In Re: Pixar Securities Litigation 05-CV-4290-Declaration of Cheryl

Home , Buzz Lightyear, Edwin Catmull, Fox Entertainment Group, Hal Roach Studios, Joe Roth

1 BORIS FELDMAN, State Bar No . 128838 ([email protected]) DOUGLAS J. CLARK, State Bar No . 171499 ([email protected]) 2 CHERYL W. FOUNG, State Bar No . 108868 ([email protected]) KELLEY E . MOOHR, State Bar No. 216823 ([email protected]) 3 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 4 650 Page Mill Road Palo Alto, CA 94304-1050 5 Telephone : (650) 493-9300 Facsimile: (650) 565-5100 6

7 Attorneys for Defendants PIXAR, STEVEN P. JOBS, EDWIN E. 8 CATMULL and SIMON T . BAX

10 UNITED STATES DISTRICT COURT

11 NORTHERN DISTRICT OF CALIFORNI A

13 In re PIXAR SECURITIES LITIGATION CIVIL ACTION NO. : C 05 4290 JSW

14 CLASS ACTION

15 DECLARATION OF CHERYL W . FOUNG IN SUPPORT OF 16 DEFENDANTS' MOTION TO DISMISS AMENDED COMPLAINT 17 This Document Relates To All Actions . 18 Date : September 15, 2006 Time: 9:00 a.m. 19 Dept: The Hon. Jeffrey S. White

FOUNG DECL. ISO DEFENDANTS' MOTION To C :\NrPortbl\PALIB 1\BH4\2900085_2 .DOC DISMISS AMENDED COMPLAIN T CASE No. C 05 4290 JSW 1 I, Cheryl W . Foung, declare as follows :

2 I am of counsel at the law firm of Wilson Sonsini Goodrich & Rosati, and am counsel for

3 defendants Pixar, Steven P . Jobs, Edwin E . Catmull and Simon T. Bax (collectively

4 "defendants") . I am licensed to practice law before the Courts of the State of California and this

5 Court. I have personal knowledge of the facts set forth herein and, if called as a witness, I coul d

6 and would testify competently hereto .

8 PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION

9 1 . Attached hereto as Exhibit 1 is a true and correct copy of excerpts from Pixar's

10 Form 10-K for the fiscal year ended January 3, 2004, filed with the SEC on March 18, 2004 .

11 2 . Attached hereto as Exhibit 2 is a true and correct copy of excerpts from Pixar's

12 Form 10-K for the fiscal year ended January 1, 2005, filed with the SEC on March 17, 2005 .

13 3 . Attached hereto as Exhibit 3 is a true and correct copy of excerpts from Pixar' s

14 I Proxy Statement dated July 11, 2005 .

15 4. Attached hereto as Exhibit 4 is a true and correct copy of excerpts from Pixar' s

16 Form 8-K filed with the SEC on January 24, 2006 .

17 5 . Attached hereto as Exhibit 5 is a true and correct copy of excerpts from Pixar's

18 Form 10-K for the fiscal year ended December 31, 2005, filed with the SEC on March 7, 2006 .

19 6. Attached hereto as Exhibit 6 is a true and correct copy of Edwin E . Catmull's 20 Form 4 filed with the SEC on August 17, 2004 .

21 7 . Attached hereto as Exhibit 7 is a true and correct copy of Edwin E . Catmull' s

22 Form 4 filed with the SEC on November 18, 2004 .

23 8. Attached hereto as Exhibit 8 is a true and correct copy of Edwin E. Catmull' s

24 Form 4 filed with the SEC on February 18, 2005 .

25 9. Attached hereto as Exhibit 9 is a true and correct copy of Edwin E . Catmull's 26 Form 4 filed with the SEC on March 7, 2005 .

27 10. Attached hereto as Exhibit 10 is a true and correct copy of Edwin E. Catmull' s

28 11 Form 4 filed with the SEC on May 20, 2005 .

FOUND DECL . ISO DEFENDANTS' MOTION To -1- C:\NrPortbl\PALIB I \BH4\2900085_2 . DOC DISMISS AMENDED COMPLAIN T CASE No . C 05 4290 JSW 1 11 . Attached hereto as Exhibit 11 is a true and correct copy of Simon T . Bax' s

2 Form 4 filed with the SEC on May 3, 2004 .

3 12. Attached hereto as Exhibit 12 is a true and correct copy of Simon T . Bax's

4 Form 4 filed with the SEC on May 12, 2005 .

6 CONFERENCE CALL TRANSCRIPT S

7 13 . Attached hereto as Exhibit 13 is a true and correct copy of the transcript fro m

8 Pixar's Conference Call held on February 10, 2005 .

9 14. Attached hereto as Exhibit 14 is a true and correct copy of the transcript fro m

10 Pixar's Conference Call held on May 5, 2005 .

11 15. Attached hereto as Exhibit 15 is a true and correct copy of the transcript from

12 Pixar's Conference Call held on August 4, 2005 .

14 SLIP OPINIONS

15 16 . Attached hereto as Exhibit 16 is a true and correct copy of the decision in In re

16 Applied Signal Tech . Inc. Sec. Litig., No. C-5-1027 SBA, slip op. (N.D . Cal. Feb. 8 , 2006) .

17 17 . Attached hereto as Exhibit 17 is a true and correct copy of the decision in In re

18 Autodesk, Inc. Sec. Litig., No. C-00-1285-PJH, slip op . (N.D. Cal . Nov. 21, 2001).

19 18 . Attached hereto as Exhibit 18 is a true and correct copy of the decision in

20 Kuehbeck v. Genesis Microchip Inc ., No. C 02-5344 JSW, slip op . (N.D. Cal. Mar. 29, 2004).

21 19 . Attached hereto as Exhibit 19 is a true and correct copy of the decision in In re

22 Tibco Software, Inc. Sec. Litig., No. C 05-2146 SBA, slip op . (N.D. Cal. May 25, 2006).

23 20. Attached hereto as Exhibit 20 is a true and correct copy of the decision in In re

24 Vaxgen, Inc. Sec. Litig., No . C 03-01129 JSW, slip op . (N.D . Cal. Mar. 30, 2005).

25 21 . Attached hereto as Exhibit 21 is a true and correct copy of the decision in In re

26 Veritas Software Corp. Sec. Litig., No. C-03-0283 MMC, slip op . (N.D . Cal. Dec. 10, 2003).

FOUNG DECL . ISO DEFENDANTS' MOTION To -2- C :\NrPortbl\PALIBI\BH4\29000852 .DOC DISMISS AMENDED COMPLAIN T CASE No . C 05 4290 JSW 1 MISCELLANEOUS

2 22 . Attached hereto as Exhibit 22 is a true and correct copy of excerpts from H .R.

3 CONF. REP. No. 104-369 (1995 ), reprinted in 1995 U.S.C.C.A.N. 730.

4 23. Attached hereto as Exhibit 23 is a true and correct copy of Pixar's daily stock

5 price from February 10, 2005 to May 4, 2006 .

6 I declare under penalty of perjury under the laws of the State of Califo rnia that the

7 foregoing is true and correct . Executed this 29th day of June 2006 at Palo Alto, California. 8

9 By: /s/ CHERYL W . FOUNG CHERYL W. FOUNG 10

11 I, Boris Feldman , am the ECF User whose identification and password are being used to

12 file this Declaration of Cheryl W. Foung in Support of Defendants' Motion to Dismiss Amended

13 Complaint. I hereby attest that Cheryl W. Foung has concurred in this filing .

14 Dated: June 29, 2006 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 15

16 By: /s/ BORIS FELDMAN BORIS FELDMAN 17 Attorneys for Defendant s 18 Pixar, Steven P . Jobs, Edwin E . Catmull and Simon T. Bax 19

FOUNG DECL . ISO DEFENDANTS' MOTION To _3_ C:\NrPortbl\PALIBI\BH4\29000852 .DOC DISMISS AMENDED COMPLAIN T CASE No. C 05 4290 JSW EXHIBIT 1 Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 3, 2004

Commission File Number 0-26976 Pixar

(Exact name of registrant as specified in its charter)

California 68-0086179 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No)

1200 Park Avenue, 94608 Emeryvi lle , California (Zip Code) (Address of principal executive offices)

Registrant's telephone number, including area code :

(510) 752-3000

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

Non e

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

Common Stock , no par value per share (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act") 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 0 No ❑

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) . Yes 0 No ❑

As of June 28, 2003, the last day of the Registrant's most recently completed second fiscal quarter, there were 54,135,552 shares of the Registrant's Common Stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the Nasdaq National Market on June 27, 2003) was $1,377,878,000 . Shares of the Registrant's Common Stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates . This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 1, 2004, there were 55,960,801 shares of the Registrant's Common Stock outstanding .

TABLE OF CONTENTS

Page

PART I Item 1 . Business 2 Risk Factors 1 6 Item 2 . Pro erties 3 0 Item 3 . Legal Proceedings 3 1 Item 4 . Submission of Matters to a Vote of Security Holders 31 Table of Content s

These reimbursed costs through the end of fiscal 2003 are set forth in Note 4 of Notes to Financial Statement s

The statements regarding the targeted release dates for our future films are forward-looking, and the actual release dates may differ . Factors that could cause delays in the release of our films include, but are not limited to (1) the uncertainties related to production delays, (2) financing requirements , (3) personnel availability, (4) external socioeconomic and political events, and (5) the release dates of competitive films . See "Risk Factors" in Item I of this Form 10-K.

Critical Accounting Policies

Revenue Recognition

We recognize film revenue from the distribution of our animated feature films and related products when earned and reasonably estimable in accordance with Statement of Position 00-2 - "Accounting by Producers or Distributors of Films" (SOP 00-2) . The following are the conditions that must be met in order to recognize revenue in accordance with SOP 00-2 :

• persuasive evidence of a sale or licensing arrangement with a customer exists;

• the film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery ;

• the license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale ;

• the arrangement fee is fixed or determinable ; and

• collection of the arrangement fee is reasonably assured.

Under the Co-Production Agreement, we share equally with Disney in the profits of Finding Nemo, Monsters, Inc., Toy Story 2 and A Bug's Life after Disney recovers its marketing, distribution and other predefined costs and fees . Our revenues for Toy Story are governed by the terms of the Feature Film Agreement . The amount of revenue recognized in any given quarter or quarters from all of our films depends on the timing, accuracy and sufficiency of the information we receive from Disney to determine revenues and associated gross profits . Although Disney provides us with the most current information available to enable us to recognize our share of revenue and determine our film gross profit, we may make adjustments to that information based on our estimates and judgments . For example, our theatrical revenues may be adjusted for our estimated reserves on potential uncollectible amounts to be received from theatrical exhibitors . We also make adjustments to our home video revenues for estimates on return reserves that may differ from those reported by Disney . The estimates on reserves may be adjusted periodically based on actual rates of returns, inventory levels in the distribution channel, as well as other business and industry information. In addition, we utilize margin normalization, such as with merchandising or home video, in accordance with the provisions of SOP 00-2 . This may result in the utilization of budgeted or forecasted information rather than actual costs incurred if it is deemed to be a more accurate reflection of our participation . Similar to return reserves, these expense estimates are reviewed and may be adjusted periodically to ensure the most accurate depiction of our participation is reflected . Such adjustments were made to home video reserve and home video and merchandise expense estimates during fiscal 2002 and 2003 . Additionally, during the fourth quarter of fiscal 2003, our fiscal reporting period differed from that of Disney . Consequently, it was necessary to use a combination of information from Disney and our own estimates to determine our revenues for the period between Disney's fiscal period end and ours .

Disney may also make subsequent adjustments to the information that it has provided, and these adjustments could have a material impact on our operating results in later periods . As updated information becomes available from Disney on a more timely basis, it may result in a change of estimation for revenue recognition . For example, we received updated information from Disney in the first quarter of fiscal 2003, which decreased previously recorded home video expenses by $3 .2 million for all of our film titles on a cumulative basis . This resulted in an increase of $0 .03 to our diluted net income per share for our first quarter

35 Table of Contents of fiscal 2003 . We also received a settlement on Monsters, Inc. merchandise revenue for the third quarter ended September 27, 2003, which resulted in an increase of $3 .5 million to our revenues and $0.03 to our diluted net income per share . During fiscal 2002, one-time adjustments to A Bug's Life and Toy Story 2 home video reserves and margins and merchandising revenues had a positive net impact of $0 .19 to our diluted net income per share . During the second quarter of fiscal 2003, we recognized an adjustment which reduced our Monsters, Inc. domestic home video revenue after we received updated information from Disney, which reflected higher returns of domestic home video than had been originally anticipated . This adjustment reduced our home video revenues by $4 .4 million and had a net impact of $0 .04 to our diluted net income per share in the second quarter of fiscal 2003 . Additionally, we have the right to audit Disney's books and records related to the Pictures according to the terms of the Co-Production Agreement, which could result in adjustments that may be material to the financial statements in any given quarter or quarters . Any revenue received in advance from Disney is deferred and recorded as revenue when earned.

In accordance with the provisions of SOP 00-2, a film is classi fied as a libra ry title after three years from the film' s initial release. Currently , Toy Story, A Bug's Life and Toy Story 2 are classi fi ed as library titles . The term library titles is used solely for the purpose of classification and for identifying previously released films in accordance with the provisions of SOP 00-2 . Revenue recognition for such titles is in accordance with our revenue recognition policy for film revenue .

Film Production Costs

Once a film is released, capitalized film production costs will be amortized in the proportion that the revenue during the period for each film bears to the estimated revenue to be received from all sources under the individual-film-forecast-computation method . The amount of film costs that will be amortized each quarter will depend on how much future revenue we expect to receive from each film . We make certain estimates and judgments of our future gross revenues to be received for each film based on information received from Disney, and our knowledge of the industry . Estimates of anticipated total gross revenues are reviewed periodically and may be revised if necessary . A change to the estimate of gross revenues for an individual film may result in an increase or decrease to the percentage of amortization of capitalized film costs relative to a previous period . Unamortized film production costs are compared with net realizable value each reporting period on a film-by-film basis . If estimated remaining gross revenues are not sufficient to recover the unamortized film production costs, the unamortized film production costs will be written down to fair value .

Results of Operations

Our revenues are derived primarily from our animated feature films and related products, and to a lesser extent, software licensing . Feature film revenue and related products represented 90%, 96% and 95% of our total revenue in fiscal 2001, 2002 and 2003, respectively . Significant film revenue streams include worldwide theatrical, home video, television and consumer products . Home video sales, including VHS and DVD formats, continue to be among the largest contributors to lifetime revenues of our films . The television market for our feature films generally follows the theatrical and home video release . We intend to release all of our films on television, which includes Pay-Per-View, pay television and network television .

Our results for the year ended January 3, 2004 were driven primarily by the worldwide theatrical release, domestic home video release, merchandise and ancillary royalties from Finding Nemo . By the end of fiscal 2003, Finding Nemo had generated approximately $792 million in worldwide box office receipts, comprised of

36 Table of Content s

$340 million domestically and $452 million internationally . We also recognized domestic home video sales of approximately 24 .8 million home video units, comprised of 5 .6 million VHS units and 19.2 million DVD units. Continuing revenues from Monsters, Inc . and our library titles also contributed to fiscal 2003 results .

Revenue

Total revenue, which consists of film revenue and software revenue, amounted to $70 .2 million in 2001, $201 .7 million in 2002 and $262 .5 million in 2003 .

Film revenue was $63 .4 million in 2001, $193 .6 million in 2002 and $250 .4 million in 2003 . Film revenues for 2001 consisted of revenues from our library titles (Toy Story, A Bug's Life an d Toy Story 2) of $50 .5 million and $12 .1 million from Monsters, Inc. domestic theatrical release . Revenues from our library titles resulted from television licensing, home video sales and merchandise sales, and ancillary royalties, including revenues resulting from a one-time transaction associated with interactive games. Film revenues for 2002 consisted of $141 .5 million from Monsters, Inc. and $50 .1 million in revenues from our library titles. Revenues for Monsters, Inc. were derived from worldwide home video sales, foreign box office receipts, merchandise sales and ancillary royalties . Revenues from our library titles resulted primarily from international television licensing, worldwide home video sales, merchandising sales and ancillary royalties. Included within these amounts were revenues of $20 .1 million as a result of one-time adjustments to film revenue from A Bug's Life and Toy Story 2 home video reserves and margins and merchandising revenues, which had a net impact of $0 .19 to our diluted net income per share . The higher revenues in 2002 relative to 2001 were primarily due to the tremendous success of Monsters, Inc. in both foreign theatrical and worldwide home video markets .

Film revenues for 2003 consisted of $189 .2 million from Finding Nemo, primarily attributable to domestic home video revenues and worldwide theatrical revenues . Monsters, Inc. contributed $22.6 million, resulting primarily from domestic television licensing and merchandising revenues . During fiscal 2003, we received updated information from Disney, which decreased previously recorded home video expenses by $3 .2 million for all of our film titles on a cumulative basis . We also received a settlement on Monsters, Inc. merchandise revenue, which resulted in an increase of $3 .5 million to our revenues . Library titles contributed $38 .0 million for fiscal 2003, resulting from merchandising, worldwide home video sales and foreign television licensing . The higher revenues in 2003 relative to 2002 were primarily due to the tremendous success of Finding Nemo in both worldwide theatrical and domestic home video markets . In May 2003, two of our library titles, Toy Story and Toy Story 2, were placed on a domestic home video sales moratorium.

Software revenue includes software license revenue, principally from RenderMan®, and royalty revenue from licensing Physical Effects, Inc . ("PEI") technology to a third party . Software revenue was $6 .9 million in 2001, $8 .1 million in 2002 and $12 .1 million in 2003 . PEI, a company we acquired in 1998, licensed certain of its technology to a third party, from which we now receive associated royalty revenue on a quarterly basis . In spite of the increase in software revenue for 2003, our primary focus is on content creation for animated feature films and related products, and as a result, we have not increased the time and resources necessary to generate significantly higher RenderMan® license revenues . Therefore, we continue to expect ongoing variability in revenue derived from software licenses from year to year . Software maintenance contracts are recorded as unearned revenue and recognized ratably over the life of the maintenance agreement, which ranges from 6 to 24 months in duration .

