the problems
encountered. Any significant delay in the completion of new products, or the
failure of such products, if and when installed, to achieve any significant
degree of market acceptance, would have a material adverse effect on HNC's
business, financial condition and results of operations. Any failure by HNC to
anticipate or to respond adequately to changing technologies, or any significant
delays in product development or introduction, could cause customers to delay or
decide against purchases of HNC's products and would have a material adverse
effect on HNC's business, financial condition and results of operations.

HNC DERIVES SUBSTANTIAL REVENUES FROM ONE PRODUCT OR PRODUCT LINE IN EACH OF ITS
TARGET MARKETS.

   HNC currently has one product or product line in each of its three target
markets that accounts for a majority of HNC's total revenues from that market.
These products in the aggregate accounted for 49.2% of HNC's total revenues in
1998, 57.9% of HNC's total revenues in 1997 and 59.1% of HNC's total revenues in
1996. In the healthcare/insurance market, HNC's CRLink product accounted for
21.5% of total revenues in 1998, 23.0% of total revenues in 1997 and 24.6% of
total revenues in 1996, and HNC expects that CRLink will continue to account for
a substantial portion of HNC's total revenues for the foreseeable future. The
quality and 




                                       17
<PAGE>   18
timely introduction of future product enhancements and competition
will affect continued market acceptance of CRLink. Demand for, or use of, CRLink
could decline as a result of competition, simplification of state workers'
compensation fee schedules, changes in the overall payment system or regulatory
structure for workers' compensation claims, technological change, the inability
of HNC to obtain or use state fee schedule or claims data, saturation of market
demand, industry consolidation or other factors. Decline in demand for CRLink
would result in decreased revenues from CRLink, which could have a material
adverse effect on HNC's business, financial condition and results of operations.

   Revenues from the Retek Merchandising System, or RMS, a retail management
product, accounted for 13.2% of HNC's total revenues in 1998, 18.9% of HNC's
total revenues in 1997 and 13.6% of HNC's total revenues in 1996, and HNC
expects that RMS will continue to account for a substantial portion of HNC's
revenues for the foreseeable future. The quality and timely introduction of
future product enhancements and competition will affect continued market
acceptance of RMS. Demand for, or use of, RMS could decline as a result of
continued entry into the retail inventory management market by vendors that may
have significantly greater resources and a broader customer base than HNC,
technological change, saturation of market demand, industry consolidation or
other factors. Decline in demand for RMS would result in decreased revenues from
RMS, which could have a material adverse effect on HNC's business, financial
condition and results of operations.

   Revenues from HNC's Falcon product line for credit card fraud detection
accounted for 14.5% of total revenues in 1998, 16.0% of total revenues in 1997
and 20.9% of total revenues in 1996, and HNC expects that Falcon products will
continue to account for a substantial portion of HNC's total revenues for the
foreseeable future. The quality and timely introduction of future product
enhancements and competition will affect continued market acceptance of the
Falcon product line. In addition, it is possible that patterns of credit card
fraud may change in a manner that the Falcon product line would not detect and
that other methods of credit card fraud prevention may reduce customers' needs
for the Falcon product line. As a result of increasing saturation of market
demand for the Falcon product line, HNC may also need to rely increasingly on
international sales to maintain or increase Falcon revenue levels. Furthermore,
Falcon customers are banks and related financial institutions. Accordingly,
HNC's future success depends upon the capital expenditure budgets of such
customers and the continued demand by such customers for Falcon products. The
financial services industry tends to be cyclical, which may result in variations
in demand for HNC's products. In addition, there has been and continues to be
consolidation in the financial services industry, which in some cases has led to
lost or delayed sales and reduced HNC's financial solutions customer base, which
may lead to reduced demand for HNC's products. Industry consolidation also could
affect HNC's base of recurring revenues on transaction based contracts as
customers combine their operations under one contract with HNC that, in some
cases, could result in lower payments or fees than those previously paid by such
customers. Demand for, or use of, Falcon, could decline as a result of
competition, technological change, change in fraud patterns, the cyclical nature
of the financial services industry, saturation of market demand, fluctuations in
interest rates, industry consolidation, reduction in capital spending or other
factors. Decline in demand for Falcon would result in decreased revenues from
Falcon products, which could have a material adverse effect on HNC's business,
financial condition and results of operations. See "Business -- Markets and
Products."

HNC DEPENDS ON DATA TO UPDATE STATISTICAL MODELS.

   The development, installation and support of HNC's credit card fraud control
and profitability management, loan underwriting and certain healthcare/insurance
products require periodic statistical model updates. HNC must develop or obtain
a reliable source of sufficient amounts of current and statistically relevant
data to analyze transactions and update its models. For example, in the
electronic payments market, the data required by HNC are collected privately and
maintained in proprietary databases. As a result, HNC and its Falcon and
ProfitMax customers enter into agreements pursuant to which customers agree to
provide the data HNC requires to analyze transactions, report results and build
new fraud detection and profitability models. Many of HNC's healthcare/insurance
products use historical workers' compensation claims data obtained from
customers. CRLink also uses data from state workers' compensation fee schedules
adopted by state regulatory agencies, and certain third parties have asserted
copyright interests in such data. In most cases, such data must be periodically
updated and refreshed to enable HNC's predictive software products to continue
to work effectively. In addition, the development of new and enhanced products
also depends to a significant extent on the availability of sufficient amounts
of statistically relevant data to enable HNC to develop models. HNC may 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. Any failure by HNC to obtain required
data when it is needed, for a reasonable price and on reasonable terms, could
have a significant negative impact on existing product performance, new product
development and product pricing which could in turn have a material adverse
effect on HNC's business, financial condition and results of operations. See
"Business -- Customer Service and Support."





                                       18
<PAGE>   19

HNC'S MARKETS ARE HIGHLY COMPETITIVE.

   The market for predictive software solutions is intensely competitive and
subject to rapid change. Competitors, many of which have substantially greater
financial resources than HNC, vary in size and in the scope of the products and
services they offer. HNC encounters competition from a number of sources,
including:

o   other application software companies, including enterprise software vendors;

o   management information systems departments of customers and potential
    customers, including financial institutions, insurance companies and
    retailers;

o   third-party professional services organizations, including consulting
    divisions of public accounting firms;

o   hardware suppliers that bundle or develop complementary software;

o   network and service providers that seek to enhance their value-added
    services;

o   neural-network tool suppliers; and

o   managed care organizations.

   HNC expects to experience additional competition from other established and
emerging companies, as well as from other technologies. For example, HNC's
Falcon product competes against other methods of preventing credit card fraud,
such as 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, reduced gross margins and loss of
market share, any of which could materially adversely affect HNC's business,
financial condition and results of operations.

   HNC expects that it will face increasing pricing pressures from its current
competitors and new market entrants. Price competition could adversely affect
HNC's ability to obtain new long-term contracts and renewals of existing
long-term contracts on terms favorable to HNC. Any reduction in the price of
HNC's products could materially adversely affect HNC's business, financial
condition and results of operations.

   Some of HNC's current competitors, and many of HNC's potential competitors,
have significantly greater financial, technical, marketing and other resources
than HNC and broader integrated product lines. As a result, they may have
competitive advantages over HNC, including:

o   the ability to respond more quickly than HNC to new or emerging technologies
    and changes in customer requirements;

o   the ability to devote greater resources to the development, promotion and
    sale of their products than HNC; and

o   the ability to market integrated suites of related products that are 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 the ability of their products to address the needs of HNC's prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly gain significant market share. Also, HNC
relies upon its customers to provide data, expertise and other support for the
ongoing updating of HNC's models. HNC's customers, most of which have
significantly greater financial and marketing resources than HNC, may compete
with HNC in the future or otherwise discontinue their relationships with or
support of HNC. HNC may not be able to compete successfully against current and
future competitors and competitive pressures faced by HNC may materially
adversely affect its business, financial condition and results of operations.
See "Business -- Competition."





                                       19
<PAGE>   20

HNC MUST RECRUIT AND RETAIN QUALIFIED PERSONNEL.

   HNC's success depends to a significant degree upon the continued service of
members of HNC's senior management and other key research, development, sales
and marketing personnel. Accordingly, the loss of any of HNC's senior management
or key research, development, sales or marketing personnel could have a material
adverse effect on HNC's business, financial condition and results of operations.
Only a small number of employees have employment agreements with HNC, and these
agreements may not result in the retention of these employees for any
significant period of time. In addition, the untimely loss of a member of the
management team or a key employee of a business acquired by HNC could have a
material adverse effect on HNC's business, financial condition and results of
operations, particularly if such loss occurred before HNC has had adequate time
to familiarize itself with the operating details of that business and provide a
suitably experienced replacement for such employee. In the past, HNC has
experienced difficulty in recruiting a sufficient number of qualified sales and
technical employees. In addition, competitors may attempt to recruit HNC's key
employees. HNC may not be successful in attracting, assimilating and retaining
such personnel. The failure to attract, assimilate and retain key personnel
could have a material adverse effect on HNC's business, financial condition and
results of operations. See "Business -- Employees".

INTERNATIONAL SALES POSE RISKS.

   International operations and export sales (including sales in Canada)
represented 23.1% of HNC's total revenues in 1998, 18.9% of HNC's total revenues
in 1997 and 17.7% of HNC's total revenues in 1996. HNC intends to continue to
expand its operations outside the United States and to enter additional
international markets, which will require significant management attention and
financial resources. For certain more mature products, such as Falcon, HNC may
need to increase international sales in order to continue to expand the
product's customer base. HNC has committed and continues to commit significant
time and development resources to customizing certain of its products for
selected international markets and to developing international sales and support
channels. HNC's efforts to develop products, databases and models for targeted
international markets or to develop additional international sales and support
channels may not be successful. The failure of such efforts, which can entail
considerable expense, could have a material adverse effect on HNC's business,
financial condition and results of operations.

   International sales are subject to additional inherent risks, including:

   o  longer payment cycles;

   o  unexpected changes in regulatory requirements;

   o  import and export restrictions and tariffs;

   o  difficulties in staffing and managing foreign operations;

   o  the burdens of complying with a variety of foreign laws;

   o  greater difficulty or delay in accounts receivable collection;

   o  potentially adverse tax consequences; and

   o  political and economic instability.


   HNC's international sales are currently denominated predominately in United
States dollars and a small portion are denominated in the currencies of Western
Europe, Canada and Australia. An increase in the value of the United States
dollar relative to foreign currencies could make HNC's products more expensive,
and therefore potentially less competitive, in foreign markets. In the future,
to the extent that HNC's international sales are denominated in local
currencies, foreign currency translations may contribute to significant
fluctuations in HNC's business, financial condition and results of operations.
If for any reason, exchange or price controls or other restrictions on foreign
currencies are imposed, HNC's business, financial condition and results of
operations could be materially adversely affected. See "Business -- Sales and
Marketing."





                                       20
<PAGE>   21

HNC'S PRODUCTS ARE SUBJECT TO GOVERNMENT REGULATION.

   HNC's customers are subject to a number of government regulations and certain
other industry standards with which many of HNC's key products must comply. For
example, HNC's financial services products are affected by Regulation B
promulgated under the Equal Credit Opportunity Act, by regulations governing the
extension of credit to consumers and by Regulation E promulgated under the
Electronic Fund Transfers Act governing the transfer of funds from and to
consumer deposit accounts, as well as VISA and MasterCard electronic payment
standards. In the mortgage services market, HNC's products are affected by
regulations such as Fannie Mae and Freddie Mac regulations for conforming loans.
In addition, recent regulatory initiatives have restricted the availability of
bank and credit bureau data, reflecting a consumer privacy trend that could
limit HNC's ability to obtain or use certain credit-related information. It is
also possible that insurance-related regulations may in the future apply to
HNC's healthcare/insurance products. In addition, if state-mandated workers'
compensation laws or regulations or state workers' compensation fee schedules
are simplified, such changes would diminish the need for, and the benefit
provided by, the CRLink product. 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 HNC's healthcare/insurance products by making
them obsolete, or by requiring extensive changes in these products to reflect
new workers' compensation rules. To the extent that HNC sells new products
targeted to markets that include regulated industries and businesses, HNC's
products will need to comply with these additional regulations. Any failure of
HNC's products to comply with existing or future regulations and standards could
result in legal action against HNC or its customers by regulatory authorities or
by third parties, including actions seeking civil or criminal penalties,
injunctions against HNC's use of data or civil damages, any of which could have
a material adverse effect on HNC's business, financial condition and results of
operations. HNC may also be liable to its customers for failure of its products
to comply with such regulatory requirements. Furthermore, changes to these
regulations and standards or the adoption of new regulations or standards that
affect HNC's products could affect the performance of such products and have a
material adverse effect on HNC's business, financial condition and results of
operations.

HNC MUST PROTECT ITS INTELLECTUAL PROPERTY.

   HNC relies on a combination of patent, copyright, trademark and trade secret
laws and confidentiality procedures to protect its proprietary rights. HNC also
seeks to protect its software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection. Despite
HNC's measures to protect confidentiality of intellectual property, it may be
possible for a third party to copy or otherwise to obtain and use HNC's products
or technology without authorization, or to develop similar technology
independently. Patents may not be issued with respect to HNC's pending or future
patent applications and HNC's patents may not be upheld as valid or prevent the
development of competitive products. In addition, to ensure that customers will
not be adversely affected by an interruption in HNC's business, HNC places
source code for certain of its products into escrow, which may increase the
likelihood of misappropriation or other misuse of HNC's intellectual property.
Moreover, effective protection of intellectual property rights may be
unavailable or limited in certain foreign countries in which HNC has done and
may do business. Also, HNC has developed technologies under research projects
conducted under agreements with various United States Government agencies or
subcontractors to such agencies. Although HNC has acquired certain commercial
rights to such technologies, the United States Government typically retains
ownership of certain intellectual property rights and licenses in the
technologies developed by HNC under such contracts, and in some cases can
terminate HNC's rights in such technologies if HNC fails to commercialize them
on a timely basis. In addition, under certain United States Government
contracts, the results of HNC's research may be made public by the government,
which could limit HNC's competitive advantage with respect to future products
based on such research. See "Business -- Intellectual Property and Other
Proprietary Rights."

HNC IS SUBJECT TO CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS.

   In the past, HNC has received communications from third parties asserting
that HNC trademarks infringe such other parties' trademarks, or that data used
by HNC is copyrighted by such third party, none of which has resulted in
litigation or material losses to HNC. In November 1998, Nestor, Inc. filed a
complaint against HNC alleging that HNC is infringing a United States patent
issued to Nestor and seeking a declaration that a United States patent issued to
HNC is invalid and seeking damages and injunctive relief. The complaint also
seeks treble compensatory damages, punitive damages and injunctive relief for
alleged violations of the Sherman Antitrust Act and the Rhode Island Antitrust
Act. See "Item 3 -- Legal Proceedings." Given HNC's ongoing efforts to develop
and market new technologies and products, HNC may be subject to claims from
other third parties asserting that HNC's products infringe, or may infringe,
their intellectual property rights. If as a result of any claims HNC were
precluded from using certain technologies or intellectual property rights,
licenses to such disputed third-party technology or intellectual property rights
might not be available on reasonable commercial terms, if at all. Furthermore,
HNC may initiate claims or litigation against third parties for infringement of





                                       21
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HNC's proprietary rights or to establish the validity of HNC's proprietary
rights. Litigation, either as plaintiff or defendant, could result in
significant expense to HNC and divert the efforts of HNC's technical and
management personnel from productive tasks, whether or not such litigation is
resolved in favor of HNC. In the event of an adverse ruling in any such
litigation, HNC 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, and a
court might invalidate HNC's patents, trademarks or other proprietary rights. In
the event of a successful claim against HNC and the failure of HNC to develop or
license a substitute technology, HNC's business, financial condition and results
of operations would be materially and adversely affected. As the number of
software products increases and the functionality of these products further
overlaps, HNC believes that software developers may become increasingly subject
to infringement claims. Any such claims, with or without merit, can be time
consuming and expensive to defend and could materially and adversely affect
HNC's business, financial condition and results of operations. See "Business --
Intellectual Property and Other Proprietary Rights."

HNC'S PRODUCTS ARE COMPLEX AND ARE VULNERABLE TO PRODUCT DEFECTS AND PRODUCT
LIABILITY CLAIMS.

   Software products as complex as those offered by HNC often contain undetected
errors or failures when first introduced or as new versions are released. In
addition, to the extent that HNC may have to develop new products that operate
in new environments, such as the Internet, the possibility for program errors
and failures may increase due to factors such as the use of new technologies or
the need for more rapid product development that is characteristic of the
Internet market. Despite pre-release testing by HNC and by current and potential
customers, there still may be errors in new products, even after commencement of
commercial shipments. The occurrence of errors could result in delay in, or
failure to achieve, market acceptance of HNC's products, which could have a
material adverse effect on HNC's business, financial condition and results of
operations. Although HNC's license agreements with its customers typically
contain provisions designed to limit HNC's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective as a result of existing or future laws or judicial
decisions. Because HNC's products are used in business-critical applications,
any errors or failures in such products may give rise to substantial product
liability claims, which could have a material adverse effect on HNC's business,
financial condition and results of operations.

HNC'S COMMON STOCK PRICE FLUCTUATES AND HAS BEEN VOLATILE.

   HNC's common stock has experienced significant price volatility and such
volatility may be expected to continue in the future. Factors such as
announcements of the introduction of new products by HNC or its competitors,
acquisitions of businesses or products by HNC, quarter-to-quarter variations in
HNC's operating results and the gain or loss of significant orders, as well as
market conditions in the technology and emerging growth company sectors, may
have a significant impact on the market price of HNC's common stock. Further,
the stock market has historically experienced extreme volatility that has
particularly affected the market prices of securities of many technology
companies and that often has been unrelated or disproportionate to the operating
performance of such companies. These market fluctuations may adversely affect
the price of HNC common stock.

YEAR 2000 COMPLIANCE.

   It is generally anticipated that many organizations will experience
operational difficulties at the beginning of the Year 2000 as a result of the
fact that many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Significant
uncertainty exists in the software and other industries concerning the scope and
magnitude of problems associated with the century change. To track performance
of completing any remaining compliance work as well as to assess the Year 2000
issue more broadly, HNC developed a Year 2000 project plan. All costs associated
with carrying out HNC's plan for the Year 2000 compliance are being expensed as
incurred. The total cost associated with preparation for the Year 2000 has not
been, and is not expected to be, material to HNC's business, financial condition
or results of operations. Nevertheless, HNC may not timely identify and
remediate all significant Year 2000 problems and remedial efforts may involve
significant time and expense. Failure to identify such problems could, for
example, impair HNC's internal product development efforts and internal
management systems. Year 2000 compliance problems of HNC or its customers or
suppliers may have a material adverse effect on HNC's business, financial
condition and results of operations.

   The inability of HNC to complete its assessment and any necessary
modifications to recently acquired products could have a material adverse effect
on HNC's business, financial condition and results of operations. Based on HNC's
assessment of its major software products to date, HNC believes that the current
version of each is Year 2000 compliant. However, some number of HNC's customers
may not install the Year 2000 compliant version of HNC's products in time, which
could lead to failure of customer systems and product liability claims against
HNC. Even if HNC's products are Year 2000 compliant, HNC may in the future be
subject to





                                       22
<PAGE>   23

claims based on Year 2000 issues in the products of other companies, or issues
arising from the integration of multiple products within a system. The costs of
defending and resolving Year 2000-related disputes, and any liability of HNC for
Year 2000 related damages, including consequential damages, could have a
material adverse effect on HNC's business, financial condition and results of
operations. Further, HNC's products are generally used with enterprise systems
involving complex software products developed by other vendors, which may not be
Year 2000 compliant. In particular, many of HNC's customers are financial
institutions, insurance companies and other companies with insurance and
financial services businesses, all of which use legacy computer systems that are
expected to be particularly susceptible to Year 2000 compliance issues. If HNC's
customers are unable to use their information systems because of the failure of
such non-compliant systems or software or for any other reason, there would be a
decrease in the volume of transactions that HNC's customers process using HNC's
products. As a result, HNC's recurring revenue in the form of usage-based
transactional fees from customers in the insurance and financial solutions
markets would decline, which would have a material adverse effect on HNC's
business, financial condition and results of operations. Such failure could also
affect the perceived performance of HNC's products, which could have a negative
effect on HNC's competitive position. In addition, HNC believes that the
purchasing patterns of customers and potential customers may be affected by Year
2000 issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by HNC, which could result in a material adverse effect on HNC's business,
financial condition and results of operations.

