UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from___ to ___

Fair Isaac Corporation

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

901 Marquette Avenue, Suite 3200 Minneapolis, Minnesota (Address of principal executive offices)		55402-3232 (Zip Code)

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

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer þ           Accelerated Filer o           Non-Accelerated Filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

     The number of shares of common stock outstanding on July 31, 2007 was 55,420,997 (excluding 33,435,786 shares held by the Company as treasury stock).

 

 

TABLE OF CONTENTS

		PART I – FINANCIAL INFORMATION
Item 1.		Financial Statements			1
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			29
Item 4.		Controls and Procedures			30
		PART II – OTHER INFORMATION
Item 1.		Legal Proceedings			31
Item 1A.		Risk Factors			31
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3.		Defaults Upon Senior Securities			40
Item 4.		Submission of Matters to a Vote of Security Holders			40
Item 5.		Other Information			40
Item 6.		Exhibits			41
Signatures					42
Certification of CEO
Certification of CFO
Section 1350 Certification of CEO
Section 1350 Certification of CFO

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

		June 30,				September 30,
		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	90,242			$	75,154
Marketable securities available for sale, current portion			151,328				152,141
Accounts receivable, net			179,443				165,806
Prepaid expenses and other current assets			22,162				17,998
Deferred income taxes			—				2,211
Total current assets			443,175				413,310
Marketable securities available for sale, less current portion			16,514				38,318
Other investments			12,374				2,161
Property and equipment, net			53,510				56,611
Goodwill			696,476				695,162
Intangible assets, net			67,115				90,900
Deferred income taxes			18,017				20,010
Other assets			3,082				4,733
		$	1,310,263			$	1,321,205
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	17,017			$	12,162
Senior convertible notes			400,000				400,000
Revolving line of credit			70,000				—
Accrued compensation and employee benefits			40,745				34,936
Other accrued liabilities			38,212				41,647
Deferred revenue			40,885				48,284
Total current liabilities			606,859				537,029
Other liabilities			13,403				14,148
Total liabilities			620,262				551,177
Stockholders’ equity:
Preferred stock ($0.01 par value; 1,000 shares authorized; none issued and outstanding)			—				—
Common stock ($0.01 par value; 200,000 shares authorized, 88,857 shares issued and 55,340 and 59,369 shares outstanding at June 30, 2007 and September 30, 2006, respectively)			553				594
Paid-in-capital			1,089,365				1,073,886
Treasury stock, at cost (33,517 and 29,488 shares at June 30, 2007 and September 30, 2006, respectively)			(1,129,758	)			(952,979	)
Retained earnings			717,883				644,836
Accumulated other comprehensive income			11,958				3,691
Total stockholders’ equity			690,001				770,028
		$	1,310,263			$	1,321,205

See accompanying notes to condensed consolidated financial statements.

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

		Quarter Ended								Nine Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues		$	205,782			$	207,129			$	615,009			$	618,076
Operating expenses:
Cost of revenues (1)			73,731				71,497				218,472				211,686
Research and development			17,275				21,370				52,775				65,794
Selling, general and administrative (1)			72,476				66,338				209,139				193,878
Amortization of intangible assets (1)			6,036				6,302				18,778				18,825
Restructuring and acquisition-related			—				5,290				—				6,800
Gain on sale of product line assets			—				—				(1,541	)			—
Total operating expenses			169,518				170,797				497,623				496,983
Operating income			36,264				36,332				117,386				121,093
Interest income			3,382				4,317				10,287				11,333
Interest expense			(3,240	)			(2,155	)			(9,146	)			(6,433	)
Other income, net			42				551				80				153
Income before income taxes			36,448				39,045				118,607				126,146
Provision for income taxes			12,680				13,042				42,176				44,713
Net income		$	23,768			$	26,003			$	76,431			$	81,433
Earnings per share:
Basic		$	0.43			$	0.41			$	1.34			$	1.27
Diluted		$	0.42			$	0.40			$	1.31			$	1.23
Shares used in computing earnings per share:
Basic			55,776				63,664				56,928				64,303
Diluted			56,896				64,973				58,518				66,003

See accompanying notes to condensed consolidated financial statements.

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

																						Accumulated
		Common Stock																				Other				Total
						Par				Paid-In-				Treasury				Retained				Comprehensive				Stockholders’				Comprehensive
		Shares				Value				Capital				Stock				Earnings				Income				Equity				Income
Balance at September 30, 2006			59,369			$	594			$	1,073,886			$	(952,979	)		$	644,836			$	3,691			$	770,028
Share-based compensation			—				—				28,232				—				—				—				28,232
Exercise of stock options			2,895				28				(27,909	)			96,174				—				—				68,293
Tax benefit from exercised stock options			—				—				15,589				—				—				—				15,589
Forfeitures of restricted stock			(17	)			—				541				(541	)			—				—				—
Repurchases of common stock			(7,205	)			(72	)			—				(282,335	)			—				—				(282,407	)
Issuance of ESPP shares from treasury			278				3				(328	)			9,277				—				—				8,952
Issuance of restricted stock to employees from treasury			20				—				(646	)			646				—				—				—
Dividends paid			—				—				—				—				(3,384	)			—				(3,384	)
Net income			—				—				—				—				76,431				—				76,431			$	76,431
Unrealized gains on investments			—				—				—				—				—				119				119				119
Cumulative translation adjustments			—				—				—				—				—				8,148				8,148				8,148
Balance at June 30, 2007			55,340			$	553			$	1,089,365			$	(1,129,758	)		$	717,883			$	11,958			$	690,001			$	84,698

See accompanying notes to condensed consolidated financial statements.

