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, 2006

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)

     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, 2006 was 62,876,783 (excluding 25,980,000 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			35
Item 4.		Controls and Procedures			37
		PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			37
Item 1A.		Risk Factors			37
Item 6.		Exhibits			37
Signatures					38
Rule 13a-14(a)/15d-14(a) Certifications of CEO
Rule 13a-14(a)/15d-14(a) Certifications of CFO
Section 1350 Certification of CEO
Section 1350 Certification of CFO

 i

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,
		2006				2005
Assets
Current assets:
Cash and cash equivalents		$	133,964			$	82,880
Marketable securities available for sale, current portion			182,170				146,088
Receivables, net			161,021				156,375
Prepaid expenses and other current assets			20,535				20,249
Deferred income taxes			3,064				7,088
Total current assets			500,754				412,680
Marketable securities available for sale, less current portion			34,856				56,926
Other investments			2,161				2,161
Property and equipment, net			55,433				48,436
Goodwill			692,327				688,683
Intangible assets, net			96,473				114,623
Deferred income taxes			24,758				19,902
Other assets			5,464				7,650
		$	1,412,226			$	1,351,061
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	16,489			$	11,579
Accrued compensation and employee benefits			30,932				31,373
Other accrued liabilities			51,841				39,368
Deferred revenue			50,364				55,837
Total current liabilities			149,626				138,157
Senior convertible notes			400,000				400,000
Other liabilities			5,339				7,810
Total liabilities			554,965				545,967
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 62,770 and 63,836 shares outstanding at June 30, 2006 and September 30, 2005, respectively)			628				638
Paid-in-capital			1,063,186				1,037,524
Treasury stock, at cost (26,087 and 25,021 shares at June 30, 2006 and September 30, 2005, respectively)			(831,284	)			(775,746	)
Unearned compensation			—				(1,284	)
Retained earnings			624,007				546,450
Accumulated other comprehensive income (loss)			724				(2,488	)
Total stockholders’ equity			857,261				805,094
		$	1,412,226			$	1,351,061

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,
		2006				2005				2006				2005
Revenues		$	207,129			$	203,807			$	618,076			$	595,374
Operating expenses:
Cost of revenues (1)			71,497				68,339				211,686				207,757
Research and development			21,370				21,176				65,794				60,297
Selling, general and administrative (1)			66,338				59,126				193,878				167,779
Amortization of intangible assets (1)			6,302				6,320				18,825				19,640
Restructuring and acquisition-related			5,290				—				6,800				—
Total operating expenses			170,797				154,961				496,983				455,473
Operating income			36,332				48,846				121,093				139,901
Interest income			4,317				2,295				11,333				5,874
Interest expense			(2,155	)			(2,142	)			(6,433	)			(6,206	)
Other income, net			551				8				153				333
Income before income taxes			39,045				49,007				126,146				139,902
Provision for income taxes			13,042				12,395				44,713				41,102
Net income		$	26,003			$	36,612			$	81,433			$	98,800
Earnings per share:
Basic		$	0.41			$	0.55			$	1.27			$	1.47
Diluted		$	0.40			$	0.53			$	1.23			$	1.34
Shares used in computing earnings per share:
Basic			63,664				66,215				64,303				67,247
Diluted			64,973				68,531				66,003				75,661