   Potential worst case Year 2000 scenarios currently being considered by HNC
address issues arising from non-compliance by its customers, suppliers or
internal operating systems. Although HNC's Y2k Project will strive to uncover
significant non-compliance issues, in the worst case not all Y2k problems may be
uncovered by the year 2000, which could have a material adverse effect on HNC's
business. However, HNC believes that its most probable worst case scenario is
more likely to arise from its customers' and vendors' inability to become Year
2000 compliant than from HNC's failure to bring its own products into
compliance. As a result, HNC's supply chain and revenues could be adversely
impacted.

HNC IS SUBJECT TO ANTI-TAKEOVER PROVISIONS.

   HNC's board of directors is authorized to issue up to 4,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by HNC's stockholders. The rights of the holders of HNC's common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any of HNC's preferred stock that may be issued 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 the
outstanding voting stock of HNC. HNC has no current plans to issue shares of
preferred stock. In addition, Section 203 of the Delaware General Corporation
Law restricts certain business combinations with any "interested stockholder" as
defined by such statute. The statute may have the effect of delaying, deferring
or preventing a change in control of HNC.


ITEM 2. PROPERTIES

   The Company's principal administrative, sales, marketing, support, research
and development facilities are located in approximately 112,000 square feet of
space in San Diego, California. The Company and its subsidiaries also lease an
aggregate of approximately 157,000 square feet of additional office space in
Irvine, California; Minneapolis, Minnesota; Costa Mesa, California; Cincinnati,
Ohio; and Atlanta, Georgia. The Company and its subsidiaries also maintain
numerous field offices in the United States and in foreign countries. The
Company believes that its current facilities are adequate to meet its needs for
the foreseeable future. The Company believes that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.






                                       23
<PAGE>   24

ITEM 3. LEGAL PROCEEDINGS

   On November 25, 1998, Nestor filed a complaint against the Company in the
United States District Court for the District of Rhode Island (C.A. No. 98 569).
In the complaint, Nestor alleges that the Company has violated the federal
Sherman Antitrust Act and the Rhode Island Antitrust Act and tortuously
interfered with prospective contractual business relationships of Nestor in
connection with the Company's marketing of its Falcon credit card fraud
detection product. The complaint also alleges that the Company has infringed a
United States patent held by Nestor. Nestor seeks to recover unspecified
compensatory damages, treble damages and punitive damages and to obtain certain
injunctive relief arising from these claims. The complaint also seeks a
declaratory judgment that a United States patent held by the Company relating to
technology used in HNC's Falcon products is invalid and unenforceable due to
alleged inequitable conduct of the Company in obtaining such patent and that
Nestor's products do not infringe such patent. Although the Company is in the
early stages of analyzing Nestor's complaint, the Company believes that the
complaint is without merit and that the Company has good and valid defenses to
Nestor's claims. The Company intends to defend the action rigorously.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   A Special Meeting of Stockholders was held on November 20, 1998 to approve an
amendment to the Company's 1995 Equity Incentive Plan increasing the number of
shares of the Company's Common Stock reserved for issuance thereunder by 700,000
shares. The proposal passed by the following vote:

<TABLE>
<CAPTION>
                                                                 ABSTENTIONS
                                                                 AND BROKER
                                     VOTES FOR   VOTES AGAINST   NON-VOTES
                                     ---------   -------------   -----------
          <S>                       <C>            <C>           <C>   
          Proposal..............    14,271,352     6,500,305     42,713
</TABLE>

                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

   The Company's Common Stock has been traded on the Nasdaq National Market
since June 1995 under the symbol "HNCS." The following table sets forth for the
periods indicated the high and low sales prices of the Common Stock. Prior to
June 1995, there was no established public trading market for the Common Stock.

<TABLE>
<CAPTION>
                                           HIGH      LOW
                                           ----      ---
          <S>                           <C>        <C>
          1998:
            First Quarter............   $ 43       $ 30 3/4
            Second Quarter...........     42 3/4     31 1/2
            Third Quarter............     47 1/8     33 7/8
            Fourth Quarter...........     40 1/2     22 1/2

          1997:
            First Quarter............   $ 36 3/4   $ 23 1/4
            Second Quarter...........     42 3/8     18 1/4
            Third Quarter............     43 5/8     33 3/4
            Fourth Quarter...........     43 1/2     30
</TABLE>

   As of February 26, 1999, there were approximately 230 holders of record of
the Common Stock.

   The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future. The Company's bank credit agreement prohibits the Company
from declaring or paying any cash dividends without the bank's consent.





                                       24
<PAGE>   25

ITEM  6. SELECTED FINANCIAL DATA

   The selected consolidated financial data as of December 31, 1998 and 1997 and
for each of the years in the three-year period ended December 31, 1998 have been
derived from the Company's audited Consolidated Financial Statements included
elsewhere in this Report. The selected consolidated financial data as of
December 31, 1996, and for the year ended December 31, 1995 have been derived
from separate audited financial statements for the Company not included herein.
The selected consolidated financial data as of December 31, 1995 and 1994 and
for the year ended December 31, 1994 have been derived from separate audited
financial statements for the Company and CompReview is not included herein. The
data set forth below is qualified in their entirety by reference to, and should
be read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes thereto included elsewhere in this Report.

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                           ----------------------------------------------------
                                                                             1998       1997       1996       1995       1994
                                                                           --------   --------   --------   --------   --------
                                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
         <S>                                                               <C>        <C>        <C>        <C>        <C>     
         STATEMENT OF INCOME DATA:(1)
             Total revenues ............................................   $178,608   $113,735   $ 71,439   $ 43,704   $ 29,838
             Operating income ..........................................     21,026     23,040      9,659      5,082      2,881
             Net income ................................................     10,452     17,565     11,893      6,077      3,142
             Basic net income per common share(2) ......................       0.41       0.72       0.50       0.38       0.28
             Diluted net income per common share(2) ....................       0.39       0.68       0.47       0.28       0.17
             Pro forma net income(3) ...................................                15,417      9,731      4,534      2,137
             Pro forma basic net income per common share(3) ............                  0.64       0.41       0.30       0.25
             Pro forma diluted net income per common share(3) ..........                  0.60       0.38       0.21       0.12
             Shares used in computing basic net income
               per common share and basic pro forma net
               income per common share .................................     25,362     24,275     23,552     15,195      8,642
             Shares used in computing diluted net income
               per common share and diluted  pro forma net
               income per common share .................................     26,650     25,681     25,363     21,510     18,142
</TABLE>

<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                           ----------------------------------------------------
                                                                             1998       1997       1996       1995       1994
                                                                           --------   --------   --------   --------   --------
                                                                                              (IN THOUSANDS)
         <S>                                                               <C>        <C>        <C>        <C>        <C>     
         BALANCE SHEET DATA:
             Cash,  cash  equivalents and investments available for sale   $153,340   $ 42,946   $ 34,849   $ 44,975   $  7,827
             Total assets ..............................................    283,914    119,877     98,293     63,113     20,663
             Long-term obligations, less current portion ...............    101,039        239        683      1,659      1,212
             Mandatorily redeemable convertible preferred stock ........       --         --         --         --       13,169
</TABLE>

----------

(1) The selected consolidated financial data gives retroactive effect to the
    acquisitions of Risk Data, Retek and CompReview for all periods presented,
    accounted for as poolings of interests.

(2) The computations of basic net income per common share for 1994 and 1995
    include reductions of consolidated net income in the amounts of $717,000 and
    $348,000, respectively, related to the accretion of dividends on mandatorily
    redeemable convertible Preferred Stock, which converted into Common Stock
    upon the closing of the Company's initial public offering on June 26, 1995.

(3) Pro forma net income and net income per common share reflect a provision for
    taxes on the income of CompReview, which was a subchapter S corporation
    prior to its acquisition by HNC, as if CompReview had been subject to
    corporate income taxes as a C corporation for all periods presented.





                                       25
<PAGE>   26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

   This Report (including without limitation the following section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations) contains forward-looking statements regarding the Company and its
business, financial condition, results of operations and prospects. Words such
as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are intended to
identify forward-looking statements, but are not the exclusive means of
identifying forward-looking statements in this Report. Additionally, statements
concerning future matters such as the development of new products, enhancements
or technologies, possible changes in legislation and other statements regarding
matters that are not historical are forward-looking statements.

   Although forward-looking statements in this Report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include without
limitation those discussed in "Risk Factors" in Item 1 above as well as those
discussed elsewhere in this Report. Readers are urged not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Report. The Company undertakes no obligation to revise or update any
forward-looking statements in order to reflect any event or circumstance that
may arise after the date of this Report. Readers are urged to carefully review
and consider the various disclosures made in this Report, which attempt to
advise interested parties of the risks and factors that may affect the Company's
business, financial condition, results of operations and prospects.

OVERVIEW

   The Company develops, markets and supports predictive software solutions for
leading service industries. These predictive software solutions employ
proprietary neural-network predictive decision engines, profiles, traditional
statistical modeling, business models, expert rules and context vectors to
convert existing data and business experiences into meaningful recommendations
and actions. The Company's segments are as follows: the Financial Solutions
Group ("FSG"), the Insurance Solutions Group ("ISG") and the Retail Solutions
Group ("RSG"). The FSG segment provides transaction-based, real-time
authorization and action decisions for applications such as credit card charge
authorization and the loan approval decision process. The ISG segment provides
users with the ability to reduce fraud losses and streamline operations in the
containment of the medical costs of workers' compensation and automobile
accident insurance claims, workers' compensation loss reserving, workers'
compensation fraud, managed care effectiveness and provider effectiveness. The
RSG segment offers predictive software solutions to allow retailers to build
forecasting and marketing models to carry out day-to-day buying and selling
activities which address inventory control, merchandise management and financial
control management, thereby reducing carrying costs for inventories and
improving purchasing, promotion and logistics efficiencies. The Company was
founded in 1986 to provide software tools and contracted technology services
using neural-network technology.

   In August 1996, the Company completed its acquisition of Risk Data in a
transaction accounted for as a pooling of interests. Risk Data is based in
Irvine, California and develops, markets and supports proprietary software
decision products for use in the insurance industry. In November 1996, the
Company completed its acquisition of Retek in a transaction accounted for as a
pooling of interests. Retek is based in Minneapolis, Minnesota and develops,
markets and supports management decision software products for retailers and
their vendors. In November 1997, the Company completed its acquisition of
CompReview, in a transaction accounted for as a pooling of interests. CompReview
is located in Irvine, California and develops, markets and supports a software
product and related services designed to assist in the management and
containment of the medical costs of workers' compensation and automobile
accident medical claims. CompReview provides its product and services primarily
to insurance companies, managed care organizations, third party administrators
and large self-insured employers. In March 1998, the Company acquired PCS, a
company that develops, markets and supports fully integrated distribution center
management software products that address the distribution needs of the retail,
manufacturing and wholesale industries. In April 1998, the Company acquired FTI,
which develops and markets profitability measurement and decision support
software products and related support services to banks and other similar
financial institutions. In June 1998, the Company acquired the ATACS product
line of Bedford Associates, Inc., which is a wholly owned subsidiary of British
Airways plc. ATACS is a fraud-management software solution for wireline,
wireless and Internet telecommunication service providers. In June 1998, Risk
Data merged with and into CompReview to form HNC Insurance Solutions. In
December 1998, the Company acquired the minority interest of Aptex Software Inc.
("Aptex"), previously a majority-owned subsidiary located in San Diego,
California that develops, markets and supports electronic text analysis
technology in products designed for the Internet and other environments. The
Company anticipates that from time to time it will consider acquisitions of
other businesses in order to





                                       26
<PAGE>   27

expand the markets served by the Company and to acquire complementary
technologies, products and personnel. See "Business -- Risk Factors --
Acquisitions" and "Business -- HNC's Strategy."

   After giving retroactive effect to the Company's acquisitions of Risk Data,
Retek and CompReview, HNC experienced compound annual growth in total revenues
of 62% from 1994 through 1998. See "Business -- Risk Factors -- Risks Associated
with Managing Growth." This revenue growth resulted primarily from increased
license fees for the Retek suite of products, CRLink, the Falcon product line,
and ProfitMax products. Contributing to the growth during 1998 were revenues
derived from products of the recently acquired companies, FTI, PCS and ATACS.
Because of the long sales and development cycle associated with the Company's
products, the Company has not received significant revenues to date from the
Falcon Cheque, VeriComp, AUTOADVISOR, eCM Director, SPYDER, Retek Store
Operations - RF and SelectProfile products. See "Business -- Risk Factors --
Lengthy and Unpredictable Sales Cycle."

   The Company markets many of its predictive software solutions as an ongoing
service that includes software licenses, decision model updates, application
consulting and on-line or on-site support and maintenance. The Company's pricing
for the CRLink, AUTOLINK, Falcon, MIRA, ProfitMax, PMAdvisor, CompCompare and
ProviderCompare products typically includes an annual or monthly usage fee and a
one to seven year contract commitment. In 1998, 1997 and 1996, recurring license
and maintenance revenues represented 50.8%, 55.2% and 56.1% of the Company's
total revenues, respectively.

   The Company's revenues and operating results have varied significantly in the
past and may do so in the future. Factors affecting the Company's revenues and
operating results include: market acceptance of the Company's products; the
relatively large size and small number of customer orders that may be received
during a given period; customer cancellation of long-term contracts yielding
recurring revenues or customers' ceasing their use of the Company's products for
which the Company's fees are usage based; the length of the sales cycle of the
Company's products; the Company's ability to develop, introduce and market new
products and product enhancements; the timing of new product announcements and
introductions by the Company and its competitors; changes in the mix of the
Company's distribution channels; changes in the level of the Company's operating
expenses; the Company's ability to achieve progress on percentage-of-completion
contracts; the Company's success in completing certain pilot installations for
contracted fees; competitive conditions in the industry; domestic and
international economic conditions; and market conditions in the Company's
targeted markets. In addition, license agreements entered into during a quarter
may not meet HNC's revenue recognition criteria. Therefore, even if the Company
meets or exceeds its forecast of aggregate licensing and other contracting
activity, it is possible that the Company's revenues would not meet
expectations. Furthermore, the Company's operating results may be affected by
factors unique to certain of its product lines. For example, the Company derives
a substantial and increasing portion of its revenues from its retail products,
which are generally priced as "perpetual" license transactions in which the
Company receives a one-time license fee. The Company recognizes these fees as
revenue upon delivery of the software and acceptance by the customer. Thus,
failure to complete a perpetual license transaction during a fiscal quarter
would preclude the Company from recognizing revenue from that transaction in
that quarter, and thus would have a disproportionate adverse impact on the
Company's operating results for that quarter.

   The Company expects fluctuations in its operating results to continue for the
foreseeable future. Consequently, the Company believes that period-to-period
comparisons of its financial results should not be relied upon as an indication
of future performance. Because the Company's expense levels are based in part on
its expectations regarding future revenues and in the short term are fixed to a
large extent, the Company may be unable to adjust its spending in time to
compensate for any unexpected revenue shortfall. Accordingly, the Company may
not be able to maintain profitability on a quarterly or annual basis in the
future. Due to the foregoing factors, it is possible that in some future quarter
the Company's operating results will be below the expectations of public market
analysts and investors. In that event, the price of the Company's Common Stock
and, in turn, the price of the Company's 4.75% Convertible Subordinated Notes
due 2003, would likely be materially adversely affected.

RESULTS OF OPERATIONS

   The Company's revenues are comprised of license and maintenance revenues and
services and other revenues. Total revenues increased by 57.0% to $178.6 million
in 1998 and by 59.2% to $113.7 million in 1997. International operations and
export sales represented 23.1%, 18.9% and 17.7% of the Company's total revenues
in 1998, 1997 and 1996, respectively. For the year ended December 31, 1998,
approximately 6.8% of the Company's sales were denominated in currencies other
than the Company's functional currency, which is the US dollar. These foreign
currencies are primarily those of Western Europe, Canada and Australia. The
retail product line currently has more sales in international markets than the
healthcare/insurance and financial services product lines combined. The Company
believes that international sales represent a significant opportunity for
revenue growth and expects international sales to increase as a percent of total
revenue.





                                       27
<PAGE>   28

   License and Maintenance Revenues. The Company's license and maintenance
revenues are derived from annual license fees, monthly license fees, perpetual
license fees and annual maintenance fees. The Company typically licenses many of
its products for an annual or monthly usage fee under long-term contracts that
include software licenses, decision model updates, application consulting, and
on-line or on-site support and maintenance. The Company's revenue from periodic
software license and maintenance agreements is generally recognized ratably over
the respective license or agreement periods. Revenue from certain short-term
periodic software license and maintenance agreements with a guaranteed minimum
license fee is recognized as related services are performed. Transactional fees
are recognized as revenue based on system usage or when fees based on system
usage exceed the monthly minimum license fees. Revenue from perpetual licenses
of the Company's software for which there are no significant continuing
obligations and collection of the related receivables is probable is recognized
on delivery of the software and acceptance by the customer. See "Business --
Risk Factors -- Potential Fluctuations in Operating Results" and " -- New
Accounting Pronouncements."

   License and maintenance revenues increased by 55.4% to $139.3 million in 1998
from $89.6 million in 1997. License and maintenance revenues from the financial
solutions segment increased by 82.8% to $44.3 million in 1998 from $24.2 million
in 1997. License and maintenance revenues from the retail solutions segment
increased by 53.6% to $44.4 million in 1998 from $28.9 million in 1997. License
and maintenance revenues from the insurance solutions segment increased by 32.3%
to $43.8 million in 1998 from $33.1 million in 1997. The increase in the
financial solutions segment was attributable to an increase in the sales of the
Falcon suite of products and sales generated by the recently acquired company,
FTI. In September 1998, the Company entered into a two year service agreement
and a three year sale/license agreement for its AREAS, Data Mining Workstation,
Deploynet/API and SIMD Numerical Array Processor products with Transamerica
Intellitech which contributed to the increase in license and maintenance
revenues. The increase in the retail solutions segment was primarily
attributable to an increase in sales of the Retek suite of products. Products of
the recently acquired company, PCS, were added to the Retek suite of products
during the first quarter of 1998. The increase in the insurance solutions
segment was a result of an increase in revenues derived by the CRLink product,
which was due primarily to an increase in the customer base.

   License and maintenance revenues increased by 83.4% to $89.6 million in 1997
from $48.9 million in 1996. License and maintenance revenues from the retail
solutions segment increased by 196.78% to $28.9 million in 1997 from $9.7
million in 1996. License and maintenance revenues from the insurance solutions
segment increased by 51.6% to $33.1 million in 1997 from $21.8 million in 1996.
License and maintenance revenues from the financial solutions segment increased
by 57.8% to $24.2 million in 1997 from $15.4 million in 1996. The increase in
the retail solutions segment was primarily attributable to an increase in sales
of the Retek suite of products. The increase in the insurance solutions segment
was a result of an increase in revenues derived by the CRLink product, which was
due primarily to an increase in the customer base. Contributing to the increase
in the insurance solutions segment were increased sales of the PMAdvisor and
MIRA products. The increase in the financial solutions segment was attributable
to an increase in sales of the Falcon suite of products and sales of the
ProfitMax and Capstone products.

   Services and Other Revenues. Services and other revenues are comprised of
installation and implementation revenues, service bureau operations 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. Revenues from
installation and implementation services and contract services are 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. Service bureau revenues are derived from the Company's service
bureau operations, which provide CRLink's functionality to customers that do no
wish to obtain a license, that use this service until they can implement their
own internal CRLink operation or that use this service when their volumes peak
to high levels. Service bureau customers typically subscribe for services under
month-to-month agreements and service bureau fees are recognized as revenue when
the processing services are performed.

   Services and other revenues increased by 63.2% to $39.3 million in 1998 from
$24.1 million in 1997. Services and other revenues from the retail solutions
segment increased 505.5% to $12.3 million in 1998 from $2.0 million in 1997,
which was the result of an increase in consulting contracts with commercial
customers within the retail industry. Services and other revenues from the
financial solutions segment increased by 25.4 % to $13.3 million in 1998 from
$10.6 million in 1997 and services and other revenues from the insurance
solutions segment increased by 35.1% to $8.4 million in 1998 from $6.2 million
in 1997. These increases were attributable to an increase in installations of
the Falcon suite of products and the Capstone products in the financial
solutions segment and an increase in customers utilizing the service bureau
operations in the insurance solutions segment.