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

		Nine Months Ended
		June 30,
		2007				2006
Cash flows from operating activities:
Net income		$	76,431			$	81,433
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			39,219				36,529
Share-based compensation			28,232				30,024
Deferred income taxes			4,081				(2,724	)
Tax benefit from exercised stock options			15,589				9,260
Excess tax benefits from share-based payment arrangements			(12,174	)			(6,097	)
Net amortization (accretion) of premium (discount) on marketable securities			(999	)			76
Provision for doubtful accounts			4,002				1,329
Gain on sale of product line assets			(1,541	)			—
Changes in operating assets and liabilities, net of disposition effects:
Receivables			(17,663	)			(4,869	)
Prepaid expenses and other assets			47				1,461
Accounts payable			4,653				4,480
Accrued compensation and employee benefits			5,542				(598	)
Other liabilities			(10,607	)			9,355
Deferred revenue			(5,591	)			(5,748	)
Net cash provided by operating activities			129,221				153,911
Cash flows from investing activities:
Purchases of property and equipment			(17,315	)			(24,321	)
Cash proceeds from sale of product line assets			13,904				—
Collections of note receivable from sale of product line			—				500
Purchases of marketable securities			(171,666	)			(134,933	)
Proceeds from sales of marketable securities			14,250				26,240
Proceeds from maturities of marketable securities			182,163				95,128
Investment in cost-method investees			(10,213	)			—
Net cash provided by (used in) investing activities			11,123				(37,386	)
Cash flows from financing activities:
Proceeds from revolving line of credit			70,000				—
Debt issuance costs			(408	)			—
Proceeds from issuances of common stock under employee stock option and purchase plans			77,245				56,221
Dividends paid			(3,384	)			(3,876	)
Repurchases of common stock			(282,407	)			(124,107	)
Excess tax benefits from share-based payment arrangements			12,174				6,097
Net cash used in financing activities			(126,780	)			(65,665	)
Effect of exchange rate changes on cash			1,524				224
Increase in cash and cash equivalents			15,088				51,084
Cash and cash equivalents, beginning of period			75,154				82,880
Cash and cash equivalents, end of period		$	90,242			$	133,964
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net		$	29,266			$	22,164
Cash paid for interest		$	4,677			$	3,000

See accompanying notes to condensed consolidated financial statements.

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

1. Nature of Business

     Fair Isaac Corporation

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

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

     Principles of Consolidation and Basis of Presentation

          We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in Accounting Principles Board (“APB”) Opinion No. 28 and any amendments thereto adopted by the Financial Accounting Standards Board (“FASB”). Consequently, we have not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In our opinion, the accompanying unaudited interim condensed consolidated financial statements in this Form 10-Q reflect all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary for a fair presentation of our financial position and results of operations. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with our audited consolidated financial statements and notes thereto presented in our Annual Report on Form 10-K for the year ended September 30, 2006. The interim financial information contained in this report is not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year.

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

     Use of Estimates

          The preparation of financial statements in conformity with U.S. 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. These estimates and assumptions include, but are not limited to, assessing the following: the recoverability of accounts receivable, goodwill and other intangible assets, software development costs and deferred tax assets; estimated losses associated with contingencies and litigation; the ability to estimate hours in connection with fixed-fee service contracts, the ability to estimate transactional-based revenues for which actual transaction volumes have not yet been received, the determination of whether fees are fixed or determinable and collection is probable or reasonably assured; and the development of assumptions for use in the Black-Scholes model that estimates the fair value of our share-based awards and assessing forfeiture rates of share-based awards.

2. Amortization of Intangible Assets

          Amortization expense associated with our intangible assets, which has been reflected as a separate operating expense caption within the accompanying condensed consolidated statements of income, consisted of the following:

		Quarter Ended								Nine Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(In thousands)
Cost of revenues		$	3,580			$	3,741			$	11,129			$	11,169
Selling, general and administrative expenses			2,456				2,561				7,649				7,656
		$	6,036			$	6,302			$	18,778			$	18,825

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

     Cost of revenues reflects our amortization of completed technology, and selling, general and administrative expenses reflects our amortization of other intangible assets. Intangible assets were $67.1 million and $90.9 million, net of accumulated amortization of $100.0 million and $84.5 million, as of June 30, 2007 and September 30, 2006, respectively.

3. Restructuring and Acquisition-Related Expenses

     The following table summarizes our restructuring and acquisition-related accruals associated with acquisitions and certain Fair Isaac facility closures. The current portion and non-current portion is recorded in other accrued current liabilities and other long-term liabilities within the accompanying condensed consolidated balance sheets. These balances are expected to be paid by fiscal 2012.

		Accrual at								Accrual at
		September 30,				Cash				June 30,
		2006				Payments				2007
		(In thousands)
Facilities charges		$	15,094			$	(5,062	)		$	10,032
Employee separation			90				(90	)			—
			15,184			$	(5,152	)			10,032
Less: current portion			(6,161	)							(2,630	)
Non-current		$	9,023							$	7,402

4. Sale of Product Line Assets

     In March 2007, we sold the assets and products associated with our mortgage banking solutions product line for $15.8 million in cash. This amount includes $1.5 million in escrow balance to cover various indemnification and unidentified liabilities and a $0.4 million receivable for a post-closing working capital adjustment. The primary assets sold include accounts receivable, certain identifiable intangible assets and goodwill. We recognized a $1.5 million pre-tax gain, but a $0.4 million after-tax loss on the sale due to goodwill associated with the mortgage banking solutions product line that was not deductible for income tax purposes. We acquired the mortgage banking solutions through our May 2004 acquisition of London Bridge Software Holdings plc. The assets sold include software and e-commerce services used in the origination processing, underwriting, pricing, product definition, closing, secondary marketing, servicing, and default management of mortgage and construction loans, and BridgeLinkTM e-Services for the mortgage industry. Revenues attributable to the mortgage banking solutions product line for the quarter ended June 30, 2006 were $4.4 million, and revenues for the nine months ended June 30, 2007 and 2006 were $7.7 million and $15.0 million, respectively.