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				Unearned				Retained				Comprehensive				Stockholders’				Comprehensive
		Shares				Value				Capital				Stock				Compensation				Earnings				Income (Loss)				Equity				Income
Balance at September 30, 2005			63,836			$	638			$	1,037,524			$	(775,746	)		$	(1,284	)		$	546,450			$	(2,488	)		$	805,094
Share-based compensation											30,024				—				—				—				—				30,024
Exercise of stock options			1,779				18				(8,575	)			55,502				—				—				—				46,945
Tax benefit from exercised stock options			—				—				9,260				—				—				—				—				9,260
Reclassification due to the adoption of SFAS No. 123(R)			—				—				(1,284	)			—				1,284				—				—				—
Forfeitures of restricted stock			(22	)			—				51				(51	)			—				—				—				—
Repurchases of common stock			(3,237	)			(32	)			—				(124,075	)			—				—				—				(124,107	)
Issuance of ESPP shares from treasury			300				3				(185	)			9,458				—				—				—				9,276
Issuance of restricted stock to employees from treasury			114				1				(3,629	)			3,628				—				—				—				—
Dividends paid			—				—				—				—				—				(3,876	)			—				(3,876	)
Net income			—				—				—				—				—				81,433				—				81,433			$	81,433
Unrealized gains on investments			—				—				—				—				—				—				37				37				37
Cumulative translation adjustments			—				—				—				—				—				—				3,175				3,175				3,175
Balance at June 30, 2006			62,770			$	628			$	1,063,186			$	(831,284	)		$	—			$	624,007			$	724			$	857,261			$	84,645

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,
		2006				2005
Cash flows from operating activities:
Net income		$	81,433			$	98,800
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			36,529				39,261
Share-based compensation			30,024				1,092
Deferred income taxes			(2,724	)			13,575
Tax benefit from exercised stock options			9,260				6,494
Excess tax benefits from share-based payment arrangements			(6,097	)			—
Net amortization of premium on marketable securities			76				340
Provision for doubtful accounts			1,329				2,894
Changes in operating assets and liabilities, net of acquisition effects:
Receivables			(4,869	)			(12,855	)
Prepaid expenses and other assets			1,461				(693	)
Accounts payable			4,480				(1,010	)
Accrued compensation and employee benefits			(598	)			(2	)
Other liabilities			9,355				(15,776	)
Deferred revenue			(5,748	)			18,032
Net cash provided by operating activities			153,911				150,152
Cash flows from investing activities:
Purchases of property and equipment			(24,321	)			(14,009	)
Collections of note receivable from sale of product line			500				500
Cash paid for acquisition, net of cash acquired			—				(32,567	)
Cash proceeds from disposition of London Bridge Phoenix Software, Inc.			—				22,672
Purchases of marketable securities			(134,933	)			(195,137	)
Proceeds from sales of marketable securities			26,240				109,023
Proceeds from maturities of marketable securities			95,128				105,914
Investment in cost-method investee			—				(600	)
Net cash used in investing activities			(37,386	)			(4,204	)
Cash flows from financing activities:
Proceeds from issuances of common stock under employee stock option and purchase plans			56,221				49,353
Dividends paid			(3,876	)			(4,041	)
Repurchases of common stock			(124,107	)			(231,834	)
Excess tax benefits from share-based payment arrangements			6,097				—
Net cash used in financing activities			(65,665	)			(186,522	)
Effect of exchange rate changes on cash and cash equivalents			224				(370	)
Increase (decrease) in cash and cash equivalents			51,084				(40,944	)
Cash and cash equivalents, beginning of period			82,880				134,070
Cash and cash equivalents, end of period		$	133,964			$	93,126
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net		$	22,164			$	21,451
Cash paid for interest		$	3,000			$	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 2005 Annual Report on Form 10-K. 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, 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.

     Share-Based Payment

          Prior to October 1, 2005, we accounted for our share-based employee compensation plans under the measurement and recognition provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by Financial Accounting Standards Board Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation. We generally recorded no employee compensation expense for options granted prior to October 1, 2005 as options granted generally had exercise prices equal to the fair market value of our common stock on the date of grant. We also recorded no compensation expense in connection with our 1999 Employee Stock Purchase Plan (“Purchase Plan”) as the purchase price of the stock was not less than 85% of the lower of the fair market value of our common stock at the beginning of each offering period or at the end of each offering period. In accordance with SFAS No. 123, we disclosed our net income and earnings per share as if we had applied the fair value-based method in measuring compensation expense for our share-based incentive awards.