                                       28
<PAGE>   29


   Services and other revenues increased by 6.8% to $24.1 million in 1997 from
$22.5 million in 1996. Services and other revenues from the financial solutions
segment increased by 15.7 % to $10.6 million in 1997 from $9.1 million in 1996
and services and other revenues from the insurance solutions segment increased
by 29.6% to $6.2 million in 1997 from $4.8 million in 1996. These increases were
attributable to an increase in installations of the Falcon suite of products and
the ProfitMax product in the financial solutions segment and an increase in
customers utilizing the service bureau operations in the insurance solutions
segment. Services and other revenues from the retail solutions segment decreased
by 45.1% to $2.0 million in 1997 from $3.7 million in 1996. This decrease was
attributable to a decrease in commercial development contracts.

Gross Margin

   The following table sets forth the gross margin for each of the Company's
revenue categories for each of the comparison periods.

<TABLE>
<CAPTION>
                                                YEARS ENDED DECEMBER 31,
                                              ---------------------------
                                               1998       1997       1996
                                              -----      -----      -----
         <S>                                  <C>        <C>        <C>  
         License and maintenance .....        76.0%      77.8%      71.9%
         Services and other ..........        27.1%      38.0%      38.9%
</TABLE>

   License and Maintenance Gross Margin. License and maintenance costs primarily
represent the Company's expenses for personnel engaged in customer support,
travel to customer sites and documentation materials. The Company's gross margin
on license and maintenance revenues was 76.0%, 77.8% and 71.9% in 1998, 1997 and
1996, respectively. License and maintenance gross margin from the retail
solutions segment was 90.5%, 89.3% and 81.6% in 1998, 1997 and 1996,
respectively. These increases were primarily a result of license fees increasing
at a higher rate than the costs associated with providing these licenses.
Contributing to the increase was increased pricing producing higher margins.
License and maintenance gross margin from the financial solutions segment was
82.3%, 86.2% and 88.2% in 1998, 1997 and 1996, respectively. The primary reason
for the decreases in gross margin was increased staffing and associated costs in
client services to support an increased volume of business. License and
maintenance gross margin from the insurance solutions segment was 55.4%, 60.8%
and 57.3% in 1998, 1997 and 1996, respectively. The decrease in 1998 was
attributable to an increase in the Preferred Provider Organization bill
repricing, which typically have lower margins than the overall bill review
business. The increase in 1997 was primarily a result of license fees increasing
at a higher rate than the costs associated with providing these licenses.

   Services and Other Gross Margin. Services and other expenses consist 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 the service bureau
operations. The Company's gross margin on services and other revenues was 27.1%,
38.0% and 38.9% in 1998, 1997 and 1996, respectively. Service and other gross
margin from the retail solutions segment was 23.0%, 55.7% and 43.6% in 1998,
1997 and 1996, respectively. The decrease in 1998 was attributable to an
increase in consulting contracts with commercial customers. Due to the increase
in demand for retail consulting services, the retail solutions segment utilized
a significant amount of contract labor, which in turn caused a decrease in gross
margins. The increase in 1997 was a result of a change in the pricing of
installation services. The retail solutions segment shifted from a fixed price
pricing model to a time and materials pricing model. Service and other gross
margin from the financial solutions segment was 24.3%, 36.9% and 44.1% in 1998,
1997 and 1996, respectively. These decreases were a result of a shift in the mix
of implementations due primarily to an increase in Capstone implementations,
which have substantially lower margins than implementations of the Falcon
product line. Service and other gross margin from the insurance solutions
segment was 28.2%, 30.0% and 29.6% in 1998, 1997 and 1996, respectively. The
slight decrease in 1998 is attributable to a marginal increase in labor costs
required to support the service bureau business combined with a more static
customer base.

   Research and Development Expenses. Research and development expenses consist
primarily of salaries and other personnel-related expenses, subcontracted
development services, depreciation for development equipment and supplies.
Research and development expenses increased to $32.7 million in 1998 from $21.2
million in 1997 and from $13.8 million in 1996, representing 18.3%, 18.6% and
19.3% of total revenues in 1998, 1997 and 1996, respectively. Research and
development expenses from the insurance solutions segment increased to $8.3
million in 1998 from $2.3 million in 1997 and from $1.9 million in 1996.
Research and development expenses from the retail solutions segment increased to
$12.8 million in 1998 from $9.5 million in 1997 and from $4.8 million in 1996.
Research and development expenses from the financial solutions segment increased
to $9.8 million in 1998 from $7.5 million in 1997 and from $4.8 million in 1996.
The increase in these expenses in absolute dollars was due primarily to
increases in staffing and related costs to support new product development
activities, primarily related to enhancements to products in the insurance
solutions segment, and to a lesser extent, products in the retail solutions
segment and financial solutions segment. Contributing to the





                                       29
<PAGE>   30

increase in absolute dollars in 1998, were the increased efforts required to
support research and development functions of businesses acquired by the Company
in late fiscal 1997 and in fiscal 1998.

   Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is not established until
completion of a working model. Costs incurred by the Company 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, 1998. The Company
anticipates 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 Expenses. Sales and marketing expenses consist primarily
of salaries and benefits, commissions, travel, entertainment and promotional
expenses. Sales and marketing expenses increased to $34.5 million in 1998 from
$22.0 million in 1997 and $11.9 million in 1996, representing 19.3%, 19.4% and
16.7% of total revenues in 1998, 1997 and 1996, respectively. Sales and
marketing expenses from the retail solutions segment increased to $14.0 million
in 1998 from $8.3 million in 1997 and from $1.9 million in 1996. Sales and
marketing expenses from the financial solutions segment increased to $12.7
million in 1998 from $7.6 million in 1997 and from $5.8 million in 1996. Sales
and marketing expenses from the insurance solutions segment increased to $4.6
million in 1998 from $4.1 million in 1997 and from $3.4 million in 1996. The
increases in sales and marketing expenses were due primarily to increases in
staffing related to the Company's expansion of its direct sales and marketing
staff. Contributing to the increases were increased expenses for trade shows,
advertising, corporate marketing programs and other expenses to support the
recently acquired businesses. The Company expects sales and marketing expenses
to continue to increase for the foreseeable future. Such expenses could also
increase as a percentage of total revenues as the Company continues to develop a
direct sales force in Europe and other international markets, expand its
domestic sales and marketing organization and increase the breadth of its
product lines.

   General and Administrative Expenses. General and administrative expenses
consist primarily of personnel costs for finance, contract administration, human
resources and general management, as well as acquisition, insurance and
professional services expenses. General and administrative expenses increased to
$19.0 million in 1998 from $12.6 million in 1997 and $8.6 million in 1996,
representing 10.6%, 11.1% and 12.0% of total revenues, respectively. Included in
general and administrative expenses were acquisition expenses of $4.8 million,
primarily related to Aptex and the terminated acquisition of Open Solutions,
Inc., $1.4 million, primarily related to CompReview, and $1.2 million, primarily
related to Risk Data and Retek, in 1998, 1997 and 1996, respectively. Excluding
acquisition expenses, general and administrative expenses were $14.2 million or
7.9% of total revenues, $11.2 million or 9.8% of total revenues and $7.4 million
or 10.3% of total revenues in 1998, 1997 and 1996, respectively.

   Excluding acquisition costs, general and administrative expenses from the
retail solutions segment increased to $4.4 million in 1998 from $2.8 million in
1997 and from $1.3 million in 1996. General and administrative expenses
excluding acquisition costs from the financial solutions segment increased to
$3.7 million in 1998 from $2.7 million in 1997 and from $2.3 million in 1996.
General and administrative expenses excluding acquisition costs from the
insurance solutions segment increased to $5.3 million in 1998 from $4.9 million
in 1997 and from $3.1 million in 1996. The increase in absolute dollars was due
primarily to increased staffing and related expenses, including recruiting
costs, to support higher levels of sales and development activity across the
Company resulting in part from the Company's recent acquisitions. The decrease
of general and administrative expenses as a percentage of total revenues was the
result of general and administrative expenses increasing at a lower rate than
revenues in the same fiscal periods.

   In-process Research and Development Expenses. In-process research and
development expenses were $6.1 million or 3% of total revenues in 1998. These
one-time write-offs were related to the acquisitions of PCS, $1.8 million, and
FTI, $3.0 million, and the asset purchase of ATACS, $1.3 million.

   Practical Control Solutions, Inc. PCS is a supplier of fully integrated
distribution center management software products that address the distribution
needs of the retail, wholesale and manufacturing industries. PCS' products may
be classified into two categories: Nautilus, an off-the-shelf warehouse
management software system designed to provide the tools needed to control the
course of warehouse operations and Nautilus CBT, an operational tutorial
database which guides the user through Nautilus operations. Certain products
were complete in certain areas and under development in others. 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 ("SFAS 86"), Statement of Financial Accounting Standards No. 2 ("SFAS 2")
and Financial Accounting Standards Board Interpretation No. 4 ("FIN4"). At the
time of acquisition, PCS had a number of new software products under
development, including Nautilus Versions 6.0 and 7.0 and Nautilus CBT. Nautilus
Version 6.0 and Nautilus CBT were both nearly complete but





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had not reached technological feasibility as of the acquisition date and
approximately $280,000 of development costs were assumed to be incurred through
to their scheduled completion in mid-1998. Nautilus 7.0 was in an early stage of
development as of the acquisition date. HNC assumed that it would incur
approximately $974,000 of additional development costs through to technological
feasibility, which was assumed to be in early 1999.

   The PCS in-process research and development (R&D) projects continue to
progress, in all material respects, consistently with the assumptions that HNC
provided to the independent appraiser for use in the valuation of the in-process
R&D. The inability of HNC to complete this technology within the expected
timeframes could materially impact future revenues and earnings, which could
have a material adverse effect on HNC's business, financial condition and
results of operations.

   Financial Technology, Inc. FTI has been a provider of management accounting
software for financial institutions since 1982. Since 1994, FTI has focused on
profitability measurement and other decision support systems. FTI's products are
generally classified into six categories: ProfitVision, MarketVision,
RiskVision, DataVision, Decision Support Products and Financial Platform
Products. FTI had various new products under development in each of these
categories, none of which had reached technological feasibility as of the
acquisition date. The classification of each new technology as complete or under
development was made in accordance with the guidelines of SFAS 86, SFAS 2 and
FIN4. Each new product under development has varying release dates for
completion ranging from July 1998 through December 1999. The valuation of
in-process research and development was based on the assumption that the
estimated cost to complete all products under development, measured as of the
acquisition date, is approximately $2.1 million, of which $1.2 million would be
incurred through December 1998 and an additional $900,000 would be incurred
during 1999. The valuation approach also assumed that these products would
generate revenues through the year 2002. These statements regarding revenues and
expenses are forward-looking statements, which are subject to risks and
uncertainties. Actual results may differ materially from those anticipated. The
important factors that could cause actual results to differ include those
discussed in "Business -- Risk Factors" and elsewhere in this Report. The
inability of HNC to complete this technology within the expected timeframes
could materially impact future revenues and earnings, which could have a
material adverse effect on HNC's business, financial condition and results of
operations.

   The FTI in-process research and development projects continue to progress, in
all material respects, consistently with management's original assumptions that
were provided to the independent appraiser and used to value the in-process R&D.

   ATACS. ATACS is a fraud management software solution for the wireline,
wireless and Internet telecommunication service provider industries. The system
detects fraudulent traffic thereby avoiding significant financial losses to
traditional telecommunication carriers and Internet Service Providers. ATACS'
Version 4.2 includes significant enhanced features from its prior version,
including new enhancements to Velocity, Message Handlers and a subsystem to
support fraud detection of on-line transactions. ATACS Version 4.1 was completed
and producing revenues prior to the acquisition date while Version 4.2, which
includes new technology that allows the system to function on three interface
platforms, was under development and had not yet reached technological
feasibility as of the acquisition date. Although Version 4.2 has as its
foundation technology from the completed as well as in-process technology, HNC
believes that it will have changed significantly so as to be considered new
research and development efforts. The classification of each research and
development project as complete or under development was made in accordance with
the guidelines of SFAS 86, SFAS 2 and FIN4. The valuation approach assumed that
the cost to reach technological feasibility would be approximately $250,000 and
the release would be completed by July 1998.

   The ATACS in-process research and development projects continue to progress,
in all material respects, consistently with HNC's original assumptions that were
provided to the independent appraiser and used to value the in-process R&D.

   Valuation Approach. HNC used an independent appraisal firm to assist it with
its valuation of the fair market value of the purchased assets of PCS, FTI and
ATACS. 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. HNC
provided assumptions by product line of revenue, cost of goods sold and
operating expense to the appraiser to assist in the valuation. The appraisal
considered three traditional approaches to valuation: the cost approach, the
market approach and the income approach.





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<PAGE>   32

   Practical Control Solutions, Inc. With respect to the forecasted earnings
provided to the appraiser, PCS is forecasting slightly higher revenue growth
rates as long as it can continue to meet market demands with new releases each
year. These higher growth rates reflect PCS' expectation of greater market
acceptance with the release of its ORACLE-based platform, as well as
improvements planned to be incorporated into Nautilus versions 6 and 7. PCS'
gross margins are forecasted to remain consistent relative to prior years. PCS
is also expecting its current operating expense levels to increase only
moderately in absolute dollars and, as a result, earnings before interest and
taxes are expected to increase in later years. Management believes these growth
expectations are reasonable if new product versions are offered according to
schedule. The statements regarding expectations for PCS are forward-looking
statements, which are subject to risks and uncertainties. Actual results may
differ materially from those anticipated. The important factors that could cause
actual results to differ include those discussed in "Business -- Risk Factors "
and elsewhere in this Report.

   Financial Technology Inc. Prior to 1997, FTI primarily sold financial
reporting general ledger software to mid-sized banks. During 1997, FTI began to
derive a significant amount of its revenue from ProfitVision, a customer
profitability system for these same financial institutions. With respect to the
forecasted earnings provided to the appraiser, FTI is forecasting significant
revenue growth from a full line of new software measurement tools. The financial
forecasts reflected in the appraiser's report reflect management's expectation
of significant revenue growth from a number of new product offerings. Operating
margins (before interest and taxes) are currently expected to increase from
historical trends. Management currently believes that these projected increases
are reasonable in light of the number of new product offerings and increased
gross profit obtained from these new software measurement tools which is in
contrast to those obtained from the financial reporting packages historically
sold by FTI. The statements regarding expectations for FTI are forward-looking
statements, which are subject to risks and uncertainties. Actual results may
differ materially from those anticipated. The important factors that could cause
actual results to differ include those discussed in "Business -- Risk Factors "
and elsewhere in this Report.

   ATACS. ATACS represented a product line within Bedford Associates, Inc. since
1995. Management was provided with limited historical information but, in
conjunction with the acquisition, reviewed contracts that supported revenue. The
Company identified and ultimately hired the development and support team that
represents the underlying costs of revenue as well as development costs. Under
Bedford, ATACS was not an aggressively marketed product and, as a result, sales
growth slowed and margins dropped slightly. The product becomes more widely
marketable with the offering of Version 4.2, which expands the functionality to
three new operating environments. With respect to the forecasted earnings
provided to the appraiser, the forecasts reflected higher growth rates than
prior years' ranges, reflecting the new product offering and several years of
prior marketing of the product now generating sales opportunities. Gross margins
are also forecasted to increase rather significantly reflecting higher revenue
levels and economies of scale in the production and support cost areas. The
statements regarding expectations for ATACS are forward-looking statements,
which are subject to risks and uncertainties. Actual results may differ
materially from those anticipated. The important factors that could cause actual
results to differ include those discussed in "Business -- Risk Factors " and
elsewhere in this Report.

   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. It is the nature
of the business to be constantly developing new software for future product
releases. 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 40.0%, 27.0% and 22.5% for PCS, FTI and ATACS, respectively, based upon
the following methodologies:

   Practical Control Solutions, Inc.. Because PCS did not have short-term or
long-term debt as of the date of acquisition, the Moody's seasoned Baa rate for
March 31, 1998 was utilized as the cost of debt. 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 30%, which was used for valuing completed technology. Since incomplete
technology represents a mix of near and mid-term prospects for the business and
imparts a certain level of uncertainty and would require a higher return than
completed technology, the valuation report prepared by the Company's appraiser
suggests that a rate of 40% be ascribed to the excess earnings of incomplete
technology.

   Financial Technology Inc. The cash flows attributable to FTI's technology
were discounted based on a weighted average cost of capital ("WACC") analysis
attributable to the business. In determining an appropriate discount rate
utilizing the WACC analysis,





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<PAGE>   33

an analysis was made of short-term interest rates, the yields of long-term
corporate and government bonds, and other alternative investment instruments, as
well as the typical capital structure of companies in the industry. Employing
this formula, the discount rate attributed to the business was 17% , which was
used to discount the completed technology. Incomplete technology represents a
mix of near- and mid-term prospects for the business and imparts a certain level
of uncertainty. The valuation report prepared by the Company's appraiser
suggests that a rate of 27% be ascribed to the excess earnings of incomplete
technology.

   ATACS. Because ATACS did not have short-term or long term debt as of the date
of acquisition, the Moody's seasoned Baa rate for May 19, 1998 was utilized as
the cost of debt. 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 17.5%, which was used
for valuing completed technology. Since incomplete technology represents a mix
of near- and mid-term prospects for the business and imparts a certain level of
uncertainty and would require a higher return than completed technology, the
valuation report prepared by the Company's appraiser suggests that a rate of
22.5% be ascribed to the excess earnings of incomplete technology.

   Acquisition Related Amortization Expenses. Acquisition related amortization
expenses were $3.2 million or 2% of total revenues in 1998. These expenses
represent the amortization of intangible assets purchased in conjunction with
the Company's acquisitions of PCS and FTI and the asset purchase of ATACS during
1998. The average amortization life is approximately 4 years.

   Operating Income. The above factors resulted in operating income of $21.0
million in 1998, constituting 11.8% of total revenues in 1998, $23.0 million in
1997, constituting 20.3% of total revenues in 1997, and $9.7 million in 1996,
constituting 13.5% of total revenues in 1996. The Company does not expect that
operating income will continue to increase significantly as a percentage of
total revenues.

   Other Income (Expense) Net. Interest and other income, net of interest
expense, increased to $2.2 million in 1998 from $1.9 million in 1997 and from
$1.7 million in 1996. The increase in 1998 was primarily attributable to the
increase in interest income due to the investment of the proceeds from the
public offering in March 1998 of $100 million of 4.75% Convertible Subordinated
Notes due 2003, partially offset by the interest expense related to the Notes.
The increase in 1997 was primarily due to a decrease in interest expense of
approximately $397,000 primarily related to the repayment of Risk Data's bank
notes payable during the third quarter of 1996, offset by a decrease in interest
income of approximately $165,000.

   Income Tax Provision (Benefit). The 1998 income tax provision of $12.8
million includes the tax effects of non-deductible, one-time write-offs of
in-process research and development and/or amortization expense related to the
purchases of PCS and FTI. The 1997 income tax provision of $7.4 million was
lower than 1997 taxes at statutory rates primarily as a result of CompReview's
subchapter S corporation status prior to the acquisition, which resulted in most
of CompReview's tax liability being borne by its former stockholders. As of the
date of the acquisition, CompReview's tax status was changed to C corporation.
In the future, the Company expects that the effective tax rate will be
reflective of the tax rate of other California-based companies.

   The income tax benefit of $534,000 in 1996 was primarily attributable to the
recognition of a $2.7 million deferred tax asset based on anticipated future
utilization of all of the remaining net operating loss carryforwards and
research and development credit carryforwards relating to Risk Data and Retek.
That deferred tax asset had previously been offset by a valuation allowance.
Based on pre-tax income generated in the third and fourth quarters of fiscal
1996 at both Risk Data and Retek and estimates of future taxable income, it was
management's assessment that it was more likely that not that the Company would
realize the deferred tax assets in future periods; therefore, the Company
released the valuation allowances provided on the deferred tax assets of these
two subsidiaries during the fourth quarter of 1996. However, if the Company's
revenues and operating results fall below prior levels and expectations, the
realizability of the Company's deferred tax assets may be adversely impacted and
this may adversely impact the Company's financial position and results of
operations.