For fiscal 2001, 2002 and 2003, Disney accounted for 91%, 96% and 94%, respectively, of our total revenue

Cost of Revenue

Cost of film revenue was $11 .8 million in 2001, $41 .0 million in 2002, and $38 .0 million in 2003, and represents primarily amortization of capitalized film costs . Cost of film revenue as a percentage of film revenue for fiscal 2001, 2002 and 2003 was 19%, 21 % and 15%, respectively . Our cost of film revenue as a percentage of film revenue may vary for any given period due to changes in the mix of film revenue as the gross profit varies by film, as well as for revisions to estimates on revenue to be received under the individual-film-forecast-

37 EXHIBIT 2 Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington , D.C . 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4 For the fiscal year ended January 1, 2005 Commission File Number 0-26976 Pixar (Exact name of registrant as specified in its charter)

California 68-0086179 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No)

1200 Park Avenue, Emeryville, California 94608 (Address ofprincipal executive offices) (Zip Code)

Registrant ' s telephone number, including area code : (510)752-3000 Securities registered pursuant to Section 12(b) of the Act : Non e Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value per shar e (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act") 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 Rl No ❑ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. B Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) . Yes R1 No ❑ As of July 3, 2004, the last day of the Registrant's most recently completed second fiscal quarter, there were 56,480,505 shares of the Registrant's Common Stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ National Market on July 2, 2004) was $1,793,965,609 . Shares of the Registrant's Common Stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates . This determination of affiliate status is not necessarily a conclusive determination for other purposes . As of March 1, 2005, there were 58,776,532 shares of the Registrant's Common Stock outstanding . Table of Content s frames, each of which may be rendered several times in the production process, we typically have a large number of frames to render at any given time . To manage this process, Ringmaster coordinates and schedules all the processors in the RenderFarm . Ringmaster includes a compositing system and also maintains an array of disk drives as a central data repository for the digital image files generated by the rendering and compositing steps of the production process . Finally, Ringmaster controls the filming phase of production and is responsible for backing up shots for archival purposes .

RenderMan®. RenderMan® is a rendering software system for high quality photo-realistic image synthesis that we use internally and also license to third parties . Today, RenderMan® is used by many major film studios and special effects firms . RenderMan® was designed to be easily portable . It is available on these popular platforms : Linux, Macintosh OSX, and Windows. For more information, see "Business Model and Products -RenderMan ® ." Relationship with Disney

Our relationship with Disney dates back to 1986, when we entered into a joint technical development effort with Disney that resulted in the Computer Assisted Production System ("CAPS"), a production system owned and used by Disney in some of its two-dimensional cel-based animated feature films . Disney first used CAPS for The Rescuers Down Under and has continued to use it for its subsequent animated feature films, such as The Lion King and Tarzan . In 1992, certain employees of Pixar and Disney were jointly awarded an Academy Award ® for Scientific and Engineering Achievement for the development of CAPS .

In May 1991 , we entered into a feature film agreement with Disney , which provided for the development , production and distribution of up to three feature-length motion pictures ( the "Feature Film Agreement") . Toy Story was developed, produced and distributed under the Feature Film Agreement. In 1997, we extended our existing relationship with Disney by entering into the Co-Production Agreement . This agreement generally provides that we will be responsible for the development , pre-production and production of each Picture, while Disney will be responsible for the marketing, promotion , publicity, advertising and distribution of each Picture. The profits from the Pictures are shared equally between Pixar and Disney after Disney recovers a distribution fee and pre-agreed distribution costs . The term of this arrangement continues until the delivery of Cars to Disney . We have produced six highly successful films to date . We believe that the success of our track record, combined with the strength of our fin ancial resources , position us to negotiate a distribution arrangement that will provide us with more favorable economic terms and allow us to retain full ownership of our future films . Although we look forward to a more favorable agreement for films released after Cars, we also understand that such an agreement may increase some of the risks we face in the motion picture industry. See "Risk Factors - We face various distribution risks with respect to our feature films" and "Risk Factors - The Co-Production Agreement imposes several risks and restrictions on us ." Co-Production Agreement The following is a summary of the Co-Production Agreement, which w as filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K"). The following summary is not complete, and reference is made to the Co-Production Agreement filed as an exhibit to the 1996 Form 10-K . This summary is qualified in all respects by such reference. Before making an investment decision with respect to our Common Stock, we encourage you to read the Co-Production Agreement .

Overview. On February 24, 1997, we entered into the Co- Production Agreement with Disney pursuant to which we, on an exclusive basis, agreed to produce the Pictures for distri bution by Disney. Pixar and Disney agreed to co-finance the production costs of the Pictures, co-own the Pictures (with Disney having exclusive distri bution and exploitation rights), co-br and the Pictures and share equally in the profits of each Picture and any related merchandise and other ancillary products, after recovery of all marketing and distribution costs (which are financed by Disney ), a distri bution fee paid to Disney an d any other fees or costs , including any third-par ty part icipations . The Co-Production Agreement generally provides that we are responsible for the production of each Picture an d that Disney is responsible for the marketing , promotion, publicity , advertising and distribution Table of Content s of each Picture. The first four original Pictures under the Co-Production Agreement were A Bug's Life, Monsters, Inc., Finding Nemo and The Incredibles, which were released in November 1998, November 2001, May 2003 and November 2004, respectively . Toy Story 2, the theatrical sequel to Toy Story, was released in November 1999, and is also governed by the Co-Production Agreement, although it does not count towards the Pictures because it was a sequel The Co-Production Agreement also contemplates that with respect to theatrical sequels, made-for-home video sequels, television productions, interactive media products and other derivative works related to the Pictures, we will have the opportunity to co-finance and produce such products or to earn passive royalties on such products . We will not share in any theme park revenues generated as a result of the Pictures.

Production. The Co-Production Agreement provides a green lighting mechanism for the five films to be developed and produced as Pictures . Cars was the fifth film to be green lit . Once the film has been green lit, we have final control over the production of the Picture . Disney is entitled to designate a representative at Pixar to monitor the production and production costs of the Pictures .

Financing of Development and Production. Pixar and Disney share equally in the production costs of the Pictures. Production costs are defined in the Co-Production Agreement to mean all costs and expenses we incur directly related to or fairly allocable -to the creation, development, pre-production, production, post-production and delivery to Disney of the Pictures . Production costs, whether capitalized as film costs or expensed as incurred, include, among other things, all carrying costs we incur for retention of employees for production purposes and their associated overhead expenses, the costs of all treatments we prepare for submission to Disney, all costs of computer hardware and software used to develop the Pictures, and fair allocations of all costs and expenses we incur that are associated with or benefiting the Picture, including research and development, general and administrative and overhead expenses. The Co-Production Agreement provides mechanisms for the establishment of production budgets for each Picture . We may not exceed these contractually established production budgets without Disney's written approval, subject to certain limited exceptions .

Distribution. Disney is solely responsible for financing the costs and expenses of the marketing, promotion, publicity, advertising and distribution of each Picture, subject to certain requirements, and has final control over all related decisions . Disney is obligated to consult with us regarding all such major marketing and distribution decisions, and we are entitled to designate a representative to monitor marketing and distribution of the Pictures . As the films under the Co-Production Agreement have been approved for production, Disney has committed initially to release each Picture within certain windows and not to release other Disney family films during certain windows . Further, each Picture is to be distributed and marketed under the Walt Disney Pictures brand (or the then current Disney brand for premier Disney movies) and is to be distributed and marketed by Disney in all markets and media and on a worldwide basis in a manner similar to that in which Disney then currently distributes and markets its premiere animated movies . In addition, the costs for marketing, distribution and promotion of the films and related products are incurred well in advance of the release of such films and products, and consequently, we experience a delay in the receipt of cash proceeds from such films and products until after Disney recovers such costs .

Division of Gross Receipts. Pixar and Disney are entitled to share equally in all gross receipts remaining after deduction of (1) a distribution fee to Disney, (2) mutually agreed participations (payments to third parties such as actors, composers and other artists contingent upon the success of the Pictures), if any, paid by either Disney or as, and (3) Disney's distribution costs . Gross receipts include all revenues or other consideration received by Disney from the exploitation of the Pictures and any related merchandise, books, soundtracks and other tangible personal property based upon the Pictures, as more specifically provided in the Co-Production Agreement (collectively, "Merchandise"), subject to certain exceptions relating primarily to receipts from Disney's affiliates . Distribution costs are broadly defined in the Co-Production Agreement to include out-of-pocket costs paid (or in certain instances, accrued for payment) to a third party (or in certain instances, to Disney's affiliates) by Disney or certain of its affiliates, provided that such out-of-pocket costs are directly related or fairly allocable to the distribution of the Pictures and Merchandise . Pursuant to the Co-Production Agreement, we receive statements and payments of our share of gross receipts monthly within 45 days after the end of each calendar month for the first three years after the film's release then quarterly thereafter, subject to certain exceptions, and we have the right to audit Disney's books and records relating to the Pictures and Merchandise . 12 Table of Contents Derivative Works . Subject to certain exceptions, Disney and Pixar have mutual control of the decision to develop, produce or otherwise exploit any derivative works (or to transfer or license any rights to exploit any derivative works) during the term of the Co-Production Agreement or thereafter . Derivative works include theatrical sequels such as Toy Story 2, made-for-home video sequels, television productions such as Buzz Lightyear of Star Command, interactive media products such as Monsters, Inc., Finding Nemo and The Incredibles interactive games, and other derivative works as more specifically provided in the Co-Production Agreement (collectively, "Derivative Works") . Except in certain very limited circumstances, in the event of a disagreement over whether to proceed with a Derivative Work, Disney's decision governs . We are to be given the option to co-finance and produce, or to participate on a passive financial basis with respect to, a Derivative Work that is (1) a theatrical motion picture, (2) a made-for-home video production, (3) a television production, (4) location-based entertainment that uses unique characters or other elements from any of the Pictures or Toy Story as its primary theme, or (5) an interactive product such as a CD-ROM, DVD, video game or arcade game (collectively, "Interactive Products") . Although Disney has given us the option to co-finance and co-produce theatrical sequels to A Bug's Life, Toy Story 2, Monsters, Inc . an d Finding Nemo, we have declined . Therefore, should Disney release these sequels, we will participate on a passive financial basis .

If we elect to co-finance and produce a Derivative Work, the Co-Production Agreement provides for the following : (1) with respect to theatrical motion pictures and made-for-home video productions, the terms and conditions of the Co-Production Agreement are to be extended to cover such Derivative Works, subject to certain exceptions ; (2) with respect to (A) location-based entertainment using characters or other elements from a Picture or Toy Story as its primary theme and (B) television productions, Pixar and Disney are to agree mutually upon the terms and the conditions under which such work will be financed, produced and distributed, subject to certain specified requirements in the case of television productions ; and (3) with respect to Interactive Products, Disney and Pixar are to agree mutually upon the terms and conditions under which such Interactive Products shall be financed, produced and distributed, subject to certain commitments by Disney with respect to marketing and distribution and provided that there will be no distribution fee payable to Disney : For live entertainment such as stage plays or ice shows, we are entitled to participate on a passive financial basis as specified in the Co-Production Agreement. For all other Derivative Works except theme parks, we are entitled to participate on a passive financial basis in such work and to receive a reasonable royalty to be mutually agreed upon if the work is a revenue-producing work . Disney has the sole and exclusive right in perpetuity to use, without compensation to us, each Picture, the characters there from and any story elements thereof in theme parks, location-based entertainment for which Picture or Toy Story characters or elements are not the primary theme and cruise ships . A Derivative Work that is a theatrical motion picture does not count towards the five Pictures under the Co-Production Agreement . Accordingly, Toy Story 2 did not count as one of the five Pictures to be produced . Under the Co-Production Agreement, all provisions applicable to the original five Pictures apply to Toy Story 2 as well . Creative Controls. Pixar has full creative control of the production of Cars . The Co-Production Agreement provides for certain dispute resolution procedures in the event of a disagreement . Brand/Credit. The Co-Production Agreement sets forth Disney's and Pixar's intent that the Pixar brand be established as an equal brand to the Disney brand in connection with the Pictures, Merchandise and Derivative Works . The Co-Production Agreement provides that the Pixar logo, animated logo and credit shall be used in a manner that is perceptually equal to the Disney logo, animated logo and credit, subject to certain specific requirements . Exclusivity. We have agreed not to release or authorize the release of any feature-length animated theatrical motion picture we produce, other than the Pictures and Derivative Works we produce under the Co-Production Agreement, until twelve months from delivery of the fifth Picture, Cars, under the Co-Production Table of Contents Agreement . We further agreed that we would not enter into any agreement with any third party for the development, production or distribution of any feature-length animated theatrical motion picture until after we delivered the third Picture, Finding Nemo, to Disney under the Co-Production Agreement, which occurred in April 2003 . We have also agreed that we will not develop or produce any rides or attractions for major theme parks not owned or operated by Disney, and to give Disney a right to negotiate with respect to animated television productions or animated made-for-home video productions that we propose to produce during the term of the Co-Production Agreement . Disney, however, is not similarly restricted by the exclusivity provisions that bind us under the Co-Production Agreement and, therefore, may develop, produce, or distribute other feature-length animated and computer-animated theatrical motion pictures itself or enter into similar agreements with third parties . See "- Competition . "

Proprietary Rights. Under the Co-Production Agreement, the copyrights, trademarks and other intellectual property rights in and to the Pictures, all new and unique characters and story elements thereof and the audio- visual images thereof, and ancillary rights relating thereto, are jointly owned by Disney and Pixar on an undivided 50/50 basis, subject to our ownership rights in the technology and excluding any intellectual property rights previously owned by us or Disney . Disney has the exclusive distribution and exploitation rights with respect to the Pictures, Derivative Works and ancillary rights relating thereto. Under the Feature Film Agreement, Disney owns all of the proprietary rights associated with the first Toy Story film. Notwithstanding the foregoing, we own the copyright and all other intellectual property rights in and to all computer programs and other technology we develop or discover before, during or after the term of the Co-Production Agreement .

Term and Termination . The term of the Co-Production Agreement continues until the delivery to Disney of Cars, the fifth Picture produced and financed under the Co-Production Agreement, unless earlier terminated. For example, Disney is entitled to terminate the Co-Production Agreement in the event that certain types of competitors directly or indirectly acquire or control a 50% or greater ownership interest in Pixar or Pixar merges or consolidates into a competitor. Upon termination by Disney pursuant to the example above, Disney has certain rights to compel us to complete works in production. In the event of termination, the Co-Production Agreement provides that its terms and conditions continue to apply with respect to Pictures, Merchandise and Derivative Works that we have delivered to Disney or which Disney elects to have completed, as well as all future Merchandise and future Derivative Works relating thereto, but otherwise terminates .

Effect on Prior Agreements. All Derivative Works based on Toy Story including Toy Story 2 are to be governed by the Co-Production Agreement and not the original Feature Film Agreement . The original Feature Film Agreement now applies only to the rights and obligations of Disney and Pixar relating to the financial participation in, and the production and distribution of, the theatrical motion picture Toy Story and the financial participation in certain Merchandise related to Toy Story (unless gross receipts in any given month exceed a certain amount, in which case they will be subject to the Co-Production Agreement), subject to certain exceptions, and otherwise has no further force or effect . Additionally, under the Feature Film Agreement, Disney owns all of the proprietary rights associated with the first Toy Story film . Competitio n We experience intense competition with respect to our animated feature films, animation products, and software . Animated Feature Films . Our animated feature films compete and will continue to compete with family-o riented, animated and live action feature films and other family-oriented entertainment products produced by major movie studios, including Disney (as somewhat limited by the Co-Production Agreement), DreamWorks Animation SKG, Inc . ("DreamWorks"), Warner Bros . Entertainment ("Warner Bros ."), Sony Pictures Entertainment ("Sony"), Fox Entertainment Group Inc. ("Fox"), Paramount Pictures ("Paramount"), Lucasfilm Ltd . ("Lucasfilm"), Universal Studios, Inc. ("Universal"), MGM/UA, and Studio Ghibli as well as numerous other independent motion picture production comp anies. In 2004, competition continued to intensify in the family-oriented , animated and live action feature film market. Some of the family-oriented animated and live action feature films that were released domestically 14 Table of Contents Risk Factors The following is a discussion of certain factors that currently impact or may impact our business, operating results and/or financial condition . You should carefully consider these factors before making an investment decision with respect to our Common Stoc k Our operating results are primarily dependent on the success of our feature films and forecasting is extremely difficult . In 2005, our revenue and operating results will be largely dependent upon (1) the timing and amount of worldwide revenues and distribution costs for The Incredibles, Finding Nemo, and to a lesser extent, the titles in our film library, (2) the timing, accuracy, and sufficiency of information we receive from Disney to determine revenues and associated gross profits, (3) the timing and amount of non-film related revenues and expenses, (4) the accuracy of our assumptions and judgments used to estimate certain revenues and associated gross profits, (5) the market price of our Common Stock and related volatility, (6) the terms of our next distribution agreement and (7) domestic and international socioeconomic and political events that are beyond our control . Dependence on revenuefrom our feature films. Under the current Co-Production Agreement, which governs our relationship with Disney regarding the Pictures, Pixar and Disney share equally in the profits of our animated feature films after Disney recovers its distribution fee and its marketing and distribution costs . Distribution costs include worldwide theatrical release costs, costs related to merchandise, Disney's costs to market and distribute home videos in the United States and international markets, Disney's distribution fee, and other distribution costs including talent participation and residuals . We remain dependent on the timing, accuracy, and sufficiency of information provided by Disney .

For our business to be successful, our films must achieve box office success . While we have been successful in the rele as e of all six of our feature films, this level of success is highly unusual in the motion picture industry, and our future releases may not achieve similar results . For fiscal 2005 , we will be dependent pri mari ly on the worldwide home video an d merchandising success of The Incredibles , the domestic free television licensing of our library titles, and the continuing worldwide home video , intern ational television licensing and merchandise sales of all of our films, excluding our titles on home video moratori um . If our films do not generate sufficient revenues from these sources, our 2005 results would be adversely affected .

Forecasting film revenue and associated gross profits from our feature films is extremely difficul t

Although we have experi enced a successful track record with the releases of our feature films, it is difficult to predict their worldwide box office success prior to their release. While the populari ty of the film is initially measured by box office success, the film's success within each follow-on product category, such as home video , merchandise or television, depends on factors unique to each type of product, such as p ricing , competitive products, and the time of year or state of the economy into which a product is released, among many other factors . We have experi enced a ve ry successful worldwide box office release for The Incredibles , but it is difficult to predict its ultimate revenues from home video, television licensing , merchandise licensing, and ancillary streams . Moreover, The Incredibles is our first film to be released with a PG rating , as all of our previous films have been released with a G rating . It is difficult to predict what impact a PG rating may have on the perform ance of the film within each follow-on product catego ry. Additionally , we have not released a film into the home video market in the Sp ring since A Bug 's Life; therefore, it is difficult to forecast how the March 15 a' release date into this market will impact demand and the sales of the product. While box office success is o ften a good indicator of general customer acceptance , the relative success of follow-on products is not always directly correlated, and the degree of correlation is difficult to predict .