          Effective October 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified prospective transition method. Under that transition method, compensation expense that we recognize beginning on that date

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

includes expense associated with the fair value of all awards granted on and after October 1, 2005, and expense for the unvested portion of previously granted awards outstanding on October 1, 2005. Results for prior periods have not been restated.

          Prior to the adoption of SFAS No. 123(R), we presented all tax benefits for deductions resulting from the exercise of stock options as operating cash flows within our consolidated statements of cash flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense recorded for those options (excess tax benefits) to be classified as financing cash flows. Accordingly, the $6.1 million excess tax benefit that is classified as a financing cash inflow on the accompanying condensed consolidated statements of cash flows for the nine months ended June 30, 2006 would have been classified as an operating cash inflow if we had not adopted SFAS No. 123(R).

          We maintain the 1992 Long-term Incentive Plan (the “1992 Plan”) under which we may grant stock options, stock appreciation rights, restricted stock 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. As of June 30, 2006, 754,751 shares remained available for grants under this plan. 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. As of June 30, 2006, 1,449,318 shares remained available for grants under this 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. There are no shares available for future grants under these plans. Stock option awards granted during the quarter and nine months ended June 30, 2006 have a maximum term of seven years and vest ratably over four years. Stock option awards granted prior to October 1, 2005 typically have a maximum term of ten years and vest ratably over four years.

          We assumed all outstanding stock options held by former employees and non-employee directors of HNC Software, Inc. (“HNC”), who as of our acquisition date, held unexpired and unexercised stock option grants under the various HNC stock option plans. As of June 30, 2006, 1,479,987 shares remained available for future grant under these option plans.

          Under the 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 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.

          The following table summarizes the share-based compensation expense included in operating expense captions that we recorded within the accompanying condensed consolidated statements of income:

		Quarter Ended								Nine Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(In thousands)
Cost of revenues		$	2,722			$	79			$	8,265			$	190
Research and development			1,661				36				5,061				87
Selling, general and administrative			6,001				347				16,698				815
		$	10,384			$	462			$	30,024			$	1,092

          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 SFAS No. 123(R) 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

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

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 granted during the quarter and nine months ended June 30, 2006. 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.

          We used the following assumptions to estimate the fair value of share-based payment awards:

		Three Months Ended								Nine Months Ended
		June 30,				June 30,				June 30,				June 30,
Stock Options:		2006				2005				2006				2005
Average expected term (years)			4.75				4.00				4.75				4.00
Expected volatility			30	%			40	%			29	%			48	%
Risk-free interest rate (range)			4.8–5.2	%			3.8	%			4.2–5.2	%			3.2–3.8	%
Expected dividend yield			0.2	%			0.2	%			0.2	%			0.2	%

          The following table shows summarizes option activity during the nine months ended June 30, 2006:

										Weighted-
						Weighted-				average
						average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term				Value
		(In thousands)												(In thousands)
Outstanding at October 1, 2005			13,815			$	29.14
Granted			3,247				43.25
Exercised			(1,779	)			26.38
Forfeited			(1,071	)			36.70
Outstanding at June 30, 2006			14,212				32.14				6.36			$	87,113
Options exercisable at June 30, 2006			6,676				26.87				5.33			$	68,796

          The weighted average fair value of options granted during the nine months ended June 30, 2006 was $13.85. The aggregate intrinsic value of options outstanding at June 30, 2006 is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 10.1 million shares that had exercise prices that were lower than the $36.31 market price of our common stock at June 30, 2006. The total intrinsic value of options exercised during the nine months ended June 30, 2006 was $32.2 million, determined as of the date of exercise.

          At September 30, 2005 we had 40,219 non-vested restricted stock awards that had a weighted average grant date fair value of $20.40 and at June 30, 2006 we had 151,763 non-vested restricted stock awards that had a weighted average grant date fair value of $31.83.

