##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K/A
AMENDMENT NO. 1

|           |  |                                                                                     
|---------- |  | ------------------------------------------------------------------------------------
|(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, 2000

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
(State or other jurisdiction of
incorporation or organization) |  | 33-0248788
(I.R.S. Employer
Identification No.)

5935 Cornerstone Court West, San Diego, CA 92121
(Address of principal executive offices)

Registrants telephone number, including area code: (858) 546-8877 securities
registered pursuant to section 12(b) of the act: none

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(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 common stock held by non-affiliates of
the Registrant, based on the closing price as reported on the Nasdaq Stock
Market at March 9, 2001 was approximately $747.9 million. The number of shares
of the Registrants Common Stock outstanding at March 9, 2001 was 34,583,630
shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement to be used in connection with
the Registrants 2001 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Form 10-K.



---

---





---

TABLE OF CONTENTS



|                                                                                      |  |                                                                                           |  |  |  |  |  | 
|------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  |  |  |  |  | 
|SIGNATURES                                                                           
|MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
|                                                                                      |  | CONSOLIDATED BALANCE SHEET                                                               
|                                                                                      |  | CONSOLIDATED STATEMENT OF OPERATIONS                                                     
|                                                                                      |  | CONSOLIDATED STATEMENT OF CASH FLOWS                                                     
|                                                                                      |  | CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
|                                                                                      |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                               
|EXHIBIT INDEX                                                                        
|EXHIBIT 23.01                                                                        



---



##### Table of Contents



TABLE OF CONTENTS

PART II

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

Our information under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations is included in this Report on
pages F-1 through F-15.

Item 8.Financial Statements and Supplementary Data

Our consolidated financial statements and footnotes and the report of
independent auditors thereon are included in this report on pages F-16 through
F-42. Supplementary Financial Data are presented in Note 16 of the Notes to
Consolidated Financial Statements included in this report on page F-42.

PART IV

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



|    |  |                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | (1)-(2) Financial Statements
and Schedules:                                                                                                                                                    
|   
|    |  | See Item 8.                                                                                                                                                                                    
|   
|    |  | (3) Exhibits:                                                                                                                                                                                  
|   
|    |  | The exhibits listed on the accompanying
Exhibit Index included in this Report are filed or incorporated by
reference as part of this Report and the Exhibit Index is
incorporated by reference.
|   
|(b) |  | During the quarter ended December 31,
2000, the Registrant filed Reports on Form 8-K as follows:                                                                                               
|   
|    |  | Report on Form 8-K filed October 6, 2000,
dated September 29, 2000, reporting under Item 5 the completion of
the separation of Retek, Inc.                                                     
|   
|    |  | Report on Form 8-K filed October 13, 2000,
dated September 29, 2000, reporting under Items 2 and 7 the
completion of the separation of Retek, Inc.                                             
|   
|    |  | Amendment filed November 21, 2000 to
Report on Form 8-K filed September 22, 2000, reporting financial
statements under Item 7.                                                                 

2



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                        |                                                                                                       |                        
|----------------------- | ----------------------------------------------------------------------------------------------------- | -----------------------
|Date: February 14, 2002 | HNC SOFTWARE INC.                                                                                    
|                       
|                        | By:                                                                                                   | /s/ Kenneth J. Saunders
|                        |                                                                                                      
|                        | Kenneth J. SaundersChief Financial Officer and Secretary
(Principal Financial and Accounting 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.

|                                           |  |                                                                                                         |  |                  
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------- |  | -----------------
|Signature                                  |  | Title                                                                                                   |  | Date             
|                                           |  |                                                                                                         |  |                  
|                                          
|/s/ John MutchJohn Mutch                   |  | President and Chief Executive Officer,
Director and Chairman of the Board
(Principal Executive Officer) |  | February 14, 2002
|                                          
|/s/ Kenneth J. SaundersKenneth J. Saunders |  | Chief Financial Officer and Secretary
(Principal Financial Officer)                                     |  | February 14, 2002
|                                          
|/s/ Russell C. ClarkRussell C. Clark       |  | Vice President, Corporate Finance and
Assistant Secretary
(Principal Accounting Officer)                |  | February 14, 2002
|                                          
|/s/ Edward K. ChandlerEdward K. Chandler   |  | Director                                                                                                |  | February 14, 2002
|                                          
|/s/ Thomas F. FarbThomas F. Farb           |  | Director                                                                                                |  | February 14, 2002
|                                          
|/s/ Louis A. SimpsonLouis A. Simpson       |  | Director                                                                                                |  | February 14, 2002
|                                          
|/s/ Alex W. HartAlex W. Hart               |  | Director                                                                                                |  | February 14, 2002
|                                          
|/s/ David Y. ChenDavid Y. Chen             |  | Director                                                                                                |  | February 14, 2002

3



---



##### Table of Contents



HNC SOFTWARE INC.




MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Statements in the following section contain forward-looking information
about our anticipated future operating expenses, our expectations for our
international operations, our future capital needs and about the assumptions
and projections underlying our in-process research and development expense.
Forward-looking statements are subject to risks and uncertainties. Therefore,
our actual results could differ materially and adversely from those expressed
in any forward-looking statements as a result of various factors, including,
but not limited to, the following:



| |  |  | The timing of execution of large contracts;                                                                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The loss of any key customer;                                                                                                                  
|
| |  |  | Variations in the amount of recurring revenues;                                                                                                
|
| |  |  | The deferral, reduction or cancellation of customer orders or purchases;                                                                       
|
| |  |  | The timing of our new product announcements and introductions and those of our competitors;                                                    
|
| |  |  | Delays in the release of final commercial versions of our products;                                                                            
|
| |  |  | Changes in the mix of our distribution channels;                                                                                               
|
| |  |  | The amount and timing of our costs and operating expenses;                                                                                     
|
| |  |  | Our ability to fulfill our obligations under percentage-of-completion contracts;                                                               
|
| |  |  | Our success in completing pilot installations within contracted fee budgets;                                                                   
|
| |  |  | Changes in our product offerings;                                                                                                              
|
| |  |  | Competitive conditions in the industries we serve;                                                                                             
|
| |  |  | Economic conditions in our targeted markets;                                                                                                   
|
| |  |  | Domestic and international economic conditions;                                                                                                
|
| |  |  | Changes in prevailing technologies;                                                                                                            
|
| |  |  | Expenses and charges related to our acquisition of other businesses; and                                                                       
|
| |  |  | Our ability under generally accepted accounting principles to
recognize revenues in the quarter in which we expect to recognize
those revenues.

You should carefully consider these risks. Investors are cautioned not to
place undue reliance on these forward-looking statements that speak only as
of the date of this report. We undertake no obligation to revise or update
any forward-looking statements for any reason.

OVERVIEW

In November 1999, our former subsidiary Retek, Inc. (Retek) completed
the initial public offering of approximately 6.3 million shares of its common
stock. Prior to the offering, we transferred to Retek all of the shares of our
wholly owned subsidiary, Retek Information Systems, Inc. On August 7, 2000,
HNCs board of directors declared a dividend of all of the shares of Retek
common stock held by HNC, or approximately 40.0 million shares, to complete the
spin-off of our Retek subsidiary. We received a private letter ruling from the
Internal Revenue Service that HNCs dividend of its shares of Retek common
stock would be tax-free to HNC and our stockholders for U.S. federal income tax
purposes. This dividend was paid on September 29, 2000 to all HNC stockholders
of record as of September 15, 2000 using a distribution ratio of approximately
1.243 shares of Retek common stock for

F-1



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

each share of HNC common stock held. Cash was paid in lieu of fractional
shares. The shares of Retek common stock that were distributed by HNC in the
Retek spin-off constituted all the Retek shares owned by HNC and represented
approximately 83.9% of Reteks outstanding shares as of the September 29, 2000
distribution date. As a result of our distribution of our Retek common shares,
Retek is no longer affiliated with HNC. In this section, we refer to HNC
Software, Inc., excluding Retek, as Core HNC.

Excluding Retek, our primary business segments during 2000 were HNC
Financial Solutions (FS), HNC Insurance Solutions (IS) and HNC
Telecommunications Solutions (TS). Each of our segments sells products
incorporating our Intelligent Response, Decision Management, Risk Analytics and
Opportunity Analytics software solutions.

Financial Solutions.FS provides a suite of products that addresses the
customer-lifecycle management needs of banks and other financial institutions.
FS provides transaction-based, real-time fraud detection, authorization and
action decisions for applications such as credit card charge authorization and
the loan approval decision process.

Insurance Solutions.IS develops software solutions for the insurance
industry that are designed to add value to its customers businesses through
cost reduction and improved management of risks. Customers in this segment
include insurance carriers, third-party administrators, managed care
organizations, preferred provider organizations, insurance industry trade
groups, brokers, and other service organizations. Our current product offerings
are targeted to the workers compensation and automobile segments of the
property and casualty insurance market, as well as the group health segment of
the insurance market.

Telecommunications Solutions.TS provides solutions designed to help
telecommunications carriers acquire more customers, enhance relationships with
existing customers and retain customers for longer periods. Our current
products include solutions to reduce fraud losses and determine customer
profitability.

Our revenues and operating results have varied significantly in the past
and in some quarters we have experienced net losses. We expect fluctuations in
our operating results to continue for the foreseeable future. As a result, we
believe that investors should not rely on period-to-period comparisons of our
financial results as an indication of our future performance. Further, we
derive a substantial portion of our revenues from our CompAdvisor and Falcon
products. Our CompAdvisor and Falcon products in the aggregate accounted for
40.3% of our total revenues in 2000. CompAdvisor accounted for 23.5% of total
revenues in 2000 and Falcon accounted for 16.8% of total revenues in 2000. We
expect these products will continue to account for a substantial portion of our
total revenues for the foreseeable future. Our revenue will decline if the
market does not continue to accept these products.

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

RESULTS OF OPERATIONS

Revenues

Our revenues are comprised of license and maintenance revenues and
services and other revenues. Total revenues for 2000 increased by $38.0
million, or 17.5%, over 1999. Total revenues for 1999 increased by $38.3

F-2



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

million, or 21.4%, over 1998. Our revenues during 2000, 1999 and 1998 are
summarized as follows, and include Reteks revenues through the September 29,
2000 spin-off date:

|                            |                                  |   |                         |         |      |   |         |         |  |   |         |        | 
|--------------------------- | -------------------------------- | - | ----------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------ | 
|                            |                                  |   | Year Ended December 31,
|                            |                                  |   |                        
|                            |                                  |   | 2000                    |         | 1999 |   | 1998   
|                            |                                  |   |                         |         |      |   |        
|                            |                                  |   | (in thousands)         
|Core HNC:                   |                                  |   |                         |         |      |   |         |         |  |   |         |       
|                            | License and maintenance revenues |   | $                       | 130,834 |      |   | $       | 109,983 |  |   | $       | 94,905 | 
|                            | Services and other revenues      |   |                         | 64,135  |      |   |         | 37,747  |  |   |         | 27,034 | 
|                            |                                  |   |                         |         |      |   |         |         |  |   |         |       
|                            |                                  |   | 194,969                 |         |      |   | 147,730 |         |  |   | 121,939 |       
|                            |                                  |   |                         |         |      |   |         |         |  |   |         |       
|Retek:                      |                                  |   |                         |         |      |   |         |         |  |   |         |       
|                            | License and maintenance revenues |   |                         | 35,229  |      |   |         | 45,965  |  |   |         | 44,389 | 
|                            | Services and other revenues      |   |                         | 24,686  |      |   |         | 23,194  |  |   |         | 12,280 | 
|                            |                                  |   |                         |         |      |   |         |         |  |   |         |       
|                            |                                  |   | 59,915                  |         |      |   | 69,159  |         |  |   | 56,669  |       
|                            |                                  |   |                         |         |      |   |         |         |  |   |         |       
|Total Consolidated Revenues |                                  | $ | 254,884                 |         |      | $ | 216,889 |         |  | $ | 178,608 |       
|                            |                                  |   |                         |         |      |   |         |         |  |   |         |       

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

The following table presents our license and maintenance revenues by
segment for 2000, 1999 and 1998:

|                                  |              |          |         |                         |         |      |         |        |         |   |         |        |        | 
|--------------------------------- | ------------ | -------- | ------- | ----------------------- | ------- | ---- | ------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                  |              |          |         | Year Ended December 31,
|                                  |              |          |         |                        
|                                  |              |          |         | 2000                    |         | 1999 |         | 1998  
|                                  |              |          |         |                         |         |      |         |       
|                                  |              |          |         | (in thousands)         
|License and Maintenance Revenues: |              |          |         |                         |         |      |         |        |         |   |         |       
|                                  | FS           |          | $       | 66,207                  |         |      | $       | 52,489 |         |   | $       | 48,144 |       
|                                  | IS           |          |         | 49,804                  |         |      |         | 52,418 |         |   |         | 43,765 |       
|                                  | TS and other |          |         | 14,822                  |         |      |         | 5,076  |         |   |         | 2,996  |       
|                                  |              |          |         |                         |         |      |         |        |         |   |         |       
|                                  |              | Core HNC |         |                         | 130,834 |      |         |        | 109,983 |   |         |        | 94,905 | 
|                                  | Retek        |          |         | 35,229                  |         |      |         | 45,965 |         |   |         | 44,389 |       
|                                  |              |          |         |                         |         |      |         |        |         |   |         |       
|                                  |              | $        | 166,063 |                         |         | $    | 155,948 |        |         | $ | 139,294 |       
|                                  |              |          |         |                         |         |      |         |        |         |   |         |       

License and maintenance revenues in 2000 increased by $10.1 million, or
6.5%, compared with 1999. This increase consisted of a $20.9 million, or 19.0%
increase within Core HNC, offset by a $10.7 million, or 23.4% decline at Retek.
The increase at Core HNC was primarily attributable to a $13.7 million, or
26.1% increase at our FS segment and a $9.7 million, or 192.0% increase at our
combined TS and other segments, offset by a $2.6 million, or 5.0% decline at
our IS segment. The increase at our FS segment was attributable primarily to
increases in sales of our Falcon and ProfitMax products, along with increased
revenues resulting from acquisitions. The increase at our combined TS and other
segments is attributable primarily to growth in the TS license and maintenance
business through acquisitions, resulting in increased revenues derived
primarily through the sale of our 4SCORE and RoamEX products. The decrease at
our IS segment resulted primarily from the sale of fewer risk analytic product
perpetual licenses as compared to 1999.

License and maintenance revenues in 1999 increased by $16.7 million, or
12.0%, compared to 1998. This increase consisted of a $15.1 million, or 15.9%
increase within Core HNC and a $1.6 million, or 3.6% increase at Retek. The
increase at Core HNC was attributable primarily to a $4.3 million, or 9.0%
increase at our FS segment and a $8.7 million, or 19.8% increase at our IS
segment and a $2.1 million, or 69.4% increase at our combined TS and other
segments. The increase at our FS segment was attributable primarily to
increases in sales of our Falcon

F-3



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

and ProfitMax products as a result of an increase in the customer base.
The increase at our IS segment was primarily the result of increased license
and maintenance revenues associated with our CompAdvisor product, resulting
from an increase in the customer base coupled with growth from existing
customers, and an increase in the number of MIRA licenses sold. The increase at
our combined TS and other segments is attributable primarily to growth in the
TS license and maintenance business through increased sales of our ATACS
product line, which we acquired in June 1998.

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

The following table presents our services and other revenues by segment
for 2000, 1999 and 1998:

|                            |              |          |        |                         |        |      |        |        |        |   |        |        |        | 
|--------------------------- | ------------ | -------- | ------ | ----------------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                            |              |          |        | Year Ended December 31,
|                            |              |          |        |                        
|                            |              |          |        | 2000                    |        | 1999 |        | 1998  
|                            |              |          |        |                         |        |      |        |       
|                            |              |          |        | (in thousands)         
|Service and Other Revenues: |              |          |        |                         |        |      |        |        |        |   |        |       
|                            | FS           |          | $      | 29,480                  |        |      | $      | 21,152 |        |   | $      | 15,100 |       
|                            | IS           |          |        | 31,578                  |        |      |        | 14,372 |        |   |        | 8,375  |       
|                            | TS and other |          |        | 3,077                   |        |      |        | 2,223  |        |   |        | 3,559  |       
|                            |              |          |        |                         |        |      |        |        |        |   |        |       
|                            |              | Core HNC |        |                         | 64,135 |      |        |        | 37,747 |   |        |        | 27,034 | 
|                            | Retek        |          |        | 24,686                  |        |      |        | 23,194 |        |   |        | 12,280 |       
|                            |              |          |        |                         |        |      |        |        |        |   |        |       
|                            |              | $        | 88,821 |                         |        | $    | 60,941 |        |        | $ | 39,314 |       
|                            |              |          |        |                         |        |      |        |        |        |   |        |       

Services and other revenues in 2000 increased $27.9 million, or 45.7%,
compared to 1999. This increase consisted of a $26.5 million, or 70.2% increase
at Core HNC and a $1.4 million, or 6.4% increase at Retek. The increase at Core
HNC was attributable primarily to a $8.4 million, or 39.8% increase at our FS
segment and a $17.2 million, or 119.7% increase at our IS segment. The increase
at our FS segment was attributable primarily to an increase in Capstone
implementation revenues, along with increased revenues resulting from
acquisitions. The increase at our IS segment was attributable primarily to
overall growth in our hosted services customer base, including the commencement
of full-scale hosted service operations for a primary customer.

Services and other revenues in 1999 increased $21.6 million, or 55.0%,
compared to 1998. This increase consisted of a $10.7 million, or 39.6% increase
at Core HNC and a $10.9 million, or 88.9% increase at Retek. The increase at
Core HNC was primarily driven by a $6.1 million, or 40.1% increase at our FS
segment and a $6.0 million, or 71.6% increase at our IS segment. The increase
at our FS segment was principally the result of an increase in Capstone product
implementations and, to a lesser extent, installations of Falcon products.
These increases were partially offset by a decrease in installations related to
our ProfitMax suite of products as a result of the completion of a large
project during 1999. The increase at our IS segment was attributable to a
combination of increased installation, consulting and remote hosted service
bureau revenues relating to our CompAdvisor product, resulting from the
aggregate growth of our customer base within this segment, including the
addition of two sizable customers, offset by the loss of a significant service
bureau customer as a result of industry consolidation.

Revenues From Non-U.S. Regions.International operations and export sales
represented 19.3%, 23.2% and 23.1% of our total revenues in 2000, 1999 and
1998, respectively. During 2000, 1999 and 1998, approximately

F-4



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

4.8%, 5.2% and 6.8% of our sales were denominated in currencies other than
our functional currency, which is the U.S. dollar. These foreign currencies are
primarily those of Western Europe and Canada. During 2000, approximately 33.4%
of our international sales were derived from Retek. In 1999 and 1998, the
majority of our international sales were derived from Retek. We believe that
international sales represent a significant opportunity for revenue growth and
anticipate that our international sales may increase as a percentage of our
total revenue in the future. However, there can be no assurance that our
efforts to develop products, databases, and models for targeted international
markets or in developing additional international sales and support channels
will be successful.

Cost of Revenues

License and Maintenance Cost of Revenues.License and maintenance cost of
revenues primarily represents our expenses for personnel engaged in customer
support, travel to customer sites and documentation materials. Our license and
maintenance cost of revenues was $60.5 million in 2000, $41.6 million in 1999
and $33.5 million in 1998. The following table summarizes our license and
maintenance cost of revenues in both absolute dollars and as a percentage of
license and maintenance revenues by operating segment:

|                                         |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |   |  |  |  |        |   |        |        |      |   |      |      |  
|---------------------------------------- | ---------------------------------- | ---------------------------------- | ---------------- | - | ----------------------- | ------ | ---- | - | ---- | ---- | ------ | - | ------ | ------ | ---- | - | ---- | ---- | - |  |  |  | ------ | - | ------ | ------ | ---- | - | ---- | ---- | -
|                                         |                                    |                                    |                  |   | Year Ended December 31,
|                                         |                                    |                                    |                  |   |                        
|                                         |                                    |                                    |                  |   | 2000                    |        | 1999 |   | 1998
|                                         |                                    |                                    |                  |   |                         |        |      |   |     
|                                         |                                    |                                    |                  |   | (in thousands)         
|License and Maintenance Cost of Revenues |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |   |  |  |  |        |   |        |        |      |  
|Segment cost of revenues:                |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |   |  |  |  |        |   |        |        |      |  
|                                         |                                    | FS                                 |                  | $ | 8,989                   |        |      |   | 13.6 | %    |        | $ | 9,304  |        |      |   | 17.7 | %    |   |  |  |  |        | $ | 8,503  |        |      |   | 17.7 | %   
|                                         |                                    | IS                                 |                  |   | 24,425                  |        |      |   | 49.0 | %    |        |   | 24,420 |        |      |   | 46.6 | %    |   |  |  |  |        |   | 19,519 |        |      |   | 44.6 | %   
|                                         |                                    | TS and other                       |                  |   | 3,252                   |        |      |   | 21.9 | %    |        |   | 1,190  |        |      |   | 23.4 | %    |   |  |  |  |        |   | 701    |        |      |   | 23.4 | %   
|                                         |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |   |  |  |  |        |   |        |        |      |  
|                                         |                                    |                                    | Core HNC         |   |                         | 36,666 |      |   |      | 28.0 | %      |   |        | 34,914 |      |   |      | 31.7 | % |  |  |  |        |   |        | 28,723 |      |   |      | 30.3 | %
|                                         |                                    | Retek                              |                  |   | 15,059                  |        |      |   | 42.7 | %    |        |   | 6,358  |        |      |   | 13.8 | %    |   |  |  |  |        |   | 4,750  |        |      |   | 10.7 | %   
|                                         |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |   |  |  |  |        |   |        |        |      |  
|                                         |                                    |                                    | 51,725           |   |                         |        | 31.1 | % |      |      | 41,272 |   |        |        | 26.5 | % |      |      |   |  |  |  | 33,473 |   |        |        | 24.0 | %
|                                         | Amounts not allocated to segments: |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |   |  |  |  |        |   |        |        |      |   |     
|                                         |                                    | Stock-based compensation expense   |                  |   | 2,658                   |        |      |   | 1.6  | %    |        |   | 280    |        |      |   | 0.1  | %    |   |  |  |  |        |   |       |        |      |   |     |     
|                                         |                                    | Expenses related to Retek spin-off |                  |   | 6,086                   |        |      |   | 3.7  | %    |        |   |       |        |      |   |     |      |   |  |  |  |        |   |       |        |      |   |     |     
|                                         |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |   |  |  |  |        |   |        |        |      |  
|                                         |                                    |                                    | HNC Consolidated |   | $                       | 60,469 |      |   |      | 36.4 | %      |   | $      | 41,552 |      |   |      | 26.6 | % |  |  |  |        |   | $      | 33,473 |      |   |      | 24.0 | %
|                                         |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |   |  |  |  |        |   |        |        |      |  

Our license and maintenance cost of revenues percentage in 2000 increased
by 9.8% compared to 1999. Of this increase, 4.6% was attributable to increases
within our combined Core HNC and Retek operating segments and 5.2% of this
increase was attributable to our recognition in 2000 of increased stock-based
compensation charges and non-recurring expenditures relating to our Retek
spin-off. For a further discussion regarding stock-based compensation charges
and expenditures relating to our Retek spin-off, refer to the sections entitled
Stock-Based Compensation Expense and Expenses Related to Spin-Off of Retek
appearing later in this Report.