5. Share-Based Payment

     We maintain the 1992 Long-term Incentive Plan (the “1992 Plan”) under which we may grant stock options, stock appreciation rights, restricted stock, restricted stock units and common stock to officers, key employees and non-employee directors. Under the 1992 Plan, a number of shares equal to 4% of the number of shares of Fair Isaac common stock outstanding on the last day of the preceding fiscal year is added to the shares available under this plan each fiscal year, provided that the number of shares for grants of incentive stock options for the remaining term of this plan shall not exceed 5,062,500 shares. The 1992 Plan will terminate in February 2012. In November 2003, our Board of Directors approved the adoption of the 2003 Employment Inducement Award Plan (the “2003 Plan”). The 2003 Plan reserves 2,250,000 shares of common stock solely for the granting of inducement stock options and other awards, as defined, that meet the “employment inducement award” exception to the New York Stock Exchange’s listing standards requiring shareholder approval of equity-based inducement incentive plans. Except for the employment inducement award criteria, awards under the 2003 Plan will be generally consistent with those made under our 1992 Plan. The 2003 Plan shall remain in effect until terminated by the Board of Directors. We also maintain individual stock option plans for certain of our executive officers and the chairman of the board. Stock option awards granted since October 1, 2005 typically have a maximum term of seven years and vest ratably over four years. Stock option awards granted prior to October 1, 2005, typically had a maximum term of ten years and vest ratably over four years.

     Under our 1999 Employee Stock Purchase Plan, we are authorized to issue up to 5,062,500 shares of common stock to eligible employees. Employees may have up to 10% of their base salary withheld through payroll deductions to purchase Fair Isaac common stock during semi-annual offering periods. The purchase price of the stock is the lower of 85% of (i) the fair market value of the common stock on the enrollment date (the first day of the offering period), or (ii) the fair market value on the exercise date (the last day of each offering period). Offering period means approximately six-month periods commencing (a) on the first trading day on or

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

after January 1 and terminating on the last trading day in the following June, and (b) on the first trading day on or after July 1 and terminating on the last trading day in the following December.

     We estimate the fair value of options granted using the Black-Scholes option valuation model. We estimate the volatility of our common stock at the date of grant based on a combination of the implied volatility of publicly traded options on our common stock and our historical volatility rate, consistent with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”). Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We estimate expected term consistent with the simplified method identified in SAB 107 for share-based awards. We elected to use the simplified method as we changed the contractual life for share-based awards from ten to seven years starting in fiscal 2006. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. Previously, we estimated expected term based on historical exercise patterns. The dividend yield assumption is based on historical dividend payouts. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of our employee options. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For options granted, we amortize the fair value on a straight-line basis over the vesting period of the options.

     The fair value of restricted stock units is based on the fair market value of our common stock on the date of grant. We use historical data to estimate pre-vesting forfeitures and record share-based compensation expense only for those awards that are expected to vest. Share-based compensation expense for restricted stock units is recognized on a straight-line basis over the vesting period. Upon vesting, restricted stock units will convert into an equivalent number of shares of common stock.

6. Earnings Per Share

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

		Quarter Ended								Nine Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
						(In thousands, except per share data)
Numerator for basic earnings per share — net income		$	23,768			$	26,003			$	76,431			$	81,433
Interest expense on senior convertible notes, net of tax			1				1				3				3
Numerator for diluted earnings per share		$	23,769			$	26,004			$	76,434			$	81,436
Denominator — shares:
Basic weighted-average shares			55,776				63,664				56,928				64,303
Effect of dilutive securities			1,120				1,309				1,590				1,700
Diluted weighted-average shares			56,896				64,973				58,518				66,003
Earnings per share:
Basic		$	0.43			$	0.41			$	1.34			$	1.27
Diluted		$	0.42			$	0.40			$	1.31			$	1.23

     The computation of diluted EPS for the quarters ended June 30, 2007 and 2006, excludes options to purchase approximately 4,068,000 and 3,868,000 shares of common stock, respectively, and for the nine months ended June 30, 2007 and 2006, excludes options to purchase approximately 3,577,000 and 2,349,000 shares of common stock, respectively, because the options’ exercise prices exceeded the average market price of our common stock in these periods and their inclusion would be antidilutive.

7. Segment Information

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

•

Strategy Machine™ Solutions. These are pre-configured Enterprise Decision Management (“EDM”) applications designed for a specific type of business problem or process, such as marketing, account origination, customer management, fraud and medical bill review. This segment also includes our myFICO® solutions for consumers.

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

	•		Scoring Solutions. Our scoring solutions give our clients access to analytics that can be easily integrated into their transaction streams and decision-making processes. Our scoring solutions are distributed through major credit reporting agencies, as well as services through which we provide our scores to lenders directly.
	•		Professional Services. Through our professional services, we tailor our EDM products to our clients’ environments, and we design more effective decisioning environments for our clients. This segment includes revenues from custom engagements, business solution and technical consulting services, systems integration services, and data management services.
	•		Analytic Software Tools. This segment is composed of software tools that clients can use to create their own custom EDM applications.

     Our Chief Executive Officer evaluates segment financial performance based on segment revenues and operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, consulting, travel, depreciation and amortization. Indirect costs are allocated to the segments generally based on relative segment revenues, fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. We do not allocate share-based compensation expense, restructuring and acquisition-related expense and certain other income and expense measures to our segments. These income and expense items are not allocated because they are not considered in evaluating the segment’s operating performance. Our Chief Executive Officer does not evaluate the financial performance of each segment based on its respective assets or capital expenditures; rather, depreciation and amortization amounts are allocated to the segments from their internal cost centers as described above.

     The following tables summarize segment information for the quarters and nine months ended June 30, 2007 and 2006:

		Quarter Ended June 30, 2007
		Strategy												Analytic
		Machine				Scoring				Professional				Software
		Solutions				Solutions				Services				Tools				Total
		(In thousands)
Revenues		$	113,200			$	47,229			$	35,252			$	10,101			$	205,782
Operating expenses			(96,916	)			(16,865	)			(35,712	)			(11,873	)			(161,366	)
Segment operating income (loss)		$	16,284			$	30,364			$	(460	)		$	(1,772	)			44,416
Unallocated share-based compensation expense																			(8,152	)
Operating income																			36,264
Unallocated interest income																			3,382
Unallocated interest expense																			(3,240	)
Unallocated other income, net																			42
Income before income taxes																		$	36,448
Depreciation and amortization		$	7,861			$	2,228			$	1,628			$	635			$	12,352