          We recorded $29.3 million in share-based compensation expense for stock options and purchases under the Purchase Plan and $0.7 million in share-based compensation expense for restricted stock awards for the nine months ended June 30, 2006. The total tax benefit related to this share-based compensation expense was $10.7 million for the nine months ended June 30, 2006. As of June 30, 2006, there was $80.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of 2.3 years.

          We received $56.2 million in cash from option exercises and issuances of stock under the Purchase Plan for the nine months ended June 30, 2006. The actual tax benefit that we realized for the tax deductions from option exercises of the share-based payment arrangements totaled $9.8 million for that period.

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

          Due primarily to our ongoing program of repurchasing shares on the open market, at June 30, 2006 we had 26.1 million treasury shares. We satisfy option exercises from this pool of treasury shares.

          The following table illustrates the effect on our net income and earnings per share for the quarter and nine months ended June 30, 2005 as if we had applied the fair value recognition provisions of SFAS No. 123(R) to share-based compensation using the Black-Scholes valuation model.

						Nine Months
		Quarter Ended				Ended
		June 30,				June 30,
(In thousands, except per share data)		2005				2005
Net income, as reported		$	36,612			$	98,800
Add: Share-based employee compensation expense included in reported net income, net of tax			284				672
Deduct: Share-based employee compensation expense determined Under fair value based method for all awards, net of tax			(6,746	)			(21,725	)
Proforma net income including share-based compensation		$	30,150			$	77,747
Earnings per share, as reported:
Basic		$	0.55			$	1.47
Diluted		$	0.53			$	1.34
Proforma earnings per share — including share-based compensation:
Basic		$	0.46			$	1.16
Diluted		$	0.44			$	1.06

New Accounting Pronouncement 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.

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,
		2006				2005				2006				2005
		(In thousands)
Cost of revenues		$	3,741			$	3,696			$	11,169			$	11,149
Selling, general and administrative			2,561				2,624				7,656				8,491
		$	6,302			$	6,320			$	18,825			$	19,640

          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 $96.5 million and $114.6 million, net of accumulated amortization of $78.0 million and $58.9 million, as of June 30, 2006 and September 30, 2005, respectively.

3. Restructuring and Acquisition-Related Expenses

          The following table summarizes our restructuring and acquisition-related accruals associated with our June 2006 restructuring

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

activities, fiscal 2005 Braun acquisition, fiscal 2004 London Bridge acquisition, and certain other Fair Isaac facility closures. The current portion and non-current portion is recorded in other accrued current liabilities, other compensation and employee benefits and other long-term liabilities within the accompanying condensed consolidated balance sheets.

		Accrual at																Accrual at
		September 30,				Expense				Cash								June 30,
		2005				Additions				Payments				Reversals				2006
		(In thousands)
Facilities charges		$	6,361			$	151			$	(3,374	)		$	(164	)		$	2,974
Employee separation			—				5,139				(1,403	)			—				3,736
		$	6,361			$	5,290			$	(4,777	)		$	(164	)		$	6,710
Less: current portion			(3,721	)															(6,343	)
Non-current		$	2,640															$	367

          During the quarter ended June 30, 2006, in connection with a restructuring initiative, we incurred charges totaling $5.3 million. The charges included $5.1 million for severance costs associated with a reduction of 190 employees primarily in product management, delivery and development functions. Cash payments for the majority of these severance costs were either paid in the current quarter or will be paid in the fourth quarter of fiscal 2006. We also recognized a $0.2 million charge associated with the abandonment of leased office space representing future cash obligations under the lease.

          During the nine months ended June 30, 2006, we also recorded a $0.7 million gain due to the sublease of office space that we had exited in fiscal 2002. The gain resulted from an adjustment to the liability established for the exit of the lease space and a refund received for past rent paid to the landlord. In addition, we recorded costs of $2.2 million in connection with an abandoned acquisition, consisting of third-party legal, accounting and other professional fees.

          In July 2006, we announced our decision to vacate excess leased space in the fourth quarter of fiscal 2006. See Note 8 for additional information.