In 2000, the 4.6% license and maintenance cost of revenues percentage
increase within our operating segments was attributable to a 3.7% decline at
Core HNC, offset by a 28.9% increase at Retek. The decrease in Core HNCs
license and maintenance cost of revenues percentage was attributable to a 4.1%
decrease at our FS segment and a 1.5% decrease at our combined TS and other
segments, offset by a 2.4% increase at our IS segment. The cost of revenues
percentage decline at our FS segment was attributable primarily to our
recognition of one-time, non-recurring license fees related to Falcon product
sales, which have minimal associated costs, as well as increased revenues
associated with e-commerce products having lower associated costs. The cost of
revenues percentage decline within our combined TS and other segments was
attributable primarily to the increase of TS product sales during 2000,
primarily resulting from growth in the TS license and maintenance business
through acquisitions, with a lower percentage cost increase. The cost of
revenues percentage increase at our IS segment was attributable primarily to
the sale of fewer perpetual licenses, which have minimal associated costs,
related to risk analytic products in 2000 versus 1999.

Our license and maintenance cost of revenues percentage in 1999 increased
by 2.6% compared to 1998. This increase was attributable primarily to a 1.4%
increase at Core HNC and a 3.1% increase at Retek. Core HNCs license and
maintenance cost of revenues percentage increase was attributable primarily to
a 2.0% increase at our IS segment, while the cost of revenues percentage at our
FS segment and our combined TS and other segments

F-5



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

remained relatively flat year over year. The increase at our IS segment
was attributable primarily to increased costs related to Preferred Provider
Organization bill repricing expenses, including network access fees, as a
result of increasingly competitive market conditions.

Services and Other Cost of Revenues.Services and other cost of revenues
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 hosted service
operations. Our services and other cost of revenues was $72.9 million in 2000,
$41.3 million in 1999 and $28.7 million in 1998. The following table summarizes
our services and other cost of revenues in both absolute dollars and as a
percentage of services and other revenues by operating segment:

|                                    |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |        |   |        |        |      |   |      |      |  
|----------------------------------- | ---------------------------------- | ---------------------------------- | ---------------- | - | ----------------------- | ------ | ---- | - | ---- | ---- | ------ | - | ------ | ------ | ---- | - | ---- | ---- | ------ | - | ------ | ------ | ---- | - | ---- | ---- | -
|                                    |                                    |                                    |                  |   | Year Ended December 31,
|                                    |                                    |                                    |                  |   |                        
|                                    |                                    |                                    |                  |   | 2000                    |        | 1999 |   | 1998
|                                    |                                    |                                    |                  |   |                         |        |      |   |     
|                                    |                                    |                                    |                  |   | (in thousands)         
|Services and Other Cost of Revenues |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |        |   |        |        |      |  
|Segment cost of revenues:           |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |        |   |        |        |      |  
|                                    |                                    | FS                                 |                  | $ | 22,741                  |        |      |   | 77.1 | %    |        | $ | 14,013 |        |      |   | 66.2 | %    |        | $ | 10.445 |        |      |   | 69.2 | %   
|                                    |                                    | IS                                 |                  |   | 19,517                  |        |      |   | 61.8 | %    |        |   | 8,692  |        |      |   | 60.5 | %    |        |   | 6,013  |        |      |   | 71.8 | %   
|                                    |                                    | TS and other                       |                  |   | 2,155                   |        |      |   | 70.0 | %    |        |   | 1,586  |        |      |   | 71.3 | %    |        |   | 2.693  |        |      |   | 75.7 | %   
|                                    |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |        |   |        |        |      |  
|                                    |                                    |                                    | Core HNC         |   |                         | 44,413 |      |   |      | 69.2 | %      |   |        | 24,291 |      |   |      | 64.4 | %      |   |        | 19.151 |      |   |      | 70.8 | %
|                                    |                                    | Retek                              |                  |   | 19,349                  |        |      |   | 78.4 | %    |        |   | 16,626 |        |      |   | 71.7 | %    |        |   | 9,505  |        |      |   | 77.4 | %   
|                                    |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |        |   |        |        |      |  
|                                    |                                    |                                    | 63,762           |   |                         |        | 71.8 | % |      |      | 40,917 |   |        |        | 67.1 | % |      |      | 28,656 |   |        |        | 72.9 | %
|                                    | Amounts not allocated to segments: |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |        |   |        |        |      |   |     
|                                    |                                    | Stock-based compensation expense   |                  |   | 2,548                   |        |      |   | 2.9  | %    |        |   | 354    |        |      |   | 0.6  | %    |        |   |       |        |      |   |     |     
|                                    |                                    | Expenses related to Retek spin-off |                  |   | 6,603                   |        |      |   | 7.4  | %    |        |   |       |        |      |   |     |      |        |   |       |        |      |   |     |     
|                                    |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |        |   |        |        |      |  
|                                    |                                    |                                    | HNC Consolidated |   | $                       | 72,913 |      |   |      | 82.1 | %      |   | $      | 41,271 |      |   |      | 67.7 | %      |   | $      | 28.656 |      |   |      | 72.9 | %
|                                    |                                    |                                    |                  |   |                         |        |      |   |      |      |        |   |        |        |      |   |      |      |        |   |        |        |      |  

Our services and other cost of revenues percentage in 2000 increased by
14.4% compared to 1999. Of this increase, 4.7% was attributable to increases
within our combined Core HNC and Retek operating segments and 9.7% of this
increase was attributable to our recognition in 2000 of increased stock-based
compensation charges and non-recurring expenditures relating to our Retek
spin-off. For a further discussion regarding stock-based compensation charges
and expenditures relating to our Retek spin-off, refer to the sections entitled
Stock-Based Compensation Expense and Expenses Related to Spin-Off of Retek
appearing later in this Report.

In 2000, the 4.7% services and other cost of revenues percentage increase
within our operating segments was attributable to a 4.8% increase at Core HNC
and a 6.7% increase at Retek. The increase within Core HNC was primarily
attributable to a 10.9% increase at our FS segment and a 1.3% increase at our
IS segment. The cost of revenues percentage increase at our FS segment was
attributable primarily to the increased use of third party consultants, who
have a higher average cost than internal resources, in connection with Capstone
product implementations during the year. The cost of revenues percentage
increase at our IS segment was attributable primarily to increased costs
associated with contract development work performed during the year, offset by
improved cost efficiencies associated with the growth in our hosted service
customer base.

Our services and other cost of revenues percentage in 1999 decreased by
5.2% compared to 1998. This decrease was comprised primarily of a 6.4% decline
at Core HNC and a 5.7% decline at Retek. The decrease within HNC was primarily
attributable to a 3.0% decrease at our FS segment and an 11.3% decrease at our
IS Segment. The cost of revenues percentage decrease at our FS segment was
attributable primarily to an increase in the number of Capstone and Falcon
product implementations, which had lower associated costs than other services.
The cost of revenues percentage decrease at our IS segment was attributable
primarily to the result of improved cost efficiencies associated with the
growth in our hosted service customer base.

F-6



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Research and Development Expense

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 expense
totaled $75.5 million in 2000, $50.2 million in 1999 and $32.7 million in 1998.

Research and development expense in 2000 increased by $25.3 million, or
50.5%, compared to 1999. Of this increase, $16.5 million, or 32.9%, was
attributable to increased expenditures within our combined Core HNC and Retek
operating segments, and $8.8 million, or 17.6%, was attributable to our
recognition in 2000 of increased stock-based compensation charges as well as
non-recurring expenditures relating to our Retek spin-off. Research and
development expenses in 1999 increased by $17.5 million, or 53.6%, compared to
1998. Of this increase, $16.4 million, or 50.2%, was attributable to increased
expenditures within our combined Core HNC and Retek operating segments and $1.1
million, or 3.4%, was attributable to the recording of stock-based compensation
charges in 1999. For a further discussion regarding stock-based compensation
charges and expenditures relating to our Retek spin-off, which we do not
allocate to our operating segments, refer to the sections entitled Stock-Based
Compensation Expense and Expenses Related to Spin-Off of Retek appearing
later in this Report.

Within our operating segments, the 2000 increase consisted of a $12.9
million, or 48.8% increase within Core HNC and an increase of $3.6 million, or
15.9% related to Retek. The 2000 increase at Core HNC is attributable to a $9.6
million increase at our FS segment, a $2.4 million increase at our combined TS
and other segments and a $0.9 million increase at our IS segment. The 1999
increase consisted of a $6.6 million, or 33.3% increase at Core HNC and a $9.8
million, or 76.2% increase related to Retek. The 1999 increase at Core HNC is
attributable primarily to a $5.8 million increase at our FS segment and a $0.6
million increase at our IS segment. The absolute dollar increases at Core HNC
in 2000 and 1999 were attributable primarily to increases in staffing and
related costs to support new product development activities.

Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of software development costs from the time technological
feasibility is established until the product is available for general release
to customers. Based on our product development process, technological
feasibility is not established until completion of a working model. Costs we
incur between completion of the working model and the point at which a product
is ready for general release have been insignificant. As a result, no
significant software development costs were capitalized through December 31,
2000. We anticipate that research and development expenses will increase in
dollar amount and could increase as a percentage of total revenues for the
foreseeable future.

Sales and Marketing Expense

Sales and marketing expenses consist primarily of salaries and benefits,
commissions, travel, entertainment and promotional expenses. Sales and
marketing expenses totaled $89.9 million in 2000, $46.3 million in 1999 and
$34.5 million in 1998.

Sales and marketing expense in 2000 increased by $43.6 million, or 94.4%,
compared to 1999. Of this increase, $20.5 million, or 44.5%, was attributable
to increased expenditures within our combined Core HNC and Retek operating
segments, and $23.1 million, or 49.9%, was attributable to our recognition in
2000 of increased stock-based compensation charges as well as non-recurring
expenditures relating to our Retek spin-off. Sales and marketing expenses in
1999 increased by $11.8 million, or 34.0%, compared to 1998. Of this increase,
$11.3 million, or 32.7%, was attributable to increased expenditures within our
combined Core HNC and Retek operating segments and $0.4 million, or 1.3%, was
attributable to the recording of stock-based compensation charges in 1999. For
a further discussion regarding stockbased compensation charges and
expenditures relating to our Retek spin-

F-7



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

off, which we do not allocate to our operating segments, refer to the
sections entitled Stock-Based Compensation Expense and Expenses Related to
Spin-Off of Retek appearing later in this Report.

Within our operating segments, the 2000 increase consisted of a $12.0
million, or 45.8% increase at Core HNC and a $8.6 million, or 43.9% increase
related to Retek. The 2000 increase at Core HNC is attributable to a $6.9
million increase at our FS segment, a $3.3 million increase at our IS segment
and a $1.8 million increase at our combined TS and other segments. Sales and
marketing expenses in 1999 increased by $11.3 million, or 32.7%, compared to
1998. The 1999 increase consisted of a 5.7 million, or 27.7% increase at Core
HNC and a $5.6 million, or 40.1% increase related to Retek. The 1999 increase
at Core HNC is attributable to a $2.5 million increase at our FS segment, a
$2.6 million increase at our combined TS and other segments, and a $0.5 million
increase at our IS segment. The absolute dollar increases at Core HNC in 2000
and 1999 were attributable primarily to increases in staffing related to the
expansion of our direct sales and marketing staff, including that resulting
from acquisitions. Also contributing to the increases were additional expenses
for trade shows, advertising, corporate marketing programs and other expenses
to support recently acquired businesses.

We expect sales and marketing expenses to continue to increase in absolute
dollars for the foreseeable future. These expenses could also increase as a
percentage of total revenues as we continue to develop a direct sales force in
the EMEA (Europe, the Middle East and Africa), the Asian-Pacific and Latin
American regions, as well as other international markets, expand our domestic
sales and marketing organization and increase the breadth of our product lines.

General and Administrative Expense

General and administrative expenses consist primarily of personnel costs
for finance, contract administration, human resources and general management,
as well as insurance and professional services expenses. General and
administrative expenses totaled $53.3 million in 2000, 33.8 million in 1999 and
$19.0 million in 1998.

General and administrative expense in 2000 increased by $19.5 million, or
57.9%, compared to 1999. Of this increase, $10.8 million, or 32.0%, was
attributable to increased expenditures within our combined Core HNC and Retek
operating segments, and $8.7 million, or 25.9%, was attributable to the net
effect of our recognition of non-recurring expenditures relating to our Retek
spin-off, offset by a decline in stock-based compensation charges in 2000 as
compared to 1999. General and administrative expenses in 1999 increased by
$14.8 million, or 78.0%, compared to 1998. Of this increase, $5.0 million, or
26.4%, was attributable to increased expenditures within our combined Core HNC
and Retek operating segments and $9.8 million, or 51.6%, was attributable to
the recording of stock-based compensation charges in 1999. For a further
discussion regarding stock-based compensation charges and expenditures relating
to our Retek spin-off, which we do not allocate to our operating segments,
refer to the sections entitled Stock-Based Compensation Expense and Expenses
Related to Spin-Off of Retek appearing later in this Report.

Within our operating segments, the 2000 increase consisted of a $9.1
million, or 51.6% increase at Core HNC and a $1.7 million, or 26.6% increase
related to Retek. The 2000 increase at Core HNC is attributable to a $5.6
million increase at our FS segment, a $2.4 million increase at our IS segment
and a $1.1 million increase at our combined TS and other segments. General and
administrative expenses in 1999 increased by $5.0 million, or 26.4%, compared
to 1998. The 1999 increase consisted of a $3.3 million, or 23.1% increase at
Core HNC and a $1.7 million, or 36.8% increase related to Retek. The 1999
increase at Core HNC is attributable primarily to a $2.1 million increase at
our FS segment and a $1.0 million increase at our combined TS and other
segments. The absolute dollar increases at Core HNC in 2000 and 1999 are
attributable primarily to additional staffing and related expenses to support a
higher volume of business, resulting in part from our acquisitions.
Contributing also to the 1999 increase within our FS segment were additional
legal costs incurred in our defense related to the Nestor litigation.

F-8



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Transaction-related Amortization and Costs

Transaction-related amortization and costs primarily include
acquisition-related amortization during 2000, 1999 and 1998. Additional costs
include $0.8 million related to the write-off of deferred offering costs during
2000 and $0.6 million related to the write-off of deferred merger costs during
1999. Transactionrelated amortization and costs increased from $3.2 million in
1998 to 9.2 million in 1999 and to $43.7 million in 2000. These year-over-year
increases are primarily attributable to incremental intangible asset
amortization charges as a result of our business acquisitions during 1998, 1999
and 2000. The average amortization period and useful life for these intangible
assets is approximately 3.5 years. For further information regarding our
acquisitions, refer to Note 3 of the Notes to the Consolidated Financial
Statements.

In-process Research and Development Expense

2000 Acquisitions

In-process research and development expense was $7.6 million in 2000,
related to one-time write-offs in connection with the acquisitions of CASA
($1.4 million), Celerity ($1.1 million), HighTouch ($4.0 million), Systems/Link
($0.7 million) and CardAlert ($0.4 million). The classification of the
technology as complete or under development was made in accordance with the
guidelines of Statement of Financial Accounting Standards No. 86, Statement of
Financial Accounting Standards No. 2 and Financial Accounting Standards Board
Interpretation No. 4.

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

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

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

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

F-9



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

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

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

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

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

The in-process research and development for the CASA, Celerity, HighTouch,
Systems/Link and CardAlert projects have reached completion or continue to
progress, in all material respects, consistently with our original assumptions
that were provided to the independent appraiser and used to value the
in-process research and development.

F-10



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

1999 Acquisition

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

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

1998 Acquisitions

In-process research and development expense was $6.1 million in 1998,
related to one-time write-offs in connection with the acquisitions of PCS ($1.8
million), FTI ($3.0 million), and the ATACS product line ($1.3 million). The
classification of the technology as complete or under development was made in
accordance with the guidelines of Statement of Financial Accounting Standards
No. 86, Statement of Financial Accounting Standards No. 2 and Financial
Accounting Standards Board Interpretation No. 4.

PCS, acquired in the first quarter of 1998, was a supplier of fully
integrated distribution center management software products that address the
distribution needs of the retail, wholesale and manufacturing industries. At
the time of acquisition, PCS had a number of new technologies under
development, including primarily two software product versions that were being
designed to assist warehouse operations and of which were estimated to achieve
technological feasibility in 1999.

FTI, acquired in the second quarter of 1998, developed and marketed
profitability measurement and decision-support software products and related
support services to banks and other similar financial institutions. At the time
of acquisition, FTI had various new products under development relating to
profitability measurement and other decision support systems, that were
estimated to achieve technological feasibility at various dates in 1998 and
1999.

The ATACS product line, acquired in the second quarter of 1998, was a
fraud management software solution for the wireline, wireless and Internet
telecommunication service provider industries. At the time of acquisition,
ATACS Version 4.2, which included new features and interface technologies, was
under development and was estimated to reach technological feasibility in the
third quarter of 1998. Although Version 4.2 had as its foundation certain
technology from completed versions, management believed that Version 4.2
development efforts were of a significance level to be considered new research
and development efforts.

We used an independent appraisal firm to assist us with our valuations of
the fair market values of the purchased assets in connection with these
acquisitions. Fair market value is defined as the estimated amount at which an
asset might be expected to be exchanged between a willing buyer and willing
seller assuming the buyer continues to use the assets in its current
operations. The in-process research and development projects were valued
through the use of a discounted cash flow analysis, taking into account
projected future cash flows associated with these projects once

F-11



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

they achieve technological feasibility, their stage of completion as of
the acquisition date, and the expected return requirements (i.e. discount
rates) for determining present values of the projected cash flows. Stages of
completion were estimated by considering time, cost, and complexity of tasks
completed prior to the acquisition as a percentage of total time, cost and
effort required for the total project up to achieving technological
feasibility.

With respect to the projected financial information provided to our
appraiser pertaining to these acquisitions, we prepared detailed sets of
projections forecasting revenues from the in-process technologies as well as
gross profit and operating profit margins. These projections were made based on
an assessment of customer needs and the expected pricing and cost structure.

With respect to the discount rates used in the valuation approach,
incomplete technology represents a mix of near and mid-term prospects for the
acquired businesses/product lines and imparts a level of uncertainty as to
their prospects. A reasonable expectation of return on the incomplete
technology would be higher than that of completed technology due to these
inherent risks. As a result, the earnings associated with incomplete technology
were discounted based upon the following methodologies: The Capital Asset
Pricing Model was used to determine the cost of equity for the PCS and ATACS
product line acquisitions. 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.
The Weighted Average Cost of Capital was used to determine the discount rate
for FTI. Employing these data for PCS, FTI and the ATACS product line, the
discount rates attributable to the businesses/product line were 30.0%, 17.0%
and 17.5%, respectively, which were used for valuing completed technology.
Since incomplete technology would require a higher return than completed
technology, the valuation reports prepared by our appraiser utilized rates of
40.0%, 27.0% and 22.5% for PCS, FTI and the ATACS product line, respectively,
to present value cash flows (in excess of a return on other assets of the
business) attributable to in-process research and development projects.

Other Operating Expenses

During 2000, we recorded an impairment charge of $1.2 million related to
the abandonment of a lease and associated property and equipment. No impairment
charges were recorded in 1999 or 1998.

Interest Income

Interest income totaled $12.9 million in 2000, $6.3 million in 1999 and
$6.8 million in 1998. The increase in interest income in 2000 compared to 1999
is attributable primarily to increased interest earned as a result of higher
average cash and investment balances during 2000 whereas the decrease in
interest income in 1999 from 1998 is attributable primarily to lower average
cash and investment balances during 1999 as compared to 1998.