It is also difficult to forecast the amount of revenues from The Incredibles, Finding Nemo, and the titles in our film library . The revenues generated from continued home video an d merchandise sales can fluctuate due to various market factors , Because the revenues from fi lms nearing the end of their life cycle tend to be relatively small, minor fl uctuations can result in notable variances from our forecast. Both Toy Story and Toy Story 2 Table of Contents domestic home videos are currently subject to a domestic sales moratorium, which began on May 1, 2003 . Internationally, these two titles were placed on moratorium at various dates beginning in the Spring of 2004 . This strategy is designed to increase potential sales over the lifetime of a title, to prevent a declining sales price and to support a potentially higher sales price upon re-release. However, it is difficult to predict the actual impact of this strategy, particularly since these are our first titles to be placed on a sales moratorium, and it may not generate the results we expect in future years .

With respect to the difficulty of forecasting the timing of revenues, Disney distributes our films and film-related products and therefore determines the timing of product releases . Although we are moving towards a strategy to release our films theatrically worldwide within a narrower timeframe relative to our earlier films, the specific dates of the international releases for these films will depend on territory-specific factors, such as the local competitive environment and school holidays . Therefore, the timing of international revenues could span over several months, and the forecasting of such revenues is inherently more difficult .

In addition, the amount of revenue recognized in any given quarter or quarters from all of our films depends on the timing, accuracy, and amount of information we receive from Disney to determine revenues and associated gross profits . Although we obtain from Disney the most current information available to recognize our share of revenue and to determine our film gross profit, Disney may make subsequent revisions to the information that it has provided, which could have a significant impact on us in later periods . For instance, towards the end of the life cycle for a revenue stream, Disney may inform us, and has in the past informed us, of additional distribution costs to those previously forecasted . Such revisions have impacted and may continue to impact our revenue share and our film gross profit . In addition, through information we obtain from other sources, we may make certain judgments and/or assumptions and adjust the information we receive from Disney . For example, we also make adjustments to our home video revenues for estimates on return reserves that may differ from those reported by Disney. In determining our home video reserves, we review information which includes Disney's current return reserves, the historical return reserves for our previous titles, actual rates of returns, inventory levels in the distribution channel and other business and industry trend information that is available . Disney has provided and may continue to provide us with reserve information that may differ substantially from our historical experience with our previous titles . Unless Disney provides a sufficient rationale as to why the market and sales performance are substantially different for a particular title, we have and may continue to record reserves more consistent with our historical experience . The estimate for return reserves, whether based on historical information or more current information from Disney, is inherently subjective and may differ significantly from actual results . Our original estimates on reserves may be revised in future periods as new and additional information becomes available .

We have utilized margin normalization, such as with merchandise or home video expenses, in accordance with the provisions of SOP 00-2 . This may result in the utilization of budgeted or forecasted information to calculate an ultimate lifetime expense margin, rather than actual costs incurred if it is deemed to be a more accurate reflection of our participation. Similar to return reserves, these expense estimates are reviewed and may be adjusted periodically to ensure the most accurate depiction of our participation is reflected . Any revisions to our estimated reserves, margin normalization or updated information from Disney, as noted above, as well as findings from audit rights offered in accordance with the terms of the Co-Production Agreement, could have a material effect on our financial statements in any given quarter or quarters . For further details, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.

With respect to capitalized film production costs, our policy is to amortize these costs over the expected revenue streams as we recognize revenues from the associated films . The amount of film costs that will be amortized each quarter depends on how much future revenue we expect to receive from each film. Unamortized film production costs are compared with net realizable value each reporting period on a film-by-film basis . If estimated remaining gross revenues are not sufficient to recover the unamortized film production costs, the unamortized film production costs will be written down to net realizable value. In any given quarter, if we lower our previous forecast with respect to total anticipated revenue from any individual feature film, we would be 19 Table of Content s required to accelerate amortization of related film costs, resulting in lower gross margins . Such lower gross margins would adversely impact our business operating results, and financial condition . Forecasting our operating expenses is extremely difficult

Our operating expenses will continue to be extremely difficult to forecast . We budget the direct costs of the Pictures with Disney, and we share such costs equally . We capitalize our share of direct costs of film production in accordance with SOP 00-2. A substantial portion of all of our other costs is incurred for the benefit of feature films ("Overhead"), including research and development expenses and general and administrative expenses . Portions of our Overhead are included in the budgets for the Pictures under the Co-Production Agreement, and we share such costs equally with Disney under the Co-Production Agreement . With respect to the portion of our Overhead that is not reimbursed by Disney, we either (1) capitalize such portion as film production costs, if required under SOP 00-2 or (2) charge it to operating expense in the period incurred . During fiscal years 2002, 2003, and 2004, a substantial portion of our Overhead was related to the Pictures produced pursuant to the Co-Production Agreement, and was therefore reimbursed by Disney . Since we capitalize other amounts in accordance with SOP 00-2, our reported operating expenses for fiscal years 2002, 2003 and 2004 have not reflected, and future reported operating expenses will not reflect, our true level of spending on the production of animated feature films, related products and Overhead . Further, as we continue production of our films beyond the Co-Production Agreement, we expect our operating expenses to continue to increase to the extent that they are not capitalized or shared with Disney .

Film production budgets may increase, and film production spending may exceed such budgets .

Our future film budgets may continue to increase due to factors including, but not limited to, (I) escalation in compensation rates of people required to work on our current projects, (2) number of personnel required to work on our current projects, (3) equipment needs, (4) the enhancement of existing, or the development of new, proprietary technology and (5) the expansion of our facilities to accommodate the growth of the studio . The budgets for Cars and subsequent films and related products are expected to be greater than the budgets for our previous films . Under the Co-Production Agreement, we will continue to finance any post-production costs for The Incredibles, as well as the budget for Cars, equally with Disney. Due to production exigencies, which are often difficult to predict, it is not uncommon for film production spending to exceed film production budgets, and our current projects may not be completed within the budgeted amounts. In addition, when production of each film is completed, we may incur significant carrying costs associated with transitioning personnel on creative and development teams from one project to another . These carrying costs, which are currently shared with Disney and treated as film costs, increase overall production budgets and could have a material adverse effect on our results of operations and financial condition . Software revenue.

Our fiscal 2005 earnings are expected to include revenues attributable to non-film related sources including software revenue ; however, there can be no assurance as to the timing and amount of such revenues .

Other items affecting forecasting.

Our fiscal 2005 earnings are expected to include nonrevenue income and expenses such as interest income, tax expense, and stock-based compensation expense . These items can be difficult to predict and there is no assurance that we will meet our forecasts . For example, interest income is difficult to predict and can fluctuate depending on our cash, cash equivalents and investment balances as well as external factors beyond our control, such as economic conditions and interest rates available to us during the year . Further, our income tax rate for fiscal 2004 was lower than expected due to the utilization of certain tax benefits related to foreign income exclusions for the years 2000 through 2004 .

Changes in accounting regulations may also have a significant effect on our results of operations. For example, in December 2004, the Financial Accounting Standards Board ("FASB") enacted Statement of Financial Accounting Standards 123 - Revised 2004 ("SFAS 123R"), "Share-Based Payment" which replaces 20 Table of Contents Statement of Financial Accounting Standards No . 123 ("SFAS 123"), Accounting for Stock-Based Compensation" and supersedes APB Opinion No . 25 ("APB 25"), "Accounting for Stock Issued to Employees ." SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such compensation expense in our statements of income . We are required to adopt SFAS 123R in the third quarter of fiscal 2005 . The pro forma disclosures, previously permitted under SFAS 123 and adopted by Pixar, no longer will be an alternative to financial statement recognition. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we expect the adoption to increase our cost of revenues and operating expenses, and the adoption of SFAS 123R could make our net income less predictable in any given reporting period, could change the way we compensate our employees, or may cause other changes in the way we conduct our business .

Our operating results have fluctuated in the past, and we expect such fluctuations to continue .

Our revenues fluctuate significantly.

We continue to expect significant fluctuations in our future quarterly and annual revenues because of a variety of factors, including the following :

• the timing of the domestic and international theatrical releases of our animated feature films ,

• the success of our animated feature films,

• the timing of the release of related products into their respective markets, such as home videos, television, and merchandising,

• the demand for such related products, which is often a function of the success of the related animated feature film ,

• Disney's costs to distribute and promote our feature films and related products under the Co-Production Agreement,

• Disney's success at marketing our feature films and related products under the Co-Production Agreement,

• the timing and accuracy of information received from Disney and other sources on which we base estimates of revenue to be recognized from our animated feature films and related products,

• the timing and amount of non-film related revenues, such as the licensing of our software,

• the competitive environment,

• the final terms of our next distribution arrangement, and

• external socioeconomic and political events that are beyond our control .

In particular, since our revenue under the Co-Production Agreement is directly related to the success of our animated feature films, our operating results are likely to fluctuate depending on the level of success of our animated feature films and related products . The revenues derived from the production and distribution of an animated feature film depend primarily on the film's acceptance by the public, which cannot be predicted and does not necessarily bear a direct correlation to the production or distribution costs incurred. The commercial success of a motion picture also depends upon promotion and marketing, production costs and other factors . Further, the theatrical success of a feature film can be a significant factor in determining the amount of revenues generated from the sale of the related products . Our operating expenses fluctuate. We expect to continue to increase our operating expenses to fund greater levels of research and development, to ramp up to meet the demands of multiple films in production and to expand operations. In addition, we expect our spending levels may increase significantly due to the following : • continued investment in proprietary software systems,

21 Table of Contents

• continued and potentially increasing competition costs for creative, technical and administrative talent,

• increased costs associated with the expansion of our facilities ,

• increased number of personnel required to support studio growth as we have multiple films in parallel production,

• increased investment in creative development and our Pixar-only financed films ,

• increased proportion of operating expenses previously shared with Disney, and

• increased investment in administrative functions to support our expanding operations .

A portion of our operating expenses that are allocable to film productions is either capitalized by us or reimbursed by Disney under the Co-Production Agreement . To the extent that we do not capitalize (or Disney does not reimburse) the increases in expenses, our operating expenses will increase in fiscal 2005 . In addition, as we increase the resources allocated to our productions beyond our feature film Cars, which is the last film to be co-financed with Disney under the current Co-Production Agreement, we expect our operating expenses to increase significantly .

Our scheduled successive releases of feature films will continue to place a significant strain on our resources .

We have only recently established parallel creative teams so that we can develop more than one film at a time . These teams are presently working on a number of original animated feature films including the last Picture under the Co-Production Agreement, Cars and our first film outside of the Co-Production Agreement . We have only produced and released six feature films to date and have limited experience with respect to producing animated feature films in parallel . Due to the strain on our personnel from the effort required for the release of an upcoming film and the time required for creative development of future films, it is possible that we would be unable to release a new film in successive years, In the past, we have been required, and may continue to be required, to expand our employee base, increase capital expenditures and procure additional resources and facilities in order to accomplish the scheduled releases of our animated feature films . This growth and expansion has placed, and continues to place, a significant strain on our resources. We cannot provide any assurances that any future animated film will be released as scheduled or that this strain on resources will not have a material adverse effect on our business, financial condition or results of operations . In addition, John Lasseter's availability has been a key ingredient in the successful completion of our prior films . As we move towards achieving one film a year, there has been and will continue to be additional demands placed on his availability . In addition to Mr. Lasseter's role as our Executive Vice President - Creative, he is also directing Cars, our next feature film . A lack of his availability may adversely impact the success and timing of our future films .

We continuously implement a variety of new and upgraded operational and financial systems, procedures and controls, including improvement and maintenance of our accounting system, other internal management systems and backup systems . Our growth and these diversification activities, along with the corresponding increase in the number of our employees and our rapidly increasing costs, have resulted in increased responsibility for our management team. We will need to continue to improve our operational, financial and management information systems, to hire, train, motivate and manage our employees, to integrate them into Pixar and to provide adequate facilities and other resources for them . We cannot provide any assurance we will be successful in accomplishing all of these activities on a timely and cost-effective basis. Any failure to accomplish one or more of these activities on a timely and cost-effective basis would have a material adverse effect on our business, financial condition and results of operations .

The Co-Production Agreement imposes several risks and restrictions on us . We are dependent on Disney for the distribution and promotion of our feature films and related products. The decisions regarding the timing of the theatrical release and related products, the marketing and distribution strategy, and the extent of promotional support are important factors in determining the success of 22 Table of Content s our motion pictures and related products . Under the terms of the Co-Production Agreement, Disney is required to market and distribute the Pictures in the same manner as their premier animated films, and Disney is required to consult with us with respect to all major marketing and distribution decisions . While Disney is prohibited from distributing potential competing films within certain release collars, we ultimately do not control (1) the manner in which Disney distributes our animated feature films and related products, (2) the number of theaters to which Disney distributes our feature films, (3) the specific timing of release of our feature films and related products or (4) the specific amount or quality of marketing and promotional support of the feature films and related products as well as the associated promotional and marketing budgets . Because Disney co-finances the films developed and produced under the Co-Production Agreement, distributes the films under the "Walt Disney Pictures" label and enjoys substantial financial benefits in the event that such films achieve significant box office revenues, we believe that Disney desires such films to be successful . Nonetheless, Disney could make certain decisions as to marketing, distribution or promotion of the animated feature films or related products or the marketing and promotion of its own animated or other family films that could have a material adverse effect on our business, operating results or financial condition . In addition, the costs for marketing, distribution and promotion of the films and related products are incurred well in advance of the release of such films and products, and we experience a delay in the receipt of proceeds from such films and products until after Disney recovers such costs . We are also dependent on Disney for receiving accurate information on a timely basis on which we base estimates to recognize revenue and associated gross profit from the animated feature films and related products . If we fail to receive accurate information from Disney, or fail to receive it on a timely basis, it could have a significant adverse effect on our business, operating results or financial condition .

Disney has an exclusive arrangement with us. We have agreed not to release or authorize the release of any of our feature length animated theatrical'motion pictures, other than the Pictures, until twelve months from our delivery of the fifth Picture under the Co-Production Agreement . However, since we have delivered Finding Nemo, we have been free to enter into any agreement with any third party for the development, production or distribution of any feature length animated theatrical motion picture (other than the Pictures). In January 2004, we announced that we had ended our discussions with Disney regarding a new arrangement with them for films released beyond Cars . Since that time, we have had preliminary meetings with various major motion picture studios regarding a potential distribution agreement for the films we release after Cars, and we continue to explore our options with respect to a future distribution agreement.

We also agreed that we will not develop or produce any rides or attractions for major theme parks not owned or operated by Disney, and to give Disney a right to negotiate with respect to animated television productions or animated made-for-home video productions that we propose to produce during the term of the Co-Production Agreement . Disney, however, is not similarly restricted by the exclusivity provisions that bind us under the Co-Production Agreement and, therefore, may develop, produce or distribute other feature length animated and computer animated theatrical motion pictures itself or enter into similar agreements with third parties . However, if Disney produces any derivative works without Pixar, we are entitled to receive passive royalties pursuant to the terms of the Co-Production Agreement . See "Business - Competition," and "Risk Factors - We experience intense competition with respect to our animated feature films and software . "

We have an obligation to co-finance production costs.

We co-financed the first four films under the Co-Production Agreement, as well as Toy Story 2, and we will continue to co-finance Cars and may co-finance other related products to be developed and produced pursuant to the Co-Production Agreement . For example, we have, in the past, elected to actively participate in various interactive games with Disney where we fund half of the development costs of the games . We also have approved for production and have begun financing other Pixar-only financed films . If our feature films and related products do not generate proceeds sufficient to more than offset our share of their production costs, our business, operating results and financial condition will be materially adversely affected . 23 Table of Content s Disney retains the exclusive distribution and exploitation rights .

We share equally with Disney in the profits of each Picture and any related merchandise after Disney recovers certain costs ; however, Disney retains the exclusive distribution and exploitation rights of each Picture, all characters and story elements of each Picture and all related products we develop under the Co-Production Agreement. Accordingly, except in certain specified circumstances, we are not able to exploit or distribute any of our feature films or characters or elements of any of our feature films or related products developed under the Co-Production Agreement without a license from Disney . We cannot provide any assurances that such a license would be available to us on commercially reasonable terms or at all .

Disney can terminate the agreement under various circumstances.

Under the terms of the Co-Production Agreement, Disney may terminate the agreement under certain circumstances . For example, Disney is entitled to terminate the Co-Production Agreement in the event that certain types of competitors directly or indirectly acquire or control a 50% or greater ownership interest in Pixar or Pixar merges or consolidates into such a competitor. Disney would not lose any of its rights to distribute and exploit all feature films and all characters and elements of our feature films and other products we develop under the Co-Production Agreement, except for feature films or related products then in development or production as to which Disney does not elect to proceed, as to which we would regain the rights subject to a lien in favor of Disney for the costs advanced to date . Further, in the event that Disney terminated the Co-Production Agreement, we would be required to seek alternative channels for distribution of our animated feature films and related products. See "Business - Relationship with Disney. "

We are subject to risks inherent to our industry .

There are significant risks associated with the motion picture industry.

The completion and commercial success of a motion picture is extremely unpredictable, and the motion picture industry involves a substantial degree of risk. Each motion picture is an individual artistic work, and its commercial success is primarily determined by audience reaction, which is unpredictable . The completion and commercial success of a motion picture also depends upon other factors, such as :

• talent and crew availability,

• financing requirements ,

• distribution strategy, including the time of the year and the number of screens on which it is shown,

• the number, quality and acceptance of other competing films released into the marketplace at or near the same time,

• critical reviews ,

• the availability of alternative forms of entertainment and leisure time activities ,

• piracy and unauthorized recording, transmission and distribution of motion pictures,

• general socioeconomic conditions and political events ,

• weather conditions, and

• other tangible and intangible factors .

All of these factors can change and cannot be predicted with certainty. In addition, motion picture attendance is seasonal, with the greatest attendance typically occurring during the summer and holidays . The release of a film during a period of relatively low theater attendance is likely to affect the film's box office receipts adversely . Under the terms of the Co-Production Agreement, Pixar is guaranteed theatrical release either during the summer or holiday period. In addition, due to the expected release of a large number of family films by Disney and other movie studios in the next several years, it is possible that further saturation of the family film market, particularly CGI animated films, may adversely impact the commercial success of our films, and therefore have a material adverse effect on our business, financial condition and results of operations . See "Business - Competition." 24 Table of Contents Motion picturepiracy, which may intensify, could decrease the revenue we receive from the exploitation of our films.

Piracy and the unauthorized recording, transmission and dist ribution of our content are incre asing challenges. Motion picture piracy is already prevalent outside of the United States, Can ada and Western Europe and in count ries where we may have difficulty enforcing our intellectual proper ty ri ghts . Technological advances , such as the digital distribution of motion pictures , could increase the prevalence of piracy , including in the United States, because such advan ces simplify the creation, transmission an d shari ng of high quality unauthorized copies of motion pictures in theatrical release, on videotapes and DVDs, from pay-per-view through set top boxes and other devices and through unlicensed broadcas ts on free TV an d the Inte rnet . The proliferation of unautho rized copies of our products could have an adverse effect on our business, financial condition an d results of operations and decrease the revenue we receive from our legitimate products.