4. Earnings Per Share

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

		Quarter Ended								Nine Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(In thousands, except per share data)
Numerator for basic earnings per share — net income		$	26,003			$	36,612			$	81,433			$	98,800
Interest expense on senior convertible notes, net of tax			1				1				3				2,468
Numerator for diluted earnings per share		$	26,004			$	36,613			$	81,436			$	101,286
Denominator — shares:
Basic weighted-average shares			63,664				66,215				64,303				67,247
Effect of dilutive securities			1,309				2,316				1,700				8,414
Diluted weighted-average shares			64,973				68,531				66,003				75,661
Earnings per share:
Basic		$	0.41			$	0.55			$	1.27			$	1.47
Diluted		$	0.40			$	0.53			$	1.23			$	1.34

          The computation of diluted EPS for the quarters ended June 30, 2006 and 2005, excludes options to purchase approximately 3,868,000 and 3,665,000 shares of common stock, respectively, and for the nine months ended June 30, 2006 and 2005, excludes options to purchase approximately 2,349,000 and 3,946,000 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. Emerging Issues Task Force (“EITF”) Issue No. 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share requires us to consider all instruments with contingent conversion features that are based on the market price of our own stock in our

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

diluted earnings per share calculation, regardless of whether the market price conversion triggers are then met. The computation for diluted EPS for the quarter and nine months ended June 30, 2005 includes approximately 7,000 and 6,036,000, respectively, shares of common stock issuable upon conversion of our 1.5% Senior Convertible Notes. Effective with the March 31, 2005 exchange of Senior Convertible Notes for New Senior Convertible Notes (“New Notes”), the dilutive effect of the New Notes is calculated using the treasury stock method.

5. 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 Enterprise Decision Management (“EDM”) applications designed for specific processes such as marketing, account origination, customer account management, fraud and insurance bill review. This segment also includes our myFICO solution for consumers.
	•		Scoring Solutions. These include our scoring services distributed through major credit reporting agencies, as well as services through which we provide our scores to lenders directly.
	•		Professional Services. 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 our business rules management, model development and strategy design software sold to businesses for their use in building their own 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. 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.

          In fiscal 2006, we changed how we measure operating income by segment to exclude share-based compensation as a result of the adoption of SFAS No. 123(R) on October 1, 2005. We have reclassified prior period segment operating income to reflect this change.

          The following tables summarize segment information for the quarters and nine months ended June 30, 2006 and 2005:

		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

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

		Quarter Ended June 30, 2005
		Strategy												Analytic
		Machine				Scoring				Professional				Software
		Solutions				Solutions				Services				Tools				Total
		(In thousands)
Revenues		$	115,092			$	40,741			$	33,203			$	14,771			$	203,807
Operating expenses			(100,944	)			(15,690	)			(28,214	)			(9,651	)			(154,499	)
Segment operating income		$	14,148			$	25,051			$	4,989			$	5,120				49,308
Unallocated share-based compensation expense																			(462	)
Operating income																			48,846
Unallocated interest income																			2,295
Unallocated interest expense																			(2,142	)
Unallocated other income, net																			8
Income before income taxes																		$	49,007
Depreciation and amortization		$	7,342			$	2,877			$	1,650			$	853			$	12,722

		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

		Nine Months Ended June 30, 2005
		Strategy												Analytic
		Machine				Scoring				Professional				Software
		Solutions				Solutions				Services				Tools				Total
		(In thousands)
Revenues		$	344,156			$	119,512			$	96,253			$	35,453			$	595,374
Operating expenses			(295,137	)			(50,170	)			(82,840	)			(26,234	)			(454,381	)
Segment operating income		$	49,019			$	69,342			$	13,413			$	9,219				140,993
Unallocated share-based compensation expense																			(1,092	)
Operating income																			139,901
Unallocated interest income																			5,874
Unallocated interest expense																			(6,206	)
Unallocated other income, net																			333
Income before income taxes																		$	139,902
Depreciation and amortization		$	23,246			$	8,995			$	4,951			$	2,069			$	39,261

6. Income Taxes

          Our effective tax rate was 33.4% and 25.3% during the quarters ended June 30, 2006 and 2005, respectively, and 35.4% and 29.4% during the nine months ended June 30, 2006 and 2005, 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.