Interest Expense

Interest expense totaled $4.2 million in 2000, $5.7 million in 1999 and
$4.5 million in 1998. The majority of our interest expense during each of these
years relates to our Convertible Subordinated Notes (the Notes). The decline
in interest expense in 2000 compared to 1999 is attributable primarily to the
conversion of $83.6 million of the Notes into our common stock during the third
quarter of 2000, whereas the outstanding convertible note balance during all of
1999 was $100.0 million. The increase in interest expense in 1999 compared to
1998 is attributable primarily to a full year of interest recorded on the Notes
during 1999 and a partial year in 1998, as the Notes were issued in March 1998.

Expense Related to Debt Conversion

In connection with the conversion of $83.6 million in Notes during 2000,
we incurred and paid $12.7 million in conversion premiums to the note holders,
which we recorded as a debt conversion expense.

F-12



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Other Expense, Net

Other expense, net totaled $3.4 million in 2000, $0.2 million in 1999 and
$0.1 million in 1998. The increase in 2000 compared to 1999 and 1998 is
attributable primarily to a $2.8 million charge related to the write-down of
our investment in Network Commerce in 2000. See Note 5 of the Notes to the
Consolidated Financial Statements.

Minority Interest in Losses (Income) of Consolidated Subsidiaries

Minority interest in losses (income) of consolidated subsidiaries totaled
$7.6 million in 2000, $0.7 million in 1999 and $(0.1) million in 1998, and
represents other stockholders share of the losses (income) of our consolidated
subsidiaries, including that relating to Retek in 2000 and 1999.

Income Taxes

The provision (benefit) for income taxes was $(33.1) million in 2000, $0.5
million in 1999 and $12.8 million in 1998. The differences between the
provision (benefit) for income taxes recorded and that computed by applying
taxes at statutory rates during 2000, 1999 and 1998 are attributable primarily
to the effect of non-deductible expenses, offset by the effect of Reteks loss
attributable to minority interest stockholders and the generation of tax credit
carryforwards during each of these three years. Significant non-deductible
expenses in 2000 include the effect of one-time write-offs of in-process
research and development related to acquisitions, stock-based compensation
expense, acquisition related amortization, Retek spin-off costs, and debt
conversion expense. Significant non-deductible expenses in 1999 include the
effect of a one-time write-off of in-process research and development related
to an acquisition, stock-based compensation expense, acquisition related
amortization and stock redemption charges. Significant non-deductible expenses
in 1998 include the effect of one-time write-offs of in-process research and
development related to acquisitions, acquisition related amortization and stock
redemption charges. See Note 12 of the Notes to the Consolidated Financial
Statements.

Stock-based Compensation Expense

Within our statement of operations, stock-based compensation charges have
been classified as follows in 2000 and 1999:

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

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

During 1999, Retek granted stock options to employees and directors to
purchase Retek common stock at an exercise price of $10.00 per share when the
deemed fair market value of Reteks common stock was $13.00 per

F-13



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

share. As a result, Retek recorded unearned stock-based compensation
totaling $21.9 million representing the aggregate intrinsic value of the
options on the date of grant. Additionally, during 2000, Retek recorded
additional unearned stock-based compensation totaling $1.8 million related to
an employee option grant having an exercise price below the fair value of
Reteks common stock on the date of grant. Amortization of Reteks unearned
stock-based compensation totaled $1.9 million during 1999 and $8.3 million
during the period from January 1, 2000 through the Retek spin-off date of
September 29, 2000. Reteks unearned stock-based compensation balance of $13.3
million at September 29, 2000, net of forfeiture reductions, was removed from
our consolidated equity accounts in connection with the Retek spin-off.

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

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

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

Expenses Related to Spin-off of Retek

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

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

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

F-14



---



##### Table of Contents



HNC SOFTWARE INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Liquidity and Capital Resources

Net cash used in operating activities totaled $66.4 million in 2000,
compared to net cash provided by operating activities of $4.6 million in 1999.
Cash used in operations during 2000 reflects our net loss of $116.4 million,
reduced by non-cash aspects of our net loss totaling $50.0 million. Significant
non-recurring operational cash outflows during 2000 included $12.7 million in
debt conversion expense as well as $40.1 million in cash payments related to
bonuses paid and options repurchased in connection with the Retek spinoff.

Net cash used in investing activities totaled $72.7 million in 2000,
compared to net cash used in investing activities of $30.8 million in 1999.
Cash used in investing activities during 2000 included $18.3 million in net
purchases of marketable securities, $25.4 million expended for the purchase of
property and equipment, $22.8 million paid in connection with our business
acquisitions, net of cash acquired, and $6.3 million paid out in connection
with equity investments and employee loans made.

Net cash provided by financing activities totaled $74.6 million in 2000,
compared to net cash provided by financing activities of $108.3 million in
1999. Cash provided by financing activities during 2000 includes $98.5 million
in proceeds resulting from stock option exercises and employee stock purchase
plan contributions under both HNC and Retek plans, including the repayment of
stockholder notes. It also includes $32.6 million in proceeds from the sale of
trade receivables, offset by $18.6 million in cash expended to repurchase HNC
common stock for treasury and $7.4 million used to repay debt and capital lease
obligations, and a $30.5 million reduction of Reteks cash and cash equivalent
balance as of the September 29, 2000 spin-off date.

As of December 31, 2000, we had $162.8 million in cash, cash equivalents
and investment securities. We believe that these balances, including interest
to be earned thereon, and borrowings available under our credit facility will
be sufficient to fund our working and other capital requirements, including
potential investments in other companies and other assets to support the
strategic growth of our business, over the next twelve months. In the event
additional needs for cash arise, we may raise additional funds from a
combination of sources including the potential issuance of debt or equity
securities in public markets. Additional financing might not be available on
terms favorable to us, or at all, particularly in light of the recent decline
in the capital markets. If adequate funds were not available or were not
available on acceptable terms, our ability to take advantage of unanticipated
opportunities or respond to competitive pressures could be limited.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). 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. In July 1999, the FASB issued Statement of Accounting Standards No.
137 Accounting for Derivative Instruments and Hedging Activities Deferral of
the Effective Date of FASB Statement No. 133 which deferred the adoption
requirement until the first quarter of 2001. We adopted this new accounting
standard effective January 1, 2001. The adoption of FAS 133 in the first
quarter of 2001 is not expected to have a significant impact on our
consolidated financial position, results of operations or disclosures.

In September 2000, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140),
which replaces Statement of Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. FAS 140 revises the standards for accounting and disclosures for
securitizations and other transfers of financial assets and collateral. The
primary provisions of this statement are effective for us in the second quarter
of 2001. We have not yet determined the impact, if any, that this statement
will have on our consolidated financial position or results of operations.

F-15



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheet of HNC
Software Inc. and the related consolidated statements of operations, of cash
flows and of changes in stockholders equity and comprehensive income present
fairly, in all material respects, the financial position of HNC Software Inc.
and its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

PRICEWATERHOUSECOOPERS LLP

San Diego, California
January 24, 2001, except as
to Note 15, to which the date is
March 6, 2001

F-16



---



##### Table of Contents






HNC SOFTWARE INC.

CONSOLIDATED BALANCE SHEET(in thousands, except per share amounts)

ASSETS

|                                               |                                                                                                                           |                            |         |              |         |      |         |         |         | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------------ | ------- | ---- | ------- | ------- | ------- | 
|                                               |                                                                                                                           |                            |         | December 31,
|                                               |                                                                                                                           |                            |         |             
|                                               |                                                                                                                           |                            |         | 2000         |         | 1999
|                                               |                                                                                                                           |                            |         |              |         |     
|Current assets:                                |                                                                                                                           |                            |         |              |         |      |         |        
|                                               | Cash and cash equivalents                                                                                                 |                            | $       | 69,271       |         |      | $       | 136,340 |        
|                                               | Marketable securities available for sale-debt                                                                             |                            |         | 44,779       |         |      |         | 22,368  |        
|                                               | Marketable securities available for sale-equity                                                                           |                            |         | 250          |         |      |         | 6,810   |        
|                                               | Trade accounts receivable, net                                                                                            |                            |         | 43,856       |         |      |         | 64,189  |        
|                                               | Deferred income taxes                                                                                                     |                            |         | 15,045       |         |      |         | 20,384  |        
|                                               | Other current assets                                                                                                      |                            |         | 8,402        |         |      |         | 11,144  |        
|                                               |                                                                                                                           |                            |         |              |         |      |         |        
|                                               |                                                                                                                           | Total current assets       |         |              | 181,603 |      |         |         | 261,235 | 
|Marketable securities available for sale-debt  |                                                                                                                           |                            | 48,453  |              |         |      | 68,563  |        
|Equity investments                             |                                                                                                                           |                            | 14,719  |              |         |      | 14,219  |        
|Property and equipment, net                    |                                                                                                                           |                            | 20,826  |              |         |      | 22,219  |        
|Goodwill, net                                  |                                                                                                                           |                            | 96,810  |              |         |      | 17,280  |        
|Intangible assets, net                         |                                                                                                                           |                            | 47,522  |              |         |      | 11,788  |        
|Deferred income taxes                          |                                                                                                                           |                            | 33,844  |              |         |      | 18,085  |        
|Other assets                                   |                                                                                                                           |                            | 3,964   |              |         |      | 3,032   |        
|                                               |                                                                                                                           |                            |         |              |         |      |         |        
|                                               |                                                                                                                           | $                          | 447,741 |              |         | $    | 416,421 |        
|                                               |                                                                                                                           |                            |         |              |         |      |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY          
|Current liabilities:                           |                                                                                                                           |                            |         |              |         |      |         |        
|                                               | Accounts payable and accrued liabilities                                                                                  |                            | $       | 38,675       |         |      | $       | 30,049  |        
|                                               | Deferred revenue                                                                                                          |                            |         | 9,876        |         |      |         | 15,274  |        
|                                               |                                                                                                                           |                            |         |              |         |      |         |        
|                                               |                                                                                                                           | Total current liabilities  |         |              | 48,551  |      |         |         | 45,323  | 
|Non-current liabilities                        |                                                                                                                           |                            | 259     |              |         |      | 4,111   |        
|Convertible Subordinated Notes                 |                                                                                                                           |                            | 16,357  |              |         |      | 100,000 |        
|                                               |                                                                                                                           |                            |         |              |         |      |         |        
|                                               |                                                                                                                           | Total liabilities          |         |              | 65,167  |      |         |         | 149,434 | 
|                                               |                                                                                                                           |                            |         |              |         |      |         |        
|Commitments and contingencies (Notes 8 and 14) |                                                                                                                           |                            |         |              |         |      |         |        
|Minority interest in consolidated subsidiaries |                                                                                                                           |                            |        |              |         |      | 17,414  |        
|                                               |                                                                                                                           |                            |         |              |         |      |         |        
|Stockholders equity:                          |                                                                                                                           |                            |         |              |         |      |         |        
|                                               | Preferred stock, $0.001 par value  4,000 shares authorized:
no shares issued or outstanding                              |                            |         |             |         |      |         |        |        
|                                               | Common stock, $0.001 par value  120,000 shares authorized:
32,286 and 25,704 shares issued and outstanding, respectively |                            |         | 32           |         |      |         | 26      |        
|                                               | Common stock in treasury, at cost  49 and 882 shares, respectively                                                       |                            |         | (3,251       | )       |      |         | (19,613 | )      
|                                               | Paid-in capital                                                                                                           |                            |         | 499,705      |         |      |         | 275,955 |        
|                                               | Retained earnings (accumulated deficit)                                                                                   |                            |         | (104,209     | )       |      |         | 12,209  |        
|                                               | Notes receivable from stockholders                                                                                        |                            |         | (9,049       | )       |      |         |        |        
|                                               | Unearned stock-based compensation                                                                                         |                            |         | (577         | )       |      |         | (20,511 | )      
|                                               | Accumulated other comprehensive income (loss)                                                                             |                            |         | (77          | )       |      |         | 1,507   |        
|                                               |                                                                                                                           |                            |         |              |         |      |         |        
|                                               |                                                                                                                           | Total stockholders equity |         |              | 382,574 |      |         |         | 249,573 | 
|                                               |                                                                                                                           |                            |         |              |         |      |         |        
|                                               |                                                                                                                           | $                          | 447,741 |              |         | $    | 416,421 |        
|                                               |                                                                                                                           |                            |         |              |         |      |         |        

See accompanying notes to consolidated financial statements.

F-17



---



##### Table of Contents






HNC SOFTWARE INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)

|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |         |         | 
|----------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ----------------------- | -------- | ---- | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                  |                                                                                                                                                       |                                                     |          | Year Ended December 31,
|                                                                  |                                                                                                                                                       |                                                     |          |                        
|                                                                  |                                                                                                                                                       |                                                     |          | 2000                    |          | 1999 |        | 1998   
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |        
|Revenues:                                                         |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|                                                                  | License and maintenance                                                                                                                               |                                                     | $        | 166,063                 |          |      | $      | 155,948 |         |   | $      | 139,294 |        
|                                                                  | Services and other                                                                                                                                    |                                                     |          | 88,821                  |          |      |        | 60,941  |         |   |        | 39,314  |        
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|                                                                  |                                                                                                                                                       | Total revenues                                      |          |                         | 254,884  |      |        |         | 216,889 |   |        |         | 178,608 | 
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|Operating expenses:                                               |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|                                                                  | License and maintenance (including stock-based
compensation and Retek spin-off expense totaling $8,744
and $280 in 2000 and 1999, respectively)       |                                                     |          | 60,469                  |          |      |        | 41,552  |         |   |        | 33,473  |        
|                                                                  | Services and other (including stock-based compensation and Retek spin-off
expense totaling $9,151 and $354 in 2000 and 1999, respectively)            |                                                     |          | 72,913                  |          |      |        | 41,271  |         |   |        | 28,656  |        
|                                                                  | Research and development (including stock-based compensation and Retek
spin-off expense totaling $9,937 and $1,121 in 2000 and 1999, respectively)    |                                                     |          | 75,490                  |          |      |        | 50,176  |         |   |        | 32,669  |        
|                                                                  | Sales and marketing (including stock-based compensation and Retek spin-off
expense totaling $23,509 and $441 in 2000 and 1999, respectively)          |                                                     |          | 89,925                  |          |      |        | 46,259  |         |   |        | 34,515  |        
|                                                                  | General and administrative (including stock-based compensation and Retek
spin-off expense totaling $18,514 and $9,789 in 2000 and 1999, respectively) |                                                     |          | 53,321                  |          |      |        | 33,777  |         |   |        | 18,977  |        
|                                                                  | Transaction-related amortization and costs                                                                                                            |                                                     |          | 43,734                  |          |      |        | 9,158   |         |   |        | 3,202   |        
|                                                                  | In-process research and development                                                                                                                   |                                                     |          | 7,601                   |          |      |        | 1,480   |         |   |        | 6,090   |        
|                                                                  | Other (Note 1)                                                                                                                                        |                                                     |          | 1,172                   |          |      |        |        |         |   |        |        |        
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|                                                                  |                                                                                                                                                       | Total operating expenses                            |          |                         | 404,625  |      |        |         | 223,673 |   |        |         | 157,582 | 
|Operating income (loss)                                           |                                                                                                                                                       |                                                     | (149,741 | )                       |          |      | (6,784 | )       |         |   | 21,026 |        
|Interest income                                                   |                                                                                                                                                       |                                                     | 12,924   |                         |          |      | 6,299  |         |         |   | 6,799  |        
|Interest expense                                                  |                                                                                                                                                       |                                                     | (4,231   | )                       |          |      | (5,747 | )       |         |   | (4,460 | )      
|Expense related to debt conversion                                |                                                                                                                                                       |                                                     | (12,676  | )                       |          |      |       |         |         |   |       |        
|Other expense, net                                                |                                                                                                                                                       |                                                     | (3,378   | )                       |          |      | (226   | )       |         |   | (29    | )      
|Minority interest in losses (income) of consolidated subsidiaries |                                                                                                                                                       |                                                     | 7,582    |                         |          |      | 722    |         |         |   | (126   | )      
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|                                                                  |                                                                                                                                                       | Income (loss) before income tax provision (benefit) |          |                         | (149,520 | )    |        |         | (5,736  | ) |        |         | 23,210  | 
|Income tax provision (benefit)                                    |                                                                                                                                                       |                                                     | (33,102  | )                       |          |      | 536    |         |         |   | 12,758 |        
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|                                                                  |                                                                                                                                                       | Net income (loss)                                   |          | $                       | (116,418 | )    |        | $       | (6,272  | ) |        | $       | 10,452  | 
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|Earnings per share:                                               |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|                                                                  | Basic net income (loss) per share                                                                                                                     |                                                     | $        | (4.08                   | )        |      | $      | (0.25   | )       |   | $      | 0.41    |        
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|                                                                  | Diluted net income (loss) per share                                                                                                                   |                                                     | $        | (4.08                   | )        |      | $      | (0.25   | )       |   | $      | 0.39    |        
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|Shares used in computing basic net income (loss) per share        |                                                                                                                                                       |                                                     | 28,529   |                         |          |      | 24,969 |         |         |   | 25,362 |        
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        
|Shares used in computing diluted net income (loss) per share      |                                                                                                                                                       |                                                     | 28,529   |                         |          |      | 24,969 |         |         |   | 26,650 |        
|                                                                  |                                                                                                                                                       |                                                     |          |                         |          |      |        |         |         |   |        |        

See accompanying notes to consolidated financial statements.

F-18



---



##### Table of Contents






HNC SOFTWARE INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |         |        |         |         |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------- | ------- | ----------------------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | -
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         | Year Ended December 31,
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                        
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         | 2000                    |         | 1999    |        | 1998   
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |        
|Cash Flows from Operating Activities:                |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|                                                     | Net income (loss)                                                                                  |                                                                   | $                                        | (116,418                                            | )       |                         | $       | (6,272  | )      |         | $       | 10,452  |       
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |         |       
|                                                     |                                                                                                    | Provision for doubtful accounts                                   |                                          |                                                     | 6,505   |                         |         |         | 5,112  |         |         |         | 3,172  |        
|                                                     |                                                                                                    | Depreciation and amortization                                     |                                          |                                                     | 53,045  |                         |         |         | 17,583 |         |         |         | 10,827 |        
|                                                     |                                                                                                    | Acquired in-process research and development                      |                                          |                                                     | 7,601   |                         |         |         | 1,480  |         |         |         | 6,090  |        
|                                                     |                                                                                                    | Loss (gain) on asset impairments and dispositions                 |                                          |                                                     | 1,172   |                         |         |         | 222    |         |         |         | (56    | )      
|                                                     |                                                                                                    | Write-down of marketable security                                 |                                          |                                                     | 2,750   |                         |         |         |       |         |         |         |       |        
|                                                     |                                                                                                    | Non-cash stock-based compensation expense                         |                                          |                                                     | 15,896  |                         |         |         | 11,985 |         |         |         | 2,387  |        
|                                                     |                                                                                                    | Deferred income tax (benefit) expense                             |                                          |                                                     | (35,384 | )                       |         |         | (4,625 | )       |         |         | 4,039  |        
|                                                     |                                                                                                    | Minority interest in (losses) income of consolidated subsidiaries |                                          |                                                     | (7,582  | )                       |         |         | (722   | )       |         |         | 126    |        
|                                                     |                                                                                                    | Changes in assets and liabilities:                                |                                          |                                                     |         |                         |         |         |        |         |         |         |        |        
|                                                     |                                                                                                    |                                                                   | Trade accounts receivable                |                                                     |         | (40,458                 | )       |         |        | (35,606 | )       |         |        | (26,111 | )      
|                                                     |                                                                                                    |                                                                   | Deferred income taxes                    |                                                     |         | (291                    | )       |         |        | 4,645   |         |         |        | 6,864   |        
|                                                     |                                                                                                    |                                                                   | Other assets                             |                                                     |         | (8,753                  | )       |         |        | (4,635  | )       |         |        | (2,312  | )      
|                                                     |                                                                                                    |                                                                   | Accounts payable and accrued liabilities |                                                     |         | 15,954                  |         |         |        | 9,750   |         |         |        | 4,361   |        
|                                                     |                                                                                                    |                                                                   | Deferred revenue                         |                                                     |         | 39,562                  |         |         |        | 5,670   |         |         |        | 1,024   |        
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|                                                     |                                                                                                    |                                                                   |                                          | Net cash provided by (used in) operating activities |         |                         | (66,401 | )       |        |         | 4,587   |         |        |         | 20,863  |  
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|Cash Flows from Investing Activities:                |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|                                                     | Net sales (purchases) of marketable securities                                                     |                                                                   |                                          | (18,332                                             | )       |                         |         | 7,856   |        |         |         | (74,120 | )     
|                                                     | Cash paid for equity investments                                                                   |                                                                   |                                          | (4,750                                              | )       |                         |         | (17,225 | )      |         |         |        |       
|                                                     | Issuance of employee loans                                                                         |                                                                   |                                          | (1,500                                              | )       |                         |         | (200    | )      |         |         |        |       
|                                                     | Acquisitions of property and equipment                                                             |                                                                   |                                          | (25,366                                             | )       |                         |         | (16,093 | )      |         |         | (8,086  | )     
|                                                     | Cash paid in business acquisitions, net of cash acquired                                           |                                                                   |                                          | (22,773                                             | )       |                         |         | (5,098  | )      |         |         | (8,883  | )     
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|                                                     |                                                                                                    |                                                                   |                                          | Net cash used in investing activities               |         |                         | (72,721 | )       |        |         | (30,760 | )       |        |         | (91,089 | )
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|Cash Flows from Financing Activities:                |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|                                                     | Net proceeds from issuances of HNC common stock                                                    |                                                                   |                                          | 88,298                                              |         |                         |         | 50,107  |        |         |         | 10,536  |       
|                                                     | Net proceeds from issuances of Retek common stock                                                  |                                                                   |                                          | 5,635                                               |         |                         |         | 84,897  |        |         |         |        |       
|                                                     | Repurchase of HNC common stock for treasury                                                        |                                                                   |                                          | (18,616                                             | )       |                         |         | (50,383 | )      |         |         |        |       
|                                                     | Spin-off of Retek subsidiary                                                                       |                                                                   |                                          | (30,463                                             | )       |                         |         |        |        |         |         |        |       
|                                                     | Proceeds from sales of receivables                                                                 |                                                                   |                                          | 32,585                                              |         |                         |         | 23,711  |        |         |         |        |       
|                                                     | Proceeds from repayments of stockholder notes                                                      |                                                                   |                                          | 3,047                                               |         |                         |         |        |        |         |         |         |       
|                                                     | Net proceeds from issuance of Convertible Subordinated Notes                                       |                                                                   |                                          |                                                    |         |                         |         |        |        |         |         | 96,913  |       
|                                                     | Repayments of notes payable to stockholders                                                        |                                                                   |                                          |                                                    |         |                         |         |        |        |         |         | (770    | )     
|                                                     | Repayment of debt and capital lease obligations                                                    |                                                                   |                                          | (7,367                                              | )       |                         |         | (78     | )      |         |         | (160    | )     
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|                                                     |                                                                                                    |                                                                   |                                          | Net cash provided by financing activities           |         |                         | 73,119  |         |        |         | 108,254 |         |        |         | 106,519 |  
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|Effect of exchange rate changes on cash              |                                                                                                    |                                                                   | (1,066                                   | )                                                   |         |                         | (8      | )       |        |         | (94     | )      
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                    |                                                                   | (67,069                                  | )                                                   |         |                         | 82,073  |         |        |         | 36,199  |        
|Cash and cash equivalents at beginning of the period |                                                                                                    |                                                                   | 136,340                                  |                                                     |         |                         | 54,267  |         |        |         | 18,068  |        
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        
|Cash and cash equivalents at end of the period       |                                                                                                    | $                                                                 | 69,271                                   |                                                     |         | $                       | 136,340 |         |        | $       | 54,267  |        
|                                                     |                                                                                                    |                                                                   |                                          |                                                     |         |                         |         |         |        |         |         |        

See accompanying notes to consolidated financial statements.