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

		Quarter Ended June 30, 2006
		Strategy												Analytic
		Machine				Scoring				Professional				Software
		Solutions				Solutions				Services				Tools				Total
		(In thousands)
Revenues		$	114,820			$	43,745			$	36,714			$	11,850			$	207,129
Operating expenses			(93,330	)			(16,533	)			(34,272	)			(10,988	)			(155,123	)
Segment operating income		$	21,490			$	27,212			$	2,442			$	862				52,006
Unallocated share-based compensation expense																			(10,384	)
Unallocated restructuring and acquisition-related expense																			(5,290	)
Operating income																			36,332
Unallocated interest income																			4,317
Unallocated interest expense																			(2,155	)
Unallocated other income, net																			551
Income before income taxes																		$	39,045
Depreciation and amortization		$	7,707			$	2,011			$	1,779			$	795			$	12,292

		Nine Months Ended June 30, 2007
		Strategy												Analytic
		Machine				Scoring				Professional				Software
		Solutions				Solutions				Services				Tools				Total
		(In thousands)
Revenues		$	335,585			$	134,482			$	111,198			$	33,744			$	615,009
Operating expenses			(281,294	)			(48,102	)			(106,628	)			(34,908	)			(470,932	)
Segment operating income (loss)		$	54,291			$	86,380			$	4,570			$	(1,164	)			144,077
Unallocated share-based compensation expense																			(28,232	)
Unallocated gain on sale of product line assets																			1,541
Operating income																			117,386
Unallocated interest income																			10,287
Unallocated interest expense																			(9,146	)
Unallocated other income, net																			80
Income before income taxes																		$	118,607
Depreciation and amortization		$	24,723			$	6,679			$	5,505			$	2,312			$	39,219

		Nine Months Ended June 30, 2006
		Strategy												Analytic
		Machine				Scoring				Professional				Software
		Solutions				Solutions				Services				Tools				Total
		(In thousands)
Revenues		$	345,658			$	131,669			$	108,236			$	32,513			$	618,076
Operating expenses			(281,001	)			(48,419	)			(98,551	)			(32,188	)			(460,159	)
Segment operating income		$	64,657			$	83,250			$	9,685			$	325				157,917
Unallocated share-based compensation expense																			(30,024	)
Unallocated restructuring and acquisition- related expense																			(6,800	)
Operating income																			121,093
Unallocated interest income																			11,333
Unallocated interest expense																			(6,433	)
Unallocated other income, net																			153
Income before income taxes																		$	126,146
Depreciation and amortization		$	23,706			$	5,805			$	4,805			$	2,213			$	36,529

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

8. Income Taxes

     Our effective tax rate was 34.8% and 33.4% during the quarters ended June 30, 2007 and 2006, respectively, and 35.6% and 35.4% during the nine months ended June 30, 2007 and 2006, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the respective full fiscal year.

     Our effective tax rate for the three months ended June 30, 2007, was positively impacted by improved operating results in certain foreign jurisdictions.

     Our effective tax rate for the nine months ended June 30, 2007, was favorably impacted by a benefit of $1.8 million related to a favorable settlement of a state tax examination. Our effective tax rate for the nine months ended June 30, 2007 was also favorably impacted by the recognition of $0.5 million of U.S. federal research tax credits related to fiscal 2006. We were unable to recognize these credits during the last nine months of fiscal 2006 as legislation providing for this credit had expired. In fiscal 2007, legislation was enacted that provided for retroactive extension of this credit. Our effective tax rate, however, was adversely impacted by the sale of our mortgage banking solutions product line, due to $3.3 million of goodwill associated with the product line that was not deductible for income tax purposes. As a result, the sale increased our effective tax rate by 1.2% for the nine months ended June 30, 2007.

9. Other Investments

     In May 2007, we made a $10 million investment in convertible preferred stock in a private company. The company is developing a range of products focused on revenue cycle activities for hospitals and healthcare providers. Our minority interest will be accounted for using the cost-method.

10. Convertible Notes

     In August 2003, we issued $400.0 million of Senior Notes that mature on August 15, 2023. The Senior Notes become convertible into shares of Fair Isaac common stock, subject to the conditions described below, at an initial conversion price of $43.9525 per share, subject to adjustments for certain events. The initial conversion price is equivalent to a conversion rate of approximately 22.7518 shares of Fair Isaac common stock per $1,000 principal amount of the Senior Notes. Holders may surrender their Senior Notes for conversion, if any of the following conditions is satisfied: (i) prior to August 15, 2021, during any fiscal quarter, if the closing price of our common stock for at least 20 trading days in the 30 consecutive trading day period ending on the last day of the immediately preceding fiscal quarter is more than 120% of the conversion price per share of our common stock on the corresponding trading day; (ii) at any time after the closing sale price of our common stock on any date after August 15, 2021 is more than 120% of the then current conversion price; (iii) during the five consecutive business day period following any 10 consecutive trading day period in which the average trading price of a Senior Note was less than 98% of the average sale price of our common stock during such 10 trading day period multiplied by the applicable conversion rate; provided, however, if, on the day before the conversion date, the closing price of our common stock is greater than 100% of the conversion price but less than or equal to 120% of the conversion price, then holders converting their notes may receive, in lieu of our common stock based on the applicable conversion rate, at our option, cash or common stock with a value equal to 100% of the principal amount of the notes on the conversion date; (iv) if we have called the Senior Notes for redemption; or (v) if we make certain distributions to holders of our common stock or we enter into specified corporate transactions. The conversion price of the Senior Notes will be adjusted upon the occurrence of certain dilutive events as described in the indenture, which include but are not limited to: (i) dividends, distributions, subdivisions, or combinations of our common stock; (ii) issuance of rights or warrants for the purchase of our common stock under certain circumstances; (iii) the distribution to all or substantially all holders of our common stock of shares of our capital stock, evidences of indebtedness, or other non-cash assets, or rights or warrants; (iv) the cash dividend or distribution to all or substantially all holders of our common stock in excess of certain levels; and (v) certain tender offer activities by us or any of our subsidiaries.