LIQUIDITY AND CAPITAL RESOURCES

   The $20.2 million of net cash provided by operating activities in 1998
represents net income before depreciation and amortization of approximately
$20.7 million, further increased by a decrease in deferred income taxes of $10.9
million and offset by an increase in accounts receivable of $22.9 million. Net
cash used in investing activities was $91.1 million in 1998 primarily due to
$139.6 million of purchases of investments available for sale, offset by $61.5
million of maturities and $4.0 million of proceeds from sales of investments
available for sale. Contributing to this increase were $8.1 million expended for
property and equipment and $9.5





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<PAGE>   34

expended for acquisitions. Net cash provided by financing activities was $107.1
million in 1998 as a result of proceeds from the issuance of the Company's 4.75%
Convertible Subordinated Notes (the "Notes") due 2003 of $100.0 million issued
in conjunction with the Company's debt offering in March 1998 and net proceeds
of $10.7 million from the issuance of common stock. This was partially offset by
costs of approximately $2.6 million related to the issuance of the
above-mentioned Notes.

   As of December 31, 1998, the Company had $153.3 million in cash, cash
equivalents and investments available for sale. The Company believes that its
current cash, cash equivalents and investments available for sale balances,
borrowings under its credit facility and net cash provided by operating
activities, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. The Company expects to
invest approximately $14.1 million in capital assets, including computer
equipment and building improvements during 1999. Management intends to invest
the Company's cash in excess of current operating requirements in short-term,
interest-bearing, investment-grade securities. A portion of the Company's cash
could also be used to acquire or invest in complementary businesses or products
or otherwise to obtain the right to use complementary technologies or data. The
proceeds from the Notes will be used for general corporate purposes, including
working capital and possibly to acquire complementary businesses, products or
technologies. From time to time, in the ordinary course of business, the Company
evaluates potential acquisitions of such businesses, products, technologies or
data. The Company has no present understandings, commitments or agreements with
respect to any material acquisition of businesses, products, technologies or
data.

   The objectives of the Company's investment policy are the safety and
preservation of invested funds and liquidity of investments that is sufficient
to meet cash flow requirements. The Company's policy is to place its cash, cash
equivalents and investments available for sale with high credit quality
financial institutions and commercial companies and government agencies in order
to limit the amount of credit exposure. It is also the Company's policy to
maintain certain concentration limits and to invest only in certain "allowable
securities" as determined by the Company's management. The Company's investment
policy also provides that its investment portfolio must not have an average
portfolio maturity of beyond one year and that the Company must maintain certain
liquidity positions. Investments are prohibited in certain industries and
speculative activities. Investments must be denominated in U.S. dollars.

 YEAR 2000 COMPLIANCE.

   General. It is generally anticipated that many organizations will experience
operational difficulties at the beginning of the Year 2000 as a result of the
fact that many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Significant
uncertainty exists in the software and other industries concerning the scope and
magnitude of problems associated with the century change. As early as 1997, the
Company had begun the process of planning and updating, in some cases, its
earlier versions of existing software products. More recent versions of these
same products as well as new products were developed with Year 2000 date
processing in mind. To track performance of completing any remaining compliance
work as well as to assess the Year 2000 issue more broadly, the Company
developed a Year 2000 project plan.

   Project. The Company initiated a company-wide Year 2000 Project (Y2k Project)
during 1998 to more formally monitor compliance of its year 2000 exposure for
each major business unit and has divided the project into three major sections
that address its critical date sensitive components: software products,
information technology ("IT") infrastructure, and non-IT systems. The Y2k
Project consists of (1) assessing the current state of readiness for all
critical components, (2) developing project plans that track the status of work
performed toward completing planned solutions and (3) developing contingency
plans.

   In August 1998, IT directors of all significant business units were asked to
inventory all major components and provide the current state of readiness as
well as an indication as to when readiness would otherwise be expected. In
addition, each major business unit was asked to provide project plan status
reports that indicate how compliance would be achieved, as well as to quantify
the extent and timing of the effort and to identify when testing of the solution
would be completed. Finally, each major business unit was asked to consider
various scenarios that might impact successful implementation of their Year 2000
solutions and to develop alternative or back-up plans to mitigate the risk of
not being ready on time.

   Current Status The Company has completed the initial stage of its Y2k Project
by taking inventory of its more major software products, identifying the state
of readiness for each and developing project plans for completing and
implementing designed solutions. Based on the Company's assessment of its major
software products to date, the Company believes that the current version of each
is Year 2000 compliant. However, there can be no assurance that all of the
Company's customers will install the Year 2000 compliant version of the
Company's products in a timely manner, which could lead to failure of customer
systems and product liability claims against the Company.





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<PAGE>   35

   During the fourth quarter of 1998, the Company substantially completed its
review of its IT infrastructure, including purchased software and applications
developed in-house. The assessment includes ongoing plans to repair or replace
components as recommended by third party vendors and in-house information
technology staff.

   The Company has also substantially completed its review of major non-IT
system components for Year 2000 compliance and is undertaking appropriate repair
or replace actions based on the results of the review. Non-IT systems include
hardware and other electronic systems, excluding application systems, used in
operations of the Company's business. In general, the Company relies on
manufacturer's recommendations, certifications and warranties as validation of
Year 2000 compliance.

   The Company's plan for the Year 2000 calls for compliance verification of
third parties supplying software and information systems to the Company for both
IT and non-IT systems and communication with significant suppliers to determine
the readiness of third parties' remediation of their own Year 2000 issues. As
part of its assessment, the Company is evaluating the level of validation it
will require of third parties to ensure their Year 2000 readiness. To date, the
Company has not encountered any material Year 2000 issues concerning its
computer systems.

   Potential worst case Year 2000 scenarios currently being considered by the
Company address issues arising from non-compliance by its customers, suppliers
or internal operating systems. Although the Company's Y2k Project will strive to
uncover significant non-compliance issues, in the worst case not all Y2k
problems may be uncovered by the year 2000, which could have a material adverse
effect on the Company's business. However, the Company believes that its most
probable worst case scenario is more likely to arise from its customers' and
vendors' inability to become Year 2000 compliant than from the Company's failure
to bring its own products into compliance. As a result, the Company's supply
chain and revenues could be adversely impacted. As discussed below, the Company
generates a significant portion of its revenues from usage-based license fees
which would be at risk if its customers are unable to operate their computer
systems due to Year 2000 problems caused by software developed internally by the
customer or purchased from a third party vendor. Some considerations include
quantifying the impact that usage-based fees may have on the Company's business
and understanding the compliance programs and contingency plans, if any, the
Company's vendors and customers have developed.

   Costs. All costs associated with carrying out the Company's plan for the Year
2000 compliance are being expensed as incurred. The total cost associated with
preparation for the Year 2000 has not been, and is not expected to be, material
to the Company's business, financial condition or results of operations.
Nevertheless, the Company may not timely identify and remediate all significant
Year 2000 problems and remedial efforts may involve significant time and
expense. Failure to identify such problems could, for example, impair the
Company's internal product development efforts and internal management systems.
There can be no assurance that any Year 2000 compliance problems of the Company
or its customers or suppliers will not have a material adverse effect on the
Company's business, financial condition and results of operations.

   Risks. The inability of the Company to complete its assessment and any
necessary modifications to recently acquired products could have a material
adverse effect on the Company's business, financial condition and results of
operations. Even if the Company's products are Year 2000 compliant, the Company
may in the future be subject to claims based on Year 2000 issues in the products
of other companies, or issues arising from the integration of multiple products
within a system. The costs of defending and resolving Year 2000-related
disputes, and any liability of the Company for Year 2000 related damages,
including consequential damages, could have a material adverse effect on the
Company's business, financial condition and results of operations. Further, the
Company's products are generally used with enterprise systems involving complex
software products developed by other vendors, which may not be Year 2000
compliant. In particular, many of the Company's customers are financial
institutions, insurance companies and other companies with insurance and
financial services businesses, all of which use legacy computer systems that are
expected to be particularly susceptible to Year 2000 compliance issues. If the
Company's customers are unable to use their information systems because of the
failure of such non-compliant systems or software or for any other reason, there
would be a decrease in the volume of transactions that the Company's customers
process using the Company's products. As a result, the Company's recurring
revenue in the form of usage-based transactional fees from customers in the
insurance and financial solutions markets would decline, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. Such failure could also affect the perceived performance
of the Company's products, which could have a negative effect on the Company's
competitive position. In addition, the Company believes that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company, which could result in a material adverse effect on the Company's
business, financial condition and results of operations.





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<PAGE>   36

NEW ACCOUNTING PRONOUNCEMENTS

   In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") which HNC will be required to adopt for its 2000 annual
financial statements. This statement establishes a new model for accounting for
derivatives and hedging activities. Under FAS 133, all derivatives must be
recognized as assets and liabilities and measured at fair value. HNC has not
determined the impact of the adoption of this new accounting standard on its
consolidated financial position or results of operations.

   In January 1999, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
"Software Revenue Recognition," with Respect to Certain Transactions." This SOP
amends SOP 98-4 to extend the deferral of the application of certain passages of
SOP 97-2 that appear in SOP 98-4. The adoption of SOP 98-9 is not expected to
have a significant impact on the Company's consolidated financial position or
results of operations.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.

   The Company's foreign currency risks are mitigated principally by contracting
primarily in US dollars and maintaining only nominal foreign currency cash
balances. Working funds necessary to facilitate the short term operations of the
Company's subsidiaries are kept in the local currencies in which they do
business, with excess funds transferred to the Company's offices in the United
States for investment. For the year ended December 31, 1998, approximately 6.8%
of the Company's sales were denominated in currencies other than the Company's
functional currency, which is the US dollar. These foreign currencies are
primarily those of Western Europe, Canada and Australia.

   The fair value of the Company's investments available for sale at December
31, 1998 was $99.1 million. The objectives of the Company's investment policy
are the safety and preservation of invested funds and liquidity of investments
that is sufficient to meet cash flow requirements. The Company's policy is to
place its cash, cash equivalents and investments available for sale with high
credit quality financial institutions and commercial companies and government
agencies in order to limit the amount of credit exposure. It is also the
Company's policy to maintain certain concentration limits and to invest only in
certain "allowable securities" as determined by the Company's management. The
Company's investment policy also provides that its investment portfolio must not
have an average portfolio maturity of beyond one year and that the Company must
maintain certain liquidity positions. Investments are prohibited in certain
industries and speculative activities. Investments must be denominated in U.S.
dollars.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The following documents are filed as part of this report:

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<S>                                                                                 <C>
Report of Independent Accountants...............................................    37
Consolidated Balance Sheet as of December 31, 1998 and 1997.....................    38
Consolidated Statement of Income for the years ended December 31,
     1998, 1997 and 1996........................................................    39
Consolidated Statement of Cash Flows for the years ended
     December 31, 1998, 1997 and 1996...........................................    40
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
     Income For the years ended December 31, 1998, 1997 and 1996................    41
Notes to Consolidated Financial Statements......................................    42
Selected Consolidated Quarterly Operating Results (unaudited)...................    58
</TABLE>





                                       36
<PAGE>   37

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders
of HNC Software Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 59 present fairly, in all material
respects, the financial position of HNC Software Inc. and its subsidiaries at
December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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 the opinion expressed
above.




PRICEWATERHOUSECOOPERS LLP


San Diego, California
January 29, 1999













                                       37

<PAGE>   38


                                HNC SOFTWARE INC.

                           CONSOLIDATED BALANCE SHEET
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                     ASSETS


<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                        -------------------------
                                                                          1998            1997
                                                                        ---------       ---------
<S>                                                                     <C>             <C>      
Current assets:
  Cash and cash equivalents ......................................      $  54,267       $  18,068
  Short-term investments available for sale ......................         41,095          24,878
  Accounts receivable, net .......................................         58,078          32,980
  Current portion of deferred income taxes .......................         10,163          11,310
  Other current assets ...........................................          5,459           2,802
                                                                        ---------       ---------
          Total current assets ...................................        169,062          90,038
Deferred income taxes, less current portion ......................         12,829          15,322
Property and equipment, net ......................................         14,495          12,102
Long-term investments available for sale .........................         57,978            --             
Intangible assets, net ...........................................         25,103           1,303
Other assets .....................................................          4,447           1,112
                                                                        ---------       ---------
                                                                        $ 283,914       $ 119,877
                                                                        =========       =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable ...............................................      $   4,226       $   5,728
  Accrued liabilities ............................................         16,123           5,933
  Deferred revenue ...............................................          9,427           3,883
  Other current liabilities ......................................             78             191
                                                                        ---------       ---------
          Total current liabilities ..............................         29,854          15,735

Non-current liabilities ..........................................          1,039             239
Convertible Subordinated Notes ...................................        100,000            --

Minority interest in consolidated subsidiary .....................           --                43

Commitments and contingencies (Notes 5 and 12)

Stockholders' equity:
  Preferred stock, $0.001 par value -- 4,000  shares authorized:
     no shares issued or outstanding .............................           --              --
  Common stock, $0.001 par value -- 50,000 shares authorized:
     25,894 and 24,538 shares issued and outstanding, respectively             26              25
  Paid-in capital ................................................        134,674          95,919
  Accumulated other comprehensive loss ...........................           (160)           (113)
  Retained earnings ..............................................         18,481           8,029
                                                                        ---------       ---------
          Total stockholders' equity .............................        153,021         103,860
                                                                        ---------       ---------
                                                                        $ 283,914       $ 119,877
                                                                        =========       =========
</TABLE>



           See accompanying notes to consolidated financial statements





                                       38
<PAGE>   39

                                HNC SOFTWARE INC.

                        CONSOLIDATED STATEMENT OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                               ---------------------------------
                                                                                  1998        1997        1996
                                                                               ---------   ---------   ---------
<S>                                                                            <C>         <C>         <C>      
Revenues:
  License and maintenance ..................................................   $ 139,294   $  89,643   $  48,890
  Services and other .......................................................      39,314      24,092      22,549
                                                                               ---------   ---------   ---------
          Total revenues ...................................................     178,608     113,735      71,439
                                                                               ---------   ---------   ---------
Operating expenses:
  License and maintenance ..................................................      33,473      19,937      13,725
  Services and other .......................................................      28,656      14,932      13,773
  Research and development .................................................      32,669      21,151      13,808
  Sales and marketing ......................................................      34,515      22,049      11,923
  General and administrative ...............................................      18,977      12,626       8,551
  In-process research and development ......................................       6,090        --          --
  Acquisition related amortization .........................................       3,202        --          --
                                                                               ---------   ---------   ---------
          Total operating expenses .........................................     157,582      90,695      61,780
                                                                               ---------   ---------   ---------
Operating income ...........................................................      21,026      23,040       9,659
Interest and other income ..................................................       6,860       2,003       2,178
Interest expense ...........................................................      (4,550)        (81)       (478)
Minority  interest  in  income  of  consolidated subsidiary ................        (126)        (43)       --
                                                                               ---------   ---------   ---------
          Income  before  income  tax  provision (benefit) .................      23,210      24,919      11,359
Income tax provision (benefit) .............................................      12,758       7,354        (534)
                                                                               ---------   ---------   ---------
          Net income .......................................................   $  10,452   $  17,565   $  11,893
                                                                               =========   =========   =========
Earnings per share:
  Basic net income per common share ........................................   $    0.41   $    0.72   $    0.50
                                                                               =========   =========   =========
  Diluted net income per common share ......................................   $    0.39   $    0.68   $    0.47
                                                                               =========   =========   =========
UNAUDITED PRO FORMA DATA (NOTE 1):
  Income before income tax provision .......................................               $  24,919   $  11,359
  Income tax provision .....................................................                   9,502       1,628
                                                                                           ---------   ---------
       Net income ..........................................................               $  15,417   $   9,731
                                                                                           =========   =========
Basic pro forma net income per common share ................................               $    0.64
                                                                                           =========
Diluted pro forma net income per common share ..............................               $    0.60
                                                                                           =========
Shares used in computing basic net income per common share and
  unaudited basic pro forma net income per common share (Note 1) ...........      25,362      24,275      23,552
                                                                                  ======      ======      ======
Shares used in computing  diluted net income per common share and
  unaudited  diluted  pro forma net  income  per common share (Note 1)......      26,650      25,681      25,363
                                                                                  ======      ======      ======
</TABLE>



          See accompanying notes to consolidated financial statements





                                       39
<PAGE>   40

                                HNC SOFTWARE INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------
                                                                           1998        1997        1996
                                                                        ---------   ---------   ---------
<S>                                                                     <C>         <C>         <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income ........................................................   $  10,452   $  17,565   $  11,893
  Adjustments  to  reconcile  net  income to net cash provided
    by operating activities:
    Depreciation and amortization ...................................      10,827       4,833       3,605
    Purchased in process research and development ...................       6,090        --          --
    Compensation charge .............................................       2,387        --          --
    Tax benefit from stock option transactions ......................       7,381       3,848         896
    Changes in assets and liabilities:
      Accounts receivable, net ......................................     (22,939)    (11,124)    (10,978)
      Other assets ..................................................      (2,312)       (295)     (1,207)
      Deferred income taxes .........................................       3,522       6,909      (1,324)
      Accounts payable ..............................................      (1,945)      1,360       2,167
      Accrued liabilities ...........................................       6,659      (2,348)        625
      Deferred revenue ..............................................       1,024         375       1,472
      Other liabilities .............................................        (227)       (116)       (441)
                                                                        ---------   ---------   ---------
         Net cash provided by operating activities ..................      20,919      21,007       6,708
                                                                        ---------   ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of investments available for sale ........................    (139,583)    (26,517)    (26,113)
  Maturities of investments available for sale ......................      61,463      24,666      18,125
  Proceeds  from sales of  investments  available for sale ..........       4,000       3,716       3,707
  Cash purchased in business acquisitions ...........................         648        --          --
  Cash paid for business acquisitions, net of cash acquired .........      (9,531)       --          --
  Acquisitions of property and equipment ............................      (8,142)     (9,593)     (3,978)
                                                                        ---------   ---------   ---------
         Net cash used in investing activities ......................     (91,145)     (7,728)     (8,259)
                                                                        ---------   ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuances of common stock .......................      10,536       4,039       1,935
  Convertible Subordinated Notes issuance costs .....................     100,000        --          --
  Debt issuance costs ...............................................      (3,087)       --          --
  Repayments of notes payable to stockholders .......................        (770)       --        (1,000)
  Proceeds from bank line of credit .................................        --          --           309
  Repayments of bank line of credit .................................        --          --        (2,504)
  Repayments of debt from asset purchases ...........................        --          --        (4,710)
  Capital lease payments ............................................        (160)       (408)       (553)
  Proceeds from issuances of bank notes payable .....................        --          --         1,999
  Repayments of bank notes payable ..................................        --          --        (1,999)
  Distributions to CompReview stockholders ..........................        --        (6,798)     (5,908)
                                                                        ---------   ---------   ---------
         Net cash provided by (used in) financing activities ........     106,519      (3,167)    (12,431)
                                                                        ---------   ---------   ---------
Effect of exchange rate changes on cash .............................         (94)       (165)         54
                                                                        ---------   ---------   ---------
Net increase (decrease) in cash and cash equivalents ................      36,199       9,947     (13,928)
Cash and cash equivalents at beginning of period ....................      18,068       8,121      22,049
                                                                        ---------   ---------   ---------
Cash and cash equivalents at end of period ..........................   $  54,267   $  18,068   $   8,121
                                                                        =========   =========   =========
SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Assets purchased through issuance of debt .........................   $    --     $    --     $   4,710
                                                                        =========   =========   =========
  Acquisitions of property and equipment under capital leases .......   $    --     $    --     $     344
                                                                        =========   =========   =========
  Net assets purchased through issuance of common stock..............   $  20,003   $    --     $    --
                                                                        =========   =========   =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
  Interest paid .....................................................   $   2,335   $     101   $     448
                                                                        =========   =========   =========
  Income taxes paid .................................................   $   1,151   $     547   $     165
                                                                        =========   =========   =========
</TABLE>



           See accompanying notes to consolidated financial statements





                                       40
<PAGE>   41

                                HNC SOFTWARE INC.