F-19



---



##### Table of Contents






CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(in thousands)



|                                                                       |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|---------------------------------------------------------------------- |  | ------------ | ------ | -------------- |  | ------- | -- | ------------ |  | -------- | ------ | -------- |  | - | ------- | - |  | - | -------- | - |  | - | -------- | -
|                                                                       |  | Common Stock |        | Treasury Stock |  |         |    |              |  | Earnings
|                                                                       |  |              |        |                |  | Paid-in |    | (Accumulated
|                                                                       |  | Shares       |        | Amount         |  | Shares  |    | Amount       |  | Capital  |        | Deficit)
|                                                                       |  |              |        |                |  |         |    |              |  |          |        |         
|Balance at December 31, 1997                                           |  |              | 24,538 |                |  | $       | 25 |              |  |          |       |          |  | $ |        |   |  | $ | 95,919   |   |  | $ | 8,029    |  
|                                                                       |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|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-based compensation expense                              |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Common stock issued for acquisition of PCS                             |  |              | 143    |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 5,088    |   |  |   |          |  
|Common stock issued for acquisition of FTI                             |  |              | 397    |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 14,725   |   |  |   |          |  
|Unrealized gain on marketable securities, net of tax                   |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Foreign currency translation adjustment, net of tax                    |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Net income                                                             |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   | 10,452   |  
|                                                                       |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Balance at December 31, 1998                                           |  |              | 25,894 |                |  | $       | 26 |              |  |          |       |          |  | $ |        |   |  | $ | 137,182  |   |  |   | 18,481   |  
|                                                                       |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Purchase of HNC stock for treasury                                     |  |              | (2,266 | )              |  |         | (2 | )            |  |          | 2,266  |          |  |   | (50,381 | ) |  |   |          |   |  |   |          |  
|Common stock options exercised                                         |  |              | 1,916  |                |  |         | 2  |              |  |          | (1,384 | )        |  |   | 30,768  |   |  |   | 16,418   |   |  |   |          |  
|Common stock issued under Employee Stock Purchase Plan                 |  |              | 115    |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 2,808    |   |  |   |          |  
|Tax benefit from stock option transactions                             |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 16,993   |   |  |   |          |  
|Unearned stock-based compensation expense                              |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 21,462   |   |  |   |          |  
|Non-cash stock-based compensation expense                              |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 10,077   |   |  |   |          |  
|Effect of Reteks initial public offering                              |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 69,539   |   |  |   |          |  
|Common stock issued for PCS earn-out                                   |  |              | 45     |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 1,476    |   |  |   |          |  
|Unrealized gain on marketable securities, net of tax                   |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Foreign currency translation adjustment, net of tax                    |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Net loss                                                               |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   | (6,272   | )
|                                                                       |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Balance at December 31, 1999                                           |  |              | 25,704 |                |  | $       | 26 |              |  |          | 882    |          |  | $ | (19,613 | ) |  | $ | 275,955  |   |  | $ | 12,209   |  
|                                                                       |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Common stock options exercised                                         |  |              | 3,324  |                |  |         | 3  |              |  |          | (1,026 | )        |  |   | 32,637  |   |  |   | 64,340   |   |  |   |          |  
|Purchase of HNC common stock for treasury                              |  |              | (250   | )              |  |         |   |              |  |          | 250    |          |  |   | (18,616 | ) |  |   |          |   |  |   |          |  
|Release of FTI escrow shares into treasury                             |  |              | (49    | )              |  |         |    |              |  |          | 49     |          |  |   | (1,808  | ) |  |   |          |   |  |   |          |  
|Common stock issued under Employee Stock Purchase Plan                 |  |              | 106    |                |  |         |    |              |  |          | (106   | )        |  |   | 4,149   |   |  |   | (974     | ) |  |   |          |  
|Effect of common stock issued under Retek Employee Stock
Purchase Plan |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 3,635    |   |  |   |          |  
|Tax benefit from stock option transactions                             |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 36,392   |   |  |   |          |  
|Stock-based compensation expense                                       |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 9,217    |   |  |   |          |  
|Retek initial public offering costs                                    |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | (243     | ) |  |   |          |  
|Spin-off of Retek subsidiary                                           |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | (121,571 | ) |  |   |          |  
|Common stock issued in business
Acquisitions                           |  |              | 1,529  |                |  |         | 1  |              |  |          |        |          |  |   |         |   |  |   | 133,200  |   |  |   |          |  
|Effect of Retek common stock issued in business acquisition            |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 5,432    |   |  |   |          |  
|Effect of Retek common stock issued in business alliance               |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 8,010    |   |  |   |          |  
|Common stock issued upon conversion of Subordinated
Notes              |  |              | 1,872  |                |  |         | 2  |              |  |          |        |          |  |   |         |   |  |   | 82,319   |   |  |   |          |  
|Common stock issued for PCS earn-out                                   |  |              | 50     |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   | 3,993    |   |  |   |          |  
|Interest accrued on stockholder notes                                  |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Repayment of stockholder notes                                         |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Unrealized loss on marketable securities, net of tax                   |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Foreign currency translation adjustment, net of tax                    |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Net loss                                                               |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   | (116,418 | )
|                                                                       |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2000                                           |  |              | 32,286 |                |  | $       | 32 |              |  |          | 49     |          |  | $ | (3,251  | ) |  | $ | 499,705  |   |  | $ | (104,209 | )
|                                                                       |  |              |        |                |  |         |    |              |  |          |        |          |  |   |         |   |  |   |          |   |  |   |          |  

[Additional columns below]



---



##### Table of Contents



[Continued from above table, first column(s) repeated]

|                                                                       |  |             |         |              |  |               |         |               |  |               |        |   |  |   |          |   |  |   |          |  
|---------------------------------------------------------------------- |  | ----------- | ------- | ------------ |  | ------------- | ------- | ------------- |  | ------------- | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                       |  | Stockholder |         | Unearned     |  | Other         |         | Total         |  |               |        |  
|                                                                       |  | Notes       |         | Stock-based  |  | Comprehensive |         | Stockholders' |  | Comprehensive
|                                                                       |  | Receivable  |         | Compensation |  | Income (Loss) |         | Equity        |  | Income (Loss)
|                                                                       |  |             |         |              |  |               |         |               |  |              
|Balance at December 31, 1997                                           |  | $           |        |              |  | $             |        |               |  | $             | (113   | ) |  | $ | 103,860  |   |  | $ | 17,457   |  
|                                                                       |  |             |         |              |  |               |         |               |  |               |        |   |  |   |          |   |  |   |          |  
|Common stock options exercised                                         |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 8,603    |   |  |   |          |  
|Common stock issued under Employee Stock Purchase Plan                 |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 1,933    |   |  |   |          |  
|Tax benefit from stock option transactions                             |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 7,569    |   |  |   |          |  
|Compensation related to vested options in Aptex buy-back               |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 3,346    |   |  |   |          |  
|Unearned stock-based compensation expense                              |  |             |         |              |  |               | (2,508  | )             |  |               |        |   |  |   | (2,508   | ) |  |   |          |  
|Common stock issued for acquisition of PCS                             |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 5,088    |   |  |   |          |  
|Common stock issued for acquisition of FTI                             |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 14,725   |   |  |   |          |  
|Unrealized gain on marketable securities, net of tax                   |  |             |         |              |  |               |         |               |  |               | 47     |   |  |   | 47       |   |  |   | 47       |  
|Foreign currency translation adjustment, net of tax                    |  |             |         |              |  |               |         |               |  |               | (94    | ) |  |   | (94      | ) |  |   | (94      | )
|Net income                                                             |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 10,452   |   |  |   | 10,452   |  
|                                                                       |  |             |         |              |  |               |         |               |  |               |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 1998                                           |  | $           |        |              |  | $             | (2,508  | )             |  | $             | (160   | ) |  | $ | 153,021  |   |  | $ | 10,405   |  
|                                                                       |  |             |         |              |  |               |         |               |  |               |        |   |  |   |          |   |  |   |          |  
|Purchase of HNC stock for treasury                                     |  |             |         |              |  |               |         |               |  |               |        |   |  |   | (50,383  | ) |  |   |          |  
|Common stock options exercised                                         |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 47,188   |   |  |   |          |  
|Common stock issued under Employee Stock Purchase Plan                 |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 2,808    |   |  |   |          |  
|Tax benefit from stock option transactions                             |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 16,993   |   |  |   |          |  
|Unearned stock-based compensation expense                              |  |             |         |              |  |               | (19,911 | )             |  |               |        |   |  |   | 1,551    |   |  |   |          |  
|Non-cash stock-based compensation expense                              |  |             |         |              |  |               | 1,908   |               |  |               |        |   |  |   | 11,985   |   |  |   |          |  
|Effect of Reteks initial public offering                              |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 69,539   |   |  |   |          |  
|Common stock issued for PCS earn-out                                   |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 1,476    |   |  |   |          |  
|Unrealized gain on marketable securities, net of tax                   |  |             |         |              |  |               |         |               |  |               | 2,084  |   |  |   | 2,084    |   |  |   | 2,084    |  
|Foreign currency translation adjustment, net of tax                    |  |             |         |              |  |               |         |               |  |               | (417   | ) |  |   | (417     | ) |  |   | (417     | )
|Net loss                                                               |  |             |         |              |  |               |         |               |  |               |        |   |  |   | (6,272   | ) |  |   | (6,272   | )
|                                                                       |  |             |         |              |  |               |         |               |  |               |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 1999                                           |  | $           |        |              |  | $             | (20,511 | )             |  | $             | 1,507  |   |  | $ | 249,573  |   |  | $ | (4,605   | )
|                                                                       |  |             |         |              |  |               |         |               |  |               |        |   |  |   |          |   |  |   |          |  
|Common stock options exercised                                         |  |             | (11,857 | )            |  |               |         |               |  |               |        |   |  |   | 85,123   |   |  |   |          |  
|Purchase of HNC common stock for treasury                              |  |             |         |              |  |               |         |               |  |               |        |   |  |   | (18,616  | ) |  |   |          |  
|Release of FTI escrow shares into treasury                             |  |             |         |              |  |               |         |               |  |               |        |   |  |   | (1,808   | ) |  |   |          |  
|Common stock issued under Employee Stock Purchase Plan                 |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 3,175    |   |  |   |          |  
|Effect of common stock issued under Retek Employee Stock
Purchase Plan |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 3,635    |   |  |   |          |  
|Tax benefit from stock option transactions                             |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 36,392   |   |  |   |          |  
|Stock-based compensation expense                                       |  |             |         |              |  |               | 6,679   |               |  |               |        |   |  |   | 15,896   |   |  |   |          |  
|Retek initial public offering costs                                    |  |             |         |              |  |               |         |               |  |               |        |   |  |   | (243     | ) |  |   |          |  
|Spin-off of Retek subsidiary                                           |  |             |         |              |  |               | 13,255  |               |  |               | 1,594  |   |  |   | (106,722 | ) |  |   |          |  
|Common stock issued in business
Acquisitions                           |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 133,201  |   |  |   |          |  
|Effect of Retek common stock issued in business acquisition            |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 5,432    |   |  |   |          |  
|Effect of Retek common stock issued in business alliance               |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 8,010    |   |  |   |          |  
|Common stock issued upon conversion of Subordinated
Notes              |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 82,321   |   |  |   |          |  
|Common stock issued for PCS earn-out                                   |  |             |         |              |  |               |         |               |  |               |        |   |  |   | 3,993    |   |  |   |          |  
|Interest accrued on stockholder notes                                  |  |             | (239    | )            |  |               |         |               |  |               |        |   |  |   | (239     | ) |  |   |          |  
|Repayment of stockholder notes                                         |  |             | 3,047   |              |  |               |         |               |  |               |        |   |  |   | 3,047    |   |  |   |          |  
|Unrealized loss on marketable securities, net of tax                   |  |             |         |              |  |               |         |               |  |               | (2,112 | ) |  |   | (2,112   | ) |  |   | (2,112   | )
|Foreign currency translation adjustment, net of tax                    |  |             |         |              |  |               |         |               |  |               | (1,066 | ) |  |   | (1,066   | ) |  |   | (1,066   | )
|Net loss                                                               |  |             |         |              |  |               |         |               |  |               |        |   |  |   | (116,418 | ) |  |   | (116,418 | )
|                                                                       |  |             |         |              |  |               |         |               |  |               |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2000                                           |  | $           | (9,049  | )            |  | $             | (577    | )             |  | $             | (77    | ) |  | $ | 382,574  |   |  | $ | (119,596 | )
|                                                                       |  |             |         |              |  |               |         |               |  |               |        |   |  |   |          |   |  |   |          |  

F-20



---



##### Table of Contents






HNC SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

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

HNC Software Inc.

We develop, market, and support innovative predictive software solutions
for leading service industries. These intelligent decision management solutions
employ proprietary neural-network predictive decision engines, profiles,
traditional statistical modeling, business models, expert rules and/or context
vector technology to convert existing data and business experiences into
meaningful recommendations and actions. We currently serve the financial
services, insurance, telecommunications and e-business markets.

Principles of Consolidation and Basis of Presentation

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

The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

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

Revenue Recognition

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

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

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

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

F-21



---



##### Table of Contents



Transactional-based fees under network service or internally hosted
software arrangements are recognized as revenue based on system usage or when
fees based on system usage exceed monthly minimum license fees. Installation or
setup fees associated with network service and internally hosted software
agreements are recognized ratably over the longer of the customer contract
period or estimated life of the customer relationship.

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

Statement of Operations Data

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

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

Cash and Cash Equivalents

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

Marketable Securities

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

Equity Investments

Our investments in equity securities of companies over which we do not
have significant influence, are accounted for under the cost method. We use the
equity method to account for our investments in entities over which we have a
voting interest of 20% to 50%, or over which we otherwise have the ability to
exercise significant influence. Under the equity method, the investment is
originally recorded at cost and adjusted to recognize our share of net earnings
or losses of the investee, limited to the extent of our investment in, advances
to, and financial guarantees for the investee. At December 31, 2000, all of our
equity investments in other entities were accounted for under the cost method.

F-22



---



##### Table of Contents



Sales of Receivables

From time to time, we enter into agreements to sell an undivided interest
in specifically identified trade accounts receivable. We sell these trade
accounts receivable to a financial institution for a fee, based principally
upon defined short-term market rates. Once sold, these receivables are not
included in our trade accounts receivable balance on our consolidated balance
sheet. During 2000 and 1999, we sold $32,585 and $23,711 of receivables,
respectively. We did not sell any receivables during 1998. Fees that we paid
related to receivables sold totaled $430 and $364 during 2000 and 1999,
respectively, and are included in interest expense in our consolidated
statement of operations.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation
and amortization. Major renewals and improvements are capitalized, while repair
and maintenance costs are expensed as incurred. Depreciation and amortization
charges are calculated using the straight-line method over the estimated useful
lives of the assets ranging from three to seven years. Leasehold improvements
are amortized over the shorter of their estimated useful lives or the remaining
term of the related lease. Depreciation and amortization expense related to
property and equipment totaled $11,753, $8,215, and $6,102 during 2000, 1999,
and 1998, respectively. The cost and accumulated depreciation for property and
equipment sold, retired or otherwise disposed of are relieved from the
accounts, and resulting gains or losses are recorded in operations.

Intangible Assets

Intangible assets include goodwill, acquired software development costs,
customer base, assembled work force, covenants not to compete, and trademarks.
These assets resulted from our acquisitions accounted for under the purchase
method of accounting (see Note 3). Amortization expense related to intangible
assets totaled $42,372, $8,560, and $3,203 during 2000, 1999, and 1998,
respectively. We amortize these assets using the straight-line method over
their estimated useful lives as follows:

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

We continually review the events and circumstances related to the financial
performance and economic environment of the Company for factors that would
provide evidence of the impairment of enterprise-level goodwill. If such
factors exist, suggesting impairment, we use the market value method to
determine the extent of the impairment.

Software Development Costs

Development costs of software to be licensed or sold that are incurred
from the time technological feasibility is established until the product is
available for general release to customers are capitalized and reported at the
lower of cost or net realizable value. Through December 31, 2000, no
significant development costs were incurred after technological feasibility was
reached.

Internal-Use Software

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

F-23



---



##### Table of Contents



Long-lived Assets

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

During 2000, we recorded an impairment charge of $1,172 related to the
abandonment of a lease and associated property and equipment. The impairment
charge consisted of the write-off of the remaining net book value of abandoned
property and equipment that was deemed to have insignificant remaining value at
the time of disposal, as well as charges associated with future facility lease
cash obligations, net of estimated sublease income as determined through
consultation with an independent lease broker. Estimated lease brokerage fees
were also included in this charge. No impairment charges were recorded in 1999
or 1998.

Income Taxes

Current income tax expense is the amount of income taxes expected to be
payable for the current year, prior to the recognition of benefits from stock
option deductions. A deferred income tax asset or liability is computed for the
expected future impact of differences between the financial reporting and tax
bases of assets and liabilities as well as the expected future tax benefit to
be derived from tax loss and tax credit carry-forwards. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount
more likely than not to be realized in future tax returns. Tax rate changes
and tax credit reinstatements are reflected in income during the period the
changes are enacted.

Stock-Based Compensation

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

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

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed as net income (loss)
divided by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per common share is computed as net income
(loss) divided by the weighted average number of common shares and dilutive
potential common shares outstanding during the period, using the treasury stock
method. The computation for basic and diluted net income (loss) per share is as
follows:

F-24



---



##### Table of Contents



|                                                                                                            |  |                         |          |      |  |      |        |   |  |   |        | 
|----------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                                                                                            |  | Year Ended December 31,
|                                                                                                            |  |                        
|                                                                                                            |  | 2000                    |          | 1999 |  | 1998
|                                                                                                            |  |                         |          |      |  |     
|Net income (loss) used:                                                                                     |  |                         |          |      |  |      |        |   |  |   |        | 
|Net income (loss) used in computing basic and diluted net income
(loss) per common share                    |  | $                       | (116,418 | )    |  | $    | (6,272 | ) |  | $ | 10,452 | 
|                                                                                                            |  |                         |          |      |  |      |        |   |  |   |        | 
|Shares used:                                                                                                |  |                         |          |      |  |      |        |   |  |   |        | 
|Weighted average common shares outstanding used in computing
basic net income per common share              |  |                         | 28,529   |      |  |      | 24,969 |   |  |   | 25,362 | 
|Weighted average options to purchase common stock as determined
by application of the treasury stock method |  |                         |         |      |  |      |       |   |  |   | 1,227  | 
|Additional common shares issued for PCS acquisition earn-out                                                |  |                         |         |      |  |      |       |   |  |   | 23     | 
|Employee Stock Purchase Plan common stock equivalents                                                       |  |                         |         |      |  |      |       |   |  |   | 38     | 
|                                                                                                            |  |                         |          |      |  |      |        |   |  |   |        | 
|Shares used in computing diluted net income per common share                                                |  |                         | 28,529   |      |  |      | 24,969 |   |  |   | 26,650 | 
|                                                                                                            |  |                         |          |      |  |      |        |   |  |   |        | 

The conversion of our 4.75% Convertible Subordinated Notes (see Note 9)
outstanding during 2000, 1999 and 1998, into 3,512, 2,230 and 1,834 common
shares, respectively, were not included in the computation of diluted net
income (loss) per common share, as their effect in such periods would be
anti-dilutive.