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

          Our effective tax rate during the quarter ended June 30, 2005 was impacted by the recognition of $4.4 million of tax benefits related to prior years. These benefits were determined in conjunction with tax studies we performed with outside advisors that identified additional federal and state tax credits and other deductions related to prior years’ tax returns. The tax benefits recognized reflect our estimate of the effect of amended tax returns filed for fiscal 2002 through 2004. These tax benefits reduced our effective tax rate by 8.9% during the quarter ended June 30, 2005.

          In addition to the $4.4 million adjustment recorded in the quarter ended June 30, 2005, tax expense for the nine months ended June 30, 2005 was also reduced by a $6.0 million adjustment that resulted from the recognition of tax benefits related to prior years. This adjustment was the result of a tax study we performed with outside advisors that identified additional federal and state tax credits and other deductions related to prior years’ tax returns. The adjustment reflects our estimate of the effect of amended tax returns for fiscal 1998 through 2003. These tax benefits reduced our effective tax rate by 7.4% during the nine months ended June 30, 2005.

7. 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 is additional detail concerning certain ongoing litigation.

     Customer Claims

          We are 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 customer’s lawsuit is pending in the United States District Court for the Central District of California, and the other is pending as a counterclaim to a collection lawsuit that we commenced in the United States District Court for the Southern District of Texas. The customers in these matters have claimed damages in excess of $10 million. We believe that these claims are without merit, and we intend to contest them vigorously. We also believe that the resolution of these claims will not result in a material adverse impact to our consolidated financial condition.

     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 claims that the defendants have 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 claims that the defendants are “credit repair organizations” under CROA. The plaintiff is seeking 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. The plaintiff is seeking unspecified damages, attorneys’ fees and costs. We believe that the claims in this lawsuit are without merit, and we have denied any liability or wrongdoing and have denied that class certification is appropriate. We are vigorously contesting this matter. The plaintiff has brought a motion for class certification and a motion for summary judgment in his favor and against the defendants. We have filed briefs in opposition to the plaintiff’s motions. We believe that the resolution of this claim will not result in a material adverse impact to our consolidated financial condition.

          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 is claiming 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 claims that the defendants violated the California Credit Services Act (the “CSA”) and were unjustly enriched. The plaintiff has 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. Plaintiff seeks unspecified damages, attorneys’ fees and costs. We believe that the claims in this lawsuit are without merit and we have denied any liability or wrongdoing and have denied that class certification is appropriate. We are vigorously contesting this matter. On April 22, 2005, we brought a motion to dismiss the plaintiff’s claims. On June 27, 2005, the Court granted our motion, in part, by dismissing certain of the plaintiff’s claims under the CSA. The plaintiff has brought motions for

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

summary judgment and for class certification. We intend to oppose both motions, and we believe that the resolution of this claim will not result in a material adverse impact to our consolidated financial condition.

     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 will 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 will not pay any amount of the settlement.

8. Subsequent Event

          In July 2006, we decided to vacate excess leased space located in California in the fourth quarter of fiscal 2006. As a result of this action, we expect to incur a charge of approximately $13.0 million (or $8.4 million after tax) in the fourth quarter of fiscal 2006, which represents future cash lease obligations, net of anticipated sublease income. We expect that the future lease obligations will be paid out over the next five years, which represents the remaining term of the lease. The charge will be classified in restructuring and acquisition-related expense within our consolidated statement of income.

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 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors, below. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our reports on Forms 10-K, 10-Q and 8-K.