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 COMMON STOCK
                                                             -------------------     PAID-IN     DEFERRED
                                                             SHARES     AMOUNT       CAPITAL   COMPENSATION
                                                             ------    ---------    ---------    --------- 
<S>                                                          <C>       <C>          <C>          <C>       
BALANCE AT DECEMBER 31, 1995 ........................        22,778    $      23    $  55,771           -- 
Common stock options exercised ......................         1,140            1        1,095           -- 
Common stock issued under Employee Stock
   Purchase Plan ....................................            94           --          839           --    
Tax benefit from stock option transactions ..........            --           --        7,889           -- 
Tax benefit from Retek taxable pooling (Note 7)......            --           --       18,397           -- 
Unrealized loss on investments ......................            --           --           --           -- 
Foreign currency translation adjustment .............            --           --           --           -- 
Distributions to CompReview stockholders ............            --           --           --           -- 
Net income ..........................................            --           --           --           -- 
                                                             ------    ---------    ---------    --------- 
BALANCE AT DECEMBER 31, 1996 ........................        24,012           24       83,991           -- 
Common stock options exercised ......................           475            1        2,845           -- 
Common stock issued under Employee Stock
   Purchase Plan ....................................            51           --        1,193           -- 
Tax benefit from stock option transactions ..........            --           --        4,192           -- 
Unrealized gain on investments ......................            --           --           --           -- 
Foreign currency translation adjustment .............            --           --           --           -- 
Distributions to CompReview stockholders ............            --           --           --           -- 
CompReview contribution to capital ..................            --           --        3,698           -- 
Net income ..........................................            --           --           --           -- 
                                                             ------    ---------    ---------    --------- 
BALANCE AT DECEMBER 31, 1997 ........................        24,538           25       95,919           -- 
                                                                                                           
Common stock options exercised ......................           748            1        8,602           -- 
Common stock issued under Employee Stock
   Purchase Plan ....................................            68           --        1,933           --  

Tax benefit from stock option transactions ..........            --           --        7,569           -- 
Compensation related to vested options in
   Aptex buy-back ...................................            --           --        3,346           -- 
Unearned stock compensation expense .................            --           --           --    $  (2,508)
Common stock issued for acquisition of PCS ..........           143           --        5,088           -- 
Common stock issued for acquisition of FTI ..........           397           --       14,725           -- 
Unrealized gain on investments ......................            --           --           --           -- 
Foreign currency translation adjustment .............            --           --           --           -- 
Net income ..........................................            --           --           --           -- 
                                                             ------    ---------    ---------    --------- 
BALANCE AT DECEMBER 31, 1998 ........................        25,894    $      26    $ 137,182    $  (2,508)
                                                             ======    =========    =========    ========= 
</TABLE>

<TABLE>
<CAPTION>
                                                         ACCUMULATED   (ACCUMULATED
                                                             OTHER        DEFICIT)       TOTAL
                                                         COMPREHENSIVE    RETAINED   STOCKHOLDERS' COMPREHENSIVE
                                                         INCOME (LOSS)    EARNINGS       EQUITY       INCOME
                                                           ---------     ---------     ---------     ---------
<S>                                                        <C>                   <C>           <C>            
BALANCE AT DECEMBER 31, 1995 ........................      $      92     $  (5,025)    $  50,861     $      --
Common stock options exercised ......................             --            --         1,096            --
Common stock issued under Employee Stock
   Purchase Plan ....................................             --            --           839            --
Tax benefit from stock option transactions ..........             --            --         7,889            --
Tax benefit from Retek taxable pooling (Note 7)......             --            --        18,397            --
Unrealized loss on investments ......................           (151)           --          (151)    $    (151)
Foreign currency translation adjustment .............             54            --            54            54
Distributions to CompReview stockholders ............             --        (5,908)       (5,908)           --
Net income ..........................................             --        11,893        11,893        11,893
                                                           ---------     ---------     ---------     ---------
BALANCE AT DECEMBER 31, 1996 ........................             (5)          960        84,970     $  11,796
                                                                                                     =========
Common stock options exercised ......................             --            --         2,846            --
Common stock issued under Employee Stock
   Purchase Plan ....................................             --            --         1,193            --
Tax benefit from stock option transactions ..........             --            --         4,192            --
Unrealized gain on investments ......................             57            --            57            57
Foreign currency translation adjustment .............           (165)           --          (165)         (165)
Distributions to CompReview stockholders ............             --        (6,798)       (6,798)           --
CompReview contribution to capital ..................             --        (3,698)           --            --
Net income ..........................................             --        17,565        17,565        17,565
                                                           ---------     ---------     ---------     ---------
BALANCE AT DECEMBER 31, 1997 ........................           (113)        8,029       103,860     $  17,457
                                                                                                     =========
Common stock options exercised ......................             --            --         8,603            --
Common stock issued under Employee Stock ............             --            --         1,933            --
   Purchase Plan
Tax benefit from stock option transactions ..........             --            --         7,569            --
Compensation related to vested options in
   Aptex buy-back ...................................             --            --         3,346            --
Unearned stock compensation expense .................             --            --        (2,508)           --
Common stock issued for acquisition of PCS ..........             --            --         5,088            --
Common stock issued for acquisition of FTI ..........             --            --        14,725            --
Unrealized gain on investments ......................             47            --            47            47
Foreign currency translation adjustment .............            (94)           --           (94)          (94)
Net income ..........................................             --        10,452        10,452        10,452
                                                           ---------     ---------     ---------     ---------
BALANCE AT DECEMBER 31, 1998 ........................      $    (160)    $  18,481     $ 153,021     $  10,405
                                                           =========     =========     =========     =========
</TABLE>

           See accompanying notes to consolidated financial statements




                                       41
<PAGE>   42

                                HNC SOFTWARE INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

The Company

   Headquartered in San Diego, California, HNC Software Inc. (the "Company" or
"HNC") develops, markets and supports predictive software solutions for leading
service industries. These predictive software solutions employ proprietary
neural-network predictive decision engines, profiles, traditional statistical
modeling, business models, expert rules and context vectors to convert existing
data and business experiences into meaningful recommendations and actions. HNC
provides innovative predictive software systems in the healthcare/insurance,
financial services and retail markets.

Basis of Presentation

   In August 1996, the Company acquired Risk Data Corporation ("Risk Data"), a
company that develops, markets and supports proprietary software decision
products for use in the insurance industry. In November 1996, the Company
acquired Retek Distribution Corporation, now named Retek Information Systems,
Inc. ("Retek"), a company that develops, markets and supports management
decision software products for retailers and their vendors. In November 1997,
the Company acquired CompReview, Inc. ("CompReview"), a company that develops,
markets and supports a software product and related services designed to assist
in the management and containment of the medical costs of workers' compensation
and automobile accident medical claims. The acquisitions of Risk Data, Retek and
CompReview have been accounted for as poolings of interests.

   The consolidated financial statements and related notes give retroactive
effect to these acquisitions for all of the periods presented. The consolidated
balance sheet as of December 31, 1998 and 1997 includes the accounts of Risk
Data, Retek and CompReview as of December 31, 1998 and 1997. The consolidated
statements of income, of cash flows and of changes in stockholders' equity and
comprehensive income for each of the three years in the period ended December
31, 1998 include the results of Risk Data, Retek and CompReview for each of the
years then ended. The term "Company" as used in these consolidated financial
statements refers to HNC and its subsidiaries, including Risk Data, Retek, and
CompReview.

   No adjustments to conform the accounting methods of the acquired companies to
the accounting methods of HNC were required. Certain amounts have been
reclassified with regard to presentation of the financial information of the
acquired companies. Revenues and net income (loss) for each of the previously
separate companies for the periods prior to their respective acquisition dates
are as follows:

<TABLE>
<CAPTION>
                                               SIX MONTHS        NINE MONTHS ENDED
                                 YEAR ENDED      ENDED              SEPTEMBER 30,
                                DECEMBER 31,    JUNE 30,       ----------------------
                                    1996          1996           1997          1996
                                  --------      --------       --------      --------
                                              (UNAUDITED)            (UNAUDITED)
          <S>                     <C>           <C>            <C>           <C>     
          Revenues:
            HNC ............      $ 53,833      $ 16,478       $ 62,683      $ 31,423
            Risk Data ......            --         2,600             --            --
            Retek ..........            --         3,377             --         5,635
            CompReview .....        17,606         8,119         18,971        12,631
                                  --------      --------       --------      --------
                                  $ 71,439      $ 30,574       $ 81,654      $ 49,689
                                  ========      ========       ========      ========
          Net income (loss):
            HNC ............      $  6,376      $  1,780       $  7,597      $    975
            Risk Data ......            --        (2,184)            --            --
            Retek ..........            --            43             --            93
            CompReview .....         5,517         2,123          6,702         3,679
                                  --------      --------       --------      --------
                                  $ 11,893      $  1,762       $ 14,299      $  4,747
                                  ========      ========       ========      ========
</TABLE>





                                       42
<PAGE>   43

   Transaction costs of $563, $515 and $1,440 were incurred to complete the
acquisitions of Risk Data, Retek and CompReview, respectively. Transaction costs
were deferred and charged to income when the related transactions were
consummated. Transaction costs consisted primarily of investment banker, legal
and accounting fees, and printing, mailing and registration expenses.

Acquisitions

   In March 1998, the Company acquired Practical Control Systems ("PCS"), a
company that develops, markets and supports fully integrated distribution center
management software products that address the distribution needs of the retail,
manufacturing and wholesale industries. The Company acquired PCS in exchange for
143 shares of HNC common stock, 14 of which are subject to an escrow to secure
certain indemnification obligations of the former PCS stockholders plus the
contingent right, subject to PCS' achievement of certain financial objectives
during calendar 1998 and 1999, to receive certain additional shares of HNC
common stock. The Company expects to issue additional shares in conjunction with
this contingent right which would be recorded as an addition to the purchase
price. The application of the purchase method of the acquisition of PCS resulted
in an excess of cost over net assets acquired of approximately $5.1 million, of
which $3.3 million has been allocated to intangibles and $1.8 million has been
allocated to in-process research and development.

   In April 1998, the Company acquired Financial Technology Inc. ("FTI"), a
company that develops and markets profitability measurement and decision-support
software products and related support services to banks and other similar
financial institutions. The Company acquired FTI in exchange for the issuance of
397 shares of HNC common stock, 97 of which are subject to an escrow to secure
certain indemnification obligations of the former FTI stockholders; a cash
payment of $1.5 million; and the contingent right, subject to FTI's achievement
of certain financial objectives during calendar 1998, to receive additional
shares of HNC common stock. The Company does not expect to issue any additional
shares in conjunction with this contingent right. The application of the
purchase method of the acquisition of FTI resulted in an excess of cost over net
assets acquired of approximately $19.2 million, of which $16.2 million has been
allocated to intangibles and $3.0 million has been allocated to in-process
research and development.

   In June 1998, the Company acquired the Advanced Telecommunications Abuse
Control System ("ATACS") product line. ATACS is a fraud-management software
solution for wireline, wireless and Internet telecommunication service
providers. The Company acquired the ATACS product line for a cash payment of
$4.75 million. The application of the purchase method of the acquisition of
ATACS resulted in an excess of cost over net assets acquired of approximately
$4.9 million, of which $3.6 million has been allocated to intangibles and $1.3
million has been allocated to in-process research and development.

   During 1996, the Company established Aptex Software Inc. ("Aptex"), a
majority owned subsidiary, in order to develop, market and support certain text
analysis technology that is being used to develop products for the Internet
market. Aptex employees held a minority equity interest in Aptex through their
ownership of Aptex common stock and stock options. During the fourth quarter of
1998, the Company agreed to acquire the remaining minority interest held by
employees of Aptex and merge Aptex into the Company. Pursuant to the merger and
related transactions, the Company acquired the Aptex stock held by Aptex
employees for approximately $5.3 million in cash and assumed all outstanding
Aptex stock options and converted such options into options to purchase
approximately 380 shares of the Company's common stock. As a result of this
merger, the Company incurred a one-time charge of $2.4 million and incurred an
unearned stock redemption compensation expense of $2.5 million. The application
of the purchase method of the acquisition of Aptex resulted in an excess of cost
over net assets acquired of approximately $3.6 million, which has been allocated
to intangibles.

   These acquisitions have been accounted for as purchases for accounting
purposes. In conjunction with these purchases, the Company recorded various
intangible assets. Intangible assets are amortized as follows:

<TABLE>
<CAPTION>
                                        Amortization Method         Estimated Useful Life
                                        -------------------         ---------------------
      <S>                                   <C>                         <C>
      Software development costs            Straight-line               36 to 42 months
      Assembled work force                  Straight-line               3 years
      Covenants not to compete              Straight-line               3 years
      Customer base                         Straight-line               5 years
      Trademarks                            Straight-line               5 years
      Goodwill                              Straight-line               5 years
</TABLE>





                                       43
<PAGE>   44

   The unaudited pro forma results of operations below present the impact on the
Company's results of operations as if the PCS, FTI and Aptex acquisitions had
occurred on January 1, 1997, instead of on their respective acquisition dates.

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                          --------------------------------------------------------------
                                                       1998                             1997
                                          ----------------------------      ----------------------------
                                                            PRO FORMA                         PRO FORMA
                                           HISTORICAL       COMBINED         HISTORICAL       COMBINED
                                          -----------      -----------      -----------      -----------
                                                           (UNAUDITED)                       (UNAUDITED)
          <S>                             <C>              <C>              <C>              <C>        
          Total revenues                  $   178,608      $   180,590      $   113,735      $   122,253

          Total net income                     10,452            8,574           17,565           16,381

          Basic earnings per share        $      0.41      $      0.34      $      0.72      $      0.67

          Diluted earnings per share      $      0.39      $      0.32      $      0.68      $      0.64

          Principles of Consolidation
</TABLE>
Principles of Consolidation

   The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.

Financial Statement Preparation

   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.

Cash Equivalents

   Cash equivalents are highly liquid investments and consist of investments in
money market accounts and commercial paper purchased with maturities of three
months or less.

Investments

   Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. The Company classifies all
securities as "available for sale" and carries them at fair value with
unrealized gains or losses related to these securities included in stockholders'
equity in the Company's consolidated balance sheet. The objectives of the
Company's investment policy are the safety and preservation of invested funds
and liquidity of investments that is sufficient to meet cash flow requirements.
The Company's policy is to place its cash, cash equivalents and investments
available for sale with high credit quality financial institutions and
commercial companies and government agencies in order to limit the amount of
credit exposure. It is also the Company's policy to maintain certain
concentration limits and to invest only in certain "allowable securities" as
determined by the Company's management. The Company's investment policy also
provides that its investment portfolio must not have an average portfolio
maturity of beyond one year and that the Company must maintain certain liquidity
positions. Investments are prohibited in certain industries and speculative
activities. Investments must be denominated in U.S.
dollars.

Property and Equipment

   Property and equipment are recorded at cost. The Company computes
depreciation and amortization using either the straight-line method over the
estimated useful lives of the assets of three to seven years or an accelerated
method over the estimated useful lives of the assets of five to seven years. The
Company amortizes leasehold improvements over the shorter of their estimated
useful lives or the remaining term of the related lease. Repair and maintenance
costs are charged to expense as incurred.





                                       44
<PAGE>   45

Software Development Costs

   Software costs are comprised of purchased software and other rights that are
stated at the lower of cost or net realizable value. Development costs for
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, 1998, no significant amounts were expended
subsequent to reaching technological feasibility.

Long-Lived Assets

   The Company investigates potential impairments of long-lived assets, certain
identifiable intangibles and associated goodwill when events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized if the sum of the expected future net cash
flows were less than the carrying amount of the asset. No such impairments of
long-lived assets existed through December 31, 1998.

Stock-Based Compensation

   The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense.

Revenue Recognition

   The Company's revenue from periodic software license and maintenance
agreements is generally recognized ratably over the respective license periods.
Revenue from certain short-term periodic software license and maintenance
agreements with guaranteed minimum license fees is recognized as related
services are performed. Transactional fees are recognized as revenue based on
system usage or when fees based on system usage exceed the monthly minimum
license fees. Revenue from perpetual licenses of the Company's software for
which there are no significant continuing obligations and collection of the
related receivables is probable is recognized on delivery of the software and
acceptance by the customer. Revenue from hardware product sales, which is
included in services and other revenue, is recognized upon shipment to the
customer.

   The Company's 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 income
in the period such losses are first identified. Unbilled accounts receivable are
stated at estimated realizable value.

   Service bureau fees are from review and repricing of customers' medical bills
and are assessed to customers on the basis of volume of bills processed and are
recognized as revenue when the processing services are performed.

   During the first quarter of 1998, the Company adopted Statement of Position
No. 97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 provides
guidance for software revenue recognition. The adoption of SOP 97-2 did not have
a significant impact on HNC's financial position or results of operations.
During the second quarter of 1998, the Company adopted Statement of Position No.
98-4 ("SOP 98-4"), "Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition." This SOP defers for one year the application of
several passages in SOP 97-2. The adoption of SOP 98-4 did not have a
significant impact on the Company financial position or results of operations.

Income Taxes

   The Company's current income tax expense is the amount of income taxes
expected to be payable for the current year. 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
carryforwards. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount "more likely than not" to be realized in
future tax returns. Tax rate changes are reflected in income during the period
such changes are enacted.





                                       45
<PAGE>   46


Net Income Per Common Share

   Basic net income per common share is computed as net income divided by the
weighted average number of common shares outstanding during the period. Diluted
net income per common share is computed as net income divided by the weighted
average number of common shares and potential common shares, using the treasury
stock method, outstanding during the period.

<TABLE>
<CAPTION>
                                                                                             YEAR ENDED DECEMBER 31,
                                                                                           ---------------------------
                                                                                             1998     1997      1996
                                                                                           -------   -------   -------
     <S>                                                                                   <C>       <C>       <C>    
     NET INCOME USED:
       Net income used in  computing  basic and diluted net income per common share....    $10,452   $17,565   $11,893
                                                                                           =======   =======   =======
     SHARES USED:
       Weighted average common shares outstanding used in computing
         basic net income per common share and unaudited basic pro
         forma net income per common share ............................................     25,362    24,275    23,552
       Weighted  average  options to purchase  common stock as
         determined by application of the treasury stock method .......................      1,227     1,383     1,796
       Additional common shares to be issued for PCS acquisition earn-out .............         23        --        --
       Purchase Plan common stock equivalents .........................................         38        23        15
                                                                                           -------   -------   -------
     Shares used in computing diluted net income per
       common share and unaudited diluted pro forma net
       income per common share ........................................................     26,650    25,681    25,363
                                                                                           =======   =======   =======
</TABLE>

   The conversion of the Company's 4.75% Convertible Subordinated Notes for the
year ended December 31, 1998 of 1,834 shares, were not used to calculate diluted
net income per share as their effect would be anti-dilutive.

Unaudited Pro Forma Data

Prior to the acquisition of CompReview by HNC on November 28, 1997, CompReview
had elected sub-chapter S corporation status for income tax purposes; therefore,
its income was included in the tax returns of its stockholders, and no income
tax provision was recorded for CompReview other than certain minimum state taxes
on subchapter S corporations. As a result of the acquisition, beginning November
29, 1997, CompReview became subject to corporate income taxes on its taxable
income. For comparative purposes, unaudited pro forma data with respect to the
merged companies' income tax provision has been presented as if CompReview had
been subject to corporate income taxes on its taxable income for 1996 and 1997.

Foreign Currency Translation

   The financial statements of the Company's international operations are
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 stockholders' equity. Gains
and losses resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's local currency) are included
in the consolidated statement of income and are not material.

Diversification of Credit Risk

   The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents, investments available for
sale and accounts receivable, which are generally not collateralized. The
Company's policy is to place its cash, cash equivalents and investments
available for sale with high credit quality financial institutions and
commercial companies and government agencies in order to limit the amount of its
credit exposure. The Company's software license and installation agreements and
commercial development contracts are primarily with large customers in the
healthcare/insurance, financial services and retail industries. The Company
maintains reserves for potential credit losses.