Motion picture trade associations such as the Motion Picture Association of America monitor the progress and efforts made by various countries to limit or prevent piracy . Some of these trade associations have initiated voluntary embargoes on motion picture exports to certain countries in the past to exert pressure on the governments of those countries to become more aggressive in preventing motion picture piracy . In addition, the U.S . government has publicly considered implementing trade sanctions against specific countries that, in its opinion, do not make appropriate efforts to prevent copyright infringements of U .S . produced motion pictures. There can be no assurance, however, that voluntary industry embargoes or U .S . government trade sanctions will be enacted or, if enacted, effective . If enacted, such actions could impact the amount of revenue that we realize from the international exploitation of motion pictures depending upon the countries subject to such action and the duration and effectiveness of such action . If embargoes or sanctions are not enacted or if other measures are not taken, we may lose an indeterminate amount of additional revenue as a result of motion picture piracy .

In order for our feature films and related products to be successful, we must develop appealing creative conten t

The success of each animated feature film developed and produced by us depends in large part upon our ability to develop and produce compelling stories and characters that will appeal to a broad audience. Traditionally, this process has been extremely difficult . While we have enjoyed worldwide box office success with all of our feature films, there can be no assurance that similar levels of success will be achieved by our subsequent films, including Cars and projects beyond the Co-Production Agreement.

We experience intense competition with respect to our animated feature films and software .

Animated Feature Films.

Our animated feature films compete and will continue to compete with family-ori ented, animated and live action feature films and other family-ori ented entertainment products produced by major movie studios, including Disney ( as somewhat limited by the Co-Production Agreement), DreamWorks , Warner Bros ., Sony, Fox, Paramount, Lucasfilm, Universal, MGM/UA, and Studio Ghibli as well as numerous other independent mo ti on picture production companies .

In 2004, competition continued to intensify in the family-oriented, animated and live action feature film market. As described in "Business - Competition" above, a number of family-oriented animated and live action feature films were released during the 2004 holiday period and competed with The Incredibles, which was released domestically on November 5, 2004 . In addition, there appears to be increasing widespread acceptance for CGI-animated films. In 2004, there was a significant increase in the number of CGI-animated films released, a trend that is likely to carry through 2005 and beyond. Primarily CGI-animated feature films currently in production for major studios include A Day With Wilbur Robinson, American Dog, Chicken Little, Flushed Away, Ice Age 2, Madagascar, Open Season, Over the Hedge, Rapunzel Unbraided, Shrek 3, Surf's Up, The Barnyard, The Wild, and Valiant, among others . Some studios have also announced publicly that they intend to release multiple CGI films per year . In addition to box office and home video competition, other family-oriented films may continue to compete with Finding Memo and The Incredibles as well as our film library with respect to related television, merchandise, and other future revenue sources . 25 Table of Content s Furthermore, due to the recent success of CGI-animated films, several movie studios have developed their own internal computer animation capability, which may be used for special effects in animated films and live action films . For example, DreamWorks has successfully produced and released Antz in 1998, Shrek in 2001, and Shrek 2 and Shark Tale in 2004. In addition, Fox successfully produced, through its subsidiary Blue Sky, Ice Age, which was released in March 2002 and Robots, which was released in March 2005 ; and Warner Bros. released The Polar Express in November 2004 . Other movie studios may internally develop, license or sub-contract three-dimensional animation capability, or enter into co-production agreements with other studios capable of developing and producing three-dimensional CGI-animated films. Further, we believe that continuing enhancements to commercially available computer hardware and software technology have lowered and will continue to lower barriers to entry for studios or special effects companies which intend to produce computer-animated feature films or other products .

Therefore, we believe competition from animated feature films and family-oriented feature films will likely continue to intensify over the next several years. Due to a potentially large number of family-oriented films scheduled for release over the next few years, it is possible that the market for these films, whether animated or live action, will become further saturated .

Our films will continue to compete with the feature films of other movie studios for optimal release dates, audience acceptance, and exhibition outlets . In addition, we compete and will continue to compete with other movie studios for the services of performing artists, and the services of other creative and technical personnel, particularly in the fields of animation and technical direction . Some of the other movie studios with which we compete hav e significantly greater financial, marketing and other resources than we do .

The Co-Production Agreement provides that we will develop and produce five original computer animated feature films . Because Disney co-finances the films developed and produced under the Co-Production Agreement, distributes the films under the "Walt Disney Pictures" label and enjoys financial benefits in the event that such films achieve significant box office revenues, we believe that Disney desires such films to be successful . Nonetheless, during its long history, Disney has been a very successful producer and distributor of its own animated feature films . While the Co-Production Agreement imposes restrictions prohibiting Disney and its affiliates from releasing animated films or live action family films within certain release windows from our films, it is likely that other family-oriented motion pictures distributed by Disney or its affiliates will overlap in the market and compete with our animated feature films . For example, Pirates of the Caribbean : The Curse of the Black Pearl, Spy Kids 3D : Game Over, an d Freaky Friday, competed directly with Finding Nemo for domestic theatrical market share during summer 2003 . The home video releases of Pirates of the Caribbean: The Curse of the Black Pearl and Freaky Friday have also competed with Finding Nemo in the worldwide home video market . The theatrical releases of Disney's National Treasure and Miramax's Finding Neverland on November 19, 2004 competed with the worldwide theatrical release of The Incredibles, and the home video release of these films may also compete with The Incredibles in the worldwide home video market . After Cars, Disney may begin to release its movies during our release windows . This could have an adverse impact on the commercial success required for us to profit from future films . Our contractual arrangement with Disney also presents other risks . See "Risk Factors - The Co-Production Agreement imposes several risks and restrictions on us . "

Computer Graphics Special Effects Firms.

We also expect to compete with computer graphics special effects firms, including ILM, Rhythm & Hues/VIFX, Tippett Studios, WETA Digital, Digital Domain, and Sony Pictures Imageworks. These computer graphics special effects firms may be capable of creating their own three-dimensional computer animated feature films or may produce three-dimensional computer-animated feature films for movie studios that compete with us . For example, ILM has already created and produced three-dimensional character animation which w as used for several central characters in the live action film Star Wars Episode 11: Attack ofthe Clones , and ILM has a royalty-free, paid-up license to use our RenderMan ® software and to obtain at no cost all enhancements and upgrades thereto . Other computer graphics special effects firms have licensed or may license RenderMan ®. Accordingly, our RenderMano software may not provide us with a competitive advantage . We also compete , or may in the future compete, with the above firms with respect to an imation products other than feature films . 26 Table of Contents Software Publishers.

We also experience competition with respect to our RenderMan® software product. In particular, we compete with makers of computer graphics imaging and animation software, principally Alias, Discreet (a division of Autodesk), Mental Images GmbH and Avid Technologies . Mental Images and Avid are each marketing competing rendering software products, usually at lower prices than the price at which we offer RenderMan Under appropriate circumstances, we have in the past elected and might in the future elect to license our rendering technology patents to other companies, some of which may compete with us . In addition, as PC's become more powerful, software suppliers may also be able to introduce products for PC's that would be competitive with RenderMan® in terms of price and performance for professional users . In addition, there have been advances in graphics processing unit technology that may impinge on the market for software rendering solutions . Faster and lower cost graphic cards provide capability for users to produce pictures of higher complexity than previously available . We expect competition to persist, intensify and increase in each of our business areas in the future . Some of our current and potential competitors have longer operating histories, larger installed customer bases and significantly greater financial, technical, marketing and other resources than we do . There can be no assurance that we will be able to compete successfully against current or future competitors . Such competition could have a material adverse effect on our business, operating results or financial condition . Our success depends on certain key employees. Our success depends to a significant extent on the performance of a number of senior management personnel and other key employees, especially our film directors, producers, animators, creative personnel and technical directors . In particular, we are dependent upon the services of Steve Jobs, John Lasseter, Edwin E . Catmull, Simon Bax, Sarah McArthur and Lois Scali . We do not currently have "key person" life insurance for any of our employees . We do have an employment agreement with Mr . Lasseter, however, such employment agreement does not necessarily assure the services of Mr. Lasseter. Moreover, although it is standard in the motion picture industry to rely on employment agreements as a method of retaining the services of key employees, we have not required our employees, other than Mr . Lasseter, to enter into employment agreements . The loss of the services of any of Messrs . Jobs, Lasseter, Bax, Dr. Catmull, Ms. McArthur, Ms . Scali or of other key employees, especially our film directors, producers, animators, creative personnel and technical directors, could have a material adverse effect on our business, operating results or financial condition . See "Business - Employees" and "Executive Officers of the Company ." Our Chief Execu tive Officer has divided responsib ilities . Pixar's Chief Executive Officer and Chairman, Steve Jobs, is also Chief Executive Officer at Apple Computer, Inc . Although Mr. Jobs spends time at Pixar an d is active in our management, he does not devote his full time and resources to Pixar. To be successful, we need to a ttract and retain qualified personnel .

Our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel . Competition for the caliber of talent required to make our films, particularly our film directors, producers, animators, creative personnel and technical directors, will continue to intensify as more studios build their in-house CGI-animation or special effects capabilities . There can be no assurance that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future . If we were unable to hire, assimilate and retain qualified personnel in the future, particularly film directors, producers, animators, creative personnel and technical directors, such inability would have a material adverse effect on our business, operating results and financial condition . See "Business - Employees" and "Executive Officers of the Company ." 27 Table of Contents We face various distribution risks with respect to our feature films .

Under the Co-Production Agreement, Disney is required to distribute the Pictures in a manner consistent with that of Disney's premier animated films . Currently, distribution of our films generally includes (1) worldwide theatrical exhibition, (2) worldwide home video sales, (3) worldwide television licensing, including Pay-Pet-View, pay television, network, basic cable and syndication and some video-on-demand (VOD), (4) non-theatrical exhibition, such as airlines, schools and armed forces facilities and (5) marketing of other rights of the picture, which may include licensing of merchandise, such as toys, interactive games and soundtrack recordings . Although the Co-Production Agreement provides us with some protection, we cannot provide any assurances that our feature films made under the Co-Production Agreement will be distributed through all of these outlets . See "Business - Business Model and Products ."

Although we have enjoyed a tremendously successful track record with all six of our feature films, we cannot provide any assurances that our future films will enjoy the same level of success . Currently, Disney shares the financial risks associated with the production of our films under the Co-Production Agreement by financing 50% of the production costs . In addition, under the Co-Production Agreement, Disney is responsible for financing 100% of the costs related to the marketing and distribution of the films . In the event that a film does not generate sufficient revenues to offset such costs, Pixar is not responsible for any losses Disney incurs . However, because we anticipate financing 100% of the production costs of our films under any future distribution agreement, we expect to bear all of the financial risks associated with a future film's production costs . In addition, we cannot provide any assurances that future distribution agreements will provide us with our current level of risk minimization related to the financing of marketing and distribution expenses . In addition, as additional entrants emerge in the animation marketplace, there may be increased competition for distribution partners . We have a limited operating history . Until 1996, we had generated recurring revenue primarily from the license of our RenderMan® software, amounts we received under software development contracts and fees for animated television commercial development . We expect to generate a substantial majority of our future revenue from the development and production of animated feature films and related products, as we have since 1996 . We have, to date, developed, produced and released only six animated feature films . Accordingly, we have a limited operating history in implementing our business model upon which an evaluation of our prospects can be based . Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of a business enterprise, particularly companies in highly competitive markets . To address these risks, we must, among other things, respond to changes in the competitive environment, continue to attract, retain and motivate qualified persons, and continue to upgrade our technologies . We cannot provide any assurances that we will be successful in addressing such risks . Our current and future commitments may have an adverse impact on our cash balances .

We are currently co-financing our remaining unreleased Picture, Cars, pursuant to the Co-Production Agreement. We are also solely financing beyond the Co-Production Agreement our first feature film as well as other projects in various stages of development . The future production costs of Cars, and subsequent films, and any future expansion of our studio and headquarters in Emeryville, California, may have an adverse impact on our cash and investment balances . As of January 1, 2005, we had $854 .8 million in cash, cash equivalents and investments . We believe that these funds, along with cash provided by operating activities, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures, production costs for Cars, as well as production and development costs for future films and development projects . See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in Item 7 of this Form 10-K . To date, we have chosen to use our existing cash resources to fund film production costs and construction costs . We may continue to use our cash resources for such expenditures, or may choose to finance such capital expenditures through issuance of additional equity or debt securities, by obtaining a credit facility or by some other financing mechanism . The sale of additional equity or convertible debt securities would result in 28 Table of Contents additional dilution to our shareholders . Moreover, we cannot provide any assurances that we will be successful in obtaining future financing, or even if such financing is available, that we will obtain it on favorable terms or on terms providing us with sufficient funds to meet our obligations and objectives .

We depend on our proprietary technology and computer systems for the timely and successful development of our feature films and related products .

We cannot provide any assurances that we will not experience difficulties that could delay or prevent the successful development or production of future animated feature films or other related products . Among other things, because we are dependent upon a large base of software and a large number of computers for the development and production of our animated feature films and related products, an error or defect in the software, a failure in the hardware or a failure of the backup processes could result in a significant delay in one or more productions in process which, in turn, could result in potentially significant delays in the release dates of our feature films or other products. In the past we have experienced minor delays as a result of such matters . Significant delays in production and significant delays in release dates could have a material adverse effect on our business, operating results or financial condition . Further, because we rely mostly on internally developed software, we would not be able to rely upon assistance from third parties in the event that the software fails . See "Business - Technology. "

A single shareholder owns a large percentage of our outstanding stock .

Our Chief Executive Officer, Steve Jobs, beneficially owned approximately 51 .0% of our outstanding Common Stock as of March 1, 2005 . As a result, Mr. Jobs, acting alone, is able to exercise sole discretion over all matters requiring shareholder approval, including the election of the entire board of directors and approval of significant corporate transactions, including an acquisition of Pixar . Such concentration of ownership may also have the effect of delaying or preventing a change in control of Pixar, impeding a merger , consolidation, takeover or other business combination involving Pixar, o r discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of Pixar .

Business interruptions could adversely affect our operations .

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control . Although we have developed certain plans to respond in the event of a disaster, there can be no assurance that they will be effective in the event of a specific disaster. Our facilities in the State of California have in the past and may in the future be subject to electrical blackouts as a consequence of a shortage of available electrical power. In the event of a short-term power outage, we have installed UPS (uninterrupted power source) equipment to protect our RenderFarm and other sensitive equipment, along with two 1 .5 Megawatt backup generators; however, a long-term power outage could disrupt our operations. Prices for electricity have in the past risen dramatically and may increase in the future . An increase in prices would increase our operating costs, which could in turn adversely affect our profitability . We do not carry earthquake insurance for earthquake related losses and although we carry business interruption insurance for other potential losses, there can be no assurance that such insurance will be sufficient to compensate us for losses that may occur . Any losses or damages incurred by us could have a material adverse effect on our business and results of operations . Terrorist activities and resulting military and other actions could adversely affect our business . The continued threat of terrorism within the United States and abroad, military action and heightened security measures in response to such threats, as well as other socioeconomic and political events, may cause significant disruption to commerce, including the entertainment industry, throughout the world . For example, the terrorist attacks in New York and Washington, D.C. on September 11, 2001 disrupted commerce throughout the United States and Europe . Such disruption in the future could have a material adverse effect on our business and results of operations . 29 Table of Contents Work stoppages could adversely impact our operations.

Although none of our employees are represented by a labor union, it is common for film directors, producers, animators and actors at film production companies to belong to a union. There can be no assurance that our employees will not join or form a labor union or that we, for certain purposes, will not be required to become a union signatory . We may be directly or indirectly dependent upon certain union members, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or results of operations . If a work stoppage occurs, it could delay the completion of our films and have a material adverse effect on our business operating results or financial condition . To be successful, we will need to continuously enhance our existing proprietary technology and develop new technology .

Substantially all of our revenues have been derived, and substantially all of our future revenues are expected to be derived, from the use and license of our proprietary technologies . We expect that we will be required to enhance these technologies and to develop new technologies in order to be successful in our industry and in the licensing of our RenderMan® software . We cannot provide any assurances that we will be successful in enhancing our existing technologies or in developing and utilizing new technologies, or that competitors will not develop technology that is equivalent or superior to our technologies or that makes our technologies obsolete. If we are unable to develop enhancements to our existing technologies or new technologies as required, or if the costs associated with developing those technologies continue to increase, our business, operating results or financial condition could be materially adversely affected. See "Business - Technology" and "Business - Competition . "

There are various risks associated with our proprietary rights .

Our efforts to protect our proprietary technologies may not succee d

Our success and ability to compete is dependent in part upon our proprietary technology . While we rely on a combination of patents, copyright and trade secret protection, nondisclosure agreements and cross-licensing arrangements to establish and protect our proprietary rights, we believe that factors such as the technical and creative skills of our personnel are more essential to our success and ability to compete . We currently have twenty-nine patents in force in the United States and eighteen patents in force in foreign countries . In addition, we have a number of patent applications pending in the United States and in foreign countries . We cannot provide any assurances that patents will issue from any of these pending applications or that, if patents do issue, any claims allowed will be sufficiently broad to protect our technology . In addition, we cannot provide any assurances that any patents that have been issued to us, or that we may license from third parties, will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide us with any proprietary protection. Failure of the patents to provide protection of our technology may make it easier for our competitors to offer technology equivalent to or superior to our technology. We generally enter into confidentiality or license agreements with our employees, consultants and vendors, and generally control access to and distribution of our software, documentation and other proprietary information . Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information, products or technology without authorization, or to develop similar or superior technology independently . Policing unauthorized use of our products is difficult and expensive . In addition, effective copyright, patent and trade secret protection may be unavailable or limited in certain foreign countries . We generally rely on "electronically delivered" software licenses that include an electronic acceptance by the purchaser, which may be unenforceable under the laws of certain jurisdictions . We cannot provide any assurances that the steps we take will prevent misappropriation of our technology or that our confidentiality or license agreements will be enforceable . See "Business - Proprietary Rights. " Enforcing our proprietary rights may require litigation . Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to protect our patents, to determine the validity and scope of the proprietary rights of others, or to defend 30 Table of Content s against claims of infringement or invalidity . Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition . See "Business - Proprietary Rights." Others may assert infringement claims against us.