For 2000 and 1999, weighted average options to purchase 2,064 and 6,491
shares of common stock, respectively, and Employee Stock Purchase Plan common
stock equivalents of 196 and 56 shares of common stock, respectively, were not
included in the computation of diluted net loss per common share as their
effect in these periods would be anti-dilutive.

Foreign Currency Translation

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

Comprehensive Income (Loss)

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

Concentration of Risk

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

Segment Reporting

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

F-25



---



##### Table of Contents



Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred. Advertising and
promotion costs totaled $8,006, $3,651 and $1,791 in 2000, 1999 and 1998,
respectively, and are included in sales and marketing expense in our
consolidated statement of operations.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Accounting Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities (FAS 133). 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. In July 1999, the FASB issued Statement of Accounting Standards No.
137 Accounting for Derivative Instruments and Hedging ActivitiesDeferral of
the Effective Date of FASB Statement No. 133 which deferred the adoption
requirement until the first quarter of 2001. We adopted this new accounting
standard effective January 1, 2001. The adoption of FAS 133 in the first
quarter of 2001 is not expected to have a significant impact on our
consolidated financial position, results of operations or disclosures.

In September 2000, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140),
which replaces Statement of Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. FAS 140 revises the standards for accounting and disclosures for
securitizations and other transfers of financial assets and collateral. The
primary provisions of this statement are effective for us in the second quarter
of 2001. We have not yet determined the impact, if any, that this statement
will have on our consolidated financial position or results of operations.

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

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

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

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

F-26



---



##### Table of Contents



and dividing that product by the price of HNC common stock immediately
before payment of the dividend. The vesting acceleration of HNC stock options
and the adjustment to HNC stock option exercise prices that were greater than
the closing price of HNC common stock on September 29, 2000 resulted in
stock-based compensation charges (see Note 13).

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

Note 3  Acquisitions

In September 2000, we acquired all of the outstanding stock and other
securities of Systems/Link Corporation (Systems/Link) in exchange for the
issuance of 634 shares of our common stock, including 40 underlying shares
associated with stock options we exchanged, and $5,512 in cash. We placed 142
of the shares issued and $1,275 of the cash portion of the purchase price into
escrow, to secure indemnification obligations of the former Systems/Link
stockholders. Systems/Link is a software developer that creates data management
solutions for large telecommunications companies, providing applications for
real-time data collection, call detail record exchange, fraud control and
prepaid services to carriers. We applied the purchase method of accounting for
the acquisition of Systems/Link, which resulted in a purchase price of $42,549.
The excess of this amount over the net liabilities assumed was $56,416, of
which $55,686 was allocated to intangible assets, including goodwill, and $730
was allocated to in-process research and development.

In September 2000, we acquired all of the outstanding stock and other
securities of CardAlert Services, Inc. (CardAlert) in exchange for the
issuance of 208 shares of our common stock. We placed 42 of the shares issued
into escrow to secure indemnification obligations of the former CardAlert
stockholders. CardAlert provides ATM and debit card risk management services to
domestic financial institutions and debit card networks. We applied the
purchase method of accounting for the acquisition of CardAlert, which resulted
in a purchase price of $12,608. The excess of this amount over the net
liabilities assumed was $12,976, of which $12,555 was allocated to intangible
assets, including goodwill, and $421 was allocated to in-process research and
development.

In May 2000, Retek acquired all of the outstanding stock and other
securities of HighTouch Technologies, Inc. (HighTouch) in exchange for the
issuance of 389 shares of Reteks common stock and $18,000 in cash. HighTouch
is a provider of customized software and services relating to customer
relationship management. Retek applied the purchase method of accounting for
the acquisition of HighTouch, which resulted in a purchase price of $26,308.
The excess of this amount over the net liabilities assumed was $30,558, of
which $26,558 was allocated to intangible assets, including goodwill, and
$4,000 was allocated to in-process research and development.

In April 2000, we acquired all of the outstanding stock and other
securities of Celerity Technologies, Inc. (Celerity) in exchange for the
issuance of 220 shares of our common stock and $2,400 in cash. We placed 33 of
the shares issued into escrow to secure indemnification obligations of the
former Celerity shareholders. Celerity develops and markets electronic data
interchange solutions for the workers compensation industry. We applied the
purchase method of accounting for the acquisition of Celerity, which resulted
in a purchase price of $18,591. The excess of this amount over the net
liabilities assumed was $20,769, of which $19,719 was allocated to intangible
assets, including goodwill and $1,050 was allocated to in-process research and
development.

In March 2000, we acquired all of the outstanding stock and other
securities of Onyx Technologies, Inc. (Onyx) in exchange for the issuance of
382 shares of our common stock, including 30 underlying shares associated with
stock options we exchanged, and $1,500 in cash. We placed 105 of the shares
issued and $450 of the cash portion of the purchase price into escrow to secure
indemnification obligations of the former Onyx shareholders. During September
2000 and March 2001, we released from escrow without claim a total of 70 shares
of our common stock and $300 in cash. The remaining 35 shares and $150 in cash
are scheduled to be released from escrow in September 2001 and March 2002. Onyx
is a provider of online data access and customer acquisition analysis for
telecommunications, financial and retail service companies. We applied the
purchase method of accounting for the acquisition of Onyx, which resulted in a
purchase price of $49,555, of which $3,500 represented our initial 1999
investment in Onyx. The excess of this amount over the net liabilities assumed
of $51,163 was allocated to intangible assets, including goodwill.

F-27



---



##### Table of Contents



In March 2000, we acquired all of the outstanding stock and other
securities of the Center for Adaptive Systems Applications, Inc. (CASA) in
exchange for the issuance of 226 shares of our common stock, including 80
underlying shares associated with stock options we exchanged. CASA is an
advanced analytics solutions company that develops and markets account
optimization and precision marketing solutions. We placed 38 of the shares
issued into escrow to secure indemnification obligations of the former CASA
stockholders. We applied the purchase method of accounting for the acquisition
of CASA, which resulted in a purchase price of $23,756. The excess of this
amount over the net liabilities assumed was $27,260, of which $25,860 was
allocated to intangible assets, including goodwill, and $1,400 was allocated to
in-process research and development.

In March 2000, we acquired all of the outstanding stock and other
securities of Adaptive Systems Applications, Inc. (AIM) in exchange for 9
shares of our common stock, including 0.4 underlying shares associated with
stock options we exchanged. AIM provides marketing process automation, campaign
execution software, and client-to-vendor data management to direct marketers of
enhancement services. We applied the purchase method of accounting for the
acquisition of AIM, which resulted in a purchase price of $1,656, of which $750
represents our initial 1999 investment in AIM. The excess of this amount over
the net liabilities assumed of $1,785 was allocated to intangible assets,
including goodwill.

In October 1999, Retek acquired WebTrak Limited (WebTrak) for a cash
payment of $5,333 and the issuance of a $2,667 convertible note, which was
subsequently converted into shares of Retek common stock. WebTrak is a United
Kingdom company that develops, markets and sells business-to-business products
that enable users to publish and share a critical path on the Internet, and
allow Web-based collaboration to improve the new product design and development
process. The application of the purchase method of accounting for the
acquisition resulted in an excess of cost over net liabilities assumed of
$8,131, of which $6,651 was allocated to intangible assets, including goodwill,
and $1,480 was allocated to in-process research and development.

In March 1998, we acquired Practical Control Systems Technologies, Inc.
(PCS; renamed Retek Logistics, Inc.) in exchange for 143 shares of our common
stock, 14 shares of which were placed into escrow to secure indemnification
obligations of the former PCS stockholders, plus the contingent right, subject
to the achievement of certain financial objectives during 1998 and 1999, to
receive additional shares of our common stock. During 1999, the escrow shares
were released without claim. Additionally, we issued 45 shares in 1999 and 50
shares in 2000, related to the PCS achievement of financial objectives during
1998 and 1999, respectively. PCS is a supplier of fully integrated distribution
center management software products that address the distribution needs of the
retail, wholesale and manufacturing industries. The application of the purchase
method of accounting for the acquisition resulted in an excess of cost over net
liabilities assumed of $9,530, of which $7,780 was allocated to intangible
assets, including initial goodwill and additional goodwill recorded as a result
of the contingent shares issued, and $1,750 was allocated to in-process
research and development.

In April 1998, we acquired Financial Technology Inc. (FTI; renamed HNC
Financial Solutions, Inc.) in exchange for the issuance of 397 shares of our
common stock, 97 of which were placed in escrow to secure indemnification
obligations of the former FTI stockholders, and a cash payment of $1,500. FTI
develops and markets profitability measurement and decision-support software
products and related support services to banks and other similar financial
institutions. The application of the purchase method of accounting for the
acquisition resulted in an excess of cost over net liabilities assumed of
$19,186, of which $16,186 was allocated to intangible assets, including
goodwill, and $3,000 was allocated to in-process research and development. In
May 2000, we entered into a settlement agreement with the former FTI
stockholders pertaining to the release and distribution of the 97 shares of our
common stock that were placed into escrow to secure potential indemnification
obligations. In accordance with this settlement agreement, one-half of the
escrow shares were released to us and placed into treasury while the remaining
escrow shares were released to the former FTI shareholders, representing a full
and complete release of the former FTI shareholders contractual
indemnification obligations to us.

In June 1998, we acquired the Advanced Telecommunications Abuse Control
System (ATACS) product line in exchange for $4,750 in cash. ATACS is a
fraud-management software solution for wire-line, wireless and Internet
telecommunication service providers. The application of the purchase method of
accounting for the acquisition resulted in an excess of cost over net
liabilities assumed of $4,932, of which $3,592 was allocated to intangible
assets, including goodwill, and $1,340 was allocated to in-process research and
development.

F-28



---



##### Table of Contents



During the fourth quarter of 1998, we acquired the outstanding minority
shares of Aptex Software Inc. (Aptex). Pursuant to the merger and related
transactions, we acquired the outstanding stock held by Aptex employees for
$5,321 in cash, and exchanged all outstanding Aptex stock options into options
to purchase 380 shares of our common stock. As a result of this merger, we
incurred a one-time charge to operations of $2,459 and recorded unearned
stock-based compensation of $2,508. The application of the purchase method of
accounting to this transaction resulted in an excess of cost over net assets
acquired, of which $3,788 was allocated to intangible assets, including
goodwill.

In-process research and development recorded in connection with the
above-mentioned purchase transactions represents the present value of the
estimated after-tax cash flows expected to be generated by purchased
technologies which, as of the acquisition dates, had not yet reached
technological feasibility. The cash flow projections for revenues were based on
estimates of relevant market sizes and growth factors, expected industry
trends, the anticipated nature and timing of new product introductions, product
sales cycles and the estimated life of each products underlying technology.
Estimated operating expenses and income taxes were deducted from estimated
revenue projections to arrive at estimated after-tax cash flows. Projected
operating expenses include costs of revenues, marketing and selling expenses,
general and administrative expenses, and research and development, including
estimated costs to maintain the products once they have been introduced into
the market and are generating revenue. We made our assessment of whether
acquired technologies in these acquisitions were complete or under development
in accordance with the guidelines prescribed by Statement of Financial
Accounting Standards No. 86, Statement of Financial Accounting Standards No. 2,
and Financial Accounting Standards Board Interpretation No. 4.

The following table summarizes in the aggregate, for all purchase
acquisitions during 2000, 1999 and 1998, the goodwill and identified intangible
assets recorded:

|                   |                                     |   |                         |        |      |   |       |       |  |   |        |       | 
|------------------ | ----------------------------------- | - | ----------------------- | ------ | ---- | - | ----- | ----- |  | - | ------ | ----- | 
|                   |                                     |   | Year Ended December 31,
|                   |                                     |   |                        
|                   |                                     |   | 2000                    |        | 1999 |   | 1998 
|                   |                                     |   |                         |        |      |   |      
|Goodwill           |                                     | $ | 131,499                 |        |      | $ | 61    |       |  | $ | 21,770 |      
|                   |                                     |   |                         |        |      |   |       |       |  |   |        |      
|Intangible Assets: |                                     |   |                         |        |      |   |       |       |  |   |        |      
|                   | Acquired software development costs |   |                         | 40,834 |      |   |       | 4,940 |  |   |        | 6,604 | 
|                   | Customer base                       |   |                         | 9,938  |      |   |       | 180   |  |   |        | 1,197 | 
|                   | Assembled Workforce                 |   |                         | 6,633  |      |   |       | 240   |  |   |        | 866   | 
|                   | Other                               |   |                         | 4,422  |      |   |       | 1,230 |  |   |        | 909   | 
|                   |                                     |   |                         |        |      |   |       |       |  |   |        |      
|                   |                                     |   | 61,827                  |        |      |   | 6,590 |       |  |   | 9,576  |      
|                   |                                     |   |                         |        |      |   |       |       |  |   |        |      
|Total              |                                     | $ | 193,326                 |        |      | $ | 6,651 |       |  | $ | 31,346 |      
|                   |                                     |   |                         |        |      |   |       |       |  |   |        |      

The unaudited pro forma results of operations below present the impact on
our results of operations as if the Systems/Link, CardAlert, HighTouch,
Celerity, Onyx, CASA and AIM acquisitions had occurred on January 1, 1999, and
as if the WebTrak, PCS, FTI and Aptex acquisitions had occurred on January 1,
1998, instead of on their respective acquisition dates:

|                                    |  |                         |          |          |  |             |          |          |  |            |         |             |  |   |         |   |  |             |         |  |  |   |         | 
|----------------------------------- |  | ----------------------- | -------- | -------- |  | ----------- | -------- | -------- |  | ---------- | ------- | ----------- |  | - | ------- | - |  | ----------- | ------- |  |  | - | ------- | 
|                                    |  | Year Ended December 31,
|                                    |  |                        
|                                    |  | 2000                    |          | 1999     |  | 1998       
|                                    |  |                         |          |          |  |            
|                                    |  |                         |          |          |  | Proforma    |          |          |  |            |         | Pro Forma   |  |   |         |   |  | Pro Forma  
|                                    |  | Historical              |          | Combined |  | Historical  |          | Combined |  | Historical |         | Combined   
|                                    |  |                         |          |          |  |             |          |          |  |            |         |            
|                                    |  |                         |          |          |  | (Unaudited) |          |          |  |            |         | (Unaudited) |  |   |         |   |  | (Unaudited)
|Total revenues                      |  | $                       | 254,884  |          |  | $           | 270,192  |          |  | $          | 216,889 |             |  | $ | 239,690 |   |  | $           | 178,608 |  |  | $ | 181,048 | 
|Total net income
(loss)             |  |                         | (116,418 | )        |  |             | (121,344 | )        |  |            | (6,272  | )           |  |   | (6,868  | ) |  |             | 10,452  |  |  |   | 8,577   | 
|Basic net income
(loss) per share   |  | $                       | (4.08    | )        |  | $           | (4.03    | )        |  | $          | (0.25   | )           |  | $ | (0.26   | ) |  | $           | 0.41    |  |  | $ | 0.34    | 
|Diluted net income
(loss) per share |  | $                       | (4.08    | )        |  | $           | (4.03    | )        |  | $          | (0.25   | )           |  | $ | (0.26   | ) |  | $           | 0.39    |  |  | $ | 0.32    | 

F-29



---



##### Table of Contents



Note 4  Composition of Certain Financial Statement Captions

|                                                       |          |   |              |        |      |   |        |        | 
|------------------------------------------------------ | -------- | - | ------------ | ------ | ---- | - | ------ | ------ | 
|                                                       |          |   | December 31,
|                                                       |          |   |             
|                                                       |          |   | 2000         |        | 1999
|                                                       |          |   |              |        |     
|Trade accounts receivable, net:                        |          |   |              |        |      |   |        |       
|                                                       | Billed   |   | $            | 41,860 |      |   | $      | 56,738 | 
|                                                       | Unbilled |   |              | 5,593  |      |   |        | 13,890 | 
|                                                       |          |   |              |        |      |   |        |       
|                                                       |          |   | 47,453       |        |      |   | 70,628 |       
|Less allowance for doubtful accounts and sales returns |          |   | (3,597       | )      |      |   | (6,439 | )     
|                                                       |          |   |              |        |      |   |        |       
|                                                       |          | $ | 43,856       |        |      | $ | 64,189 |       
|                                                       |          |   |              |        |      |   |        |       

Unbilled accounts receivable represent revenue recorded in excess of
amounts billable pursuant to contract provisions and generally become billable
at contractually specified dates or upon the attainment of milestones. Unbilled
amounts are expected to be realized within one year. During 2000, 1999, and
1998, we reserved $6,505, $5,112, and $3,172, wrote off $3,661, $1,049, and
$3,917 and recovered $104, $0, and $79 of our allowance for doubtful accounts
and sales returns. Additionally, in connection with the spin-off of Retek on
September 29, 2000, we removed Reteks allowance for doubtful accounts and
sales returns of $5,787 from our consolidated balance sheet.

|                                               |                                     |   |              |         |      |   |         |        |  
|---------------------------------------------- | ----------------------------------- | - | ------------ | ------- | ---- | - | ------- | ------ | -
|                                               |                                     |   | December 31,
|                                               |                                     |   |             
|                                               |                                     |   | 2000         |         | 1999
|                                               |                                     |   |              |         |     
|Property and equipment, net:                   |                                     |   |              |         |      |   |         |       
|                                               | Computer equipment and software     |   | $            | 34,389  |      |   | $       | 28,320 |  
|                                               | Furniture and fixtures              |   |              | 8,312   |      |   |         | 11,397 |  
|                                               | Leasehold improvements              |   |              | 4,897   |      |   |         | 3,585  |  
|                                               |                                     |   |              |         |      |   |         |       
|                                               |                                     |   | 47,598       |         |      |   | 43,302  |       
|Less accumulated depreciation and amortization |                                     |   | (26,772      | )       |      |   | (21,083 | )     
|                                               |                                     |   |              |         |      |   |         |       
|                                               |                                     | $ | 20,826       |         |      | $ | 22,219  |       
|                                               |                                     |   |              |         |      |   |         |       
|Goodwill, net:                                 |                                     |   |              |         |      |   |         |       
|                                               | Goodwill                            |   |              | 126,053 |      |   |         | 22,740 |  
|                                               | Less accumulated amortization       |   |              | (29,243 | )    |   |         | (5,460 | )
|                                               |                                     |   |              |         |      |   |         |       
|                                               |                                     | $ | 96,810       |         |      | $ | 17,280  |       
|                                               |                                     |   |              |         |      |   |         |       
|Intangible assets, net:                        |                                     |   |              |         |      |   |         |       
|                                               | Acquired software development costs |   |              | 41,538  |      |   |         | 14,532 |  
|                                               | Customer base                       |   |              | 9,935   |      |   |         | 1,377  |  
|                                               | Assembled work force                |   |              | 6,779   |      |   |         | 1,106  |  
|                                               | Other                               |   |              | 4,266   |      |   |         | 2,234  |  
|                                               |                                     |   |              |         |      |   |         |       
|                                               |                                     |   | 62,518       |         |      |   | 19,249  |       
|                                               | Less accumulated amortization       |   |              | (14,996 | )    |   |         | (7,461 | )
|                                               |                                     |   |              |         |      |   |         |       
|                                               |                                     | $ | 47,522       |         |      | $ | 11,788  |       
|                                               |                                     |   |              |         |      |   |         |       
|Accounts payable and accrued liabilities:      |                                     |   |              |         |      |   |         |       
|Accounts payable                               |                                     | $ | 5,712        |         |      | $ | 9,867   |       
|Accrued payroll and related benefits           |                                     |   | 16,539       |         |      |   | 12,572  |       
|Accrued interest payable                       |                                     |   | 260          |         |      |   | 1,583   |       
|Accrued external costs related to spin-off     |                                     |   | 6,913        |         |      |   |        |       
|Income taxes payable                           |                                     |   | 2,662        |         |      |   | 45      |       
|Other                                          |                                     |   | 6,589        |         |      |   | 5,982   |       
|                                               |                                     |   |              |         |      |   |         |       
|                                               |                                     | $ | 38,675       |         |      | $ | 30,049  |       
|                                               |                                     |   |              |         |      |   |         |       

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

F-30



---



##### Table of Contents



Note 5  Marketable Securities

At December 31, 2000 and 1999, the amortized cost and estimated fair value
of marketable securities available for sale were as follows:

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

|                                     |  |                   |        |            |  |            |       |       |  |   |      |   |  |   |        | 
|------------------------------------ |  | ----------------- | ------ | ---------- |  | ---------- | ----- | ----- |  | - | ---- | - |  | - | ------ | 
|                                     |  | December 31, 1999
|                                     |  |                  
|                                     |  | Amortized         |        | Unrealized |  | Unrealized |       | Fair 
|                                     |  | Cost              |        | Gains      |  | Losses     |       | Value
|                                     |  |                   |        |            |  |            |       |      
|U.S. government and
federal agencies |  | $                 | 62,233 |            |  | $          |      |       |  | $ | (54  | ) |  | $ | 62,179 | 
|U.S. corporate debt                  |  |                   | 22,415 |            |  |            |      |       |  |   | (109 | ) |  |   | 22,306 | 
|U.S. corporate equity                |  |                   | 3,000  |            |  |            | 3,810 |       |  |   |     |   |  |   | 6,810  | 
|Foreign corporate debt               |  |                   | 6,484  |            |  |            |      |       |  |   | (38  | ) |  |   | 6,446  | 
|                                     |  |                   |        |            |  |            |       |       |  |   |      |   |  |   |        | 
|                                     |  | $                 | 94,132 |            |  | $          | 3,810 |       |  | $ | (201 | ) |  | $ | 97,741 | 
|                                     |  |                   |        |            |  |            |       |       |  |   |      |   |  |   |        | 

During the fourth quarter of 2000, we assessed the impairment in value of
our $3,000 investment in Network Commerce Inc. (See Note 6) to be other than
temporary and, accordingly, we wrote this investment down to $250 as of
December 31, 2000, representing the aggregate fair value of our investment in
this entity based on the closing market price of this publicly traded security
on December 31, 2000. As a result of this write-down, we recorded a loss of
$2,750 that is included in other expense, net in our statement of operations.
As of December 31, 1999, we had recorded an unrealized gain of $3,810 related
to our investment in this entity. No significant gains or losses were realized
on our investments during 1999 or 1998.