RESULTS OF OPERATIONS

Overview

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

     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, 2006, 72% 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 74% and 75% of our revenues during the quarters ended June 30, 2006 and 2005, respectively, and 75% and 77% of our revenues for the nine months ended June 30, 2006 and 2005, 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 new bookings achieved. We define a “new booking” as estimated future contractual revenues, including agreements with perpetual, multi-year and annual terms. New bookings values may include: (i) estimates of variable fee components such as hours to be incurred under new professional services arrangements and customer account or transaction activity for agreements with transactional-based fee arrangements, (ii) additional or expanded business from renewals of contracts, and (iii) to a lesser extent, previous customers that have attrited and been re-sold only as a result of a significant sales effort. During the quarter ended June 30, 2006, we achieved new bookings of $94.5 million, including eight deals with bookings values of $3.0 million or more. In comparison, new bookings in the prior year quarter ended June 30, 2005 were $143.3 million, including nine deals with bookings values of $3.0 million or more.

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

     Our revenues derived from clients outside the United States continue to grow, and may in the future grow more rapidly than our revenues from domestic clients. International revenues totaled $62.2 million and $52.3 million during the quarters ended June 30, 2006 and 2005, respectively, representing 30% and 26% of total consolidated revenues in each of these periods. International revenues totaled $170.5 million and $152.3 million during the nine months ended June 30, 2006 and 2005, respectively, representing 28% and 26% 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.

     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, 2006 and 2005, are set forth in Note 5 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																				Period-to-Period
		June 30,								Percentage of Revenues								Period-to-Period				Percentage
Segment		2006				2005				2006				2005				Change				Change
		(In thousands)																(In thousands)
Strategy Machine Solutions		$	114,820			$	115,092				55	%			57	%		$	(272	)			—
Scoring Solutions			43,745				40,741				21	%			20	%			3,004				7	%
Professional Services			36,714				33,203				18	%			16	%			3,511				11	%
Analytic Software Tools			11,850				14,771				6	%			7	%			(2,921	)			(20	)%
Total revenues		$	207,129			$	203,807				100	%			100	%			3,322				2	%

		Nine Months Ended																				Period-to-Period
		June 30,								Percentage of Revenues								Period-to-Period				Percentage
		2006				2005				2006				2005				Change				Change
		(In thousands)																(In thousands)
Strategy Machine Solutions		$	345,658			$	344,156				56	%			58	%		$	1,502				—
Scoring Solutions			131,669				119,512				21	%			20	%			12,157				10	%
Professional Services			108,236				96,253				18	%			16	%			11,983				12	%
Analytic Software Tools			32,513				35,453				5	%			6	%			(2,940	)			(8	)%
Total revenues		$	618,076			$	595,374				100	%			100	%			22,702				4	%

     Quarter Ended June 30, 2006 Compared to Quarter Ended June 30, 2005 Revenues

     Strategy Machine Solutions segment revenues declined due to a $4.2 million decrease in revenues from our marketing solutions, a $1.7 million decrease in revenues from our insurance and healthcare solutions and a $0.1 million net decrease in revenues from our other strategy machine solutions. The revenue decline was partially offset by a $4.5 million increase in revenues from our fraud solutions and a $1.2 million increase in revenues from our collections and recovery solutions. The decrease in marketing solutions revenues was attributable primarily to the loss of two large financial services customers, which resulted from industry consolidation. The decrease in insurance and healthcare solutions revenues was attributable primarily to a decline in bill review volumes associated with our existing customer base, lower claims volumes at some of our key customers and loss of several customer accounts. The increase in fraud solutions revenues was attributable to an increase in license sales and an increase in transaction volumes. The increase in collections and recovery solutions revenues was due to an increase in perpetual license sales.

     Scoring Solutions segment revenues increased primarily due to an increase in revenues derived from risk scoring services at the credit reporting agencies and, to a lesser extent, an increase in revenue derived from our own prescreening services and our expansion scoring product.

     During the quarters ended June 30, 2006 and 2005, revenues generated from our agreements with Equifax, TransUnion and Experian, collectively accounted for approximately 22% and 20%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.