   The Company has one major product or product line in each of its three target
markets. In the healthcare/insurance market, revenues from one product accounted
for 21.5%, 23.0% and 24.6% of the Company's total revenues for 1998, 1997 and
1996, respectively. During those same periods, one product in the retail market
accounted for 13.2%, 18.9% and 13.6%, respectively, of the Company's total
revenues, and one product line in the financial services market accounted for
14.5%, 16.0% and 20.9%, respectively, of the Company's total revenues. Revenues
from international operations and export sales, primarily to Western Europe and
Canada, represented approximately 23.1%, 18.9% and 17.7% of total revenues in
1998, 1997 and 1996, respectively. Export sales were $27,840, $10,231 and $7,310
in 1998, 1997 and 1996, respectively.





                                       46
<PAGE>   47

Disclosures About Fair Value of Financial Instruments

   The carrying amounts of cash and cash equivalents and accrued liabilities
approximate fair value because of the short-term maturities of these financial
instruments. The carrying amounts of capital lease obligations approximate their
fair values based on interest rates currently available to the Company for
borrowings with similar terms and maturities. During March 1998, the Company
completed an offering of   $100,000 of 4.75% Convertible Subordinated Notes (the
"Notes") due in 2003. The fair value of the Notes at December 31, 1998 was
$107,000.

Stock Split

   In April 1996, the Company consummated a two-for-one stock split effected in
the form of a common stock dividend. All references to share and per share
amounts of common and preferred stock and other data in these financial
statements have been retroactively restated to reflect the stock split.

Comprehensive Income

        During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS
130"). FAS 130 requires the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency items and unrealized gains and losses on certain investments in
debt and equity securities. Comprehensive income is defined as "the change in
equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners."

Segment Reporting

   For the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments
of an Enterprise and Related Information" (see Note 10). This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance.

New Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") which HNC will be required to adopt in the first quarter
of 2000. This statement establishes a new model for accounting for derivatives
and hedging activities. Under FAS 133, all derivatives must be recognized as
assets and liabilities and measured at fair value. HNC has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.

   In January 1999, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
"Software Revenue Recognition," with Respect to Certain Transactions." This SOP
amends SOP 98-4 to extend the deferral of the application of certain passages of
SOP 97-2 that appear in SOP 98-4. The adoption of SOP 98-9 is not expected to
have a significant impact on the Company's consolidated financial position or
results of operations.

Reclassifications

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





                                       47
<PAGE>   48

NOTE 2 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ---------------------
                                                         1998         1997
                                                       --------     --------
          <S>                                          <C>          <C>     
          Accounts receivable, net:
            Billed ...............................     $ 47,107     $ 27,812
            Unbilled .............................       13,347        8,368
                                                       --------     --------
                                                         60,454       36,180
          Less allowance for doubtful accounts....       (2,376)      (3,200)
                                                       --------     --------
                                                       $ 58,078     $ 32,980
                                                       ========     ========
</TABLE>

   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.

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                     ---------------------
                                                                       1998         1997
                                                                     --------     --------
          <S>                                                        <C>          <C>     
          Property and equipment, net:
            Computer equipment ..................................    $ 21,173     $ 15,611
            Furniture and fixtures ..............................       6,404        4,632
            Leasehold improvements ..............................       1,334        1,012
                                                                     --------     --------
                                                                       28,911       21,255
          Less accumulated depreciation and amortization ........     (14,416)      (9,153)
                                                                     --------     --------
                                                                     $ 14,495     $ 12,102
                                                                     ========     ========
          Intangible assets, net:
            Goodwill ............................................    $ 20,748     $    109
            Software development costs ..........................       7,628        2,989
            Other ...............................................       2,510           --
                                                                     --------     --------
                                                                       30,886        3,098
          Less accumulated amortization .........................      (5,783)      (1,795)
                                                                     --------     --------
                                                                     $ 25,103     $  1,303
                                                                     ========     ========
          Accrued liabilities:
          Payroll and related benefits ..........................    $  6,369     $  3,456
            Vacation ............................................       1,666          927
            Accrued acquisition costs ...........................       2,647           --
            Accrued interest payable ............................       1,583           --
            Other ...............................................       3,858        1,550
                                                                     --------     --------
                                                                     $ 16,123     $  5,933
                                                                     ========     ========
</TABLE>


NOTE 3 -- INVESTMENTS

   At December 31, 1998 and 1997, the amortized cost and estimated fair value of
investments available for sale were as follows:

<TABLE>
<CAPTION>
                                                                       DECEMBER 31, 1998
                                                          -------------------------------------------
                                                          AMORTIZED UNREALIZED  UNREALIZED     FAIR
                                                            COST       GAINS      LOSSES       VALUE
                                                          --------- ----------  ----------    -------
          <S>                                              <C>          <C>        <C>        <C>    
          U.S. government and federal agencies .....       $65,797      $ 49       $ --       $65,846
          U.S. corporate debt ......................        26,181         5         --        26,186
          Foreign corporate debt ...................         7,023        18         --         7,041
                                                           -------      ----       ----       -------
                                                           $99,001      $ 72       $ --       $99,073
                                                           =======      ====       ====       =======
</TABLE>

<TABLE>
<CAPTION>
                                                                       DECEMBER 31, 1997
                                                          -------------------------------------------
                                                          AMORTIZED UNREALIZED  UNREALIZED     FAIR
                                                            COST       GAINS      LOSSES       VALUE
                                                          --------- ----------  ----------    -------
          <S>                                              <C>          <C>        <C>        <C>    
          U.S.  government  and federal agencies....       $20,682      $ --       $ (1)      $20,681
          U.S. corporate debt ......................         1,894        --         (1)        1,893
          Foreign corporate debt ...................         2,304        --         --         2,304
                                                           -------      ----       ----       -------
                                                           $24,880      $ --       $ (2)      $24,878
                                                           =======      ====       ====       =======
</TABLE>

No significant gains or losses were realized during the years ended December 31,
1998, 1997 and 1996. The cost of securities sold is determined by the specific
identification method. At December 31, 1998 and 1997, all foreign corporate debt
investments were denominated in U.S. dollars.





                                       48
<PAGE>   49

NOTE 4 -- NOTES PAYABLE

   The Company has a Credit Agreement with a bank that provides for a $15,000
revolving line of credit through July 11, 1999. The agreement requires that the
Company maintain certain financial ratios and levels of working capital,
tangible net worth and profitability, and also restricts the Company's ability
to pay cash dividends and make loans, advances or investments without the bank's
consent. At December 31, 1998, the Company had no amounts outstanding under the
revolving line of credit. Interest is payable monthly at the bank's prime rate
or LIBOR rate plus 1.5%. The applicable interest rate was 6.56% at December 31,
1998.

   The Risk Data credit facilities were comprised of a revolving line of credit
secured by eligible accounts receivable, as well as a bridge loan that was
secured by the guarantees of certain stockholders. The revolving line of credit
matured on January 5, 1997. The bridge loan matured on September 5, 1996. All
outstanding amounts were repaid during 1996, and neither credit facility was
renewed.

   During 1995, the preferred stockholders of Risk Data loaned the Company
$1,000 under subordinated note agreements (secured by the assets of Risk Data
but subordinated to borrowings under the Risk Data line of credit) bearing
interest at 9%. All outstanding amounts were repaid during 1996.


NOTE 5 -- LEASES

   At December 31, 1998, The Company was obligated through 2006 under
noncancelable operating leases for its facilities and certain equipment as
follows:

<TABLE>
<CAPTION>
                                                                    NET FUTURE
                                 FUTURE MINIMUM   LESS SUBLEASE   MINIMUM LEASE
                                 LEASE PAYMENTS      INCOME          PAYMENTS
                                 --------------   -------------   -------------
          <S>                         <C>              <C>            <C>  
          1999................        5,468            749            4,719
          2000................        4,962            160            4,802
          2001................        4,807             96            4,711
          2002................        4,888             --            4,888
          2003................        3,311             --            3,311
          Thereafter..........        3,500             --            3,500
</TABLE>

   The lease for the Company's corporate headquarters provides for scheduled
rent increases and an option to extend the lease for five years with certain
changes to the terms of the lease agreement and a refurbishment allowance. Rent
expense under operating leases for the years ended December 31, 1998, 1997 and
1996 was approximately $3,689, $2,687 and $1,623, respectively, net of sublease
income of $1,029, $477 and $125, respectively.

NOTE 6 -- CONVERTIBLE SUBORDINATED NOTES

   During March 1998, the Company completed an offering of $100,000 of 4.75%
Convertible Subordinated Notes due in 2003. The Notes are convertible into the
Company's common stock at any time prior to the close of business on the
maturity date at a conversion price of $44.85 per share. This offering resulted
in net proceeds to the Company of $97,000 after the payment of underwriters'
commissions but before the deduction of offering expenses. Debt issuance costs
were recorded at cost and are being amortized using the straight-line method,
which approximates the interest-method, over the life of the Notes.

NOTE 7 -- CAPITAL STOCK

   During March 1998, the Company completed a secondary public offering of 2,100
shares of common stock (of which 2,080 share were sold by certain selling
stockholders and 20 shares were sold by the Company) at a price to the public of
$34.50 per share, which resulted in net proceeds to the Company of $655 after
the payment of underwriters' commissions but before the deduction of offering
expenses.





                                       49
<PAGE>   50

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

NOTE 8 -- INCOME TAXES

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

<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31,
                               --------------------------------------
                                 1998          1997            1996
                               -------       --------        --------
          <S>                  <C>           <C>             <C>     
          Domestic .....       $21,388       $ 23,907        $  8,599
          Foreign ......         1,822          1,012           2,760
                               -------       --------        --------
                               $23,210       $ 24,919        $ 11,359
                               =======       ========        ========
</TABLE>

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

<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31,
                               --------------------------------------
                                 1998          1997            1996
                               -------       --------        --------
          <S>                  <C>           <C>             <C>     
          CURRENT:
            Federal ....       $ 6,659       $  2,257        $  1,132
            State ......         1,549            537             204
            Foreign ....           511            233              51

          DEFERRED:
            Federal ....         3,218          3,197          (1,569)
            State ......           715            985             (56)
            Foreign ....           106            145            (296)
                               -------       --------        --------
                               $12,758       $  7,354        $   (534)
                               =======       ========        ========
</TABLE>

Deferred tax assets are summarized as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                           --------------------
                                                            1998         1997
                                                           -------      -------
          <S>                                              <C>          <C>    
          Taxable pooling basis difference ...........     $16,097      $16,955
          Net operating loss carryforwards ...........         993        7,404
          Tax credit carryforwards ...................       4,302        2,059
          Other ......................................       1,600          214
                                                           -------      -------
          Gross deferred tax assets ..................      22,992       26,632
          Deferred tax asset valuation allowance .....          --           --
                                                           -------      -------
                    Net deferred tax asset ...........     $22,992      $26,632
                                                           =======      =======
</TABLE>

   During 1996, the Company released the valuation allowances related to Risk
Data's and Retek's deferred tax assets based on management's assessment that it
was more likely than not that the Company would realize those assets in future
periods due to improvements in the operating results of those subsidiaries.

   During 1998, 1997 and 1996, the Company realized certain tax benefits related
to stock option transactions in the amount of $7,569, $4,192 and $7,889,
respectively. The benefit from the stock option tax deduction is credited
directly to paid-in capital.

   During 1996, in connection with the acquisition of Retek, the Company made an
Internal Revenue Code Section 338 election for federal and state tax purposes,
resulting in the treatment of the acquisition as a taxable transaction, whereby
the tax bases of the acquired assets and liabilities were adjusted to their fair
values as of the date of the acquisition. As the purchase price exceeded the
carrying value of the net assets acquired by approximately $46,000, the Company
recorded a deferred tax asset in the amount of $18,397.

   In connection with the acquisitions of PCS and FTI during 1998, acquired
in-process research and development of $4,750 was charged to operations as of
the acquisition dates (Note 9). Pursuant to these acquisitions, the Company
recorded a $2,895 non-recurring, non-tax-deductible charge for purchased
in-process research and development and other non-recurring, non-tax-deductible
acquisition costs.

   In 1998, the Company acquired the remaining minority equity interest held by
employees of Aptex (Note 1). Pursuant to this merger, the Company recorded a
non-recurring, non-tax-deductible compensation expense of $835.





                                       50
<PAGE>   51


   Prior to the acquisition of CompReview by the Company on November 28, 1997,
CompReview had elected subchapter S corporation status and the cash basis of
accounting for income tax purposes; therefore, its cash basis income was
included in the tax returns of its stockholders, and no income tax provision was
recorded for CompReview other than certain minimum state taxes on subchapter S
corporations. As of the date of CompReview's acquisition, its tax status was
changed to C corporation status with the accrual basis of accounting. As a
result of this change in tax status, the Company recorded a deferred tax
liability in the amount of   $869 based on the cumulative income recognition
differences as of the date of acquisition between CompReview's former and
prospective tax accounting methods.

   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 is summarized as follows:

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                 ----------------------------------
                                                                   1998         1997         1996
                                                                 --------     --------     --------
          <S>                                                    <C>          <C>          <C>     
          Amounts computed at statutory federal rate ......      $  8,123     $  8,472     $  3,862
            State income taxes, net of federal benefit.....         1,860        1,407          554
            Subchapter S corporation earnings .............            --       (2,888)      (1,901)
            Change in tax status of S corporation .........            --          869           --
            Tax credit carryforwards generated ............          (949)        (284)        (334)
            Release of valuation allowance ................            --           --       (2,717)
            Non-deductible stock redemption
              compensation expense ........................           835           --           --
            Non-deductible purchased technology and
              other non-deductible acquisition costs ......         2,895           --           --
            Foreign income taxes ..........................            21           27         (296)
            Other, net ....................................           (27)        (249)         298
                                                                 --------     --------     --------
          Income tax provision (benefit) ..................      $ 12,758     $  7,354     $   (534)
                                                                 ========     ========     ========
</TABLE>

   At December 31, 1998, the Company had federal and foreign net operating loss
carryforwards of approximately $2,838 and $76, respectively. The federal net
operating loss carryforwards expire in 2011.

   The Company also has approximately $2,559 of federal research and development
credit carryforwards, which expire from 2000 to 2018, $552 of state research and
development credit carryforwards, which have no expiration date, $763 of foreign
tax credit carryforwards, which expire from 1999 to 2003, and federal and state
alternative minimum tax credits of $417 and $11, respectively, which have no
expiration date. Certain of these net operating loss and research and
development credit carryforwards generated by Risk Data, Retek and CompReview
prior to their acquisitions by HNC are subject to annual limitations on their
utilization and also are limited to utilization solely by the company that
generated them. Should a substantial change in HNC's ownership occur, as defined
by the Tax Reform Act of 1986, there will be an annual limitation on its
utilization of net operating loss and research and development credit
carryforwards.


NOTE 9 -- IN-PROCESS RESEARCH AND DEVELOPMENT

   In connection with the acquisitions of PCS, FTI and ATACS, acquired
in-process research and development of $1.8 million, $3.0 million and $1.3
million, respectively, was charged to operations at the acquisition dates.

   PCS is a supplier of fully integrated distribution center management software
products that address the distribution needs of the retail, wholesale and
manufacturing industries. PCS' products may be classified into two categories:
Nautilus, an off-the-shelf warehouse management software system designed to
provide the tools needed to control the course of warehouse operations and
Nautilus CBT, an operational tutorial database which guides the user through
Nautilus operations. Certain products were complete in certain areas and under
development in others. 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 ("SFAS 86"), Statement of Financial Accounting
Standards No. 2 ("SFAS 2") and Financial Accounting Standards Board
Interpretation No. 4 ("FIN4"). At the time of acquisition, PCS had a number of
new software products under development including Nautilus Versions 6.0 and 7.0
and Nautilus CBT. Nautilus Version 6.0 and Nautilus CBT were both nearly
complete but had not reached technological feasibility as of the acquisition
date.

   FTI has been a provider of management accounting software for financial
institutions since 1982. Since 1994, FTI has focused on profitability
measurement and other decision support systems. FTI's products are generally
classified into six categories: ProfitVision,





                                       51
<PAGE>   52

MarketVision, RiskVision, DataVision, Decision Support Products and Financial
Platform Products. FTI had various new products under development in each of
these categories, none of which had reached technological feasibility as of the
acquisition date. The classification of each new technology as complete or under
development was made in accordance with the guidelines of SFAS 86, SFAS 2 and
FIN4.

   ATACS is a fraud management software solution for the wireline, wireless and
Internet telecommunication service provider industries. The system detects
fraudulent traffic thereby avoiding significant financial losses to traditional
telecommunication carriers and Internet Service Providers. ATACS' Version 4.2
includes significant enhanced features from its prior version, including new
enhancements to Velocity, Message Handlers and a subsystem to support fraud
detection of on-line transactions. ATACS Version 4.1 was completed and producing
revenues prior to the acquisition date while Version 4.2, which includes new
technology that allows the system to function on three interface platforms, was
under development and had not yet reached technological feasibility as of the
acquisition date. Although Version 4.2 has as its foundation technology from the
completed as well as in-process technology, HNC believes that it will have
changed significantly so as to be considered new research and development
efforts. The classification of each research and development project as complete
or under development was made in accordance with the guidelines of SFAS 86, SFAS
2 and FIN4.


NOTE 10 -- SEGMENT INFORMATION

   The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disaggregates its
business by product category. The Company's reportable segments are as follows:
Financial Solutions Group ("FSG"), Insurance Solutions Group ("ISG") and Retail
Solutions Group ("RSG"). The FSG segment provides transaction-based, real-time
authorization and action decisions for applications such as credit card charge
authorization and the loan approval decision process. The ISG segment provides
users with the ability to reduce fraud losses and streamline operations in the
containment of the medical costs of workers' compensation and automobile
accident insurance claims, workers' compensation loss reserving, workers'
compensation fraud, managed care effectiveness and provider effectiveness. The
RSG segment offers predictive software solutions to allow retailers to build
forecasting and marketing models to carry out day-to-day buying and selling
activities which address inventory control, merchandise management and financial
control management, thereby reducing carrying costs for inventories and
improving purchasing, promotion and logistics efficiencies. The Company's
Internet and telecommunications segments are reflected in the "Other" category.

   The accounting policies of the segments are the same as those described in
"Note 1 -- The Company and its Significant Accounting Policies." The Company
evaluates the performance of its segments and allocates resources to them based
on operating income. Intersegment sales are accounted for at fair value as if
the sales were to third parties.

   The Company is organized on the basis of products and services. The segments
are strategic business units that offer different products and services. The
table below presents information about the reported revenues and operating
income, which excludes all amortization and acquisition related expenses, of the
Company for 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                    ------------------------------------
                                                       1998          1997         1996
                                                    ---------     ---------    ---------
          <S>                                      <C>           <C>          <C>      
          Segment revenue:
              FSG                                   $  57,570     $  34,819    $  24,505
              RSG                                      56,669        30,923       13,433
              ISG                                      52,140        39,273       26,599
              Other                                    13,429         8,720        6,902
              Intersegment elimination                 (1,200)           --           --
                                                    ---------     ---------    ---------
                      Total consolidated revenue    $ 178,608     $ 113,735    $  71,439
                                                    =========     =========    =========
</TABLE>




                                       52

<PAGE>   53


<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------
                                                                          1998         1997        1996
                                                                       ---------    ---------    ---------
          <S>                                                          <C>          <C>          <C>      
          Segment operating income (loss):
              FSG                                                      $  13,471    $   7,016    $   4,080
              RSG                                                         11,246        6,757        1,505
              ISG                                                          8,319       10,684        5,483
              Other                                                        2,080           23         (232)
                                                                       ---------    ---------    ---------
                      Total segment operating income                      35,166       24,480       10,836
                                                                       ---------    ---------    ---------
              Acquisition expense                                         (4,798)      (1,440)      (1,177)
              In-process research and development                         (6,090)          --           --
              Acquisition related amortization                            (3,202)          --           --
                                                                       ---------    ---------    ---------
                      Consolidated operating income                       21,026       23,040        9,659
                                                                       ---------    ---------    ---------
              Interest and other income                                    6,860        2,003        2,178
              Interest expense                                            (4,550)         (81)        (478)
              Minority interest in income of consolidated subsidiary        (126)         (43)          --
                                                                       ---------    ---------    ---------
                      Income before income tax provision (benefit)     $  23,210    $  24,919    $  11,359
                                                                       =========    =========    =========
</TABLE>

   Specified items included in segment operating income:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------
                                                                          1998         1997        1996
                                                                       ---------    ---------    ---------
          <S>                                                          <C>          <C>          <C>      
          Segment depreciation expense:
              FSG                                                      $   2,602    $   1,825    $   1,195
              RSG                                                          1,262          394          113
              ISG                                                          1,564          999          825
              Other                                                          674          548          324
                                                                       ---------    ---------    ---------
                      Total segment depreciation expense               $   6,102    $   3,766    $   2,457
                                                                       =========    =========    =========
</TABLE>

   The tables below present information about the reported assets of the Company
for 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------
                                                                          1998         1997        1996
                                                                       ---------    ---------    ---------
          <S>                                                          <C>          <C>          <C>      
          Total segment assets:
              FSG                                                      $  37,896    $  18,030    $  14,781
              RSG                                                         32,333       15,081       10,241
              ISG                                                         22,937       18,895       11,024
              Other                                                       14,770        7,027        5,761
                                                                       ---------    ---------    ---------
                      Total segment assets                               107,936       59,033       41,807
                                                                       ---------    ---------    ---------
              Corporate                                                  207,784       98,857       81,043
              Eliminations                                               (31,806)     (38,013)     (24,574)
                                                                       ---------    ---------    ---------
                      Total  consolidated assets                       $ 283,914    $ 119,877    $  98,276
                                                                       =========    =========    =========
</TABLE>

   Corporate assets are primarily comprised of cash, short-term and long-term
investments available for sale, deferred tax assets and intersegment
receivables. Eliminations primarily relate to intercompany payables.