     The Senior Notes are senior unsecured obligations of Fair Isaac and rank equal in right of payment with all of our unsecured and unsubordinated indebtedness. The Senior Notes are effectively subordinated to all of our existing and future secured indebtedness and existing and future indebtedness and other liabilities of our subsidiaries. The Senior Notes bear regular interest at an annual rate of 1.5%, payable on August 15 and February 15 of each year until August 15, 2008. Beginning August 15, 2008, regular interest will accrue at the rate of 1.5%, and be due and payable upon the earlier to occur of redemption, repurchase, or final maturity. In addition, the Senior Notes bear contingent interest during any six-month period from August 15 to February 14 and from February 15 to August 14, commencing with the six-month period beginning August 15, 2008, if the average trading price of the Senior Notes for the five trading day period immediately preceding the first day of the applicable six-month period equals 120% or more of the sum of the

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

principal amount of, plus accrued and unpaid regular interest on, the Senior Notes. The amount of contingent interest payable on the Senior Notes in respect to any six-month period will equal 0.25% per annum of the average trading price of the Senior Notes for the five trading day period immediately preceding such six-month period.

     We may redeem for cash all or part of the Senior Notes on and after August 15, 2008, at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest. Holders may require us to repurchase for cash all or part of the $400 million of Senior Notes on August 15, 2007, August 15, 2008, August 15, 2013 and August 15, 2018, or upon a change in control, at a price equal to 100% of the principal amount of the Senior Notes being repurchased, plus accrued and unpaid interest.

     On March 31, 2005, we completed an exchange offer for the Senior Notes, whereby holders of approximately 99.9% of the total principal amount of our Senior Notes exchanged their existing securities for new 1.5% Senior Convertible Notes, Series B (“New Notes”). The terms of the New Notes are similar to the terms of the Senior Notes described above, except that: (i) upon conversion, we will pay holders cash in an amount equal to the lesser of the principal amount of such notes and the conversion value of such notes, and to the extent such conversion value exceeds the principal amount of the notes, the remainder of the conversion obligation in cash or common shares or combination thereof; (ii) in the event of a change of control, we may be required in certain circumstances to pay a make-whole premium on the New Notes converted in connection with the change of control and (iii) if the conversion condition in the first clause (iii) in the third paragraph preceding this paragraph is triggered and the closing price of our common stock is greater than 100% of the conversion price but less than or equal to 120% of the conversion price, the holders converting New Notes shall receive cash with a value equal to 100% of the principal amount of New Notes on the conversion date.

11. Credit Agreement

     In October 2006, we entered into a five-year $300 million unsecured revolving credit facility with a syndicate of banks. Proceeds from the credit facility can be used for capital requirements and general business purposes and may be used for the refinancing of existing debt, acquisitions and repurchases of our common stock. Interest on amounts borrowed under the credit facility is based on (i) a base rate, which is the greater of (a) the prime rate and (b) the Federal Funds rate plus 0.50% or (ii) LIBOR plus an applicable margin. The margin on LIBOR borrowings ranges from 0.30% to 0.55% and is determined based on our consolidated leverage ratio. In addition, we must pay utilization fees if borrowings and commitments under the credit facility exceed 50% of the total credit facility commitment, as well as facility fees. The credit facility contains certain restrictive covenants, including maintenance of consolidated leverage and fixed charge coverage ratios. The credit facility contains other covenants typical of unsecured facilities. We are in compliance with these covenants. As of June 30, 2007, we had $70.0 million of borrowings outstanding under the credit facility at an average interest rate of 5.675%.

     On July 23, 2007, we entered into an amended and restated credit agreement. Information related to this new credit agreement is set forth in Note 14, Subsequent Event.

12. Contingencies

     We are in disputes with certain customers regarding amounts owed in connection with the sale of certain of our products and services. We also have had claims asserted by former employees relating to compensation and other employment matters. We are also involved in various other claims and legal actions arising in the ordinary course of business. We believe that none of these aforementioned claims or actions will result in a material adverse impact to our consolidated results of operations, liquidity or financial condition. However, the amount or range of any potential liabilities associated with these claims and actions, if any, cannot be determined with certainty. Set forth below are additional details concerning certain ongoing litigation.

Customer Claims

     We are a party to two separate lawsuits involving two different customers who have asserted that our performance under professional services contracts with such customers has caused them to incur damages. One lawsuit is pending as a counterclaim to a collection lawsuit that we commenced in the United States District Court for the Southern District of Texas. This customer has claimed damages in excess of $10 million. We believe the claim is without merit, and we continue to contest the case vigorously. We also believe that the resolution of this case will not result in a material adverse impact to our consolidated financial condition.

     The other claim was brought in the United States District Court for the Central District of California. However, we recently reached an agreement in principle to settle this matter. The parties are now working on a settlement agreement and release of all claims. The Court has dismissed the case but retained its jurisdiction for 30 days while the parties negotiate a settlement agreement. The resolution of this case on the terms of the settlement in principle will not result in a material adverse impact to our consolidated financial statements.

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

Putative Consumer Class Action Lawsuits

     We are a defendant in a lawsuit captioned as Robbie Hillis v. Equifax Consumer Services, Inc. and Fair Isaac, Inc., which is pending in the U.S. District Court for the Northern District of Georgia. The plaintiff claimed that the defendants jointly sold the Score Power^® credit score product in violation of certain procedural requirements under the Credit Repair Organizations Act (“CROA”), and in violation of the antifraud provisions of that statute. The plaintiff also claimed that the defendants are “credit repair organizations” under CROA. The plaintiff sought certification of a class on behalf of all individuals who purchased products containing Score Power from the defendants in the five year period prior to the filing of the Complaint on November 14, 2004. Plaintiff claimed damages of an unspecified amount, and further claimed that Equifax and Fair Isaac were unjustly enriched such that all payments should be refunded. On February 5, 2007, the plaintiff, Equifax and Fair Isaac entered into a Settlement Agreement to resolve this lawsuit and the Christy Slack lawsuit (described below). This matter and the Christy Slack matter, below, were consolidated in the Northern District of Georgia, and the Settlement Agreement was preliminarily approved by the Court on February 8, 2007. On June 4, 2007, the Court held a hearing to determine the final approval of the settlement. Under the terms of the settlement, Fair Isaac will pay legal fees, will provide three months of its ScoreWatch product for free to participating class members, and will make certain changes to its myfico.com website. Fair Isaac has delivered notices to class members. On June 13, 2007, the Court granted final approval of the settlement and directed that final judgment be entered. However, an appeal objecting to the settlement was filed on July 11, 2007 by Meredith Whittington and Taren Hill, two members of the class.