At December 31, 2000 and 1999, all foreign corporate debt investments were
denominated in U.S. dollars.

Note 6  Equity Investments

In July 2000, we became a limited partner in Azure Capital Partners
Venture Fund, a venture capital investment management fund, through an initial
investment of $2,250. We have committed to invest an additional $2,750 into
this fund during 2001. Our commitment to this fund will not exceed 2% of total
fund ownership. This investment is being accounted for using the cost method.

In July 2000, we invested $1,000 to purchase an approximate 4% interest in
Burning Glass Technologies, LLC, a privately held developer of statistical and
predictive technologies for use in the employment marketplace. This investment
is being accounted for using the cost method.

In March 2000, we invested $1,500 to maintain our approximate 6% ownership
interest in Open Solutions Inc. (OSI). In April 1999, we had previously
invested $6,000 to purchase an approximate 6% interest in OSI. OSI is a
developer of client/server core data processing solutions for community banks
and credit unions. This investment is being accounted for using the cost
method.

In October 1999, we invested $3,500 to purchase an approximate 13%
interest in Onyx Technologies, Inc. (Onyx), a provider of online data access
and customer acquisition analysis for telecommunications, financial and retail
service companies. In March 2000, we acquired Onyx (see Note 3).

In June 1999, we invested $3,000 to purchase an approximate 1% interest in
Network Commerce Inc. (Network Commerce; formerly ShopNow.com Inc.), an
e-commerce company that helps customers and merchants buy and sell merchandise
online. In September 1999, Network Commerce became a public company. As a
result, we

F-31



---



##### Table of Contents



reclassified our investment in Network Commerce in our consolidated
balance sheet to a short-term available for sale investment classification (see
Note 5).

In July 1999, we invested $2,000 to purchase an approximate 16% interest
in KeyLime Software Inc., a privately held software company specializing in the
development of certain data mining technologies. This investment is accounted
for using the cost method.

In March 1999, we invested $2,000 to purchase an approximate 3% interest
in Qpass Inc., a Web-wide transaction and customer service network enabling
commerce in digital goods and services. This investment is accounted for using
the cost method.

In March 1999, we invested $750 to purchase an approximate 16% interest in
AIM Solutions, Inc. (AIM), a company that provides marketing process
automation, campaign execution software, and client-to-vendor data management
to direct marketers of enhancement services. In March 2000, we acquired AIM
(see Note 3).

Note 7  Credit Agreement

We have a Credit Agreement with a bank that provides for a $15,000
revolving line of credit through July 11, 2001. During 2000 and 1999, we had no
amounts outstanding under this revolving line of credit. The agreement contains
covenants that restrict our ability to pay cash dividends and make loans,
advances or investments without the banks consent. As of December 31, 2000, we
were in compliance with all covenants under this agreement. Borrowings under
this agreement bear interest at LIBOR plus 0.5%, which is payable monthly. The
applicable interest rate was 7.06% at December 31, 2000.

Note 8  Operating Leases

At December 31, 2000, we are obligated through 2007 under non-cancelable
operating leases for our facilities and equipment as follows:

|           |  |                |        |               |  |               |      |        |  |   |        | 
|---------- |  | -------------- | ------ | ------------- |  | ------------- | ---- | ------ |  | - | ------ | 
|           |  |                |        |               |  | Net           |      | Future
|           |  | Future Minimum |        | Less Sublease |  | Minimum Lease
|           |  | Lease Payments |        | Income        |  | Payments     
|           |  |                |        |               |  |              
|2001       |  | $              | 7,546  |               |  | $             | (283 | )      |  | $ | 7,263  | 
|2002       |  |                | 7,052  |               |  |               |     |        |  |   | 7,052  | 
|2003       |  |                | 5,007  |               |  |               |     |        |  |   | 5,007  | 
|2004       |  |                | 2,377  |               |  |               |     |        |  |   | 2,377  | 
|2005       |  |                | 1,832  |               |  |               |     |        |  |   | 1,832  | 
|After 2005 |  |                | 622    |               |  |               |     |        |  |   | 622    | 
|           |  |                |        |               |  |               |      |        |  |   |        | 
|           |  | $              | 24,436 |               |  | $             | (283 | )      |  | $ | 24,153 | 
|           |  |                |        |               |  |               |      |        |  |   |        | 

Our corporate headquarters lease provides for scheduled rent increases and
an option to extend the lease for five years with changes to the terms of the
lease agreement and a refurbishment allowance. Rent expense under operating
leases totaled $9,075, $6,172 and $3,689 during 2000, 1999, and 1998,
respectively, net of sublease income of $555, $1,286, and $1,029, respectively.

Note 9  Convertible Subordinated Notes

In March 1998, we completed an offering of $100,000 of 4.75% Convertible
Subordinated Notes (the Notes), due on March 1, 2003, which we fully and
unconditionally guaranteed. The Notes were originally convertible into our
common stock at any time prior to the close of business on the maturity date at
a conversion rate of 22.30 shares per $1,000 principal amount of the Notes
(equivalent to a conversion price of $44.85 per share). We also had the right
to redeem the Notes, in whole or in part, on or after March 6, 2001, at
redemption prices (plus accrued interest), as follows: a premium of 101.9 after
one year, 100.95 after two years, and at par as of the third year. This
offering resulted in net proceeds to us 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 effective interest-method, over
the life of the Notes.

F-32



---



##### Table of Contents



During 2000, $83,643 of the Notes were converted into HNC common stock at
a conversion rate of 22.30 shares per $1,000 principal amount of the Notes
(equivalent to a conversion price of $44.85 per share). In connection with
these note conversions, we issued 1,872 shares of our common stock.
Additionally, we paid $12,676 million in conversion premiums to the converting
note holders, which we recorded as a debt conversion charge. As of December 31,
2000, $16,357 of the Notes remained outstanding. In connection with the
spin-off of our Retek subsidiary, the indenture governing the Notes required an
adjustment to the conversion price of the remaining outstanding Notes. This
conversion price was based upon a formula that calculated an adjusted
conversion rate using the relative per common share values of HNC and Retek as
of the date of the spin-off. As a result of this adjustment, the remaining
Notes became convertible into our common stock at a conversion rate of 100.20
shares per $1,000 principal amount of the Notes (equivalent to a conversion
price of $9.98 per share). As discussed in Note 15, the remaining outstanding
Notes were converted into our common stock in March 2001.

The fair value of the Notes at December 31, 2000 was estimated to be
$48,657, calculated based upon the fair value of the underlying shares of HNC
common stock that the Notes were convertible into as of this date based upon
the revised conversion rate.

Cash amounts paid for interest related to the Notes totaled $4,750,
$4,750, and $2,335 during 2000, 1999, and 1998, respectively.

Note 10  Treasury, Common and Preferred Stock

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

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

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

Note 11  Income Taxes

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

|          |         |   |                         |         |      |   |      |        |   |   |        |       | 
|--------- | ------- | - | ----------------------- | ------- | ---- | - | ---- | ------ | - | - | ------ | ----- | 
|          |         |   | Year Ended December 31,
|          |         |   |                        
|          |         |   | 2000                    |         | 1999 |   | 1998
|          |         |   |                         |         |      |   |     
|Current:  |         |   |                         |         |      |   |      |        |   |   |        |      
|          | Federal |   | $                       |        |      |   | $    | 3,869  |   |   | $      | 6,659 | 
|          | State   |   |                         |        |      |   |      | 1,042  |   |   |        | 1,549 | 
|          | Foreign |   |                         | 2,282   |      |   |      | 250    |   |   |        | 511   | 
|Deferred: |         |   |                         |         |      |   |      |        |   |   |        |      
|          | Federal |   |                         | (33,899 | )    |   |      | (3,958 | ) |   |        | 3,218 | 
|          | State   |   |                         | (1,485  | )    |   |      | (694   | ) |   |        | 715   | 
|          | Foreign |   |                         |         |      |   |      | 27     |   |   |        | 106   | 
|          |         |   |                         |         |      |   |      |        |   |   |        |      
|          |         | $ | (33,102                 | )       |      | $ | 536  |        |   | $ | 12,758 |      
|          |         |   |                         |         |      |   |      |        |   |   |        |      

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

|         |  |                         |          |      |  |      |        |   |  |   |        | 
|-------- |  | ----------------------- | -------- | ---- |  | ---- | ------ | - |  | - | ------ | 
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2000                    |          | 1999 |  | 1998
|         |  |                         |          |      |  |     
|Domestic |  | $                       | (154,945 | )    |  | $    | (6,521 | ) |  | $ | 21,388 | 
|Foreign  |  |                         | 5,425    |      |  |      | 785    |   |  |   | 1,822  | 
|         |  |                         |          |      |  |      |        |   |  |   |        | 
|         |  | $                       | (149,520 | )    |  | $    | (5,736 | ) |  | $ | 23,210 | 
|         |  |                         |          |      |  |      |        |   |  |   |        | 

F-33



---



##### Table of Contents



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

|                                                     |  |                         |         |      |  |      |        |   |  |   |        |  
|---------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                     |  | Year Ended December 31,
|                                                     |  |                        
|                                                     |  | 2000                    |         | 1999 |  | 1998
|                                                     |  |                         |         |      |  |     
|Amounts computed at statutory federal rate           |  | $                       | (52,332 | )    |  | $    | (2,008 | ) |  | $ | 8,123  |  
|State income taxes, net of federal benefit           |  |                         | (965    | )    |  |      | 226    |   |  |   | 1,472  |  
|Non-deductible debt conversion expense               |  |                         | 4,437   |      |  |      |       |   |  |   |       |  
|Non-deductible spin-off expense                      |  |                         | 4,820   |      |  |      |       |   |  |   |       |  
|Tax credit carry-forwards generated                  |  |                         | (1,005  | )    |  |      | (642   | ) |  |   | (949   | )
|Non-deductible stock redemption compensation expense |  |                         |        |      |  |      | 543    |   |  |   | 835    |  
|Non-deductible acquired technology and amortization  |  |                         | 12,110  |      |  |      | 1,947  |   |  |   | 2,895  |  
|Minority interest in Retek                           |  |                         | (2,654  | )    |  |      | (253   | ) |  |   |       |  
|Stock based compensation                             |  |                         | 1,910   |      |  |      | 407    |   |  |   |       |  
|Other, net                                           |  |                         | 577     |      |  |      | 316    |   |  |   | 382    |  
|                                                     |  |                         |         |      |  |      |        |   |  |   |        |  
|Income tax provision (benefit)                       |  | $                       | (33,102 | )    |  | $    | 536    |   |  | $ | 12,758 |  
|                                                     |  |                         |         |      |  |      |        |   |  |   |        |  

During 2000, 1999 and 1998, we realized certain tax benefits related to
stock option transactions in the amounts of $36,392, $16,993 and $7,569,
respectively. The tax benefits from these stock option tax deductions were
credited directly to paid-in capital.

Deferred tax assets (liabilities) are summarized as follows:

|                                                        |                         |   |              |        |      |   |        |        | 
|------------------------------------------------------- | ----------------------- | - | ------------ | ------ | ---- | - | ------ | ------ | 
|                                                        |                         |   | December 31,
|                                                        |                         |   |             
|                                                        |                         |   | 2000         |        | 1999
|                                                        |                         |   |              |        |     
|Taxable pooling basis difference                        |                         | $ |             |        |      | $ | 14,955 |       
|Net operating loss carry-forwards                       |                         |   | 54,953       |        |      |   | 11,257 |       
|Tax credit carry-forwards                               |                         |   | 5,713        |        |      |   | 6,251  |       
|Allowance for doubtful accounts                         |                         |   | 1,431        |        |      |   | 2,506  |       
|Deferred tax liabilities related to purchase accounting |                         |   | (18,159      | )      |      |   |       |       
|Stock based compensation                                |                         |   | 741          |        |      |   | 4,106  |       
|Other                                                   |                         |   | 4,210        |        |      |   | (606   | )     
|                                                        |                         |   |              |        |      |   |        |       
|                                                        |                         |   | 48,889       |        |      |   | 38,469 |       
|Deferred tax asset valuation allowance                  |                         |   |             |        |      |   |       |       
|                                                        |                         |   |              |        |      |   |        |       
|                                                        | Net deferred tax assets |   | $            | 48,889 |      |   | $      | 38,469 | 
|                                                        |                         |   |              |        |      |   |        |       

No valuation allowance has been recorded against our net deferred tax
assets as we believe it to be more likely than not that our tax assets will be
realized.

At December 31, 2000, we had federal and state net operating loss
carry-forwards totaling $143,187 and $84,189, respectively. The federal net
operating loss carry-forwards include $4,772 that expires in 2011, $24,618 that
expires in 2019 and $113,797 that expires in 2020. The state net operating loss
carry-forwards expire from 2002 through 2010.

At December 31, 2000, we also had $2,391 of federal research and
development credit carry-forwards that expire from 2001 to 2020, $1,643 of
state research and development credit carry-forwards that have no expiration
dates, $1,525 of foreign tax credit carry-forwards that expire from 2000 to
2005, and federal and state alternative minimum tax credits of $150 and $4,
respectively, that have no expiration dates. These net operating loss and
research and development credit carry-forwards are subject to annual
limitations and also are limited to utilization solely by the segment that
generated them. Should a substantial change in our ownership occur, as defined
by the Tax Reform Act of 1986, there will be additional annual limitations on
our utilization of net operating loss and research and development credit
carry-forwards.

We paid $484, $6,312 and $1,151 of income taxes during 2000, 1999 and
1998, respectively.

F-34



---



##### Table of Contents



Note 12  Segment Information

During 2000, 1999 and 1998, our reportable segments were based upon our
method of internal reporting to management, who viewed our business for these
periods by functional market. During 2000, 1999 and 1998, our operating
segments reflected the way management organized and evaluated internal
financial information to make operating decisions and assess performance.
Excluding Retek, our primary operating segments include HNC Financial Solutions
(HNC FS), HNC Insurance Solutions (HNC IS) and HNC Telecommunications
Solutions (HNC TS).

HNC FS provides transaction-based, real-time fraud detection,
authorization and action decisions for applications such as credit card charge
authorization and the loan approval decision process. Our HNC FS segment also
includes the activities associated with our former eHNC division, the
activities of which we reintegrated into FS in July 2000. HNC IS 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. HNC
TS provides our telecommunications carrier customers with the ability to reduce
fraud losses and determine customer profitability. HNC TS is presented below
along with activities associated with our Advanced Technology Solutions group,
which primarily conducts research and development for the United States
government, as well as corporate activity. Retek, which we spun-off to
stockholders effective September 29, 2000, is also presented separately below.

The accounting policies of the segments are the same as those described in
Note 1. We evaluate the performance of our segments and allocate resources to
them based on operating income. Inter-segment sales are accounted for at fair
value as if the sales were to third parties.

Our operating segments reflect the way our management team organizes and
evaluates internal financial information, in order to make operating decisions
and assess performance. Each segment represents a strategic business unit that
offers unique products and services to their functional markets. The table
below presents segment data for certain statement of operations and balance
sheet line items as of and for the years ended December 31, 2000, 1999 and
1998.

Segment revenues are summarized as follows:

|                 |                  |                            |   |        |         |                         |   |        |         |      |   |        |         |  |  | 
|---------------- | ---------------- | -------------------------- | - | ------ | ------- | ----------------------- | - | ------ | ------- | ---- | - | ------ | ------- |  |  | 
|                 |                  |                            |   |        |         | Year Ended December 31,
|                 |                  |                            |   |        |         |                        
|                 |                  |                            |   |        |         | 2000                    |   | 1999   |         | 1998
|                 |                  |                            |   |        |         |                         |   |        |         |     
|Segment revenue: |                  |                            |   |        |         |                         |   |        |         |      |   |       
|                 | HNC FS           |                            | $ | 95,668 |         |                         | $ | 73,641 |         |      | $ | 63,244 |        
|                 | HNC IS           |                            |   | 81,382 |         |                         |   | 66,790 |         |      |   | 52,140 |        
|                 | HNC TS and other |                            |   | 17,899 |         |                         |   | 7,299  |         |      |   | 6,555  |        
|                 |                  |                            |   |        |         |                         |   |        |         |      |   |       
|                 |                  | HNC, excluding Retek       |   |        | 194,969 |                         |   |        | 147,730 |      |   |        | 121,939 | 
|                 | Retek            |                            |   | 59,915 |         |                         |   | 69,159 |         |      |   | 56,669 |        
|                 |                  |                            |   |        |         |                         |   |        |         |      |   |       
|                 |                  | Total consolidated revenue |   | $      | 254,884 |                         |   | $      | 216,889 |      |   | $      | 178,608 | 
|                 |                  |                            |   |        |         |                         |   |        |         |      |   |       

During 2000, 1999 and 1998, one product line in the HNC FS segment
accounted for 16.8%, 15.4% and 14.5% of our total revenues, respectively.
During those same periods, revenues from one product in the HNC IS segment
accounted for 23.5%, 20.9% and 21.5% of our total revenues, respectively.
During 1999 and 1998, one product in the Retek segment accounted for 10.1% and
13.2% of our total revenues, respectively.

Segment operating income (loss), excluding all non-cash and non-recurring
charges that we do not allocate between segments, is summarized as follows:

|                                 |                  |                               |   |                         |         |      |   |        |        |  |   |        |        | 
|-------------------------------- | ---------------- | ----------------------------- | - | ----------------------- | ------- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                 |                  |                               |   | Year Ended December 31,
|                                 |                  |                               |   |                        
|                                 |                  |                               |   | 2000                    |         | 1999 |   | 1998  
|                                 |                  |                               |   |                         |         |      |   |       
|Segment operating income (loss): |                  |                               |   |                         |         |      |   |        |        |  |   |       
|                                 | HNC FS           |                               | $ | 603                     |         |      | $ | 9,935  |        |  | $ | 10,936 |       
|                                 | HNC IS           |                               |   | 10,572                  |         |      |   | 13,390 |        |  |   | 7,651  |       
|                                 | HNC TS and other |                               |   | (1,709                  | )       |      |   | (5,168 | )      |  |   | 700    |       
|                                 |                  |                               |   |                         |         |      |   |        |        |  |   |       
|                                 |                  | HNC, excluding Retek          |   |                         | 9,466   |      |   |        | 18,157 |  |   |        | 19,287 | 
|                                 | Retek            |                               |   | (36,845                 | )       |      |   | (2,318 | )      |  |   | 11,031 |       
|                                 |                  |                               |   |                         |         |      |   |        |        |  |   |       
|                                 |                  | Total operating income (loss) |   | $                       | (27,379 | )    |   | $      | 15,839 |  |   | $      | 30,318 | 
|                                 |                  |                               |   |                         |         |      |   |        |        |  |   |       

F-35



---



##### Table of Contents



A reconciliation of the operating income (loss) reported by each of our
segments to our consolidated operating income (loss) is set forth below:

|                                                                  |                                      |   |                         |          |      |   |         |        |   |   |        |        | 
|----------------------------------------------------------------- | ------------------------------------ | - | ----------------------- | -------- | ---- | - | ------- | ------ | - | - | ------ | ------ | 
|                                                                  |                                      |   | Year Ended December 31,
|                                                                  |                                      |   |                        
|                                                                  |                                      |   | 2000                    |          | 1999 |   | 1998   
|                                                                  |                                      |   |                         |          |      |   |        
|Segment operating income (loss)                                   |                                      | $ | (27,379                 | )        |      | $ | 15,839  |        |   | $ | 30,318 |       
|Stock-based compensation                                          |                                      |   | (21,670                 | )        |      |   | (11,985 | )      |   |   |       |       
|Transaction-related costs and amortization                        |                                      |   | (43,734                 | )        |      |   | (9,158  | )      |   |   | (3,202 | )     
|Expense related to spin-off of Retek                              |                                      |   | (48,185                 | )        |      |   |        |        |   |   |       |       
|Acquired in-process research and development                      |                                      |   | (7,601                  | )        |      |   | (1,480  | )      |   |   | (6,090 | )     
|Other (Note 1)                                                    |                                      |   | (1,172                  | )        |      |   |        |        |   |   |       |       
|                                                                  |                                      |   |                         |          |      |   |         |        |   |   |        |       
|                                                                  | Consolidated operating income (loss) |   |                         | (149,741 | )    |   |         | (6,784 | ) |   |        | 21,026 | 
|Interest income                                                   |                                      |   | 12,924                  |          |      |   | 6,299   |        |   |   | 6,799  |       
|Interest expense                                                  |                                      |   | (4,231                  | )        |      |   | (5,747  | )      |   |   | (4,460 | )     
|Expense related to debt conversion                                |                                      |   | (12,676                 | )        |      |   |        |        |   |   |       |       
|Other expense, net                                                |                                      |   | (3,378                  | )        |      |   | (226    | )      |   |   | (29    | )     
|Minority interest in losses (income) of consolidated
Subsidiaries |                                      |   | 7,582                   |          |      |   | 722     |        |   |   | (126   | )     
|                                                                  |                                      |   |                         |          |      |   |         |        |   |   |        |       
|Income (loss) before income tax provision                         |                                      | $ | (149,520                | )        |      | $ | (5,736  | )      |   | $ | 23,210 |       
|                                                                  |                                      |   |                         |          |      |   |         |        |   |   |        |       