One of the risks of the film production business is the possibility of claims that our productions infringe on the intellectual property rights of third parties with respect to previously developed films, stories, characters or other entertainment . In addition, our technology and software may be subject to patent, copyright or other intellectual property claims of third parties . We have received, and are likely to receive in the future, claims of infringement of other parties' proprietary rights . There can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against us, or that any assertions or prosecutions will not have a material adverse effect on our business, financial condition or results of operations. Irrespective of the validity or the successful assertion of such claims, we would incur significant costs and diversion of resources with respect to the defense thereof, which could have a material adverse effect on our business, financial condition or results of operations . If any claims or actions are asserted against us, we may seek to obtain a license under a third party's intellectual property rights . We cannot provide any assurances, however, that under such circumstances a license would be available on reasonable terms or at all . See "Business - Proprietary Rights ."

Third-party technology licenses may not continue to be available to us in the future.

We also rely on certain technology that we license from third parties, including software that we integrate and use with our internally developed software . We cannot provide any assurances that these third-party technology licenses will continue to be available to us on commercially reasonable terms The loss of, or inability to maintain any of these technology licenses could result in delays in feature film releases or product releases until equivalent technology could be identified, licensed and integrated . Any such delays in feature film releases or product releases could have a material adverse effect on our business, operating results and financial condition. See "Business - Proprietary Rights . "

The market price of our Common Stock has been very volatile in the past, and we expect such volatility to continue .

The market price of our Common Stock is highly volatile and is subject to wide fluctuations in response to a wide variety of factors, including the publication of box office results for our feature films and those of our competitors, fluctuations in our quarterly or annual results of operations, changes in financial estimates by securities analysts, announcements made by us, Disney, or our competitors, budget increases, delays in or cancellation of feature film or other product release dates, speculation about the negotiation of terms or conditions of our next distribution arrangement, or socioeconomic, political or other factors . For example, during fiscal 2004, our Common Stock closed as low as $62 .42 and as high as $94 .56 per share, and during fiscal 2003, our Common Stock closed as low as $50 .19 and as high as $74 .20 per share . Moreover, in recent years, the stock market has experienced extreme price and volume fluctuations, some of which have been unrelated or disproportionate to the operating performances of the companies affected . These broad market and industry fluctuations may adversely affect the market price of our Common Stock . In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company . If brought against Pixar, such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on our business, operating results or financial condition. See "Market for Registrant's Common Stock and Related Shareholder Matters . " As described in "Risk Factors - Our operating results have fluctuated in the past, and we expect such fluctuations to continue," we believe that period-to-period comparisons of our results of operations may not be necessarily meaningful . Accordingly, you should not rely on our annual and quarterly results of operations as any indication of future performance . In addition, it is possible that in some future period our operating results will be below the expectations of public market analysts and investors or the guidance we have provided. In such event, the price of our Common Stock may be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K . 31 Table of Contents While we believe we currently have adequate internal control over financial reporting , we are required to assess our internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor con fidence in our financial repo rts and have an adverse effect on our stock p ri ce .

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, ("Section 404") and the rules and regulations promulgated by the SEC to implement Section 404, we are required to include in our Form I 0-K an annual report by our management regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management .

Management's assessment of internal controls over financial reporting requires management to make subjective judgments and, because this requirement to provide a management report is newly effective, some of our judgments will be in areas that may be open to interpretation . Therefore our management report may be uniquely difficult to prepare and our auditors, who are required to issue an audit report along with our management's report, may not agree with management's assessments. While we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls to future periods is subject to the risk that our controls may become inadequate because of changes in conditions, and, as a result, the degree of compliance of our internal control over financial reporting with the policies or procedures may deteriorate .

If we are unable to assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price .

We are subject to ri sks caused by the availability and cost of insurance .

Changing conditions in the insurance industry have affected most areas of corporate insurance . These changes have in the past and may in the future result in higher premium costs, higher deductibles and lower insurance coverage limits . Due to these factors, we have elected to self-insure certain risks . For example, we do not carry earthquake insurance due to its high cost .

Item 2 . Properties

Our primary studio and headquarters facility is located at 1200 Park Avenue, Emeryville, California and consists of approximately 247,000 square feet of office space for two buildings, which we own . In addition, we lease approximately 40,000 square feet of office and warehouse space, which are located within close proximit'to our Emeryville facility, as well as approximately 4,000 square feet of office space in Seattle, Washington, which is occupied by our RenderMan software group . We believe that our properties and facilities are suitable and adequate for current operations . In November 2002, we purchased approximately 2.24 acres of land adjacent to our primary facility for $9 .4 million, for future expansion, Our primary studio and headquarters facility together with the additional land purchases noted above represents our Emeryville Campus . We used existing cash resources to fund these facility-related costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in Item 7 of this Form 10-K .

Item 3 . Legal Proceedings

Pixar is regularly subject to certain legal proceedings and claims that arise in the ordinary course of business. Many of these have not yet been fully adjudicated. In the opinion of management, Pixar does not have a potential liability related to any current legal proceedings and claims that would have a material adverse effect on its financial condition, liquidity or results of operations . However, the results of legal proceedings cannot be predicted with certainty. Should Pixar fail to prevail in any of these legal matters or should several of these legal matters be resolved against Pixar in the same reporting period, the operating results of a particular reporting period could be materially adversely affected . 32 Table of Content s Although we look forward to a more favorable distribution agreement for films released after Cars, we also understand that distributing our films through another studio may increase some of the risks we face in the motion picture industry . See "- Relationship with Disney," "Risk Factors - We experience intense competition with respect to our animated feature films and software" and "Risk Factors - We face various distribution risks with respect to our feature films."

Pixar and Disney jointly finance all production costs relating to the Pictures on an equal basis . Pursuant to the terms of the Co-Production Agreement the parties established a mutually acceptable funding mechanism to ensure that sums would be available in a timely manner to fund production costs. In practice, Pixar prepares funding requests for forecasted film production costs and Disney funds its share on a monthly basis at approximately the beginning of the month . All payments to Pixar from Disney for development and production of Toy Story under the Feature Film Agreement, and the Pictures under the Co-Production Agreement have been recorded as cost reimbursements . Accordingly, no revenue has been recognized for such reimbursements; rather, we have netted the reimbursements against the related costs . These reimbursed costs through the end of fiscal 2004 are set forth in Note 4 of Notes to Financial Statements .

Critical Accounting Policies

Revenue Recognition

We recognize film revenue from the distribution of all our animated feature films and related products when earned and reasonably estimable in accordance with Statement of Position 00-2 - "Accounting by Producers or Distributors of Films" (SOP 00-2) . The following are the conditions that must be met in order to recognize revenue in accordance with SOP 00-2 :

• persuasive evidence of a sale or licensing arrangement with a customer exists ;

• the film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery ;

• the license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale ;

• the arrangement fee is fixed or determinable ; and

• collection of the arrangement fee is reasonably assured .

Under the Co-Production Agreement, we share equally with Disney in the profits of The Incredibles, Finding Nemo, Monsters, Inc ., Toy Story 2 and A Bug 's Life after Disney recovers its marketing, distribution and other predefined costs and fees . Our revenues for Toy Story are govern ed by the terms of the Feature Film Agreement under which Disney fully fi nanced the production costs an d shares a specifi ed percentage of Toy Story pro fi ts with Pixar after certain agreed upon costs and fees are deducted . We recognize revenue from our films net of distribution fees, rese rv es for returns , an d marketing and distribution expenses. Disney provides us with gross receipt information, retu rn rese rve information, marketing and distribution costs and any other fees and expenses . We utilize this information to determine our portion of the revenue by applying the contractual provisions included in our arrangements with Disney. We may also adjust certain of Disney ' s estimates, such as home video returns and distribution expenses, bas ed on Pixar's histo ri cal experience and other industry information. The amount of revenue recognized in any given quarter or quarters from all of our fi lms depends on the timing, accuracy, and sufficiency of information we receive from Disney to determine revenues and associated gross profits. Although Disney provides us with the most current information available to enable us to recognize our share of revenue and determine our film gross profit, in the p ast we have made revisions , and we are likely to make revisions in the future, to that information bas ed on our estimates and judgments . Such information includes theat ri cal bad debt reserves and expenses , home video return reserves an d expenses , merchandise expenses , and estimates for both revenues and related expenses resulting from differences between Disney's fiscal report ing peri od and ours .

For example, in the past, our theatrical revenues have been adjusted for our estimated rese rves on potential uncollectible amounts to be received from theatrical exhibitors. Estimated reserves for uncollectible amounts are 37 Table of Contents established b ased on a review of the industry, discussions with Disney, and our historical experience. To date we have not expe rienced significant losses, and therefore we have not had significant rese rves for uncollectible receivables . The total allowance against our revenue for theatrical exhibitor uncollectible amounts approximated $2.2 million and $1.0 million at January 3, 2004 and January 1, 2005, respectively.

We have also made adjustments to our home video revenues for estimates on return rese rv es that may differ fr om those repo rted by Disney. In determining our home video rese rves for a particular title, we review information such as Disney ' s current return reserv es , the historical return reserv es for our previous titles, actual rates of returns, invento ry levels in the distribution channel and other business and indust ry trend information that is available . Disney has provided and may continue to provide us with reserve information that may differ substantially from our historical experi ence with our previous titles . Unless Disney provides a sufficient rationale as to why the market an d sales perform ance are subst antially different for a particular title, we have and may continue to record reserves more consistent with our histori cal experience . Our home video return reserves exceeded Disney's estimates by $27 .8 million and $ 2.5 million at January 3, 2004 an d January 1, 2005, respectively . The estimate for return reserv es, whether based on histori cal information or more current information from Disney , is inherently subjective and may differ signific an tly from actual results. Our ori ginal estimates on reserves may be revised in future periods as new and additional information becomes available . See Note 9 of Notes to Financial Statements for further discussion on rese rv es for returns .

We have utilized margin normalization, such as with merchandise or home video expenses, in accordance with the provisions of SOP 00-2 . This may result in the utilization of budgeted or forecasted information to calculate an ultimate lifetime expense margin, rather than actual costs incurred if it is deemed to be a more accurate reflection of our part icipation . Similar to return reserves , these expense estimates are reviewed and may be adjusted periodically to ensure that the most accurate depiction of our participation is reflected. For example, during fiscal 2004, we received updated information from Disney that supported a reduction in the ultimate expense projections for Finding Nemo and Monsters, Inc . As a result, we revised our estimate of domestic home video and merchandise expense, which increased our revenues by $13 . 8 million for the year .

Disney may also make subsequent adjustments to the information that it has provided , and these adjustments could have a significant impact on our operating results in later periods . As updated information becomes available from Disney, it may result in a change of estimation for revenue recognition . For example , we received updated information from Disney in the first qua rter of 2003, which decreased previously recorded home video expenses by $3 .2 million for all of our fi lm titles on a cumulative basis . Duri ng the second quart er of 2003, we recognized an adjustment that reduced our Monsters, Inc. domestic home video revenue after we received updated information from Disney, which reflected higher returns of domestic home video than had been ori ginally anticipated. This adjustment reduced our home video revenues by $4 .4 million for the quarter. We also received a settlement on Monsters, Inc . merchandise revenue during the third quarter of 2003, which resulted in an increase of $3 .5 million to our revenues .

Any revisions to our estimated reserves, margin normalization or updated information from Disney , as noted above, as well as findings from audit rights offered in accordance with the terms of the Co-Production Agreement , could have a material effect on our financial statements in any given qua rter or quarters. See Note 8 and Note 9 of Notes to Financial Statements for additional discussion on such adjustments and revisions . In accordance with the provisions of SOP 00-2, a film is classified as a libra ry title after three years from the film's initial release . Currently, Toy Story, A Bug 's Life, Toy Story 2 and Monsters, Inc. are classified as library titles. The term "library title" is used solely for the purpose of classification and for identifying previously released films in accordance with the provisions of SOP 00-2. Revenue recognition for such titles is in accordance with our revenue recognition policy for film revenue. Software Revenue Revenue for software licenses is recognized in compliance with SOP 97-2 "Software Revenue Recognition" as amended by SOP 98-9 "Modification of SOP 97-2, With Respect to Certain Tr ansactions." Under SOP 97-2, as amended, we recognize revenues when all of the following conditions are met : • persuasive evidence of an agreement exists ;

38 Table of Content s

• delivery of the product has occurred ;

• the fee is fixed or determinable ; and

• collection of these fees is probable .

SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element b ased on the relative fair values of the elements . Revenue recognized from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as support services , b ased on the relative fair values of the elements . Our determination of fair value of each element in multi-element arrangements is b as ed on vendor- specific objective evidence (VSOE). We limit our as sessment of VSOE for each element to either the price charged when the same element is sold separately or the p ri ce established by management, having the relevant authority to do so, for an element not yet sold separately .

Software maintenance is recorded as deferred revenue and is recognized ratably over the term of the agreement, which is generally twelve months . Film Production Costs

We capitalize our share of direct film production costs in accordance with SOP 00-2 . Film production costs include costs to develop and produce computer animated motion pictures, which primarily consist of salaries, equipment and overhead . With regard to the Pictures, we capitalize film production costs in excess of reimbursable amounts from Disney . For film projects outside of our existing Disney relationship, we capitalize all film production costs . Production overhead, a component of film costs, includes allocable costs of individuals or departments with exclusive or significant responsibility for the production of our films . Capitalized production overhead does not include administrative, general and research and development expenses . Once a film is released, capitalized film production costs will be amortized in the proportion that the revenue during the period for each film bears to the estimated revenue to be received from all sources under the individual-film-forecast-computation method . The amount of film costs that will be amortized each quarter will depend on how much future revenue we expect to receive from each film. With respect to the Pictures, we make certain estimates and judgments of our future gross revenues to be received for each film based on information received from Disney and on our knowledge of the industry . Estimates of anticipated total gross revenues are reviewed periodically and may be revised if necessary . A change to the estimate of gross revenues for an individual film may result in an increase or decrease to the percentage of amortization of capitalized film costs relative to a previous period . Unamortized film production costs are compared with net realizable value each reporting period on a film-by-film basis . If estimated remaining gross revenues are not sufficient to recover the unamortized film production costs, the unamortized film production costs will be written down to fair value . In the event a film is not set for production within three years from the time of the first capitalized transaction, all such costs will be expensed . Results of Operation s

Our revenues are derived primarily from our animated feature films and related products, and to a lesser extent, software licensing . Feature film revenue and related products represented 96%, 95% and 95% of our total revenue in fiscal 2002, 2003 and 2004, respectively . Significant film revenue streams include worldwide theatrical, home video, television and consumer products . Home video sales, including VHS and DVD formats, continue to be among the largest contributors to lifetime revenues of our films. The television market for our feature films generally follows the theatrical and home video release . We intend to release all of our films on television, which includes Pay-Per-View, pay television and network television .

Our results for the year ended January 1, 2005 were driven primarily by worldwide home video and consumer products revenue from Finding Nemo and the worldwide theatrical release of The Incredibles. By the end of fiscal 2004, The Incredibles had generated approximately $530 million in worldwide box office receipts, comprised of $252 million domestically and $278 million internationally . Additionally, the films in our film library contributed approximately 25% of our total revenues underscoring the long-term value of these highly successful franchises . 39 EXHIBIT 3 Table of Contents UNITED STATE S SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D .C . 20549

SCHEDULE 14A INFORMATIO N PROXY STATEMENT PURSUANT TO SECTION 14 (a) OF THE SECURITIES EXCHANGE ACT OF 193 4 Filed by the Registrant Fx1

Filed by a Party other than the Registrant ❑

Check the appropriate box : ❑ Preliminary Proxy Statemen t ❑ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6 (e) (2)) ❑x Definitive Proxy Statement ❑ Definitive Additional Materials ❑ Soliciting Material Pursuant to Section 240 .14a-11 (c) or Section 240 .14a-12 PIXAR

(Exact Name of Registrant as Specified in its Charter) Payment of Filing Fee (Check the appropriate box) : ❑ No fee required . ❑ Fee computed per Exchange Act Rules 14a-6 (i) (4) and 0-11 . ❑ Fee paid previously with preliminary materials. ❑ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11 (a) (2) and identify the filing for which the offsetting fee was paid previously . Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing . Table of Contents A T\ ANIMATION STUDIO S

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To Be Held on August 19, 200 5 To the Shareholders :

Notice is hereby given that the Annual Meeting of Shareholders (the "Annual Meeting") of Pixar, a California corporation, will be held on Friday, August 19, 2005 at 10:00 a.m ., local time, in the Wattis Theater at the San Francisco Museum of Modern Art located at 151 Third Street, San Francisco, California 94103, for the following purposes : 1 . To re-elect eight directors to serve for the ensuing year or until their successors are duly elected and qualified .

2 . To ratify the appointment of KPMG LLP as Pixar's independent registered public accounting firm for the fiscal year ending December 31, 2005 .

3 . To transact such other business as may properly come before the meeting or any adjournment thereof .

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.

Only holders of record of Pixar's common stock at the close of business on June 20, 2005 are entitled to notice of and to vote at the Annual Meeting .

All shareholders are cordially invited to attend the Annual Meeting in person . However, to assure your representation at the Annual Meeting, please vote as soon as possible using one of the following methods : (1) by telephone by calling the toll-free number as instructed on the enclosed proxy card, (2) by using the Internet as instructed on the enclosed proxy card or (3) by mail by completing, signing, dating and returning the enclosed proxy card as promptly as possible in the postage-prepaid envelope enclosed for that purpose . For further details, please see the section entitled "Voting" on page two of the accompanying Proxy Statement . Any shareholder attending the Annual Meeting may vote in person even if he or she has voted using the Internet, telephone or proxy card. By Order of the Board of Directors /s/ SIMON T. BAX

Simon T. Bax Executive Vice President, Chief Financial Officer and Secretary Emeryville, California July 11, 200 5

IMPORTANT : WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE BY (1) TELEPHONE, (2) USING THE INTERNET OR (3) COMPLETING AND PROMPTLY RETURNING THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED. Table of Contents SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMEN T

The following table sets forth the beneficial ownership of Common Stock of Pixar as of June 20, 2005 for the following : (1) each person who is known by Pixar to own beneficially more than 5% of the outstanding shares of Pixar's Common Stock ; (2) each of the Named Officers (as defined in the Summary Compensation Table) ; (3) each of Pixar's directors; and (4) all directors and executive officers of Pixar as a group .

Number of Percent of Name of Beneficial Owner Shares (1) Total (1 )

Steve Jobs 60,000,002 50.61%o c/o Pixar 1200 Park Avenue Emeryville, CA 94608 The TCW Group, Inc. (2) 19,718,804 16 .63 % 865 South Figueroa Street Los Angeles, CA 90017 Wellington Management Company (3) 8,191,520 6 .91 % 75 State Street Boston, MA 0210 9 Entities affiliated with FMR Corp . (4) 6,267,498 5 .29% 82 Devonshire Stree t Boston, MA 02109 Simon T . Bax (5) 170,00 0 Edwin E . Catmull (6) 887,60 0 John Lasseter (7) 446,347 Lois Scali (5) 190,00 0 Skip M . Brittenham (5) 120,00 0 Susan L . Decker (8) 30,000 Joseph A. Graziano (5) 40,000 Lawrence B . Levy (9) 110,02 0 Joe Roth (5 ) 80,00 0 Larry W . Sonsini (ID ) 62,730 All directors and executive officers as a group (12 persons) (11) 62,236,699 51 .93 %

* Represents less than 1% of the total .