     We are a defendant in a lawsuit captioned as Christy Slack v. Fair Isaac Corporation and myFICO Consumer Services, Inc., which is pending in the United States District Court for the Northern District of California. As in the Hillis matter, the plaintiff claimed that the defendants violated certain procedural requirements of CROA, and violated the antifraud provisions of CROA, with respect to the sale of credit score products on our myfico.com website. The plaintiff also claimed that the defendants violated the California Credit Services Act (the “CSA”) and were unjustly enriched. The plaintiff sought certification of a class on behalf of all individuals who purchased credit score products from us on the myfico.com website in the five year period prior to the filing of the Complaint on January 18, 2005. This matter was covered by the settlement agreement in the Robbie Hillis lawsuit, as described above. The appeal in Hillis also affects this case.

Braun Consulting, Inc.

     Braun (which we acquired in November 2004) was a defendant in a lawsuit filed on November 26, 2001, in the United States District Court for the Southern District of New York (Case No. 01 CV 10629) that alleges violations of federal securities laws in connection with Braun’s initial public offering in August 1999. This lawsuit is among approximately 300 coordinated putative class actions against certain issuers, their officers and directors, and underwriters with respect to such issuers’ initial public offerings. As successor-in-interest to Braun, we have entered into a Stipulation and Agreement of Settlement, pursuant to a Memorandum of Understanding, along with most of the other defendant issuers in this coordinated litigation, whereby such issuers and their officers and directors would be dismissed with prejudice, subject to the satisfaction of certain conditions, including, among others, approval of the Court. Under the terms of this Agreement, we would not pay any amount of the settlement.

     However, since December 2006, certain procedural matters concerning the class status have been decided in the district and appellate courts of the Second Circuit, with the courts ultimately determining that no class status exists for the plaintiffs. Since there is no class status, there can be no agreement, thus the District Court entered an order formally denying the motion for final approval of the settlement agreement. We cannot predict whether the issuers and their insurers will be able to renegotiate a settlement that would comply with the appellate court’s ruling. Plaintiffs plan to replead their complaints and move for class certification again.

     We intend to continue to defend vigorously against these claims. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation.

13. New Accounting Pronouncements Not Yet Adopted

     In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for the Company beginning October 1, 2007. We are in the process of determining what effect, if any, the adoption of FIN 48 will have on our consolidated financial statements.

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

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are in the process of determining what effect, if any, the adoption of SFAS No. 157 will have on our consolidated financial statements.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets & Financial Liabilities — Including an Amendment of SFAS No. 115” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS 159 will become effective for fiscal years beginning after November 15, 2007. We are in the process of determining what effect, if any, the adoption of SFAS 159 will have on our consolidated financial statements.

14. Subsequent Event

Credit Agreement

     On July 23, 2007, we entered into an amended and restated credit agreement. The amended and restated credit agreement increased our five-year unsecured revolving credit facility provided by the prior credit agreement from $300 million to $600 million. Proceeds from the credit facility will be used for working capital and general corporate purposes and may also be used for the refinancing of existing debt, acquisitions, and the repurchase of the Company’s common stock.

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

FORWARD LOOKING STATEMENTS

     Statements contained in this Report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements in our future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services; (iii) statements of assumptions underlying such statements; (iv) statements regarding business relationships with vendors, customers or collaborators; and (v) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,” “potential,” “goals,” “strategy,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Item 1A of Part II, Risk Factors, below. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our reports on Forms 10-Q and 8-K to be filed by the Company in fiscal 2007.

RESULTS OF OPERATIONS

Overview

     We are a leader in Enterprise Decision Management (“EDM”) solutions that enable businesses to automate and improve their decisions across the enterprise. Our predictive analytics and decision management systems power hundreds of billions of customer decisions each year. We help companies acquire customers more efficiently, increase customer value, reduce fraud and credit losses, lower operating expenses and enter new markets more profitably. Most leading banks and credit card issuers rely on our solutions, as do many insurers, retailers, telecommunications providers, healthcare organizations, pharmaceutical and government agencies. We also serve consumers through online services that enable people to purchase and understand their FICO^® scores, the standard measure of credit risk in the United States, empowering them to manage their financial health.

     Most of our revenues are derived from the sale of products and services within the consumer credit, financial services and insurance industries, and during the quarter ended June 30, 2007, 77% of our revenues were derived from within these industries. A significant portion of our remaining revenues is derived from the telecommunications, healthcare and retail industries, as well as the government sector. Our clients utilize our products and services to facilitate a variety of business processes, including customer marketing and acquisition, account origination, credit and underwriting risk management, fraud loss prevention and control, and client account and policyholder management. A significant portion of our revenues is derived from transactional or unit-based software license fees, annual license fees under long-term software license arrangements, transactional fees derived under scoring, network service or internal hosted software arrangements, and annual software maintenance fees. The recurrence of these revenues is, to a significant degree, dependent upon our clients’ continued usage of our products and services in their business activities. The more significant activities underlying the use of our products in these areas include: credit and debit card usage or active account levels; lending acquisition, origination and customer management activity; workers’ compensation and automobile medical injury insurance claims; and wireless and wireline calls and subscriber levels. Approximately 76% and 74% of our revenues during the quarters ended June 30, 2007 and 2006, respectively, and 76% and 75% of our revenues for the nine months ended June 30, 2007 and 2006, respectively, were derived from arrangements with transactional or unit-based pricing. We also derive revenues from other sources which generally do not recur and include, but are not limited to, perpetual or time-based licenses with upfront payment terms, non-recurring professional service arrangements and gain-share arrangements where revenue is derived based on percentages of client revenue growth or cost reductions attributable to our products.