Segment depreciation expense, included in operating income, is summarized
as follows:

|                              |                  |                                    |   |                         |        |      |   |       |       |  |   |       |       | 
|----------------------------- | ---------------- | ---------------------------------- | - | ----------------------- | ------ | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                              |                  |                                    |   | Year Ended December 31,
|                              |                  |                                    |   |                        
|                              |                  |                                    |   | 2000                    |        | 1999 |   | 1998 
|                              |                  |                                    |   |                         |        |      |   |      
|Segment depreciation expense: |                  |                                    |   |                         |        |      |   |       |       |  |   |      
|                              | HNC FS           |                                    | $ | 4,533                   |        |      | $ | 2,971 |       |  | $ | 2,921 |      
|                              | HNC IS           |                                    |   | 2,510                   |        |      |   | 2,134 |       |  |   | 1,564 |      
|                              | HNC TS and other |                                    |   | 1,122                   |        |      |   | 801   |       |  |   | 355   |      
|                              |                  |                                    |   |                         |        |      |   |       |       |  |   |      
|                              |                  | HNC, excluding Retek               |   |                         | 8,165  |      |   |       | 5,906 |  |   |       | 4,840 | 
|                              | Retek            |                                    |   | 3,588                   |        |      |   | 2,309 |       |  |   | 1,262 |      
|                              |                  |                                    |   |                         |        |      |   |       |       |  |   |      
|                              |                  | Total segment depreciation expense |   | $                       | 11,753 |      |   | $     | 8,215 |  |   | $     | 6,102 | 
|                              |                  |                                    |   |                         |        |      |   |       |       |  |   |      

Segment assets are summarized as follows:

|                      |                  |                           |   |         |         |              |   |         |         |  |  | 
|--------------------- | ---------------- | ------------------------- | - | ------- | ------- | ------------ | - | ------- | ------- |  |  | 
|                      |                  |                           |   |         |         | December 31,
|                      |                  |                           |   |         |         |             
|                      |                  |                           |   |         |         | 2000         |   | 1999   
|                      |                  |                           |   |         |         |              |   |        
|Total segment assets: |                  |                           |   |         |         |              |   |        
|                      | HNC FS           |                           | $ | 96,553  |         |              | $ | 49,492  |        
|                      | HNC IS           |                           |   | 60,106  |         |              |   | 40,491  |        
|                      | HNC TS and other |                           |   | 67,003  |         |              |   | 5,872   |        
|                      |                  |                           |   |         |         |              |   |        
|                      |                  | HNC, excluding Retek      |   |         | 223,662 |              |   |         | 95,855  | 
|                      | Retek            |                           |   |        |         |              |   | 129,099 |        
|                      |                  |                           |   |         |         |              |   |        
|                      |                  | Total segment assets      |   |         | 223,662 |              |   |         | 224,954 | 
|                      | Corporate        |                           |   | 295,762 |         |              |   | 291,098 |        
|                      | Eliminations     |                           |   | (71,683 | )       |              |   | (99,631 | )      
|                      |                  |                           |   |         |         |              |   |        
|                      |                  | Total consolidated assets |   | $       | 447,741 |              |   | $       | 416,421 | 
|                      |                  |                           |   |         |         |              |   |        

Corporate assets are primarily comprised of cash and cash equivalents,
marketable securities, deferred tax assets and inter-company receivables.
Eliminations primarily relate to inter-company balances and investments in
subsidiaries.

Segment capital expenditures are summarized as follows:

|                              |                  |                            |   |                         |        |      |   |       |        |  |   |       |       | 
|----------------------------- | ---------------- | -------------------------- | - | ----------------------- | ------ | ---- | - | ----- | ------ |  | - | ----- | ----- | 
|                              |                  |                            |   | Year Ended December 31,
|                              |                  |                            |   |                        
|                              |                  |                            |   | 2000                    |        | 1999 |   | 1998 
|                              |                  |                            |   |                         |        |      |   |      
|Segment capital expenditures: |                  |                            |   |                         |        |      |   |       |        |  |   |      
|                              | HNC FS           |                            | $ | 7,053                   |        |      | $ | 4,455 |        |  | $ | 2,909 |      
|                              | HNC IS           |                            |   | 2,252                   |        |      |   | 4,336 |        |  |   | 1,831 |      
|                              | HNC TS and other |                            |   | 3,991                   |        |      |   | 1,565 |        |  |   | 407   |      
|                              |                  |                            |   |                         |        |      |   |       |        |  |   |      
|                              |                  | HNC, excluding Retek       |   |                         | 13,296 |      |   |       | 10,356 |  |   |       | 5,147 | 
|                              | Retek            |                            |   | 12,070                  |        |      |   | 5,737 |        |  |   | 2,939 |      
|                              |                  |                            |   |                         |        |      |   |       |        |  |   |      
|                              |                  | Total capital expenditures |   | $                       | 25,366 |      |   | $     | 16,093 |  |   | $     | 8,086 | 
|                              |                  |                            |   |                         |        |      |   |       |        |  |   |      

F-36



---



##### Table of Contents



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

|                              |               |               |   |                         |         |      |   |         |         |  |   |         |         | 
|----------------------------- | ------------- | ------------- | - | ----------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                              |               |               |   | Year Ended December 31,
|                              |               |               |   |                        
|                              |               |               |   | 2000                    |         | 1999 |   | 1998   
|                              |               |               |   |                         |         |      |   |        
|Revenue by geographical area: |               |               |   |                         |         |      |   |         |         |  |   |        
|                              | United States |               | $ | 205,361                 |         |      | $ | 166,505 |         |  | $ | 137,332 |        
|                              | Foreign       |               |   | 49,523                  |         |      |   | 50,384  |         |  |   | 41,276  |        
|                              |               |               |   |                         |         |      |   |         |         |  |   |        
|                              |               | Total revenue |   | $                       | 254,884 |      |   | $       | 216,889 |  |   | $       | 178,608 | 
|                              |               |               |   |                         |         |      |   |         |         |  |   |        

|                                        |               |                         |   |              |         |      |   |        |        | 
|--------------------------------------- | ------------- | ----------------------- | - | ------------ | ------- | ---- | - | ------ | ------ | 
|                                        |               |                         |   | December 31,
|                                        |               |                         |   |             
|                                        |               |                         |   | 2000         |         | 1999
|                                        |               |                         |   |              |         |     
|Long-lived assets by geographical area: |               |                         |   |              |         |      |   |       
|                                        | United States |                         | $ | 169,963      |         |      | $ | 54,174 |       
|                                        | Foreign       |                         |   | 159          |         |      |   | 145    |       
|                                        |               |                         |   |              |         |      |   |       
|                                        |               | Total long-lived assets |   | $            | 169,122 |      |   | $      | 54,319 | 
|                                        |               |                         |   |              |         |      |   |       

Our foreign revenues are from export sales and international operations.
Export sales include sales from the United States to foreign countries.
International operations include sales by foreign operations. Revenues from
international operations and export sales, primarily to Western Europe, Japan
and Canada, represented 19.3%, 23.2% and 23.1% of total revenues in 2000, 1999
and 1998, respectively. Export sales totaled $42,540, $37,713 and $27,840 in
2000, 1999 and 1998, respectively.

Note 13  Stock Compensation Plans

We apply Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for our stock-based compensation. Had
compensation cost for our stock-based compensation awards been determined based
on the fair value at the grant dates of awards, consistent with the method of
Financial Accounting Standards Board Statement No. 123, our net income (loss)
and basic and diluted pro forma net income (loss) per common share would have
been reduced to the pro forma amounts indicated below:

|                                            |             |  |                         |          |      |  |      |         |   |  |   |         |  
|------------------------------------------- | ----------- |  | ----------------------- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                            |             |  | Year Ended December 31,
|                                            |             |  |                        
|                                            |             |  | 2000                    |          | 1999 |  | 1998
|                                            |             |  |                         |          |      |  |     
|Net income (loss):                          |             |  |                         |          |      |  |      |         |   |  |   |        
|                                            | As reported |  | $                       | (116,418 | )    |  | $    | (6,272  | ) |  | $ | 10,452  |  
|                                            | Pro forma   |  | $                       | (230,171 | )    |  | $    | (43,583 | ) |  | $ | (21,678 | )
|Basic net income (loss)
per common share:   |             |  |                         |          |      |  |      |         |   |  |   |        
|                                            | As reported |  | $                       | (4.08    | )    |  | $    | (0.25   | ) |  | $ | 0.41    |  
|                                            | Pro forma   |  | $                       | (8.07    | )    |  | $    | (1.75   | ) |  | $ | (0.84   | )
|Diluted net income (loss)
per common share: |             |  |                         |          |      |  |      |         |   |  |   |        
|                                            | As reported |  | $                       | (4.08    | )    |  | $    | (0.25   | ) |  | $ | 0.39    |  
|                                            | Pro forma   |  | $                       | (8.07    | )    |  | $    | (1.75   | ) |  | $ | (0.85   | )

HNC Software Inc. Sponsored Plans

We administer several employee benefit plans, both active and inactive.
Our active plans include our 1995 Equity Incentive Plan, our 1995 Directors
Stock Option Plan, our 1995 Employee Stock Purchase Plan, and our 1998 Stock
Option Plan. Our inactive plans include our original 1987 Stock Option Plan and
various plans that we acquired in conjunction with our acquisitions. Our
inactive plans also include the eHNC 1999 Equity Incentive and Executive Equity
Incentive Plans. As a result of a short-form merger of eHNC into HNC in July
2000, all outstanding options under eHNC plans were assumed. These assumed
plans were amended to convert their respective options into HNC options as of
the respective acquisition or merger dates. While subsequent to the assumption
of these plans the acquired employees participated in our own stock option
plans and are subject to our plans terms and conditions, options issued prior
to the acquisition or merger dates are subject to their respective plan terms
and conditions. Our inactive plans are not discussed herein. For purposes of
the discussion regarding our active plans below, fair market value means the
closing price of our common stock on the Nasdaq National Market on the grant
date.

F-37



---



##### Table of Contents



Our 1995 Directors Stock Option Plan (Directors Plan), as amended,
provides for the issuance of up to 600 nonqualified stock options to our
outside directors. Under the provisions of the Directors Plan, nonqualified
options to purchase 25 shares of our common stock are granted to outside
directors upon their respective dates of becoming members of the Board of
Directors, and nonqualified options to purchase ten shares of our stock will be
granted on each anniversary date. Options under the Directors Plan are to be
granted at the fair market value of the stock at the grant date and vest at
specific times over a four-year period. As of December 31, 2000, 255 shares
remained available for future grant under this plan.

Our 1995 Equity Incentive Plan (Incentive Plan) as amended, provides for
the issuance of up to 9,100 shares of our common stock in the form of
nonqualified or incentive stock options, restricted stock or stock bonuses.
Nonqualified stock options and restricted stock may be awarded at a price not
less than 85% of the fair market value of the stock at the date of the award.
Incentive stock options must be awarded at a price not less than 100% of the
fair market value of the stock at the date of the award. Options granted under
the Incentive Plan may have a term of up to ten years. We have the discretion
to provide for restrictions, and the lapse of restrictions, in respect of
restricted stock awards. Options typically vest at the rate of 25% of the total
grant per year over a four-year period; however, we may, at our discretion,
implement a different vesting schedule with respect to any new stock option
grant. At December 31, 2000, 1,172 shares remained available for future grant
under this plan.

Our 1998 Stock Option Plan (1998 Plan), as amended, provides for the
issuance of up to 2,980 shares of our common stock in the form of nonqualified
stock options to our employees, officers, consultants and independent advisors.
Options granted under the 1998 Plan may have a term of up to ten years and
typically vest at the rate of 25% of the total grant per year over a four-year
period; however, we may, at our discretion, implement a different vesting
schedule with respect to any new stock option grant. At December 31, 2000,
1,148 shares remained available for future grant under this plan.

Our 1995 Employee Stock Purchase Plan (Stock Purchase Plan), as amended,
provides for the issuance of a maximum of 850 shares of common stock. Each
purchase period, eligible employees may designate between 2% and 10% of their
cash compensation, up to legally permitted amounts, to be deducted from their
compensation for the purchase of common stock under the Stock Purchase Plan.
The purchase price of the shares under the Stock Purchase Plan is equal to 85%
of the lesser of the fair market value per share on the first day of the
twelve-month offering period or the last day of each six-month purchase period.
During 2000, 1999 and 1998, 106, 115 and 68 shares of our common stock were
issued under the Stock Purchase Plan at an average price of $29.55, $24.46 and
$28.34 per share, respectively. As of December 31, 2000, 416 shares were
reserved for future issuance under the Stock Purchase Plan.

Option transactions under HNCs plans during the three years ending
December 31, 2000 are summarized as follows:

|                                      |                           |  |        |        |       |   |          |       | 
|------------------------------------- | ------------------------- |  | ------ | ------ | ----- | - | -------- | ----- | 
|                                      |                           |  |        |        |       |   | Weighted
|                                      |                           |  |        |        |       |   | Average 
|                                      |                           |  |        |        |       |   | Exercise
|                                      |                           |  | Shares |        | Price
|                                      |                           |  |        |        |      
|Outstanding at December 31, 1997      |                           |  | 4,591  |        |       | $ | 23.92    |      
|                                      | Options granted/exchanged |  |        | 3,333  |       |   |          | 34.59 | 
|                                      | Options exercised         |  |        | (732   | )     |   |          | 12.12 | 
|                                      | Options canceled          |  |        | (718   | )     |   |          | 32.04 | 
|                                      |                           |  |        |        |       |   |          |      
|Outstanding at December 31, 1998      |                           |  | 6,474  |        |       |   | 29.84    |      
|                                      | Options granted           |  |        | 3,845  |       |   |          | 33.67 | 
|                                      | Options exercised         |  |        | (1,916 | )     |   |          | 24.68 | 
|                                      | Options canceled          |  |        | (2,368 | )     |   |          | 32.11 | 
|                                      |                           |  |        |        |       |   |          |      
|Outstanding at December 31, 1999      |                           |  | 6,035  |        |       |   | 33.03    |      
|                                      | Options granted/exchanged |  |        | 3,747  |       |   |          | 69.84 | 
|                                      | Options exercised         |  |        | (3,227 | )     |   |          | 29.76 | 
|                                      | Options canceled          |  |        | (1,249 | )     |   |          | 47.57 | 
|                                      |                           |  |        |        |       |   |          |      
|Outstanding at September 29, 2000 (a) |                           |  | 5,306  |        |       |   | 57.60    |      
|                                      | Options granted           |  |        | 1,559  |       |   |          | 17.46 | 
|                                      | Options exercised         |  |        | (98    | )     |   |          | 12.44 | 
|                                      | Options canceled          |  |        | (848   | )     |   |          | 10.92 | 
|                                      |                           |  |        |        |       |   |          |      
|Outstanding at December 31, 2000      |                           |  | 5,919  |        |       |   | 12.88    |      
|                                      |                           |  |        |        |       |   |          |      

F-38



---



##### Table of Contents





---

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

The fair value of each option grant under our HNC plans was estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for grants during 2000, 1999 and 1998,
respectively: dividend yield of 0.0% for all three years; risk-free interest
rates of 6.21%, 5.47% and 5.14%; expected volatilities of 100%, 100% and 65%;
and expected lives of 4.1, 4.1 and 5.0 years. The weighted average fair value
of options granted under HNC plans during 2000, 1999 and 1998 was $37.61,
$23.15 and $22.17, respectively. The fair value of the employees purchase
rights issued pursuant to the Stock Purchase Plan were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions during 2000, 1999 and 1998, respectively: dividend yield of 0.0%
for all three years; risk-free interest rates of 6.18%, 4.98% and 5.02%;
expected volatilities of 100%, 100% and 65%; and an expected life of 6 months
for all three years. The weighted average fair value of those purchase rights
granted in 2000, 1999 and 1998 was $7.29, $16.66 and $16.25, respectively.

The following table summarizes information about employee stock options
outstanding at December 31, 2000 under HNCs plans:

|                |       |              |   |                 |  |          |  |              |       |          |  |                     |       |                     |   |          |      |                |  |          |       |  |   |      |     |  |  |  |       | 
|--------------- | ----- | ------------ | - | --------------- |  | -------- |  | ------------ | ----- | -------- |  | ------------------- | ----- | ------------------- | - | -------- | ---- | -------------- |  | -------- | ----- |  | - | ---- | --- |  |  |  | ----- | 
|                |       |              |   |                 |  |          |  |              |       |          |  | Options Outstanding |       |                     |   |          |      |                |  |         
|                |       |              |   |                 |  |          |  |              |       |          |  |                     |       | Options Exercisable
|                |       |              |   |                 |  |          |  |              |       |          |  |                     |       |                     |   | Weighted |      |                |  |          |       | 
|                |       |              |   |                 |  |          |  |              |       |          |  | Number              |       | Average             |   | Weighted |      | Number         |  | Weighted
|                |       |              |   |                 |  |          |  |              |       |          |  | Outstanding At      |       | Remaining           |   | Average  |      | Exercisable At |  | Average 
|Range of        |       | December 31, |   | Contractual     |  | Exercise |  | December 31, |       | Exercise
|Exercise Prices |       | 2000         |   | Life (In Years) |  | Price    |  | 2000         |       | Price   
|                |       |              |   |                 |  |          |  |              |       |         
|$               | 0.03  | to           | $ | 6.23            |  |          |  | 814          |       |          |  | 7.73                |       |                     | $ | 5.23     |      |                |  | 126      |       |  | $ | 5.21 |    
|                | 6.24  |              |   |                 |  |          |  |              | 7.46  |          |  |                     | 733   |                     |   |          | 7.23 |                |  |          | 6.92  |  |   |      | 100 |  |  |  | 6.97  | 
|                | 7.47  |              |   |                 |  |          |  |              | 10.42 |          |  |                     | 758   |                     |   |          | 6.58 |                |  |          | 8.58  |  |   |      | 96  |  |  |  | 8.32  | 
|                | 10.43 |              |   |                 |  |          |  |              | 13.22 |          |  |                     | 618   |                     |   |          | 6.73 |                |  |          | 11.24 |  |   |      | 130 |  |  |  | 10.99 | 
|                | 13.23 |              |   |                 |  |          |  |              | 16.25 |          |  |                     | 1,036 |                     |   |          | 6.85 |                |  |          | 15.13 |  |   |      | 109 |  |  |  | 14.40 | 
|                | 16.33 |              |   |                 |  |          |  |              | 18.10 |          |  |                     | 858   |                     |   |          | 6.22 |                |  |          | 17.41 |  |   |      | 195 |  |  |  | 17.39 | 
|                | 18.11 |              |   |                 |  |          |  |              | 20.25 |          |  |                     | 599   |                     |   |          | 6.43 |                |  |          | 19.05 |  |   |      | 94  |  |  |  | 19.38 | 
|                | 20.36 |              |   |                 |  |          |  |              | 29.69 |          |  |                     | 503   |                     |   |          | 6.60 |                |  |          | 22.71 |  |   |      | 50  |  |  |  | 22.00 | 
|                |       |              |   |                 |  |          |  |              |       |          |  |                     |       |                     |   |          |      |                |  |          |       |  |   |      |     |  |  |  |       | 
|                | 0.03  |              |   |                 |  |          |  |              | 29.69 |          |  |                     | 5,919 |                     |   |          | 6.81 |                |  |          | 12.88 |  |   |      | 900 |  |  |  | 12.73 | 
|                |       |              |   |                 |  |          |  |              |       |          |  |                     |       |                     |   |          |      |                |  |          |       |  |   |      |     |  |  |  |       | 

Retek Inc. Sponsored Plans

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

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

F-39



---



##### Table of Contents



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



---

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

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

Stock-Based Compensation

During 2000, we recorded net stock-based compensation expense totaling
$21,670, consisting of $13,762 in stock-based compensation charges attributable
to our Retek spin-off, which are discussed separately below, and $7,908 in
additional net compensation expense. This additional net compensation expense
relates primarily to the amortization of unearned stock-based compensation of
$8,772 (of which $8,266 related to Retek) and also includes additional net
compensation income of $864, primarily related to the reversal of compensation
expense recorded in 1999 on variable awards, as a result of a decline in the
fair values of these awards during 2000.

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

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

The fair values of HNCs variable awards during 2000 and 1999 were
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: dividend yield of 0.0% for both years; risk-free
interest rate of 5.02% and 5.23% in 2000 and 1999, respectively; volatility of
100% for both years; and expected

F-40



---



##### Table of Contents



lives from four months to one year according to the vesting date and
subsequent exercise period of each option grant, and our stock prices on the
various grant dates as well as on December 31, 2000 and 1999.

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

Note 14  Contingencies

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

We recently settled, without liability, a suit that Nestor Inc. filed
against us in November 1998 in the United States District Court for the
District of Rhode Island. In this suit, Nestor had alleged antitrust violations
and unfair competition claims with respect to our marketing of our Falcon
credit card fraud detection product. Nestors complaint also alleged that we
infringed United States patents held by Nestor and sought a declaratory
judgment that a United States patent we hold relating to technology used in our
Falcon products is invalid and unenforceable. In January 2000 Nestor dropped
its claim of patent infringement against us and in January 2001 the case
settled and Nestors remaining claims for antitrust and unfair competition were
dismissed.

Note 15  Subsequent Event

In February 2001, we announced the call for redemption of our outstanding
Convertible Subordinated Notes on March 6, 2001. In March 2001, all remaining
outstanding Notes were converted into 1,639 shares of our common stock at a
conversion ratio of 100.2004 shares per $1,000 principal amount of Notes held.