(1) Based on 118,558,936 shares outstanding on June 20, 2005 . The number and percentage of shares beneficially owned is determined under rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose . Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days of June 20, 2005 through the exercise of any stock option or other right . Unless otherwise indicated in the footnotes, each person has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares shown as beneficially owned . (2) As indicated in the Schedule 13G filed by The TCW Group, Inc. pursuant to the Exchange Act on February 14, 2005. (3) As indicated in the Schedule 13G filed by Wellington Management Company LLP pursuant to the Exchange Act on February 14, 2005 . (4) As indicated in the Schedule 13G filed by FMR Corp . pursuant to the Exchange Act on February 14, 2005. The following natural persons exercise dispositive power for the shares held by entities affiliated with FMR Corp.: Edward C . Johnson 3d and Abigail P . Johnson . (5) All such shares are subject to options that are exercisable within 60 days of June 20, 2005 .

(6) Includes 390,000 shares subject to options that are exercisable within 60 days of June 20, 2005 .

9 Table of Content s

(7) Includes 53,365 shares subject to options that are exercisable within 60 days of June 20, 2005 . (8) Includes 20,000 shares subject to options that are exercisable within 60 days of June 20, 2005 . (9) Includes 60,000 shares subject to options that are exercisable within 60 days of June 20, 2005 .

(10) Includes 53,674 shares subject to options that are exercisable within 60 days of June 20, 2005 .

(11) Includes 1,277,039 shares subject to options that are exercisable within 60 days of June 20, 2005 .

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANC E

Section 16(a) of the Exchange Act ("Section 16(a)") requires Pixar's executive officers, directors and persons who own more than 10% of Pixar's Common Stock, to file initial reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC and the National Association of Securities Dealers, Inc . Such executive officers, directors and 10% shareholders are also required by SEC rules to furnish Pixar with copies of all such forms that they file .

Based solely on its review of the copies of such forms received by Pixar and written representations from certain reporting persons that no Forms 5 were required for such persons, Pixar believes that during fiscal 2004 all Section 16(a) filing requirements applicable to its executive officers, directors and 10% shareholders were complied with .

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIO N

Pixar's Compensation Committee was formed in October 1995 and currently consists of Ms . Decker and Mr. Graziano . No interlocking relationship exists between any member of Pixar's Board of Directors or Compensation Committee and any member of the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past . No member of the Compensation Committee is or was formerly an officer or an employee of Pixar .

EQUITY COMPENSATION PLAN INFORMATIO N The following table summarizes the number of outstanding options granted to employees and directors, as well as the number of securities remainin g available for future issuance, under Pixar's compensation plans as of January 1, 2005 .

Number of Securiti es Remaining Number of Securities to Weighted-Average Available for Future Issuanc e be Issued Upon Exercise Exercise Price of Under Equity Compensatio n of Outstanding Options, Outstanding Options, Plana (Excluding Securi ti e s Plan Category Warrants and Rights Warrants and Rights Reflected in the Fi rst Column)

Equity compensation plans approved by security holders 16,203,366 $ 20.66 6,059,632(1 ) Equity compensation plans not approve d by security holders - -

Total 16,203,366 $ 20.66 6,059,632(1 )

(1) Includes 3,505,576 shares that were added to the shares reserved for issuance on January 1, 2005 pursuant to an evergreen formula . Pixar's 2004 Plan incorporates an evergreen formula pursuant to which on January 1 of each year (beginning January 1, 2005 and ending January 1, 2014) the aggregate number of shares reserved for issuance under the 2004 Plan will increase by a number of shares equal to the lesser of (i) 3% of the outstanding shares on the immediately preceding date or (ii) an amount determined by the Board . 10 Table of Contents EXECUTIVE OFFICER COMPENSATIO N

Summary Compensation Tabl e

The following table shows, as to the Chief Executive Officer and each of the four most highly compensated executive officers whose salary plu s bonus exceeded $100,000 during the last fiscal year (the "Named Officers"), informa tion concerning compensation paid for services to Pixar in al l capacities during the last three fiscal years .

Long Ter m Compensatio n Awards Annual Compensation

Securities All Other Underlying Compensati on Name and Principal Posi ti on Year Sala ry(1) Bonus Options (2)

Steve Jobs 2004 S 52 5 - S Chairman, Chief Executive Officer 2003 53 - 2002 52 - - - Edwin E. Catmull 2004 545,019 - - 1,85 0 President 2003 530,012 120,003 - 2,15 0 2002 521,950 43,334 - 2,000 Simon T . Bax(3) 2004 310,583 200,000(4) 800,000 2,00 0 Executive Vice President, Chief Financial Officer 200 3 2002 - - - - John Lasseter 2004 2,862,307 675 Executive Vice President, Creative 2003 2,776,988 - --~ 3,32 5 2002 2,595,542 - - 2,000 Lois Scali(5) 2004 458,246 - - 1,79 0 Executive Vice President, General Counsel 2003 347,131 207,217(4) 600,000 2,21 0 200 2

(1) For fiscal 2004 and 2002, amounts shown represent 52 weeks of salary. For fiscal 2003, amounts shown represent 53 weeks of salary .

(2) This amount consists of employer-matching contributions under the Company's 401(k) Plan . Fiscal 2004 and 2002 were 52-week years, while fiscal 2003 was a 53-week year.

(3) Mr. Bax joined Pixar in May 2004 .

(4) Includes a signing bonus of $200,000. (5) Ms . Scali joined Pixar in March 2003 . Option Grants in Last Fiscal Yea r The following table sets forth, for each of the Named Officers, the stock options granted under Pixar's stock option plans during fiscal 2004 . Potential Realizable Value at Assumed Annual Rate s Number of % of Total of Stock Price Apprecia ti on Securi ti e s Option s for Option Term (3) Underlying Granted to Exercise Options Employees in Price Expiratio n Name Granted Fiscal Year (1) (S/SH) Date ( 2) 5% 10%

Steve Jobs S - $ Edwin E . Catmull - - - - Simon T . Bax 800,000(4) 33 .14% 34 .135 05/03/14 17, 173,854 43,521,91 9 John Lasseter Lois Scali

11 Table of Content s

(1) Pixar granted options to purchase 2,413,800 shares of Common Stock to employees in fiscal 2004 . (2) Options may terminate before their expiration upon the termination of optionee's status as an employee or consultant, the optionee's death or an acquisition of Pixar. (3) The 5% and 10% assumed rates of appreciation are provided in accordance with rules of the SEC and do not represent Pixar's estimates or projections of future Common Stock price growth . This table does not take into account any appreciation in the price of the Common Stock from the date of grant to date. (4) This option is a non-statutory stock option granted under the 1995 Stock Plan. It has an exercise price equal to the fair market value on the date of grant and vests over a four-year period at the rate of one-fourth at the end of each year from the vesting start date. Option Exercises and Holding s The following table sets forth, for each of the Named Officers, certain information concerning stock options exercised during fiscal 2004, and the number of shares subject to both exercisable and unexercisable stock options as of January 1, 2005 . Also reported are values for "in-the-money" options that represent the positive spread between the respective exercise prices of outstanding stock options and the fair market value of Pixar's Common Stock as of January 1, 2005 .

Number of Securities Value of Unexercised Underlying Unexercised Options In-the-Money Options Number of at Fiscal Year End (#) At Fiscal Year End ($) (1) Shares Acquired On Value Name Exercise (t~ Realized ($) Exercisable Unexercisable Exercisable Unexercisable

Steve Jobs - $ - - $ $ Edwin E . Catmull 310,000 6,797,250 290,000 250,000 8,570,950 7,388,750 Simon T . Bax - - - 800,000 - 6,936,000 John Lasseter 640,000 13,943,731 130,026 1,199,974 3,842,918 35,465,232 Lois Scali 50,000 863,350 100,000 450,000 1,771,000 7,969,500

(1) Market value of underlying securities based on the closing price of Pixar's Common Stock on December 31, 2004 (the last trading day of fiscal 2004) on the Nasdaq National Market of $42.805 minus the exercise price .

Employment Agreement s

In March 2001, Pixar entered into an employment agreement with John Lasseter (the "Employment Agreement"), which has a term of 10 years. The Employment Agreement supersedes Pixar's prior employment agreement with Mr . Lasseter, which was entered into in February 1997 . Pursuant to the Employment Agreement, Mr. Lasseter received a signing bonus of $5,000,000, of which $60,000 was paid to a third party . The Employment Agreement provided for an initial annual salary of $2,500,000 with 5% annual increases . In connection with the Employment Agreement, Mr . Lasseter was previously granted an option to purchase 2,000,000 shares of Pixar Common Stock at the fair market value on the date of such grant . The option vests on an equal monthly basis over the ten-year term of the agreement, except for options that vest on the last month will vest on the penultimate month of this ten-year period . Under the Employment Agreement, Mr. Lasseter will direct three Feature Films (a Feature Film is defined as a feature-length animated motion picture) and he has the option to direct certain sequels to Feature Films he has directed if Pixar elects to produce such sequels within 12 years of the initial release of the applicable Feature Film . In addition, at Pixar's request, Mr. Lasseter will provide writing services and supervisory services to create stories, treatments and screenplays for Feature Films, and Mr . Lasseter will also provide executive producing services on Feature Films, made-for-home videos and short-subject motion pictures that Mr . Lasseter does not direct. During the term of the Employment Agreement, Mr . Lasseter is prohibited from accepting other employment and from becoming financially interested or associated with any entity engaged in a related or competitive business . Pixar can terminate the Employment Agreement at any time for any reason . If Pixar terminates Mr. Lasseter's employment without cause, Pixar mus t 12 EXHIBIT 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 2054 9

FORM 8-K

CURRENT REPORT Pursuant to Section 13 or 15 (d) of th e Secu ri ties Exchange Act of 1934 January 24, 2006 Date of Report (Date of Earliest Event Repo rt ed)

Pixar (Exact Name of Registrant as Specified in its Charter )

California 0-26976 68- 0086179 (State or Other Jurisdiction (Commission File Number) (I .R.S. Employe r of Incorporation ) Identification Number)

1200 Park Avenu e Emeryville , CA 94608 (510) 752-3000 (Addresses , including zip code, and telephone number , including area code, of principal executive offices)

(Former name or former address, if changed since last report )

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A .2. below) : 191 Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230 .425) ❑ Soliciting material pursuant to Rule l4a-12 under the Exchange Act (17 CFR 240 .14a-l 2 ) ❑ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) ❑ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240 .13e-4(c)) Exhibit 99.1 Contacts : The Walt Disney Company Pixar Zenia Mucha - 818-560-5300 Katie Cotton - 408-974-7269 Michelle Bergman - 818-560-8231 Nils Erdmann - 510-752-337 4 Disney to Acquire Pixar Long-time Creative Partners Form New Worldwide Leader in Quality Family Entertainmen t

Ed Catmull Named President of the Combined Pixar and Disney Animation Studios and John Lasseter Named Chief Creative Officer; Steve Jobs to Join Disney's Board of Directors

Disney Increases Stock Repurchase Authorization Burbank, CA and Emeryville, CA (January 24, 2006) - Furthering its strategy of delivering outstanding creative content, Robert A . Iger, President and Chief Executive Officer of The Walt Disney Company (NYSE : DIS), announced today that Disney has agreed to acquire computer animation leader Pixar (NASDAQ: PIXR) in an all-stock transaction, expected to be completed by this summer . Under terms of the agreement, 2.3 Disney shares will be issued for each Pixar share . Based on Pixar's fully diluted shares outstanding, the transaction value is $7 .4 billion ($6.3 billion net of Pixar's cash of just over $1 billion).*

This acquisition combines Pixar's preeminent creative and technological resources with Disney's unparalleled portfolio of world-class family entertainment, characters, theme parks and other franchises, resulting in vast potential for new landmark creative output and technological innovation that can fuel future growth across Disney's businesses . Garnering an impressive 20 Academy Awards, Pixar's creative team and global box office success have made it a leader in quality family entertainment through incomparable storytelling abilities, creative vision and innovative technical artistry .

"With this transaction, we welcome and embrace Pixar's unique culture, which for two decades, has fostered some of the most innovative and successful films in history . The talented Pixar team has delivered outstanding animation coupled with compelling stories and enduring characters that have captivated audiences of all ages worldwide and redefined the genre by setting a new standard of excellence," Iger said . "The addition of Pixar significantly enhances Disney animation, which is a critical creative engine for driving growth across our businesses . This investment significantly advances our strategic priorities, which include - first and foremost - delivering high-quality, compelling creative content to consumers, the application of new technology and global expansion to drive long-term shareholder value . "

Pixar President Ed Catmull will serve as President of the new Pixar and Disney animation studios, reporting to Iger and Dick Cook, Chairman of The Walt Disney Studios . In addition, Pixar Executive Vice President John Lasseter will be Chief Creative Officer of the animation studios, as well as Principal Creative Advisor at Walt Disney Imagineering, where he will provide his expertise in the design of new attractions for Disney theme parks around the world, reporting directly to Iger . Pixar Chairman and CEO Steve Jobs will be appointed to Disney's Board of Directors as a non-independent member . With the addition of Jobs, I 1 of Disney's 14 directors will be independent . Both Disney and Pixar animation units will retain their current operations and locations . "Disney and Pixar can now collaborate without the barriers that come from two different companies with two different sets of shareholders," said Jobs . "Now, everyone can focus on what is most important, creating innovative stories, characters and films that delight millions of people around the world ." "Pixar's culture of collaboration and innovation has its roots in Disney Animation . Our story and production processes are derivatives of the Walt Disney `school' of animated filmmaking," said Dr . Catmull . "Just like the Disney classics, Pixar's films are made for family audiences the world over and, most importantly, for the child in everyone . We can think of nothing better for us than to continue to make great movies with Disney ." The acquisition brings to Disney the talented creative teams behind the tremendously popular original Pixar blockbusters, who will now be involved in the nurturing and future development of these properties, including potential feature animation sequels . Pixar's 20-year unrivaled creative track record includes the hits Toy Story, Toy Story 2, A Bug's Life, Monsters, Inc ., Finding Nemo and The Incredibles. Disney will also have increased ability to fully capitalize on Pixar-created characters and franchises on high-growth digital platforms such as video games, broadband and wireless, as well as traditional media outlets, including theme parks, consumer products and live stage plays . "For many of us at Pixar, it was the magic of Disney that influenced us to pursue our dreams of becoming animators, artists, storytellers and filmmakers," said Lasseter. "For 20 years we have created our films in the manner inspired by Walt Disney and the great Disney animators - great stories and characters in an environment made richer by technical advances . It is exciting to continue in this tradition with Disney, the studio that started it all ." "The wonderfully productive 15-year partnership that exists between Disney and Pixar provides a strong foundation that embodies our collective spirit of creativity and imagination," said Cook . "Under this new, strengthened animation unit, we expect to continue to grow and flourish ." Disney first entered into a feature film agreement with Pixar in 1991, resulting in the release of Toy Story, which was hailed as an instant classic upon its release in November 1995 . In 1997, Disney extended its relationship with Pixar by entering into a co-production agreement, under which Pixar agreed to produce on an exclusive basis five original computer-animated feature films for distribution by Disney . Pixar is currently in production on the final film under that agreement, Cars, to be distributed by Disney on June 9 . The Boards of Directors of Disney and Pixar have approved the transaction, which is subject to clearance under the Hart-Scott-Rodino Antritrust Improvements Act, certain non-United States merger control regulations, and other customary closing conditions . The agreement will require the approval of Pixar's shareholders . Jobs, who owns approximately 50 .6% of the outstanding Pixar shares, has agreed to vote a number of shares equal to 40% of the outstanding shares in favor of the transaction. The Disney Board was advised by Goldman, Sachs & Co . and Bear, Steams & Co . The Pixar Board was advised by Credit Suisse. Separately, the Disney Board approved the repurchase of approximately 225 million additional shares, bringing the Company's total available authorization to 400 million shares . Since August 2004 through the end of December 2005, Disney has invested nearly $4 billion to purchase nearly 155 million shares . Disney anticipates further significant share repurchases going forward, reflecting Disney's continued commitment to returning value to shareholders over time.

* Based on Disney's closing share price of $25 .52 as of 1/23/06 . About The Walt Disney Comoanv:

The Walt Disney Company (NYSE :DIS), together with its subsidiaries and affiliates, is a leading diversified international family entertainment and media enterprise with four business segments : media networks, parks and resorts, studio entertainment and consumer products . Disney is a Dow 30 company, had annual revenues of nearly $32 billion in its most recent fiscal year, and a market capitalization of approximately $50 billion as of January 23, 2006 .

Investor Conference Call :

An investor conference call will take place at approximately 2 :15 p.m. PT / 5 :15 p .m. ET today, January 24, 2006 . To listen to the Webcast, turn your browser to www .disney .com/investors/presentations or http ://corporate .pixar.com . If you cannot participate in the live Webcast, re-plays will be available for domestic callers at (888) 286-8010 (PIN 56666399) and for international callers at (617) 801-6888 (PIN 56666399), or at www.disney .com/investors/presentations until 4 :00 p .m . PT on Tuesday, February 7, 2006 . An mp3 version of this Webcast replay will also be available approximately 24 hours after the Webcast concludes at www .disney .com/investors/presentations. Forward-Looking Statements : Certain statements in this press release may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of the views and assumptions of the management of The Walt Disney Company and Pixar regarding future events and business performance as of the time the statements are made and they do not undertake any obligation to update these statements . Actual results may differ materially from those expressed or implied . Such differences may result from legal or regulatory proceedings or other factors that affect the timing or ability to complete the transactions contemplated herein, actions taken by either of the companies, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the companies' control, including : adverse weather conditions or natural disasters ; health concerns ; international, political or military developments ; technological developments ; and changes in domestic and global economic conditions, competitive conditions and consumer preferences . Such developments may affect assumptions regarding the operations of the businesses of The Walt Disney Company and Pixar separately or as combined entities including, among other things, the timing of the transaction, the performance of the companies' theatrical and home entertainment releases, expenses of providing medical and pension benefits, and demand for products and performance of some or all company businesses either directly or through their impact on those who distribute our products . Additional factors that may affect results are set forth in the Annual Report on Form 10-K of The Walt Disney Company for the year ended October 1, 2005 under the heading "Item IA-Risk Factors" and in the Quarterly Report on Form 10-Q of Pixar for the quarter ended October 1, 2005 under the heading "Risk Factors" section of Part I, Item 2 . For Additional Information :

This material is not a substitute for the prospectus/proxy statement Disney and Pixar will file with the Securities and Exchange Commission . Investors are urged to read the prospectus/proxy statement which will contain important information, including detailed risk factors, when it becomes available . The prospectus/proxy statement and other documents which will be filed by Disney and Pixar with the Securities and Exchange Commission will be available free of charge at the SEC's website, www .see .gov, or by directing a request when such a filing is made to The Walt Disney Company, 500 South Buena Vista Street, Burbank, CA 91521-9722, Attention : Shareholder Services or by directing a request when such a filing is made to Pixar, 1200 Park Avenue, Emeryville, CA 94608 .