     Within a number of our sectors there has been a sizable amount of industry consolidation. In addition, many of our sectors are experiencing increased levels of competition. As a result of these factors, we believe that future revenues in particular sectors may decline. However, due to the long-term customer arrangements we have with many of our customers, the near term impact of these declines may be more limited in certain sectors.

     One measure used by management as an indicator of our business performance is the volume of bookings achieved. We define a “booking” as estimated future contractual revenues, including agreements with perpetual, multi-year and annual terms. Bookings values may include: (i) estimates of variable fee components such as hours to be incurred under new professional services arrangements and customer account or transaction activity for agreements with transactional-based fee arrangements, (ii) additional or expanded business from renewals of contracts, and (iii) to a lesser extent, previous customers that have attrited and been re-sold only as a result of a significant sales effort. During the quarter ended June 30, 2007, we achieved bookings of $89.8 million, including four with bookings values of $3.0 million or more. In comparison, bookings in the quarter ended June 30, 2006 were $94.5 million, including eight deals with bookings values of $3.0 million or more.

     Management regards the volume of bookings achieved, among other factors, as an important indicator of future revenues, but they are not comparable to, nor should they be substituted for, an analysis of our revenues, and they are subject to a number of risks and uncertainties, including those described in Item 1A of Part II, Risk Factors, concerning timing and contingencies affecting product delivery and performance. Although many of our contracts have fixed non-cancelable terms, some of our contracts are terminable by the client on short notice or without notice. Accordingly, we do not believe it is appropriate to characterize all of our bookings as backlog that will generate future revenue.

     Our revenues derived from clients outside the United States continue to grow, and may in the future grow more rapidly than our revenues from domestic clients. International revenues totaled $63.4 million and $62.2 million during the quarters ended June 30, 2007 and 2006, respectively, representing 31% and 30% of total consolidated revenues in each of these periods. International revenues totaled $180.1 million and $170.5 million during the nine months ended June 30, 2007 and 2006, respectively, representing 29% and 28% of total consolidated revenues in each of these periods. In addition to clients acquired via our acquisitions, we believe that our international growth is a product of successful relationships with third parties that assist in international sales efforts and our own increased sales focus internationally, and we expect that the percentage of our revenues derived from international clients will increase in the future.

     In March 2007, we sold the assets and products associated with our mortgage banking solutions product line for $15.8 million in cash. We recognized a $1.5 million pre-tax gain, but a $0.4 million after-tax loss on the sale due to goodwill associated with the product line that was not deductible for income tax purposes. For the nine months ended June 30, 2007 and 2006, we recorded revenues from the mortgage banking solutions product line of $7.7 million and $15.0 million, respectively. The earnings contribution from this mortgage banking solutions product line was not significant to our fiscal 2007 or fiscal 2006 results of operations.

     Our reportable segments are: Strategy Machine Solutions, Scoring Solutions, Professional Services and Analytic Software Tools. Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance. Comparative segment revenues, operating income, and related financial information for the quarters and nine months ended June 30, 2007 and 2006, are set forth in Note 7 to the accompanying condensed consolidated financial statements.

Revenues

     The following tables set forth certain summary information on a segment basis related to our revenues for the fiscal periods indicated.

		Quarter Ended
		June 30,								Percentage of Revenues												Period-to-Period
																		Period-to-Period				Percentage
Segment		2007				2006				2007				2006				Change				Change
		(In thousands)																(In thousands)
Strategy Machine Solutions		$	113,200			$	114,820				55	%			55	%		$	(1,620	)			(1	)%
Scoring Solutions			47,229				43,745				23	%			21	%			3,484				8	%
Professional Services			35,252				36,714				17	%			18	%			(1,462	)			(4	)%
Analytic Software Tools			10,101				11,850				5	%			6	%			(1,749	)			(15	)%
Total revenues		$	205,782			$	207,129				100	%			100	%			(1,347	)			(1	)%

		Nine Months Ended
		June 30,								Percentage of Revenues												Period-to-Period
																		Period-to-Period				Percentage
		2007				2006				2007				2006				Change				Change
		(In thousands)																(In thousands)
Strategy Machine Solutions		$	335,585			$	345,658				55	%			56	%		$	(10,073	)			(3	)%
Scoring Solutions			134,482				131,669				22	%			21	%			2,813				2	%
Professional Services			111,198				108,236				18	%			18	%			2,962				3	%
Analytic Software Tools			33,744				32,513				5	%			5	%			1,231				4	%
Total revenues		$	615,009			$	618,076				100	%			100	%			(3,067	)			—

     Quarter Ended June 30, 2007 Compared to Quarter Ended June 30, 2006 Revenues

     Strategy Machine Solutions segment revenues decreased $1.6 million due to the sale of our mortgage banking solutions product line, which contributed $3.9 million of segment revenues in the prior year period. In addition, segment revenues declined due to a $3.2 million decrease in revenues from our customer management solutions, a $2.8 million decrease in revenues from our originations solutions, and a $0.7 million net decrease in revenues from our other strategy machine solutions. The revenue decline was partially offset by a $4.8 million increase in revenues from our collections and recovery solutions, a $2.1 million increase in our consumer solutions, and a $2.1 million increase in our fraud solutions.

     The decrease in customer management solutions revenues was the result of a decline in license sales and a decline in transactional-based revenues due to the loss of a customer. The decrease in originations solutions revenues was the result of a decline in transactional-based revenues due to a customer usage and unfavorable pricing on a renewed customer contract that occurred earlier in the fiscal year. The increase in collections and recovery solutions revenues was primarily the result of two significant license sales and volumes associated with transactional-based agreements. The increase in consumer solutions revenues was attributable to increases in revenues derived from myfico.com and our strategic alliance partners. The increase in fraud solutions revenues was attributable primarily to a new license sale and increased volumes associated with transactional-based agreements. However, we have experienced a delay in a product upgrade, which impacted current period bookings and may impact fraud solutions revenues in future periods.

     Scoring Solutions segment revenues increased $3.5 million primarily due an increase in revenues derived from risk scoring services at the credit reporting agencies, resulting from increased sales of scores for prescreening activities, and to a lesser extent an increase in revenues derived from our FICO expansion score product.