     Professional Services segment revenues increased from industry consulting services and predictive modeling services. The increase in industry consulting services revenue resulted from initiatives to expand our professional service offerings into additional industry markets.

     Analytic Software Tools segment revenues decreased due to a decline in sales of perpetual licenses for our Blaze Advisor software product.

     Nine Months Ended June 30, 2006 Compared to Nine Months Ended June 30, 2005 Revenues

     Strategy Machine Solutions segment revenues increased due to a $10.7 million increase in revenues from our fraud solutions, a $10.0 million increase in revenues from our consumer solutions and a $3.9 million increase in revenues from our collections and recovery solutions. The revenue increase was partially offset by a $15.9 million decrease in revenues from our marketing solutions, a $6.4 million decrease in revenues from our insurance and healthcare solutions, and a $0.8 million decrease in revenues from our other strategy machine solutions. The increase in fraud solutions revenues was attributable to higher license sales and an increase in transaction volumes. The increase in consumer solutions revenues was partially attributable to increases in revenues derived from myFICO.com and our strategic alliance partners. The increase in consumer solutions revenue was also the result of a revision made during the second quarter of fiscal 2006 to the estimated period during which revenue is earned on sales of certain products that provide consumers access to multiple credit scores. The revision, which increased revenues by $3.6 million, resulted from the completion of a study that showed that consumers were accessing their scores over a shorter period of time than initially estimated. The increase in collections and recovery solutions revenues was attributable primarily to an increase in license sales. The decrease in marketing solutions revenues was attributable primarily to the loss of two large financial services customers, which resulted from industry consolidation. The decrease in insurance and healthcare solutions revenues was attributable primarily to a decline in bill review volumes associated with our existing customer base, lower claims volumes at some of our key customers and loss of several customer accounts.

     Scoring Solutions segment revenues increased primarily due to an increase in revenues derived from risk scoring services at the credit reporting agencies and an increase in revenue derived from our own prescreening services.

     During the nine months ended June 30, 2006 and 2005, revenues generated from our agreements with Equifax, TransUnion and Experian, collectively accounted for approximately 22% and 19%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.

     Professional Services segment revenues increased from industry consulting services, implementation services for our Blaze Advisor products and predictive modeling services. The increase in industry consulting services revenue resulted from initiatives to expand our professional service offerings into additional industry markets.

     Analytic Software Tools segment revenues decreased due to a decline in sales of perpetual licenses for our Blaze Advisor software product. The decline was partially offset by an increase in sales of Model Builder software products.

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																				Period-to-Period
		June 30,								Percentage of Revenues								Period-to-Period				Percentage
		2006				2005				2006				2005				Change				Change
		(In thousands)																(In thousands)
Revenues		$	207,129			$	203,807				100	%			100	%		$	3,322				2	%
Operating expenses:
Cost of revenues			71,497				68,339				35	%			34	%			3,158				5	%
Research and development			21,370				21,176				10	%			10	%			194				1	%
Selling, general and administrative			66,338				59,126				32	%			29	%			7,212				12	%
Amortization of intangible assets			6,302				6,320				3	%			3	%			(18	)			—
Restructuring and acquisition-related			5,290				—				2	%			—				5,290				—
Total operating expenses			170,797				154,961				82	%			76	%			15,836				10	%
Operating income			36,332				48,846				18	%			24	%			(12,514	)			(26	)%
Interest income			4,317				2,295				2	%			1	%			2,022				88	%
Interest expense			(2,155	)			(2,142	)			(1	)%			(1	)%			(13	)			—
Other income, net			551				8				—				—				543				—
Income before income taxes			39,045				49,007				19	%			24	%			(9,962	)			(20	)%
Provision for income taxes			13,042				12,395				6	%			6	%			647				5	%
Net income		$	26,003			$	36,612				13	%			18	%			(10,609	)			(29	)%
Number of employees at quarter end			2,840				2,804												36				1	%