F-41



---



##### Table of Contents



Note 16  Quarterly Financial Information (Unaudited)

Summarized quarterly financial information for 2000 and 1999 is as
follows:

|                                        |  |                                    |         |         |  |         |         |         |  |       |         |   |  |   |         |   |  |   |          |  
|--------------------------------------- |  | ---------------------------------- | ------- | ------- |  | ------- | ------- | ------- |  | ----- | ------- | - |  | - | ------- | - |  | - | -------- | -
|                                        |  | Year Ended December 31, 2000(1)(2)
|                                        |  |                                   
|                                        |  | First                              |         | Second  |  | Third   |         | Fourth  |  | Total
|                                        |  | Quarter                            |         | Quarter |  | Quarter |         | Quarter |  | Year 
|                                        |  |                                    |         |         |  |         |         |         |  |      
|                                        |  | (In Thousands)                    
|Revenues                                |  | $                                  | 54,564  |         |  | $       | 67,432  |         |  | $     | 77,812  |   |  | $ | 55,076  |   |  | $ | 254,884  |  
|Gross Profit                            |  |                                    | 26,896  |         |  |         | 35,349  |         |  |       | 43,543  |   |  |   | 33,609  |   |  |   | 139,397  |  
|Operating loss                          |  |                                    | (20,992 | )       |  |         | (30,462 | )       |  |       | (85,363 | ) |  |   | (12,924 | ) |  |   | (149,741 | )
|Net loss                                |  |                                    | (12,215 | )       |  |         | (20,145 | )       |  |       | (78,519 | ) |  |   | (5,539  | ) |  |   | (116,418 | )
|Basic net income (loss) per
share (a)   |  | $                                  | (0.47   | )       |  | $       | (0.75   | )       |  | $     | (2.71   | ) |  | $ | (0.17   | ) |  | $ | (4.08    | )
|Diluted net income (loss) per
share (a) |  | $                                  | (0.47   | )       |  | $       | (0.75   | )       |  | $     | (2.71   | ) |  | $ | (0.17   | ) |  | $ | (4.08    | )

|                                        |  |                                 |        |         |  |         |        |         |  |       |        |  |  |   |         |   |  |   |         |  
|--------------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | ----- | ------ |  |  | - | ------- | - |  | - | ------- | -
|                                        |  | Year Ended December 31, 1999(3)
|                                        |  |                                
|                                        |  | First                           |        | Second  |  | Third   |        | Fourth  |  | Total
|                                        |  | Quarter                         |        | Quarter |  | Quarter |        | Quarter |  | Year 
|                                        |  |                                 |        |         |  |         |        |         |  |      
|                                        |  | (In Thousands)                 
|Revenues                                |  | $                               | 49,189 |         |  | $       | 55,933 |         |  | $     | 58,773 |  |  | $ | 52,994  |   |  | $ | 216,889 |  
|Gross Profit                            |  |                                 | 29,815 |         |  |         | 35,484 |         |  |       | 38,697 |  |  |   | 30,704  |   |  |   | 134,700 |  
|Operating Income (loss)                 |  |                                 | 3,685  |         |  |         | 5,994  |         |  |       | 7,599  |  |  |   | (24,062 | ) |  |   | (6,784  | )
|Net Income (loss)                       |  |                                 | 2,124  |         |  |         | 3,345  |         |  |       | 3,331  |  |  |   | (15,072 | ) |  |   | (6,272  | )
|Basic net income (loss) per share (4)   |  | $                               | 0.08   |         |  | $       | 0.14   |         |  | $     | 0.14   |  |  | $ | (0.60   | ) |  | $ | (0.25   | )
|Diluted net income (loss) per share (4) |  | $                               | 0.08   |         |  | $       | 0.13   |         |  | $     | 0.13   |  |  | $ | (0.60   | ) |  | $ | (0.25   | )



---

|(1) |  | Results of operations in 2000 include: i) charges of $1.4 million,
$5.0 million and $1.2 million related to the write-off of in-process
research and development in the first, second and third quarters,
respectively; ii) $12.7 million in non-recurring debt conversion expense
and $48.2 million in non-recurring Retek spin-off charges in the third
quarter, and iii) a $2.8 million charge relating to the write-down of
our investment in Network Commerce and a $1.2 million impairment charge
related to the abandonment of a lease and associated property and
equipment in the fourth quarter.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Results of operations in 2000 exclude Reteks results of operations
in the fourth quarter, as a result of our spin-off of Retek on September
29, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|   
|   
|   
|(3) |  | Results of operations in 1999 include a charge of $1.5 million
related to the write-off of in-process research and development in the
fourth quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|   
|   
|   
|(4) |  | Net income (loss) per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net income
(loss) amounts per share do not equal the total for the year.                                                                                                                                                                                                                                                                                                                                                                                                    

F-42



---



##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                                                                                                                     
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                     
|2.01    |  | 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. Pursuant to Item
601(b)(2) of Regulation S-K, certain schedules have been
omitted but will be furnished supplementally to the
Commission upon request. (Incorporated by reference to
Exhibit 2.01 to Registrants Form 8-K filed April 22, 1998.)   
|       
|       
|       
|       
|2.02    |  | Plan of Merger dated December 21, 1998 adopted by Registrant
and Aptex Software Inc. (Incorporated by reference to
Exhibit 2.01 to Registrants Form 8-K filed February 5,
1999)                                                                                                                                                                                                                                    
|       
|       
|       
|       
|2.03    |  | Agreement and Plan of Reorganization dated as of March 9,
2000 among the Registrant, ONYX Technologies, Inc. and FW2
Acquisition Corp. Pursuant to Item 601(b)(2) of Regulation
S-K, certain schedules have been omitted but will be
furnished supplementally to the Commission upon request.
(Incorporated by reference to Exhibit 2.01 to Registrants
Form 8-K filed March 27, 2000.)                            
|       
|       
|       
|       
|2.04    |  | Agreement and Plan of Merger among Retek Inc., HT
Acquisition, Inc., HighTouch Technologies, Inc. and Kipling
Investments Labvan Limited dated as of April 17, 2000.
Pursuant to Item 601(b)(2) of Regulation S-K, certain
schedules have been omitted but will be furnished
supplementally to the Commission upon request. (Incorporated
by reference to Exhibit 2.01 to Registrants Form 8-K filed
May 25, 2000.)
|       
|       
|       
|       
|2.05**  |  | Agreement and Plan of Reorganization dated as of September
7, 2000 among Registrant, Systems/Link Corporation and SLC
Merger Corp. Pursuant to Item 601(b)(2) of Regulation S-K,
certain exhibits and schedules have been omitted but will be
furnished supplementally to the Commission upon request.
(Incorporated by reference to Exhibit 2.01 to Registrants
Form 8-K, as amended, filed September 22, 2000.)  
|       
|       
|       
|       
|3.01    |  | Registrants Restated Certificate of Incorporation filed
with the Secretary of State of Delaware on June 13, 1996.
(Incorporated by reference to Exhibit 3(i).04 to
Registrants Form 10-Q for the quarter ended June 30, 1996.)                                                                                                                                                                                    
|       
|       
|       
|       
|3.02    |  | Certificate of Amendment to Registrants Restated
Certificate of Incorporation filed with the Secretary of
State of Delaware on June 12, 2000. (Incorporated by
reference to Exhibit 4.08 to Registrants Form S-8
Registration Statement, File No. 333-40344, filed June 28,
2000.)                                                                                                                                
|       
|       
|       
|       
|3.03*   |  | Registrants Bylaws, as amended.                                                                                                                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|4.01    |  | Form of Specimen Certificate for Registrants Common Stock.
(Incorporated by reference to Exhibit 4.01 to Registrants
Form S-1 Registration Statement, as amended (File No.
33-91932) (the IPO S-1).)                                                                                                                                                                                                            
|       
|       
|       
|       
|10.01   |  | Registrants 1987 Stock Option Plan and related documents.
(Incorporated by reference to Exhibit 10.01 to the IPO
S-1.)(1)                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.02   |  | Registrants 1995 Equity Incentive Plan, as amended through
March 30, 2000. (Incorporated by reference to Exhibit 4.01
to Registrants Form S-8 Registration Statement, File No.
333-40344, filed June 28, 2000.)(1)                                                                                                                                                                                                
|       
|       
|       
|       
|10.03   |  | Form of 1995 Equity Incentive Plan Stock Option Agreement
and Stock Option Exercise Agreement. (Incorporated by
reference to Exhibit 10.02 to Registrants Form S-4
Registration Statement, File No. 333-64527, as amended
December 21, 1998.)(1)                                                                                                                                                                   
|       
|       
|       
|       
|10.04   |  | Registrants 1995 Directors Stock Option Plan, as amended
through April 30, 2000. (Incorporated by reference to
Exhibit 4.05 to Registrants Form S-8 Registration
Statement, File No. 333-40344, filed June 28, 2000.)(1)                                                                                                                                                                                          
|       
|       
|       
|       
|10.05   |  | Form of 1995 Directors Stock Option Plan Option Agreement
and Stock Option Exercise Agreement. (Incorporated by
reference to Exhibit 10.01 to Registrants Form 10-Q for the
quarter ended June 30, 1999)(1)                                                                                                                                                                                                        
|       
|       
|       
|       
|10.06   |  | Registrants 1995 Employee Stock Purchase Plan, as amended
through January 1, 2001. (Incorporated by reference to
Exhibit 4.01 to Registrants Form S-8 Registration
Statement, File No. 333-55398, filed February 12, 2001.)(1)                                                                                                                                                                                    
|       
|       
|       
|       
|10.07   |  | Registrants 1998 Stock Option Plan, as amended through
September 1, 2000 and related form of option agreement.
(Incorporated by reference to Exhibit 4.05 to Registrants
Form S-8 Registration Statement, File No. 333-45442, filed
September 8, 2000.)(1)                                                                                                                                                        
|       
|       
|       
|       
|10.08   |  | Aptex Software Inc. 1996 Equity Incentive Plan assumed by
Registrant. (Incorporated by reference to Exhibit 4.03 to
Registrants Form S-8 Registration Statement, File No.
333-71923, filed February                                                                                                                                                                                                                





---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                   
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                   
|       
|       
|       
|       
|        |  | 5, 1999.)(1)                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|10.09   |  | Form of Aptex Software Inc. 1996 Equity Incentive Plan Stock
Option Agreement and Stock Option Exercise Agreement.
(Incorporated by reference to Exhibit 4.04 to Registrants
Form S-8 Registration Statement, File No. 333-71923, filed
February 5, 1999.)(1)                    
|       
|       
|       
|       
|10.10   |  | Practical Control Systems Technologies, Inc. 1998 Stock
Option Plan assumed by Registrant. (Incorporated by
reference to Exhibit 4.03 to Registrants Form S-8
Registration Statement, File No. 333-50623, filed April 21,
1998.)(1)                                              
|       
|       
|       
|       
|10.11   |  | Form of Practical Control Systems Technologies, Inc. 1998
Stock Option Plan Stock Option Agreement and Stock Option
Exercise Agreement. (Incorporated by reference to Exhibit
4.04 to Registrants Form S-8 Registration Statement, File
No. 333-50623, filed April 21, 1998.)(1) 
|       
|       
|       
|       
|10.12   |  | Advanced Information Management Solutions, Inc. Stock Option
Plan assumed by Registrant. (Incorporated by reference to
Exhibit 4.01 to Registrants Form S-8 Registration
Statement, File No. 333-33952, filed April 4, 2000.)(1)                                                 
|       
|       
|       
|       
|10.13   |  | Form of Advanced Information Management Solutions, Inc.
Stock Option Agreement. (Incorporated by reference to
Exhibit 4.02 to Registrants Form S-8 Registration
Statement, File No. 333-33952, filed April 4, 2000.)(1)                                                          
|       
|       
|       
|       
|10.14   |  | ONYX Technologies, Inc. 1999 Stock Plan assumed by
Registrant. (Incorporated by reference to Exhibit 4.03 to
Registrants Form S-8 Registration Statement, File No.
333-33952, filed April 4, 2000.)(1)                                                                           
|       
|       
|       
|       
|10.15   |  | Form of ONYX Technologies, Inc. Stock Option Agreement.
(Incorporated by reference to Exhibit 4.04 to Registrants
Form S-8 Registration Statement, File No. 333-33952, filed
April 4, 2000.)(1)                                                                                  
|       
|       
|       
|       
|10.16   |  | The Center for Adaptive Systems Applications, Inc. 1995
Stock Option Plan assumed by Registrant. (Incorporated by
reference to Exhibit 4.05 to Registrants Form S-8
Registration Statement, File No. 333-33952, filed April 4,
2000.)(1)                                         
|       
|       
|       
|       
|10.17   |  | Forms of The Center for Adaptive Systems Applications, Inc.
Stock Option Agreements. (Incorporated by reference to
Exhibit 4.06 to Registrants Form S-8 Registration
Statement, File No. 333-33952, filed April 4, 2000.)(1)                                                     
|       
|       
|       
|       
|10.18   |  | eHNC Inc. 1999 Equity Incentive Plan, as amended, assumed by
Registrant. (Incorporated by reference to Exhibit 4.01 to
Registrants Form S-8 Registration Statement, File No.
333-41388, filed July 13, 2000.)(1)                                                                 
|       
|       
|       
|       
|10.19   |  | Forms of eHNC Inc. Stock Option Agreements and Stock Option
Exercise Agreements under the eHNC Inc. 1999 Equity
Incentive Plan. (Incorporated by reference to Exhibit 4.02
to Registrants Form S-8 Registration Statement, File No.
333-41388, filed July 13, 2000.)(1)          
|       
|       
|       
|       
|10.20   |  | eHNC Inc. 1999 Executive Equity Incentive Plan assumed by
Registrant. (Incorporated by reference to Exhibit 4.03 to
Registrants Form S-8 Registration Statement, File No.
333-41388, filed July 13, 2000.)(1)                                                                    
|       
|       
|       
|       
|10.21   |  | Forms of eHNC Inc. Stock Option Agreements and Stock Option
Exercise Agreements under the eHNC Inc. 1999 Executive
Equity Incentive Plan. (Incorporated by reference to Exhibit
4.04 to Registrants Form S-8 Registration Statement, File
No. 333-41388, filed July 13, 2000.)(1)
|       
|       
|       
|       
|10.22   |  | Systems/Link Corporation 1999 Stock Option Plan assumed by
Registrant and related forms of agreements. (Incorporated by
reference to Exhibit 4.04 to Registrants Form S-8
Registration Statement, File No. 333-45442, filed September
8, 2000.)(1)                               
|       
|       
|       
|       
|10.23   |  | Separation Agreement dated December 14, 1999 between the
Registrant and Robert L. North. (Incorporated by reference
to Exhibit 10.23 to Registrants Form 10-K, as amended, for
the year ended December 31, 1999.)(1)                                                             
|       
|       
|       
|       
|10.24   |  | Separation Agreement dated December 13, 1999 between the
Registrant and Raymond V. Thomas. (Incorporated by reference
to Exhibit 10.24 to Registrants Form 10-K, as amended, for
the year ended December 31, 1999.)(1)                                                           
|       
|       
|       
|       
|10.25   |  | Employment Agreement dated October 13, 1999 between the
Registrant and John Mutch. (Incorporated by reference to
Exhibit 10.25 to Registrants Form 10-K, as amended, for the
year ended December 31, 1999.)(1)                                                                   
|       
|       
|       
|       
|10.26   |  | Employment Agreement dated December 13, 1999 between the
Registrant and John Mutch. (Incorporated by reference to
Exhibit 10.26 to Registrants Form 10-K, as amended, for the
year ended December 31, 1999.)(1)                                                                  





---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                    
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|10.27   |  | Employment Agreement dated December 13, 1999 between
Registrant and Kenneth J. Saunders. (Incorporated by
reference to Exhibit 10.27 to Registrants Form 10-K, as
amended, for the year ended December 31, 1999.)(1)                                                                                              
|       
|       
|       
|       
|10.28   |  | Form of Indemnity Agreement entered into by Registrant with
each of its directors and executive officers. (Incorporated
by reference to Exhibit 10.08 to the IPO S-1.)(1)                                                                                                                                          
|       
|       
|       
|       
|10.29   |  | Loan and Security Agreement by and among Registrant and John
Mutch and Teresa Mutch, dated as of May 31, 2000.
(Incorporated by reference to Exhibit 20.02 to Registrants
Form 10-Q, as amended, for the quarter ended June 30,
2000.)(1)                                                                         
|       
|       
|       
|       
|10.30   |  | Loan and Security Agreement by and among Registrant and
Bruce Hansen and Jody Hansen, dated as of June 2, 2000.
(Incorporated by reference to Exhibit 20.03 to Registrants
Form 10-Q, as amended, for the quarter ended June 30,
2000.)(1)                                                                        
|       
|       
|       
|       
|10.31*  |  | First Amendment to Loan and Security Agreement by and among
Registrant and Bruce Hansen and Jody Hansen, effective as of
December 1, 2000.(1)                                                                                                                                                                      
|       
|       
|       
|       
|10.32   |  | Employee Option Exercise Assistance documents used under
Registrants option plans, consisting of forms of Secured
Full Recourse Promissory Note, Stock Pledge Agreement and
related documents. (Incorporated by reference to Exhibit
10.01 to Registrants Form 10-Q for the quarter ended
September 30, 2000.)(1)
|       
|       
|       
|       
|10.33*  |  | Amended Employee Option Exercise Assistance documents,
consisting of forms of Secured Full Recourse Promissory
Note, Stock Pledge Agreement and related documents.(1)                                                                                                                                              
|       
|       
|       
|       
|10.34   |  | [Intentionally Omitted]                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.35*  |  | Strategic Partnership Agreement dated as of October 23,
2000, between Registrant and GeoTrust, Inc., as amended by
Amendment No. 1 dated March 6, 2001.                                                                                                                                                            
|       
|       
|       
|       
|10.36   |  | Office Building Lease dated as of December 1, 1993, as
amended effective February 1, 1994 and June 1, 1994, between
Registrant and PacCor Partners. (Incorporated by reference
to Exhibit 10.09 to the IPO S-1.)                                                                                                   
|       
|       
|       
|       
|10.37   |  | Credit Agreement dated as of July 11, 1997, between
Registrant and Wells Fargo Bank, National Association.
(Incorporated by reference to Exhibit 10.02 to Registrants
Form 10-Q, as amended, for the quarter ended June 30, 1997.)                                                                                
|       
|       
|       
|       
|10.38   |  | 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 10.01
to Registrants Form 10-Q, as amended, for the quarter ended
June 30, 1997.)                                                            
|       
|       
|       
|       
|10.39   |  | Lease Agreement dated as of June 17, 1996, between
Registrant and Williams Properties I, LLC & Williams
Properties II, LLC. (Incorporated by reference to Exhibit
10.12 to Registrants Form 10-K, as amended, for the year
ended December 31, 1996.)                                                              
|       
|       
|       
|       
|10.40   |  | Office Building Lease dated June 17, 1993, between
Linsco/Private Ledger Corp. and PacCor Partners and
Assignment of the lease to the Registrant. (Incorporated by
reference to Exhibit 10.17 to Registrants Annual Report on
Form 10-K, as amended, for the year ended December 31,
1997.)                       
|       
|       
|       
|       
|10.41   |  | First Amendment to Lease Agreement between Williams
Properties I, LLC and Williams Properties II, LLC and the
Registrant dated June 17, 1996, amended October 28, 1997.
(Incorporated by reference to Exhibit 10.16 to Registrants
Form S- 4 Registration Statement, as amended, File No.
333-64527.)             
|       
|       
|       
|       
|10.42   |  | Second Amendment to Lease between the Registrant and W9/PC
Real Estate Limited Partnership dated as of April 13, 1998.
(Incorporated by reference to Exhibit 10.17 to Registrants
Form S-4 Registration Statement, as amended, File No.
333-64527.)                                                               
|       
|       
|       
|       
|10.43   |  | Industrial Lease dated as of October 2, 1998, between the
Registrant and The Irvine Company. (Incorporated by
reference to Exhibit 99.01 to Registrants Registration
Statement on Form S-8, File No. 333-71923, filed February 5,
1999.)                                                                          
|       
|       
|       
|       
|10.44   |  | Supplement and 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 99.02 to Registrants Form S-8 Registration
Statement, File No. 333-71923, filed February 5, 1999.)                              
|       
|       
|       
|       
|10.45   |  | Supplement and 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 99.03 to Registrants Form S-8 Registration
Statement, File No. 333-71923, filed February 5, 1999.)                              
|       
|       
|       
|       
|10.46   |  | Multi-Tenant Industrial Lease between LBA VF-1, LLC and
eHNC. (Incorporated by reference to Exhibit 10.01 to
Registrants Form 10-Q for the quarter ended March 31,
2000.)                                                                                                                                         
|       
|       
|       
|       
|21.01*  |  | List of Registrants subsidiaries.                                                                                                                                                                                                                                                                                 





---



##### Table of Contents



|         |  |                                                                
|-------- |  | ---------------------------------------------------------------
|EXHIBIT  |  |                                                                
|NUMBER   |  | DESCRIPTION                                                    
|         |  |                                                                
|        
|        
|        
|        
|23.01*** |  | Consent of PricewaterhouseCoopers LLP, Independent
Accountants.



---

|*   |  | Filed with the Form 10-K on March 30, 2001.                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|**  |  | Confidential treatment has been granted for portions of this exhibit. These
portions have been omitted from this exhibit and have been filed separately
with the Commission.
|   
|   
|   
|   
|*** |  | Filed herewith.                                                                                                                                                             
|   
|   
|   
|   
|(1) |  | Management contract or compensatory plan or arrangement.