Pixar, its directors, and certain of its executive officers may be considered participants in the solicitation of proxies in connection with the proposed transactions . Information about the directors and executive officers of Pixar and their ownership of Pixar stock is set forth in the proxy statement for Pixar's 2005 annual meeting of shareholders . Investors may obtain additional information regarding the interests of such participants by reading th e prospectus/proxy statement when it becomes available . EXHIBIT 5 Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission File Number 0-26976 Pixar (Exact name of registrant as specified in its charter)

California 68-0086179 (State or other jurisdiction of (I.R .S. Employer incorporation or organization) Identification No)

1200 Park Avenue , Emeryvill e, California 94608 (Address ofprincipal executive offices) (Zip Code)

Registrant' s telephone number, including area code : (510) 752-3000

Securities registered pursuant to Section 12(b) of the Act: None Secu rities registered pursuant to Section 12(g) of the Act : Common Stock, no par value per share (Title of Class)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933 . Yes B No ❑

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") . Yes ❑ No Q

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 0 No ❑

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 .

Large accelerated filer 0 Accelerated filer ❑ Non-accelerated filer ❑

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ❑ No 10

As of July 2, 2005, the last day of the Registrant ' s most recently completed second fi scal quarter, there were 118,568,761 shares of the Registr ant's Common Stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ National Market on July 1, 2005) was $2, 480,647,889 . Shares of the Registrant' s Common Stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates . This determination of affiliate status is not necessa ri ly a conclusive determination for other purposes.

As of February 15, 2006, there were 120,429,073 shares of the Registrant's Common Stock outstanding. Table of Contents Creative Group Our creative and technical personnel have collaborated since our founding to produce three-dimensional computer-animated films . The principal objective of our creative group is to create heartwarming sto ries with memorable characters utilizing the medium of computer animation. The members of our creative and technical teams have been nominated for and received a number of awards . A partial list of those awards is included in the table below: n 1m . Category Award /Nomination Year One Man Band Best Animated Short Film Academy Award' Nominee 2005 The Incredibles Best Animated Feature Film Academy Award` 2004 Best Original Screenplay Academy Award' Nomine e Best Sound Editing Academy Award' Best Sound Mixing Academy Award"' Nominee Best Picture, Musical or Comedy Golden Globe Nomine e Finding Nemo Best Animated Feature Film Academy Awards 2003 Best Original Screenplay Academy Award', Nomine e Best Musical Score Academy Award'' Nominee Best Sound Editing Academy Award" Nominee Best Picture, Musical or Comedy Golden Globe Nomine e Boundin' Best Animated Short Film Academy Award' Nominee 2003 Mike :s New Car Best Animated Short Film Academy Award' Nominee 2002 Monsters, Inc. Best Song Academy Award", 2001 Best Animated Feature Film Academy Award's Nominee Best Original Score Academy Award' Nominee Best Sound Editing Academy Award' Nominee For the Birds Best Animated Short Film Academy Award" 2001 Toy Starr 2 Best Original Song Academy Award's 2000 Best Picture, Musical or Comedy Golden Globe Awar d Best O ri ginal Song Golden Globe Nomine e Geri's Game Best Animated Short Film Academy Award' 1998 A Bug's Life Best Musical Score Academy Award® Nominee 1998 Best Original Score Golden Globe Nomine e Tin TO Best Animated Short Film Academy Award' 1988 Luxo, Jr. Best Animated Sho rt Film Academy Award' 1986

John Lasseter is Executive Vice President, Creative . Mr. Lasseter is an Academy Award ®-winning director and animator , the Director of Toy Story, A Bug's Life, Toy Story 2 and Cars and Executive Producer for Monsters, Inc., Finding Nemo and The Incredibles . In March 1996, Mr . L as seter received a Special Achievement Oscar® from the Academy of Motion Picture Arts an d Sciences for the development and application of techniques that made possible the first feature-length computer-an imated film , Toy Story . In February 2004 , Mr. Lasseter w as awarded the Art Directors Guild ' s coveted honorary Contribution to Cinematic Image ry Award. The Contribution to Cinematic Image ry Award is voted fr om time to time to an individual whose body of work in the film business has richly enhanced the visual aspects of the movie-going experience . Award-winning directors working with Mr. Lasseter include, among others , Andrew Stanton, Brad Bird and Pete Docter . Finding Nemo , released domestically on May 30, 2003 , w as written and directed by Academy Award®-winning Andrew Stanton , who serv ed as co-director and co-screenwriter ofA Bug 's Life and as co-screenw riter of Toy Story, Toy Story 2, and Monsters, Inc. Academy Award ®-winning Brad Bird previously directed an d wrote the screenplay of the critically acclaimed animated feature, The Iron Giant, and directed and wrote the multiple award-winning The Incredibles, which was rele ased domestically on November 5, 2004 . Pete Docter, the director of Monsters, Table of Content s to our Emeryville facility, as well as approximately 4,000 square feet of office space in Seattle, Washington, which is occupied by our RenderMan software group . We believe that our properties and facilities are suitable and adequate for current operations . In November 2002, we purchased approximately 2 .24 acres of land adjacent to our primary facility for $9 .4 million, for future expansion. Our primary studio and headquarters facility together with the additional land purchases noted above represents our Emeryville Campus . We used existing cash resources to fund these facility-related costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in Item 7 of this Form 10-K.

Item 3 . Legal Proceedings

Shareholder Litigation . On October 21, 2005, a putative shareholder class action lawsuit was filed against the Company and certain of its officers in the United States District Court for the Northern District of California alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule lob-5 promulgated thereunder. The case is entitled Mataraza v. Pixar, et al ., Case No . C-05-4290 JSW . The complaint asserts a class period from January 18, 2005 to June 30, 2005 . Three other similar complaints have been filed since October 21, 2005 . Plaintiff alleges that the defendants made false and misleading statements about earnings projections for the second fiscal quarter of 2005, ended July 2, 2005, in light of sales and return information for home video sales of The Incredibles . The cases have been consolidated before a single judge and are referred to as In re Pixar Securities Litigation. Currently pending before the court is a motion for appointment of lead plaintiffs and their respective counsel . Management believes the lawsuits to be without merit and intends to vigorously defend against the action .

Informal Inquiry by the SEC. The Company received an informal inquiry from the SEC requesting information regarding the disclosure of our second quarter financial results. The SEC informed the Company in a letter dated February 17, 2006 that the informal inquiry had been terminated .

Merger Related Litigation . On January 27, 2006, an action, titled Jonathan Levene v. Pixar, et al., was filed in the Superior Court of the State o f California for the County of Alameda, naming Pixar and all members of the Pixar board of directors as defendants . The complaint generally alleged that Pixar's directors breached their fiduciary duties in approving the proposed merger between Pixar and Disney because they failed to maximize value for Pixar's shareholders . The complaint sought class certification and certain forms of equitable relief, including enjoining the consummation of the proposed merger. The complaint did not seek compensatory damages . On January 30, 2006, the defendants removed the action to the United States District Court for the Northern District of California. On February 1, 2006, the plaintiff dismissed the action voluntarily .

Other Matters. Pixar is regularly subject to certain legal proceedings and claims that arise in the ordinary course of business . Many of these have not yet been fully adjudicated . In the opinion of management, Pixar does not have a potential liability related to any such current legal proceedings and claims that would have a material adverse effect on its financial condition, liquidity or results of operations . However, the results of legal proceedings cannot be predicted with certainty . Should Pixar fail to prevail in any of these legal matters or should several of these legal matters be resolved against Pixar in the same reporting period, the operating results of a particular reporting period could be materially adversely affected. 34 EXHIBIT 6 FORM 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION OMB APPROVA L Washington, D.C. 20549 OMB Number: 3235-0287 ❑ Check this box Expires : January if no longer STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP OF 31, 2005 subject to Estimated Section 16 . SECURITIE S average Form 4 or Form burden hours 5 obligations Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 0.5 may continue . 17(a) of the Public Utility Holding Company Act of 1935 or Section 30(h) of the See Instruction Investment Company Act of 1940 1(b).

(Print or Type Responses)

(Street) 4 . If Amendment, Date Original Filed 6 . Individual or Joint/Group Filing (Chec k (Month/Day/Year) Applicable Line) X Form filed by One Reporting Perso n EMERYVILLE, CA 94608 _ Form filed by More than One Reporting Perso n

(City) (State) (Zip )

Table I - Non - Derivative Securities Acquired, Disposed of, or Beneficially Owne d

] .Title of Security 2 . Transaction Date 2A . Deemed 3 . Transaction 4 . Securities Acquired (A) or 5. Amount o f 6 . Ownership Form : 7 . Nature of (Instr . 3 ) (Month/Day/Year) Execution Date, i f Code Disposed of (D ) Secu ri ties Direct (D) or Indirect Beneficia l any (Intr . 8) (Instr . 3 , 4 and 5 ) Bene ficially Owned Indirect (I) Ownership (Month/Day/Year) Following Reporte d (Instr . 4) ( Instr. 4) Code V Amount ( A ) Price Transaction(s) o r (Instr . 3 and 4) (D) Common Stock 08/13/2004 M 10,000 A $26.5 171,001 D Common Stock 08/13/2004 S 10,000 D $70.47 161,001 D Common Stock 08/13/2004 M 5,000 A $26.5 166,001 D Common Stock 08/13/2004 S 5,000 D $70.36 161,001 D Common Stock 08/13/2004 M 5,000 A $26.5 166,001 D Common Stock 08/13/2004 S 5,000 D $70.28 161,001 D Common Stock 08/13/2004 M 5,000 A $26.5 166,001 D Common Stock 08/13/2004 S 5,000 D $70.25 161,001 D Common Stock 10,000 I by Daughter Common Stock 10,000 I by Son l Common Stock 47,799 I by Trust 1 Common Stock 25,000 I by Trust 2

Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned (e.g., puts, calls, warrants, options, convertible securities )

I . Title of Derivative 2. 3, Transaction Date 3A. Deemed 4 . Transaction 5. Number of 6. Date Exercisable and Expiration 7 . Title and Amount of 8, Price of 9. Number of 10, It . Nature Security Conversion (Month /Day/Year) Execution Date , if Code De rivative Date Underlying Securities De rivative Deri vative Ownership of Indirec t (Intr. 3) or Exercise any (Instr . 8) Securities (Month /Day/Year) (Instr . 3 and 4) Security Securities Form of Beneficial P ri ce of (Month[Day/Year) Acquired (A) or (Intr. 5) Beneficially Derivative Ownership Derivative Disposed of (D) Owned Secu rity: ( Instr . 4 ) Security (Intr. 3, 4, and Following Direct (D ) 5 Reported or Indirect T ra nsaction(s) (I) Amount (Intr. 4) (Intr. 4) xDate Or Code V (A) Expiration Date Title (D) E ercisable Numbe r of Sh ar es Non-Qualified Common Stock Option $26.5 08/13/2004 M 10,000 1/19/2002(') 12/06/2010 10,000 $ 0 305,000 D (light to buy) Stock Non-Qualified $26.5 08/13/2004 M 5,000 1/19/2002(1 12/06/2010 Common 5,000 $ 0 300,000 D Stock Option Stock (right to buy) Non-Qualified Stock Option $26.5 08/13/2004 M 5,000 1/19/200211 12/06/2010 Common 5 000 $ 0 295,000 D ri ht to buy) Stock Non-Qualified Common Stock Option $26.5 08/13/2004 M 5,000 1/19/200 ~t 12/06/2010 5,000 $ 0 290,000 D ti ht to buy) Stock

Reporting Owners

Relationships Reporting Owner N ame /Add ress Director 10% Owner Officer Othe r CATMULL EDWIN 1200 PARK AVENUE X President EMERYVILLE, CA 9460 8 Explanation of Responses :

(1) 25% of the options will vest on January 19, 2002 . The remaining options will vest in equal increments over the next 3 years.

Signatures Edwin Catmull 08/17/2004 !Signature of Reporting Person Date Reminder : Report on a separate line for each class of securities beneficially owned directly or indirectly . * If the form is filed by more than one reporting person, see Instruction 4(b)(v). ** Intentional misstatements or omissions of facts constitute Federal Criminal Violations . See 18 U .S.C . 1001 and 15 U.S.C. 78ff(a) . Note : File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure. Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB number. EXHIBIT 7 OMB APPROVAL FORM 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D .C. 20549 OMB Number: 3235-0287 ❑ Check this box Expires : January if no longer STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP OF 31, 2005 Estimated Sectionsubject 16 . to SECURITIE S average Form 4 or Form burden hours 5 obligations Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 0.5 may continue . 17(a) of the Public Utility Holding Company Act of 1935 or Section 30(h) of the See Instruction Investment Company Act of 194 0 1(b) .

(Print or Type Responses)

1 . Name and Address of Reporting Person : 2 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person(s) to Issue r CATMULL EDWIN PIXAR \CA\ [PIXR] (Check all applicable) (Last) (First) (Middle) 3 . Date of Earliest Transaction ( Month/Day/Year) 11/16/2004 X Director 10% Owner 1200 PARK AVENUE (give title Other ( specify below) below) President (Street) 4 . If Amendment, Date Original Filed 6 . Individual or Joint/Group Filing (Check (Month/Day/Year) Applicable Line ) X Form filed by One Report ing Person EMERYVILLE , CA 94608 Form filed by More than One Reporting Person

(Ci ty ) (State) (Zip)

Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned

1 .Title of Security 2 . Transaction Date 2A. Deeme d 3 . Transaction 4. Securi ties Acquired (A) or 5. Amount o f 6. Ownership 7. Nature of (Instr . 3) (Month/Day/Year) Execution Date , i f Code Disposed of (D ) Securities Form: Direct (D) or Indirect Bene ficial any (Instr. 8) (Instr. 3, 4 and 5) Beneficially Owned Indirect (I) Ownership (Month/Day/Year) Following Reported (Instr. 4) (Instr. 4 ) Code V Amount (A) or (D) Price Transaction(s ) (Intr. 3 and 4) Common Stock 11/16/2004 M 20,000 A $26.5 181,001 D Common Stock 11/16/2004 S 20,000 D $89 161,001 D Common Stock 11/16/2004 S 5,000 D $89 42,799 I by Trust 1 Common Stock 10,000 I by Daughter Common Stock 10,000 I by Sonl Common Stock 25,000 I b Trust 2

Table II - Derivative Securities Acquired, Disposed of, or Beneficia lly Owned (e.g., puts, calls, warrants, options, convertible securities)

1 . Title of Derivative 2. 3 . Transaction Date 3A. Deemed 4, Transaction S. Number of 6 . Date Exercisable and Expiration 7 . Title and Amount of 8. Price of 9. Number of 10 . 11 . Nature Security Conversion (Month/Day/Year) Execution Date, if Code Derivative Date Underlying Securities Derivative Derivative Ownership of Indirec t (Intr. 3) or Exercise any (Instr . 8) Securities (Month/Day/Year) (lnstr . 3 and 4) Security Securities Form of Beneficial Price of (Month/Day/Year) Acquired (A) or (Intr. 5) Beneficially Derivative Ownershi p Derivative Disposed of (D) Owned Security : (lnstr . 4 ) Security (Intr. 3, 4, and Following Direct (D) 5 Reported of Indirect Transaction(s) (1 ) Amount (Insp. 4) (Instr. 4) Code V (A) xDat Expiration Date Title (D) E e ercisable Numbe r of Share s Non-Qualified Common Stock Option $26.5 11/16/2004 M 20,000 1/19/2002(1 12/06/2010 20,000 $ 0 270,000 D (right to buy) Stock

Reporting Owners

Re portin gOwner Name / Address Relationship s Director 10% Owner Officer Other CATMULL EDWI N 1200 PARK AVENUE X President EMERYVILLE, CA 94608 Explanation of Responses :

(1) 25% of the options will vest on January 19, 2002 . The remaining options will vest in equal increments over the next 3 years .

Signatures Edwin Catmull 11/18/200 4 signature of Reporting Person Date Reminder : Report on a separate line for each class of securities beneficially owned directly or indirectly . * If the form is filed by more than one reporting person, see Instruction 4(b)(v).

** Intentional misstatements or omissions of facts constitute Federal Criminal Violations . See 18 U.S .C. 1001 and 15 U .S .C . 78ff(a) . Note : File three copies of this Form, one of which must be manually signed . If space is insufficient , see Instruction 6 for procedure . Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB number. EXHIBIT 8 FORM 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 OMB Number: 3235-0287 ❑ Check this box Expires : January if no longer STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP OF 31, 2005 Estimate d Sectionsubject 16 . to SECURITIE S average Form 4 or Form burden hours 5 obligations Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section may continue . 17(a) of the Public Utility Holding Company Act of 1935 or Section 30(h) of the See Instruction Investment Company Act of 194 0 1(b) .