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------
                                                                          1998         1997        1996
                                                                       ---------    ---------    ---------
          <S>                                                          <C>          <C>          <C>      
          Segment capital expenditures:
              FSG                                                      $   2,571    $   3,038    $   2,367
              RSG                                                          2,939        3,101          281
              ISG                                                          1,831        2,442          358
              Other                                                          801        1,012          972
                                                                       ---------    ---------    ---------
                      Total capital expenditures                       $   8,142    $   9,593    $   3,978
                                                                       =========    =========    =========
</TABLE>

   The following is sales and long-lived asset information by geographic areas
for 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------
                                                                          1998         1997        1996
                                                                       ---------    ---------    ---------
          <S>                                                          <C>          <C>          <C>      
          Revenue by geographic area:
              United States                                            $ 137,332    $  92,294    $  58,807
              Foreign                                                     41,276       21,441       12,632
                                                                       ---------    ---------    ---------
                      Total revenue                                    $ 178,608    $ 113,735    $  71,439
                                                                       =========    =========    =========
</TABLE>





                                       53
<PAGE>   54

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------
                                                                          1998         1997        1996
                                                                       ---------    ---------    ---------
          <S>                                                          <C>          <C>          <C>      
          Long-lived assets by geographic area:
              United States                                            $  43,852    $  14,231    $   9,555
              Foreign                                                        193          286          114
                                                                       ---------    ---------    ---------
                      Total long-lived assets                          $  44,045    $  14,517    $   9,669
                                                                       =========    =========    =========
</TABLE>

   The Company's foreign sales represent revenues from export sales and
international operations. Export sales include sales from the United States to
foreign countries. International operations include sales by foreign operations.


NOTE 11 -- EMPLOYEE BENEFIT PLANS

   During 1987, the Company adopted the 1987 Stock Option Plan and reserved
2,500 shares of the Company's common stock for issuance pursuant to nonqualified
and incentive stock options to its officers, directors, key employees and
consultants. The plan, as amended, is administered by the Board of Directors or
its designees and provides generally that, for incentive stock options and
nonqualified stock options, the exercise price must not be less than the fair
market value of the shares as determined by the Board of Directors at the date
of grant. The options expire no later than ten years from the date of grant and
may be exercised in installments based upon stipulated timetables (not in excess
of seven years). At December 31, 1998, options to purchase 465 shares were
exercisable.

   During 1995, the Company adopted the 1995 Directors Stock Option Plan (the
"Directors Plan"), the 1995 Equity Incentive Plan (the "Incentive Plan") and the
1995 Employee Stock Purchase Plan (the "Purchase Plan"). For purposes of the
discussion contained in the three paragraphs below, "fair market value" means
the closing price of the Company's common stock on the Nasdaq National Market on
the grant date.

   The Directors Plan provides for the issuance of up to 300 nonqualified stock
options to the Company's outside directors. Under the provisions of the
Directors Plan, options to purchase 25 shares of the Company's common stock are
granted to outside directors upon their respective dates of becoming members of
the Board of Directors and options to purchase ten shares of such stock will be
granted on each anniversary of such dates. Options under the Directors Plan are
granted at the fair market value of the stock at the grant date and vest at
specific times over a four-year period. At December 31, 1998, options to
purchase 80 shares were exercisable.

   The Incentive Plan provides for the issuance of up to 5,250 shares of the
Company's common stock in the form of nonqualified or incentive stock options,
restricted stock or stock bonuses. In addition, all shares that remained
unissued under the 1987 Stock Option Plan on the effective date of the Incentive
Plan, and all shares issuable upon exercise of options granted pursuant to the
1987 Stock Option Plan that expire or become unexercisable for any reason
without having been exercised in full are available for issuance under the
Incentive Plan. 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. The Company
has the discretion to provide for restrictions and the lapse thereof in respect
of restricted stock awards. Options typically vest at the rate of 25% of the
total grant per year over a four-year period; however, the Company may, at its
discretion, implement a different vesting schedule with respect to any new stock
option grant. At December 31, 1998, 814 shares were exercisable.

   The Purchase Plan provides for the issuance of a maximum of 400 shares of
common stock. Each purchase period, eligible employees may designate between 2%
and 10% of their cash compensation, subject to certain limitations, to be
deducted from their compensation for the purchase of common stock under the
Purchase Plan. The purchase price of the shares under the 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.
Approximately 65% of eligible employees have participated in the Purchase Plan
in the last three years.

   During 1998, the Company adopted the 1998 Stock Option Plan ("1998 Plan").
The 1998 Plan provides for the issuance of up to 1,000 shares of the Company's
common stock in the form of nonqualified stock options to employees, officers,
consultants and independent advisors of the Company. Options granted under the
1998 Plan may have a term of up to ten years. Options typically vest at the rate
of 25% of the total grant per year over a four-year period; however, the Company
may, at its discretion, implement a different vesting schedule with respect to
any new stock option grant. At December 31, 1998, there were no shares
exercisable under the 1998 Plan.





                                       54
<PAGE>   55

   Risk Data's stock option plan is administered by HNC's Board of Directors.
All outstanding Risk Data options were converted into options to purchase HNC
common stock and adjusted to give effect to the acquisition exchange ratio in
the Risk Data acquisition. No changes were made to the terms of the Risk Data
options in connection with the exchange. Options granted under the Risk Data
stock option plan generally vest at the rate of 25% of the total grant per year
and expire ten years after the date of grant. At December 31, 1998, 16 shares
were exercisable under the Risk Data plan.

   Retek's stock options are administered by HNC's Board of Directors. All
outstanding Retek options were converted into options to purchase the Company's
common stock and adjusted to give effect to the acquisition exchange ratio in
the Retek acquisition. No changes were made to the terms of the Retek options in
connection with the exchange. Options granted vest ratably over periods from one
to four years and have a term of up to ten years. At December 31, 1998, options
to purchase 13 shares were exercisable.

   The CompReview 1995 Stock Option Plan is administered by HNC's Board of
Directors. All outstanding CompReview stock options were converted into options
to purchase HNC common stock in the CompReview acquisition and adjusted to give
effect to the acquisition exchange ratio. No changes were made to the terms of
the CompReview options in connection with the exchange. Options granted under
the CompReview Stock Option Plan generally vest ratably over periods from two to
four years and expire ten years after the date of grant. At December 31, 1998,
options to purchase 15 shares were exercisable.

   The PCS 1998 Stock Option Plan is administered by HNC's Board of Directors.
There were no PCS options outstanding on the acquisition date. Options granted
under the PCS Plan may have a term of up to ten years. Options typically vest at
the rate of 25% of the total grant per year over a four-year period; however,
the Company may, at its discretion, implement a different vesting schedule with
respect to any new stock option grant. At December 31, 1998, there were no
options exercisable under the PCS Plan.

   The Aptex plan is administered by HNC's Board of Directors. During the fourth
quarter of 1998, the Company agreed to acquire the remaining minority interest
held by employees of Aptex (Note 1). All of the outstanding Aptex stock options
were converted into options to purchase HNC common stock in the Aptex
acquisition and adjusted to give effect to the acquisition exchange ratio.
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 Aptex plan may have a term of up to ten years. The Company has the
discretion to provide for restrictions and the lapse thereof in respect of
restricted stock awards. Options typically vest at the rate of 25% of the total
grant per year over a four-year period; however, the Company may, at its
discretion, implement a different vesting schedule with respect to any new stock
option grant. At December 31, 1998, 15 shares were exercisable under the Aptex
plan.

   Transactions under the Company's stock option and purchase plans during the
years ended December 31, 1998, 1997 and 1996, including options under the Risk
Data stock option plan, options under the Retek stock option plan, options under
the CompReview Stock Option Plan, options under the PCS Stock Option Plan and
options under the Aptex stock option plan are summarized as follows.

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                               ----------------------------------------------------------------------------
                                                         1998                      1997                       1996
                                               -----------------------    ----------------------     ----------------------
                                                       WEIGHTED AVERAGE          WEIGHTED AVERAGE           WEIGHTED AVERAGE
                                               SHARES   EXERCISE PRICE    SHARES  EXERCISE PRICE     SHARES  EXERCISE PRICE
                                               ------   --------------    ------- --------------     ------- --------------
   <S>                                          <C>       <C>             <C>        <C>               <C>      <C>      
   Outstanding at beginning of year .......     4,591       $23.92         3,215       $15.65          2,868       $ 2.84
     Options granted ......................     3,333        34.59         2,177        32.61          1,645        27.98
     Options exercised ....................      (732)       12.12          (475)        6.16         (1,140)        0.96
     Options canceled .....................      (718)       32.04          (326)       26.33           (158)       17.62
                                               ------                     ------                      ------
   Outstanding at end of year .............     6,474        29.84         4,591        23.92          3,215        15.65
                                               ======                     ------                      ======
   Options exercisable at end of year......     1,418                      1,096                         841
   Weighted average fair value of
     options granted during the year.......    $22.17                     $19.79                      $14.50
</TABLE>





                                       55
<PAGE>   56



   The following table summarizes information about employee stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                               OPTIONS OUTSTANDING
                     -------------------------------------     OPTIONS EXERCISABLE
                                      WEIGHTED              -------------------------
                         NUMBER        AVERAGE     WEIGHTED    NUMBER      WEIGHTED
                     OUTSTANDING AT   REMAINING     AVERAGE OUTSTANDING AT AVERAGE
       RANGE OF       DECEMBER 31,   CONTRACTUAL   EXERCISE  DECEMBER 31,  EXERCISE
   EXERCISE PRICES        1998     LIFE (IN YEARS)  PRICE       1998        PRICE
-------------------   -----------  --------------- -------- -------------  ---------
<S>                      <C>            <C>         <C>           <C>       <C>   
$  0.02 to $ 15.38...      842          5.44        $ 3.22        612       $ 2.78
  16.50      30.75...    1,153          7.98         27.44        368        27.52
  30.81      32.00...    1,255          8.78         31.63        192        31.41
  32.06      35.05...    1,145          9.45         34.02         47        33.40
  35.13      38.31...    1,176          9.01         36.87        111        36.78
  38.50      49.50...      903          9.04         40.74         90        41.45
                         -----                                  -----
   0.02      49.50...    6,474          8.40         29.84      1,418        19.17
                         =====                                  =====
</TABLE>

   The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. No compensation
expense has been recognized for its employee stock option grants, which are
fixed in nature, as the options have been granted at fair market value. No
compensation expense has been recognized for the Purchase Plan. Had compensation
cost for the Company's stock-based compensation awards issued during 1998 and
1997 been determined based on the fair value at the grant dates of awards
consistent with the method of Financial Accounting Standards Board Statement No.
123 ("FAS 123"), the Company's net income and basic and diluted pro forma net
income per common share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                  ----------    ----------     ----------
                                                     1998          1997           1996
                                                  ----------    ----------     ----------
          <S>                                     <C>           <C>            <C>       
          Net income (loss):
            As reported ......................     $ 10,452      $17,565        $11,893
            Pro forma ........................      (21,678)       2,232          6,122
          Basic net income per common share:
            As reported ......................     $   0.41      $  0.72        $  0.50
            Pro forma ........................     $  (0.84)     $  0.09        $  0.26
          Diluted net income per common share:
            As reported ......................     $   0.39      $  0.68        $  0.47
            Pro forma ........................     $  (0.85)     $  0.09        $  0.24
</TABLE>

   The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1998, 1997 and
1996, respectively: dividend yield of 0.0% for all three years, risk-free
interest rates of 5.14%, 6.10% and 6.03%, expected volatilities of 65%, 65% and
70% (0% for 1996 options granted by Risk Data, Retek and CompReview prior to
their acquisition by HNC), and expected lives of 3.0, 3.0 and 3.5 years. The
fair value of the employees' purchase rights pursuant to the Purchase Plan is
estimated using the Black-Scholes model with the following assumptions: dividend
yield of 0.0% for all three years, risk-free interest rates of 5.23%, 5.32% and
5.36%, expected volatilities of 65%, 65% and 70%, and an expected life of 6
months for all three years. The weighted average fair value of those purchase
rights granted in 1998, 1997 and 1996 was $16.25, $14.10 and $9.61,
respectively.

   The fair value of each option granted under the Aptex plan is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during the years ended
December 31, 1998, 1997 and 1996: dividend yield of 0.0% for all three years,
risk-free interest rates of 5.15%, 6.33% and 6.42%, expected volatility of 90%
for all three years, and expected lives of 5.0 years, 8.0 years and 9.25 years.
Options to purchase 120, 214 and 704 shares were granted during 1998, 1997 and
1996, with weighted average exercise prices per share of $0.60, $0.08 and $0.03,
respectively. During 1998 and 1997, options to purchase 219 and 173 shares with
weighted average exercise prices of $0.04 and $0.03 per share, respectively,
were exercised. During 1998 and 1997, options to purchase 41 and 58 shares with
weighted average exercise prices of $0.08 and $0.03 per share, respectively,
were cancelled. The weighted average fair values per share of options granted
during 1998, 1997 and 1996 were $0.94, $0.07 and $0.03, respectively.





                                       56
<PAGE>   57

NOTE 12 -- CONTINGENCIES

   Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.


NOTE 13 -- SUBSEQUENT EVENTS

   On January 25, 1999, the Company announced that it had terminated the
previously announced proposed acquisition of Open Solutions, Inc. ("OSI") due to
current uncertainty in the small to medium size banking business environment.
The Company also announced that it has commenced negotiations to establish a
strategic alliance with OSI. The proposed alliance is expected to involve a
cooperative marketing relationship and a minority equity investment in OSI by
HNC. The Company incurred transaction costs of approximately $975 in connection
with this terminated acquisition during the fourth quarter of 1998.













                                       57

<PAGE>   58


                SELECTED CONSOLIDATED QUARTERLY OPERATING RESULTS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER 31, 1998
                               ----------------------------------------------------
                                FIRST     SECOND      THIRD     FOURTH       TOTAL
                               QUARTER    QUARTER    QUARTER    QUARTER      YEAR
                               -------    -------    -------    -------    --------
                                                 (IN THOUSANDS)
          <S>                            <C>        <C>        <C>        <C>        <C>     
          REVENUES             $35,081    $43,141    $47,750    $52,636    $178,608
          OPERATING INCOME       4,754      2,848      8,198      5,226      21,026
          NET INCOME             2,387        508      5,076      2,481      10,452
</TABLE>

<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER 31, 1997
                               ----------------------------------------------------
                                FIRST     SECOND      THIRD     FOURTH       TOTAL
                               QUARTER    QUARTER    QUARTER    QUARTER      YEAR
                               -------    -------    -------    -------    --------
                                                 (IN THOUSANDS)
          <S>                            <C>        <C>        <C>        <C>        <C>     
          REVENUES             $24,072    $27,593    $29,989    $32,081    $113,735
          OPERATING INCOME       5,120      6,002      6,371      5,547      23,040
          NET INCOME             4,212      4,959      5,127      3,267      17,565
</TABLE>


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

   Not applicable.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information required by this Item, which will be set forth under the
captions "Proposal No. 1 Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Compliance" in the Company's Proxy Statement
for its 1999 Annual Meeting of Stockholders, is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

   The information required by this Item, which will be set forth under the
captions "Director Compensation," "Executive Compensation" and "Compensation
Committee Interlocks and Insider Participation" in the Company's Proxy Statement
for its 1999 Annual Meeting of Stockholders, is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information required by this Item, which will be set forth under the
caption "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders, is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information required by this Item, which will be set forth under the
caption "Certain Transactions" in the Company's Proxy Statement for its 1999
Annual Meeting of Stockholders, is incorporated herein by reference.





                                       58
<PAGE>   59


                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

  (a)  The following documents are filed as part of this report:

       1. Consolidated Financial Statements:

          The consolidated financial statements of the Company listed below and
          the report thereon are included in Item 8 hereof:

          Report of Independent Accountants
          Consolidated Balance Sheet as of December 31, 1998 and 1997
          Consolidated Statement of Income for the years ended December 31,
          1998, 1997 and 1996
          Consolidated Statement of Cash Flows for the years ended December 31,
          1998, 1997 and 1996
          Consolidated Statement of Changes in Stockholders' Equity and
          Comprehensive Income for the years ended December 31, 1998, 1997 and
          1996
          Notes to Consolidated Financial Statements

       2. Financial Statement Schedule:

          The financial statement schedule of the Company listed below and the
          report thereon are included herein:

          Schedule II -- Valuation and Qualifying Accounts and Reserves for the
          years ended December 31, 1998, 1997 and 1996 (See page 63.)

          All other schedules are omitted because they are not applicable or not
          required or because the required information is shown in the
          Consolidated Financial Statements or notes thereto.

   3. Exhibits:

<TABLE>
<CAPTION>
      EXHIBIT      
      NUMBER                             DESCRIPTION
      ------                             -----------
     <S>           <C>
       2.01        Agreement and Plan of Reorganization dated as of July 19,
                   1996 by and among the Registrant, HNC Merger Corp. and Risk
                   Data Corporation, as amended. (Incorporated by reference to
                   Exhibit Number 2.01 to Registrant's Current Report on Form
                   8-K filed on September 12, 1996, as amended (the "Risk Data
                   8-K").)

       2.02        Agreement of Merger dated August 30, 1996 by and between HNC
                   Merger Corp. and Risk Data Corporation. (Incorporated by
                   reference to Exhibit Number 2.02 to the Risk Data 8-K.)

       2.03        Exchange Agreement dated as of October 25, 1996 by and among
                   the Registrant, Retek Distribution Corporation and the
                   shareholders of Retek Distribution Corporation. (Incorporated
                   by reference to Exhibit Number 2.01 to Registrant's Current
                   Report on Form 8-K filed on December 12, 1996 (the "Retek
                   8-K").)

       2.04        Form of Option Exchange Agreement between the Registrant and
                   each person who held outstanding options to purchase shares
                   of Retek Distribution Corporation on November 29, 1996.
                   (Incorporated by reference to Exhibit Number 2.02 to the
                   Retek 8-K.)

       2.05        Agreement and Plan of Reorganization dated as of July 14,
                   1997 by and among the Registrant, FW1 Acquisition Corp.,
                   CompReview, Inc., Robert L. Kaaren and Mishel E. Munnayer,
                   a.k.a. Michael Munayyer, Trustee of the Michael Munayyer
                   Trust dated August 11, 1995. (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 Number 2.01 to
                   Registrant's Current Report on Form 8-K filed on December 15,
                   1997 (the "CompReview 8-K").)

       2.06        Agreement of Merger dated as of November 28, 1997 by and
                   between FW1 Acquisition Corp. and CompReview, Inc.
                   (Incorporated by reference to Exhibit Number 2.02 to the
                   CompReview 8-K.)