     During the quarters ended June 30, 2007 and 2006, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 20% and 18%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.

     Professional Services segment revenues decreased $1.5 million due to a decline in implementation and consulting services for our fraud and collection and recovery products and a decline in revenues from industry consulting services. The decrease was partially offset by an increase in consulting and implementation services associated with our customer management and EDM products.

     Analytic Software Tools segment revenues decreased $1.7 million primarily due to a decrease in sales of Blaze Advisor and Model Builder licenses. The decrease reflects the timing of license sales, which includes large individual contracts. The decline was partially offset by an increase in maintenance revenues, which was due to growth in our installed base of Blaze Advisor software applications.

     Nine Months Ended June 30, 2007 Compared to Nine Months Ended June 30, 2006 Revenues

     Strategy Machine Solutions segment revenues decreased $10.1 million due partially to the sale of our mortgage banking solutions product line, which resulted in a $6.5 million decline in segment revenues. In addition, segment revenues declined due to a $4.2 million decrease in revenues from our originations solutions, a $3.7 million decrease in revenues from our insurance and healthcare solutions and a $3.2 million decrease in revenues from our customer management solutions. The revenue decrease was partially offset by a $7.2 million increase in revenues from our collection and recovery solutions and a $0.3 million increase in revenues from our other strategy machine solutions.

     The decrease in originations solutions revenues was the result of a decline in transactional-based revenues, unfavorable pricing on a renewed customer contract and a reduction in sales of software licenses. The decrease in insurance and healthcare solutions revenues was attributable primarily to a decline in bill review volumes associated with our existing customer base and loss of customer accounts. The decrease in customer management solutions revenues was the result of a decline in transactional-based revenues due to the loss of a customer. The increase in collections and recovery solutions revenues was attributable primarily to several large license sales and increased volumes associated with transactional-based agreements.

     Scoring Solutions segment revenues increased $2.8 million primarily due to an increase in revenues derived from risk scoring services at the credit reporting agencies, resulting from increased sales of scores for prescreening activities, and to a lesser extent an increase in revenues derived from our FICO expansion score product. The increase was partially offset by a decline in revenues derived from prescreening services that we provided directly to users in financial services. This decrease was due to a difficult comparison to strong revenues for these services that we recorded in the first quarter last year.

     During the nine months ended June 30, 2007 and 2006, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 18% of our total revenues, including revenues from these customers that are recorded in our other segments.

     Professional Services segment revenues increased $3.0 million from consulting and implementation services for customer management products, for services to develop predictive models for a large customer and implementation services for Blaze Advisor. The increase was partially offset by a decline in implementation services for our collection and recovery products and fraud products and a decline in industry consulting services.

     Analytic Software Tools segment revenues increased $1.2 million primarily due to an increase in sales of Blaze Advisor licenses and increased maintenance revenue. The increase reflects the timing of Blaze Advisor sales, which includes large individual contracts. The increase in maintenance revenues was due to growth in our installed base of Blaze Advisor software applications.

Operating Expenses and Other Income (Expense)

     The following table sets forth certain summary information related to our statements of income for the fiscal periods indicated.

		Quarter Ended
		June 30,								Percentage of Revenues												Period-to-Period
																		Period-to-Period				Percentage
		2007				2006				2007				2006				Change				Change
		(In thousands)																(In thousands)
Revenues		$	205,782			$	207,129				100	%			100	%		$	(1,347	)			(1	)%
Operating expenses:
Cost of revenues			73,731				71,497				36	%			35	%			2,234				3	%
Research and development			17,275				21,370				8	%			10	%			(4,095	)			(19	)%
Selling, general and administrative			72,476				66,338				35	%			32	%			6,138				9	%
Amortization of intangible assets			6,036				6,302				3	%			3	%			(266	)			(4	)%
Restructuring and acquisition-related			—				5,290				—				2	%			(5,290	)			(100	)%
Total operating expenses			169,518				170,797				82	%			82	%			(1,279	)			(1	)%
Operating income			36,264				36,332				18	%			18	%			(68	)			—
Interest income			3,382				4,317				2	%			2	%			(935	)			(22	)%
Interest expense			(3,240	)			(2,155	)			(2	)%			(1	)%			(1,085	)			(50	)%
Other income, net			42				551				—				—				(509	)			(92	)%
Income before income taxes			36,448				39,045				18	%			19	%			(2,597	)			(7	)%
Provision for income taxes			12,680				13,042				6	%			6	%			(362	)			(3	)%
Net income		$	23,768			$	26,003				12	%			13	%			(2,235	)			(9	)%
Number of employees at quarter end			2,760				2,840												(80	)			(3	)%

		Nine Months Ended
		June 30,								Percentage of Revenues												Period-to-Period
																		Period-to-Period				Percentage
		2007				2006				2007				2006				Change				Change
		(In thousands)																(In thousands)
Revenues		$	615,009			$	618,076				100	%			100	%		$	(3,067	)			—
Operating expenses:
Cost of revenues			218,472				211,686				35	%			34	%			6,786				3	%
Research and development			52,775				65,794				9	%			11	%			(13,019	)			(20	)%
Selling, general and administrative			209,139				193,878				34	%			31	%			15,261				8	%
Amortization of intangible assets			18,778				18,825				3	%			3	%			(47	)			—
Restructuring and acquisition-related			—				6,800				—				1	%			(6,800	)			(100	)%
Gain on sale of product line assets			(1,541	)			—				—				—				(1,541	)			—
Total operating expenses			497,623				496,983				81	%			80	%			640				—
Operating income			117,386				121,093				19	%			20	%			(3,707	)			(3	)%
Interest income			10,287				11,333				1	%			1	%			(1,046	)			(9	)%
Interest expense			(9,146	)			(6,433	)			(1	)%			(1	)%			(2,713	)			(42	)%
Other income, net			80				153				—				—				(73	)			(48	)%
Income before income taxes			118,607				126,146				19	%			20	%			(7,539	)			(6	)%
Provision for income taxes			42,176				44,713				7	%			7	%			(2,537	)			(6	)%
Net income		$	76,431			$	81,433				12	%			13	%			(5,002	)			(6	)%