       2.07        Agreement and Plan of Reorganization dated as of April 6,
                   1998 by and among the Registrant, FW2 Merger Corp. and the
                   shareholders of Financial Technology, Inc. (Incorporated by
                   reference to Exhibit Number 2.01 to Registrant's Current
                   Report on Form 8-K filed on April 22, 1998 (the "FTI 8-K").)
</TABLE>





                                       59
<PAGE>   60

<TABLE>
<CAPTION>
      EXHIBIT      
      NUMBER                             DESCRIPTION
      ------                             -----------
     <S>           <C>
          2.08     Plan of Merger dated December 21, 1998 adopted by Registrant
                   and Aptex Software Inc. (Incorporated by reference to Exhibit
                   Number 2.01 to Registrant's Current Report on Form 8-K filed
                   on February 5, 1999).
        3(i).01    Registrant's Restated Certificate of Incorporation filed with
                   the Secretary of State of Delaware on June 13, 1996.
                   (Incorporated by reference to Exhibit Number 3(i).04 to
                   Registrant's Quarterly Report on Form 10-Q for the quarter
                   ended June 30, 1996 (the "Second Quarter 1996 10-Q").)
       3(ii).02    Registrant's Bylaws, as amended. (Incorporated by reference
                   to Exhibit Number 3(i).01 to Registrant's Quarterly Report on
                   Form 10-Q for the quarter ended June 30, 1998, as amended
                   (the "Second Quarter 1998 10-Q").)
          4.01     Form of Specimen Certificate for Registrant's Common Stock.
                   (Incorporated by reference to Exhibit Number 4.01 to
                   Registrant's Form S-1 Registration Statement, as amended
                   (File No. 33-91932) (the "IPO S-1").)
          4.02     Registration Rights Agreement dated as of October 25, 1996 by
                   and among the Registrant and the former shareholders of Retek
                   Distribution Corporation. (Incorporated by reference to
                   Exhibit Number 4.01 to the Retek 8-K.)
          4.03     Amendment No. 1 to the Registration Rights Agreement dated as
                   of February 24, 1997 by and between the Registrant and the
                   former shareholders of Retek Distribution Corporation.
                   (Incorporated by reference to Exhibit Number 4.06 to
                   Registrant's Annual Report on Form 10-K, as amended, for the
                   year ended December 31, 1996 (the "1996 10-K").)
          4.04     Registration Rights Agreement dated as of March 31, 1998 by
                   and among the Registrant and the former shareholders of
                   Practical Control Systems Technologies, Inc. (Incorporated by
                   reference to Exhibit Number 4.06 to Registrant's Form S-3
                   Registration Statement, File No. 333-50779.)
          4.05     Registration Rights Agreement dated as of April 6, 1998 by
                   and among the Registrant and the former shareholders of
                   Financial Technology, Inc. (Incorporated by reference to
                   Exhibit Number 4.01 to the FTI 8-K.)
         10.01     Registrant's 1987 Stock Option Plan and related documents.
                   (Incorporated by reference to Exhibit Number 10.01 to the IPO
                   S-1.)(1)
         10.02     Registrant's 1995 Equity Incentive Plan, as amended through
                   November 20, 1998. (Incorporated by reference to Exhibit
                   Number 4.01 to Registrant's Form S-8 Registration Statement,
                   File No. 333-71923 (the "February 1999 S-8").)(1)
         10.03     Form of 1995 Equity Incentive Plan Stock Option Agreement and
                   Stock Option Exercise Agreement. (Incorporated by reference
                   to Exhibit Number 4.02 to the February 1999 S-8.) (1)
         10.04     Registrant's 1995 Directors Stock Option Plan and related
                   documents. (Incorporated by reference to Exhibit Number 10.03
                   to the IPO S-1.)(1)
         10.05     Registrant's 1995 Employee Stock Purchase Plan and related
                   documents. (Incorporated by reference to Exhibit Number 10.04
                   to the IPO S-1.)(1)
         10.06     Registrant's 1998 Stock Option Plan, as amended through March
                   20, 1998. (Incorporated by reference to Exhibit Number 4.01
                   to Registrant's Form S-8 Registration Statement, File No.
                   333-50623 (the "April 1998 S-8").)(1)
         10.07     Form of 1998 Stock Option Plan Stock Option Agreement and
                   Stock Option Exercise Agreement. (Incorporated by reference
                   to Exhibit 4.02 to the April 1998 S-8.)(1)
         10.08     Form of Indemnity Agreement entered into by Registrant with
                   each of its directors and executive officers. (Incorporated
                   by reference to Exhibit Number 10.08 to the IPO S-1.)(1)
         10.09     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 Number 10.09 to the IPO S-1.)
         10.10     Loan and Security Agreement dated as of July 11, 1997,
                   between Registrant and Wells Fargo Bank, National
                   Association. (Incorporated by reference to Exhibit Number
                   10.01 to Registrant's Quarterly Report on Form 10-Q, as
                   amended, for the quarter ended June 30, 1997 (the "Second
                   Quarter 1997 10-Q").)
         10.11     Office Building Lease dated as of May 30, 1997, between Retek
                   Information Systems, Inc. and Midwest Real Estate Holdings,
                   Inc. (Incorporated by reference to Exhibit Number 10.02 to
                   the Second Quarter 1997 10-Q.)
         10.12     Office Building Lease dated as of June 17, 1996, between
                   Registrant and Williams Properties I, LLC & Williams
                   Properties II, LLC. (Incorporated by reference to Exhibit
                   Number 10.12 to the 1996 10-K.)
         10.13     Aptex Software Inc.'s 1996 Equity Incentive Plan.
                   (Incorporated by reference to Exhibit Number 4.03 to the
                   February 1999 S-8.)(1)
</TABLE>





                                       60
<PAGE>   61


<TABLE>
<CAPTION>
      EXHIBIT      
      NUMBER                             DESCRIPTION
      ------                             -----------
     <S>           <C>
         10.14     Form of Aptex Software Inc. 1996 Equity Incentive Plan Stock
                   Option Agreement and Stock Option Exercise Agreement.
                   (Incorporated by reference to Exhibit Number 4.04 to the
                   February 1999 S-8.)(1)
         10.15     Practical Control Systems Technologies, Inc. 1998 Stock
                   Option Plan. (Incorporated by reference to Exhibit Number
                   4.03 to the April 1998 S-8.)(1)
         10.16     Form of Practical Control Systems Technologies, Inc. 1998
                   Stock Option Plan Stock Option Agreement and Stock Option
                   Exercise Agreement. (Incorporated by reference to Exhibit
                   Number 4.04 to the April 1998 S-8.)(1)
         10.17     Office Building Lease dated June 17, 1993, between
                   Linsco/Private Ledger Corp. and PacCor Partners and
                   Assignment of such lease to the Registrant. (Incorporated by
                   reference to Exhibit Number 10.17 to Registrant's Annual
                   Report on Form 10-K, as amended, for the year ended December
                   31, 1997.)
         10.18     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 Number 10.16 to
                   Registrant's Form S-4 Registration Statement, File No.
                   333-64527 (the "S-4").)
         10.19     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 Number 10.17 to the
                   S-4.)
         10.20     Office Building Lease dated as of October 2, 1998, between
                   the Registrant and The Irvine Company. (Incorporated by
                   reference to Exhibit Number 99.01 to the February 1999 S-8.)
         10.21     Office Building Lease Amendment No. 1 dated as of November
                   30, 1998, between Retek Information Systems, Inc. and Midwest
                   Real Estate Holdings LLC. (Incorporated by reference to
                   Exhibit Number 99.02 to the February 1999 S-8.)
         10.22     Office Building Lease Amendment No. 2 dated as of December
                   18, 1998, between Retek Information Systems, Inc. and Midwest
                   Real Estate Holdings LLC. (Incorporated by reference to
                   Exhibit Number 99.03 to the February 1999 S-8.)
        *21.01     List of Registrant's subsidiaries.
        *23.01     Consent of PricewaterhouseCoopers LLP, Independent
                   Accountants.
        *27.01     Financial Data Schedule
</TABLE>

 ----------
 *   Filed herewith.
(1)  Management contract or compensatory plan or arrangement.

     (b) Reports on Form 8-K
         None.





                                       61
<PAGE>   62


                                   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.


Date: March 26, 1999                HNC SOFTWARE INC.



                                    By:         /s/ RAYMOND V. THOMAS
                                        ----------------------------------------
                                                    Raymond V. Thomas
                                        Vice President, Finance & Administration
                                               and Chief Financial Officer

   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.

<TABLE>
<CAPTION>
                  SIGNATURE                                       TITLE                            DATE
                  ---------                                       -----                            ----
<S>                                            <C>                                            <C> 
           /s/   ROBERT L. NORTH               President and Chief Executive Officer          March 26, 1999
--------------------------------------------   (Principal Executive Officer)
               Robert L. North


           /s/   RAYMOND V. THOMAS             Vice President, Finance & Administration       March 26, 1999
--------------------------------------------   and Chief Financial Officer (Principal
                 Raymond V. Thomas             Financial Officer)


          /s/   KENNETH J. SAUNDERS            Vice President, Corporate Controller           March 26, 1999
--------------------------------------------   (Principal Accounting Officer)
             Kenneth J. Saunders               


          /s/   EDWARD K. CHANDLER             Director                                       March 26, 1999
--------------------------------------------
              Edward K. Chandler


            /s/   OLIVER D. CURME              Director                                       March 26, 1999
--------------------------------------------
               Oliver D. Curme

                                                
                                               Director                                       March  , 1999
--------------------------------------------
                Thomas F. Farb


        /s/   CHARLES H. GAYLORD, JR.          Director                                       March 26, 1999
--------------------------------------------
           Charles H. Gaylord, Jr.


             /s/   ALEX W. HART                Director                                       March 26, 1999
--------------------------------------------
                 Alex W. Hart
</TABLE>





                                       62

<PAGE>   63

                                HNC SOFTWARE INC.

          SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVEs
                   FOR THE THREE YEARS ENDED DECEMBER 31, 1998


<TABLE>
<CAPTION>
                                              ALLOWANCE FOR         DEFERRED TAX
                                             DOUBTFUL ACCOUNT      ASSET VALUATION
                                             AND SALES RETURNS       ALLOWANCE
                                             -----------------     ---------------
<S>                                             <C>                 <C>        
Balance at December 31, 1995 ...........        $   553,000         $ 4,238,000
  Provision ............................            279,000             702,000
  Write-off ............................            (94,000)                 --
  Recovery .............................            (29,000)         (2,223,000)
                                                -----------         -----------
Balance at December 31, 1996 ...........            709,000           2,717,000
  Provision ............................          3,171,000                  --
  Write-off ............................           (505,000)                 --
  Recovery .............................           (175,000)         (2,717,000)
                                                -----------         -----------
Balance at December 31, 1997 ...........          3,200,000                  --
  Provision ............................          3,172,000                  --
  Write-off ............................         (3,917,000)                 --
  Recovery .............................            (79,000)                 --
                                                -----------         -----------
Balance at December 31, 1998 ...........        $ 2,376,000         $        --
                                                ===========         ===========
</TABLE>

















                                       63

<PAGE>   64

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<S>        <C>
     2.01  Agreement and Plan of Reorganization dated as of July 19, 1996 by and
           among the Registrant, HNC Merger Corp. and Risk Data Corporation, as
           amended. (Incorporated by reference to Exhibit Number 2.01 to
           Registrant's Current Report on Form 8-K filed on September 12, 1996,
           as amended (the "Risk Data 8-K").)
     2.02  Agreement of Merger dated August 30, 1996 by and between HNC Merger
           Corp. and Risk Data Corporation. (Incorporated by reference to
           Exhibit Number 2.02 to the Risk Data 8-K.)
     2.03  Exchange Agreement dated as of October 25, 1996 by and among the
           Registrant, Retek Distribution Corporation and the shareholders of
           Retek Distribution Corporation. (Incorporated by reference to Exhibit
           Number 2.01 to Registrant's Current Report on Form 8-K filed on
           December 12, 1996 (the "Retek 8-K").)
     2.04  Form of Option Exchange Agreement between the Registrant and each
           person who held outstanding options to purchase shares of Retek
           Distribution Corporation on November 29, 1996. (Incorporated by
           reference to Exhibit Number 2.02 to the Retek 8-K.)
     2.05  Agreement and Plan of Reorganization dated as of July 14, 1997 by and
           among the Registrant, FW1 Acquisition Corp., CompReview, Inc., Robert
           L. Kaaren and Mishel E. Munnayer, a.k.a. Michael Munayyer, Trustee of
           the Michael Munayyer Trust dated August 11, 1995. (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 Number 2.01 to Registrant's
           Current Report on Form 8-K filed on December 15, 1997 (the
           "CompReview 8-K").)
     2.06  Agreement of Merger dated as of November 28, 1997 by and between FW1
           Acquisition Corp. and CompReview, Inc. (Incorporated by reference to
           Exhibit Number 2.02 to the CompReview 8-K.)
     2.07  Agreement and Plan of Reorganization dated as of April 6, 1998 by and
           among the Registrant, FW2 Merger Corp. and the shareholders of
           Financial Technology, Inc. (Incorporated by reference to Exhibit
           Number 2.01 to Registrant's Current Report on Form 8-K filed on April
           22, 1998 (the "FTI 8-K").)
     2.08  Plan of Merger dated December 21, 1998 adopted by Registrant and
           Aptex Software Inc. (Incorporated by reference to Exhibit Number 2.01
           to Registrant's Current Report on Form 8-K filed on February 5,
           1999).
  3(i).01  Registrant's Restated Certificate of Incorporation filed with the
           Secretary of State of Delaware on June 13, 1996. (Incorporated by
           reference to Exhibit Number 3(i).04 to Registrant's Quarterly Report
           on Form 10-Q for the quarter ended June 30, 1996 (the "Second Quarter
           1996 10-Q").)
  3(ii).02 Registrant's Bylaws, as amended. (Incorporated by reference to
           Exhibit Number 3(i).01 to Registrant's Quarterly Report on Form 10-Q
           for the quarter ended June 30, 1998, as amended (the "Second Quarter
           1998 10-Q").)
     4.01  Form of Specimen Certificate for Registrant's Common Stock.
           (Incorporated by reference to Exhibit Number 4.01 to Registrant's
           Form S-1 Registration Statement, as amended (File No. 33-91932) (the
           "IPO S-1").) 4.02 Registration Rights Agreement dated as of October
           25, 1996 by and among the Registrant and the former shareholders of
           Retek Distribution Corporation. (Incorporated by reference to Exhibit
           Number 4.01 to the Retek 8-K.)
     4.03  Amendment No. 1 to the Registration Rights Agreement dated as of
           February 24, 1997 by and between the Registrant and the former
           shareholders of Retek Distribution Corporation. (Incorporated by
           reference to Exhibit Number 4.06 to Registrant's Annual Report on
           Form 10-K, as amended, for the year ended December 31, 1996 (the
           "1996 10-K").)
     4.04  Registration Rights Agreement dated as of March 31, 1998 by and among
           the Registrant and the former shareholders of Practical Control
           Systems Technologies, Inc. (Incorporated by reference to Exhibit
           Number 4.06 to Registrant's Form S-3 Registration Statement, File No.
           333-50779.)
     4.05  Registration Rights Agreement dated as of April 6, 1998 by and among
           the Registrant and the former shareholders of Financial Technology,
           Inc. (Incorporated by reference to Exhibit Number 4.01 to the FTI
           8-K.)
     10.01 Registrant's 1987 Stock Option Plan and related documents.
           (Incorporated by reference to Exhibit Number 10.01 to the IPO
           S-1.)(1)
     10.02 Registrant's 1995 Equity Incentive Plan, as amended through November
           20, 1998. (Incorporated by reference to Exhibit Number 4.01 to
           Registrant's Form S-8 Registration Statement, File No. 333-71923 (the
           "February 1999 S-8").)(1)
     10.03 Form of 1995 Equity Incentive Plan Stock Option Agreement and Stock
           Option Exercise Agreement.
</TABLE>





                                       64
<PAGE>   65


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<S>        <C>
           (Incorporated by reference to Exhibit Number 4.02 to the February
           1999 S-8.) (1)
    10.04  Registrant's 1995 Directors Stock Option Plan and related documents.
           (Incorporated by reference to Exhibit Number 10.03 to the IPO
           S-1.)(1)
    10.05  Registrant's 1995 Employee Stock Purchase Plan and related documents.
           (Incorporated by reference to Exhibit Number 10.04 to the IPO
           S-1.)(1)
    10.06  Registrant's 1998 Stock Option Plan, as amended through March 20,
           1998. (Incorporated by reference to Exhibit Number 4.01 to
           Registrant's Form S-8 Registration Statement, File No. 333-50623 (the
           "April 1998 S-8").)(1)
    10.07  Form of 1998 Stock Option Plan Stock Option Agreement and Stock
           Option Exercise Agreement. (Incorporated by reference to Exhibit 4.02
           to the April 1998 S-8.)(1)
    10.08  Form of Indemnity Agreement entered into by Registrant with each of
           its directors and executive officers. (Incorporated by reference to
           Exhibit Number 10.08 to the IPO S-1.)(1)
    10.09  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 Number 10.09
           to the IPO S-1.)
    10.10  Loan and Security Agreement dated as of July 11, 1997, between
           Registrant and Wells Fargo Bank, National Association. (Incorporated
           by reference to Exhibit Number 10.01 to Registrant's Quarterly Report
           on Form 10-Q, as amended, for the quarter ended June 30, 1997 (the
           "Second Quarter 1997 10-Q").)
    10.11  Office Building Lease dated as of May 30, 1997, between Retek
           Information Systems, Inc. and Midwest Real Estate Holdings, Inc.
           (Incorporated by reference to Exhibit Number 10.02 to the Second
           Quarter 1997 10-Q.)
    10.12  Office Building Lease dated as of June 17, 1996, between Registrant
           and Williams Properties I, LLC & Williams Properties II, LLC.
           (Incorporated by reference to Exhibit Number 10.12 to the 1996 10-K.)
    10.13  Aptex Software Inc.'s 1996 Equity Incentive Plan. (Incorporated by
           reference to Exhibit Number 4.03 to the February 1999 S-8.)(1)
    10.14  Form of Aptex Software Inc. 1996 Equity Incentive Plan Stock Option
           Agreement and Stock Option Exercise Agreement. (Incorporated by
           reference to Exhibit Number 4.04 to the February 1999 S-8.)(1)
    10.15  Practical Control Systems Technologies, Inc. 1998 Stock Option Plan.
           (Incorporated by reference to Exhibit Number 4.03 to the April 1998
           S-8.)(1)
    10.16  Form of Practical Control Systems Technologies, Inc. 1998 Stock
           Option Plan Stock Option Agreement and Stock Option Exercise
           Agreement. (Incorporated by reference to Exhibit Number 4.04 to the
           April 1998 S-8.)(1)
    10.17  Office Building Lease dated June 17, 1993, between Linsco/Private
           Ledger Corp. and PacCor Partners and Assignment of such lease to the
           Registrant. (Incorporated by reference to Exhibit Number 10.17 to
           Registrant's Annual Report on Form 10-K, as amended, for the year
           ended December 31, 1997.)
    10.18  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
           Number 10.16 to Registrant's Form S-4 Registration Statement, File
           No. 333-64527 (the "S-4").)
    10.19  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 Number 10.17 to the S-4.)
    10.20  Office Building Lease dated as of October 2, 1998, between the
           Registrant and The Irvine Company. (Incorporated by reference to
           Exhibit Number 99.01 to the February 1999 S-8.)
    10.21  Office Building Lease Amendment No. 1 dated as of November 30, 1998,
           between Retek Information Systems, Inc. and Midwest Real Estate
           Holdings LLC. (Incorporated by reference to Exhibit Number 99.02 to
           the February 1999 S-8.)
    10.22  Office Building Lease Amendment No. 2 dated as of December 18, 1998,
           between Retek Information Systems, Inc. and Midwest Real Estate
           Holdings LLC. (Incorporated by reference to Exhibit Number 99.03 to
           the February 1999 S-8.)
   *21.01  List of Registrant's subsidiaries.
   *23.01  Consent of PricewaterhouseCoopers LLP, Independent Accountants.
   *27.01  Financial Data Schedule
</TABLE>

----------

 *  Filed herewith.






                                       65


<PAGE>   66
(1) Management contract or compensatory plan or arrangement.































































                                       66