(Print or Type Responses)

1 . Name and Address of Reporting Person .- 2 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Report ing Person( s) to Issuer CATMULL EDWIN PIXAR \CA\ [PIXR] (Check all applicable) (Last) (First) ( Middle) 3 . Date of Earliest Transaction (Month/Day/Year) 02/17/2005 _X_ Director 10% Owner 1200 PARK AVENUE _X_ Officer (give title Other (specify below) below) President

(Street) 4 . If Amendment, Date Original Filed 6 . Individual or Joint/Group Filing (Check ( Month /Day/Year) Applicable Line) X Form fi led by One Repo rting Person EMERYVILLE, CA 94608 Form filed by More than One Repo rting Perso n

(City) (State) (Zip )

Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned

1 :Title of Security 2 . Transaction Date 2A . Deemed 3. Transactio n 4 . Securities Acquired (A) or 5 . Amount o f 6 . Ownership Form : 7 . Nature of (lnstr . 3) (Month/Day/Year) Execution Date, i f Code Disposed of (D ) Securitie s Direct (D) or Indirect Bene ficia l any (Instr . 8) (Instr . 3, 4 and 5) Bene ficially Owned Indirect (I) Ownership (Month/Day/Year) Following Repo rted ( Instr. 4) (Instr. 4) Code V Amount (A) P ri ce Transaction(s) o r (Instr . 3 an d 4) (D) Common Stock 02/17/2005 M 10,000 A $26.5 171,001 D Common Stock 02/17/2005 S 10,000 D $89.34 161,001 D Common Stock 02/17/2005 M 10,000 A $26.5 171,001 D Common Stock 02/17/2005 S 10,000 D $89.44 161,001 D

Common Stock 10,000 I by Daughter Common Stock 10,000 I by Son l Common Stock 42,799 I by Trust 1 Common Stock 25,000 I by Trust 2

Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned (e.g., puts, calls, warrants, options, convertible securities )

I . Title of Derivative 2 . 3 . Transaction Date 3A. Deemed 4 . Transaction 5. Number of 6. Date Exercisable and Expiration 7. Title and Amount of 8 . Price of 9. Number of 10 . 11 . Nature Security Conversion ( Month /DaylYear) Execution Date, if Code Derivative Date Underlying Securities Derivative Derivative Ownership of Indirect (Instr . 3) or Exercise any (Instr. 8 ) Securities (Month /Day/Ycar) (lnstr. 3 and 4) Security Securities Form of Beneficia l Price of (Month/DayfYear) Acquired ( A) or (Instr , 5) Bene fi cially Derivati ve Ownership Derivative Disposed of (D) Owned Security: (lnstr.4) Security (Instr . 3, 4, and Following Direct (D ) 5) Reported or Indirect Transaction(s ) (I) Amount (Instr.4) (Instr. 4) Code V (A) Date Expiration Date Title or (D) Number of Shares Non-Qualified Common Stock Option $26.5 02/17/2005 M 10,000 1/19/2002(1 12/06/2010 10,000 $ 0 260,000 D (light to buy) Stock Non-Qualified Common Stock Option $26.5 02/17/2005 M 10,000 l/19/2002(I 12/06/2010 10,000 $ 0 250,000 D (right to buy) Stock

Reporting Owners

Reporting Owner Name / Address Director 1 10% Owner I Officer I Other

CATMULL EDWIN 1200 PARK AVENUE X President EMERYVILLE. CA 94608 Explanation of Responses :

(1) 25% of the options will vest on January 19, 2002 . The remaining-options will vest in equal increments over the next 3 years .

Signatures Edwin Catmull 02/18/2005 .Signature of Reporting Person Date Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly , * If the form is filed by more than one reporting person, see Instruction 4(b)(v) .

** Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U . S .C . 1001 and 15 U .S .C . 78ff(a) . Note : File three copies of this Form, one of which must be manually signed . If space is insufficient, see Instruction 6 for procedure . Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB number . EXHIBIT 9 FORM 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION OMB APPROVAL Washington, D .C. 20549 OMB Number: 3235-0287 ❑ Check this box Expires : January if no longer STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP O F 31, 2005 subject to Estimated Section 16 . SECURITIE S average Form 4 or Form burden hours 5 obligations Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Sectio n per res onse ... 0.5 may continue . 17(a) of the Public Utility Holding Company Act of 1935 or Section 30(h) of th e See Instruction Investment Company Act of 1940 I (b).

(Print or Type Responses)

1 . Name and Address of Reporting Person - 2 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person(s) to Issue r CATMULL EDWIN PIXAR \CA\ [PIXR] (Check all applicable ) (Last) (First) (Middle) 3 . Date of Earliest Transaction (Month/Day/Year) 03/03/2005 X Director 10% Owner 1200 PARK AVENUE _X_ Officer (give title Other (specify below) below) President (Street) 4. If Amendment, Date Original Filed 6 . Individual or Joint/Group Filing (Chec k (Month/Day/Year) Applicable Line ) X Form filed by One Reporting Person EMERYVILLE, CA 94608 Form filed by More than One Reporting Person

(Ci ty ) (State) (Zip)

Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned

I .Title of Security 2. Transaction Dat e 2A . Deemed 3 . Transactio n 4 . Securities Acquired (A) or Disposed 5. Amount o f 6. Ownership 7 . Nature o f (Intr . 3) (Month/Day/Year) Execution Date, i f Cod e of (D ) Securities Form: Direct (D ) Indirect Beneficia l any (Intr . 8) (Intr. 3, 4 and 5) Beneficially or Indirect (I) Ownershi p (Month/Day/Year) Owned Followin g (Instr. 4) (Intr . 4) Code V Amount (A) or (D) Price Reporte d Transaction(s) (Instr. 3 and 4) Common Stock 03/03/2005 M 10,000 A $26.5 171,001 D Common Stock 03/03/2005 S 10,000 D $91 .1 161,001 D Common Stock 03/04/2005 M 20,000 A $26.5 181,001 D Common Stock 03/04/2005 S 20,000 D $92.5022 161,001 D

Common Stock 10,000 I by Daughter Common Stock 10,000 I b Sonl Common Stock 42,799 I by Trust 1 Common Stock 25,000 1 by Trust 2

Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned (e.g., puts, calls, warrants, options, convertible securities )

I . Title of Derivative 2. 3 . Transaction Date 3A. Deemed 4 . Transaction S. Number of 6, Date Exercisable and Expiration 7. Title and Amount of 8 . Price of 9. Number of 10. 11 . Nature Security Conversion (Month/Day/Year) Execution Date, if Code Derivative Date Underlying Securities Derivative Derivative Ownership of Indirec t (Instr. 3) or Exercise any (Instr . 8) Securities (Month/Day/Year) (Intr. 3 and 4) Security Securities Form of Beneficia l Price of (Month/Day/year) Acquired (A) or (Instr, 5) Beneficially Derivative Ownershi p Derivative Disposed of (D) Owned Security: (Intr . 4 ) Security (Intr. 3, 4, and Following Direct (D) 5) Reported or Indirect Transaction(s) (I) Amount (Instr. 4) (Insp. 4) Code V (A) xDate Expiration Date or (D) E ercisable Title Numbe r of Sh ar es Non-Qualified Common Stock Option $26.5 03/03/2005 M 10,000 1/19/2002(1 12/06/2010 10,000 $ 0 240,000 D Stock ri ht to buy) Non-Qualified Common Stock Option $26.5 03/04/2005 M 20,000 1/19/2002(1 12/06/2010 20,000 $ 0 220,000 D n ht to buy) Stock

Reporting Owners

Reporting Owner Name / Address Director 110% Owner I Officer I Other CATMULL EDWIN 1200 PARK AVENUE X President EMERYVILLE . CA 9460 8 Explanation of Responses :

(1) 25% of the options will vest on January 19, 2002 . The remaining options will vest in equal increments over the next 3 years .

Signatures Edwin Catmull 03/07/2005 -Signature of Reporting Person Date Reminder: Report on a separate line for each class of securi ties bene fi cially owned directly or indirectly. * If the form is filed by more than one repo rting person, see Instruction 4(b)(v) . ** Intentional misstatements or omissions of facts constitute Federal Cri minal Violations . See 18 U . S .C . 1001 and 15 U .S .C . 78ff(a) . Note : File three copies of this Form , one of which must be manually signed . If space is insufficient, see Instruction 6 for procedure. Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB number . EXHIBIT 10 OMB APPROVAL FORM 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 OMB Number : 3235-0287 ❑ Check this bo x Expires : January if no longer STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP OF 31, 2005 Estimate d Sectionsubject 16 . to SECURITIE S average Form 4 or Form burden hours 5 obligations Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section er res onse ... 0 .5 may continue. 17(a) of the Public Utility Holding Company Act of 1935 or Section 30(h) of the See Instruction Investment Company Act of 194 0 1(b) .

(Print or Type Responses)

(Street) 4 . If Amendment, Date Original Filed 6 . Individual or Joint/Group Filing (Chec k ( Month/Day/Year) Applicable Line) X Form filed by One Reporting Person EMERYVILLE , CA 94608 Form filed by More than One Reporting Person (City) (State) (Zip)

Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned

I .Title of Security 2 . Transaction Date 2A . Deemed 3 . Transactio n 4. Securities Acquired (A) or Dispose d 5 . Amount o f 6. Ownershi p 7 . Nature o f (Instr. 3) (Month/Day/Year) Execution Date, i f Cod e of (D ) Securities Form: Direct (D ) Indirect Beneficia l any (Instr. 8) (Instr. 3, 4 and 5) Beneficially or Indirect (I) Ownership (Month/Day/Year) Owned Followin g (Intr. 4) (Instr . 4) Code V Amount (A) or (D) Price Reported Transaction(s) (Instr. 3 and 4) Common Stock 05/18/2005 M 15,000 A $13.25 337,002 D Common Stock 05/18/2005 S 15,000 D $49.95 322,002 D Common Stock 05/18/2005 M 15,000 A $13.25 337,002 D Common Stock 05/18/2005 S 15,000 D $49.8899 322,002 D Common Stock 05/18/2005 M 20,000 A $13.25 342,002 D Common Stock 05/18/2005 S 20,000 D $49.85 322,002 D Common Stock 20,000 I by Daughter Common Stock 20,000 I by Son 1 Common Stock 85,598 I b Trust 1 Common Stock 50,000 I by Trust 2

Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned (e.g., puts, calls, warrants, options , convertible securities)

I . Title of Derivative 2 . 3 . Transaction Date 3A . Deemed 4. Transaction 5 . Number of 6 . Date Exercisable and Expiration 7 . Title and Amount of 8. Price of 9 . Number of 10. 11 . Natur e Security Conversion (Month/Day/Year) Execution Date, if Code Derivative Date Underlying Securities Derivative Derivative Ownership of Indirect (lastr. 3) or Exercise any ( lusts. 8) Securities (Month/Day/Year) ( Instr. 3 and 4) Security Securities Form of Beneficial Price of (Month/Day/Year) Acquired (A) or (Intr. 5) Beneficially Deri vative Ownership Derivative Disposedof ( D) Owned Security : (Instr.4) Security (Instr. 3, 4, and Following Direct (D) 5 Reported or Indirect Transaction(s) (1 ) Amount (Insh .4) (l usts . 4 ) Code V (A) (D) Daee Expiration Date Title Number of Shares Non-Qualified Common Stock Option $13.25 05/18/2005 M 15,000 1/19/2002(1 12/06/2010 15,000 $ 0 425,000 D (fight to buy) Stock Non-Qualified Common Stock Option $13.25 05/18/2005 M 15,000 1/19I2002! 12/06/2010 15,000 $ 0 410 000 D Stock , (right to buy) $13.25 05/18/2005 M 20,000 1/19/2002(1 12/06/2010 20,000 $ 0 390,000 D Common Stock Stock

Reporting Owners

Relationships Reporting Owner N ame / Address Director 10% Owner Officer Othe r CATMULL EDWI N 1200 PARK AVENUE X President EMERYVILLE, CA 9460 8 Explanation of Responses :

(1) 25% of the options will vest on January 19, 2002 . The remaining options will vest in equal increments over the next 3 years ,

Signatures Edwin Catmull 05/20/2005

Signature of Reporting Person Date Reminder: Report on a separate line for each class of securities benefi cially owned directly or indirectly. * If the form is filed by more than one reporting person, see Instruction 4(b)(v) . ** Intentional misstatements or omissions of facts constitute Federal C riminal Violations . See 18 U .S.C . 1001 and 15 U.S .C. 78ff(a) .

Remarks : A 2-for-1 stock split of Pixar's common stock was effected at the close of business on Apri l 18, 2005, resulting in the reporting person's acquisition of 248,800 additional shares of common stock (of which 161,001 were acquir ed by Mr . Catmull, 42,799 shares were acquired by Trust 1, 25,000 shares were acquired by Trust 2, and 10,000 shares were acquired by each of SonI and Daughter) . In addition, the stock option described above, which was granted prior to April 18, 2005, has been adj usted to reflect the stock split . Note: File three copies of this Form, one of which must be manually signed . If space is insufficient, see Instruction 6 for procedure. Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB number. EXHIBIT 11 I OMB APPROVAL I FORM 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 OMB Number: 3235-0287 ❑ Check this box Expires : January if no longer STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP OF 31, 2005 Estimated Sectionsubject 16 . to SECURITIE S average Form 4 or Form burden hours 5 obligations Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section per res onse . .. 0 .5 may continue. 17(a) of the Public Utility Holding Company Act of 1935 or Section 30(h) of the See Instruction Investment Company Act of 194 0 1(b) .

(Print or Type Responses)

1 . Name and Address of Reporting Person - 2 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person(s) to Issue r BAX SIMON T PIXAR \CA\ [PIXR] (Check all applicable ) (Last) (First) (Middle) 3 . Date of Earliest Transaction (Month/Day/Year) 05/03/2004 Director 10% Owne r 1200 PARK AVENUE _X_ Officer (give title Other (specify below ) below) Executive Vice President (Street) 4 . If Amendment, Date Original Filed 6 . Individual or Joint/Group Filing (Chec k (Month/Day/Year) Applicable Line ) X Form filed by One Reporting Person EMERYVILLE, CA 94608 Form filed by More than One Reporting Person

(City) (State) (Zip )

Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned

l .Title of Security 2 . Transaction Date 2A . Deemed 3 . Transaction 4. Securities Acquired (A) or 5. Amount of 6 . Ownership 7. Nature o f (Intr. 3) (Month/Day/Year) Execution Date, if Code Disposed of (D) Securities Form : Direct (D) or Indirect Beneficia l any (Instr . 8) (Intr. 3, 4 and 5) Beneficially Owned Indirect (I) Ownership (Month/Day/Year) Following Reported (Instr. 4) (Intr. 4 ) Code V Amount (A) or (D) Price Transaction(s) (Instr. 3 and 4)

Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned (e.g., puts, calls, warrants, options, convertible securities )

I . Title of Derivative 2. 3 . Transaction Date it . Deemed 4. Transaction 5. Number of 6 . Date Exercisable and 7 . Title and Amount of 8, Price of 9 . Number of 10 . 11 . Nature Security Conversion (Month/Day/Year) Execution Date, if Code Derivative Expiration Date Underlying Securities Derivative Derivative Ownership of indirect (Intr. 3) or Exercise any (lnstr. 8) Securities (Month/DaylYear) (Instr.3 and 4) Security Securities Form of Beneficia l Price of (Month(Day/Year) Acquired (A) or (intr. 5) Beneficially Derivative Ownership Derivative Disposed of (D) Owned Security : (Instr . 4) Security (Intr . 3, 4, and Following Direct (D) 5 Rep tied or Indirec t Transaction(s) (1) Date Amount or (Intr. 4) (Intr. 4 ) Code V (A) (D) Expiration Date Title Number of Exercisable Shares Non-Qualified Common Stock Option $68.27 05/03/2004 A 400,000 () 05/03/2014 400,000 $ 0 400,000 D _right to bu Stock

Reporting Owners

Relationships Reportin g Owner Name /Address Director 10% Owner Officer Othe r BAX SIMON T 1200 PARK AVENUE Executive Vice President EMERYVILLE, CA 9460 8 Explanation of Responses :

(ll 25% of the shares subject to the option vest one (1) year after the Vesting Commencement Date . The Vesting Commencement Date is 5/3/04, and 25% of the shares subject to the option vest each year thereafter .

Signatures Simon T. Bax 05/03/2004

** Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U .S.C. 1001 and 15 U .S .C . 78ff(a) . Note: File three copies of this Form, one of which must be manually signed . If space is insufficient, see Instruction 6 for procedure. Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB number. EXHIBIT 12 FORM 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D .C. 20549 OMB Number: 3235-0287 ❑ Check this box Expires : January if no longer STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP OF 31, 2005 subject to Estimate d Section 16 . SECURITIE S average Form 4 or Form burden hours 5 obligations Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 0.5 may continue . 17(a) of the Public Utility Holding Company Act of 1935 or Section 30(h) of the See Instruction Investment Company Act of 1940 1(b) .

(Print or Type Responses)

1 . Name and Address of Reporting Person .- 2. Issuer Name and Ticker or Trading Symbol S. Relationship of Reporting Person(s) to Issue r BAX SIMON T PIXAR \CA\ PIXR (Check all applicable ) (Last) (First) (Middle) 3. Date of Earliest Transaction (Month/Day/Year ) 05/10/2005 x Offcer 10% Owner 1200 PARK AVENUE (give title Other (specify below) below) Executive VP and CFO (Street) 4. If Amendment, Date Original Filed 6. Individual or Joint/Group Filing (Chec k (Month/Day/Year) Applicable Line) X Form filed by One Reporting Person EMERYVILLE, CA 94608 Form filed by More than One Reporting Perso n

(City ) (State) (Zip )

Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owne d

l .Title of Security 2. Transaction Date 2A. Deeme d 3 . Transactio n 4. Securi ties Acquired (A) o r 5. Amount of 6 . Ownership Form : 7 . Nature o f (Instr. 3) (Month/Day/Year) Execution Date, if Cod e Disposed of (D) Securities Direct ( D) o r Indirect Beneficia l any (Instr. 8) (Instr. 3, 4 and 5) Beneficially Owned Indirect (I) Ownership (Month/Day/Year) Following Reported ( Intr . 4) (Instr . 4) Code V Amount ( A) Price Transaction(s ) o r (Instr . 3 and 4) (D) Common Stock 05/10/2005 M 10,000 A $34.135 10,000 D Common Stock 05/10/2005 S 10,000 D $48.557 0 D Common Stock 05/10/2005 M 10,000 A $34.135 10,000 D Common Stock 05/10/2005 S 10,000 D $48.53 0 D Common Stock 05/10/2005 M 5,000 A $34.135 5,000 D Common Stock 05/10/2005 S 5,000 D $48.36 0 D Common Stock 05/10/2005 M 5,000 A $34.135 5,000 D Common Stock 05/10/2005 S 5,000 D $48.32 0 D

Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned (e.g., puts, calls, warrants, options, convertible securities )

I . Title of Derivative 2. 3 . Transaction Date 3A. Deemed 4. Tran saction 5 . Number of 6 . Date Exercisable and Expiration 7. Title and Amount of 8 . Price of 9 . Number of It . It. Nature Security Conversion (Month/Day/Year) Execution Date, if Code Derivative Date Underlying Securities Derivative De ri vative Ownership of Indirec t (In tr. 3 ) or Exercise any (Instr . 8 ) Securities (Month /Daylyear) (Instr. 3 and 4) Security Securities Form of Beneficial Price of (Month/Day/Year) Acquired ( A) or (In tr. 5) Beneficially Derivative Ownership Derivative Disposedof (D) Owned Security: (lnsir.4 ) Security (Intr . 3, 4, and Following Direct (D) 5 Reported or Indirect Transaction(s) (1 ) Amount (Instr.4) (Instr.4) Code V (A) Expiration Date Title (D) Date Exercisable Numbe r of Shares Non-Qualified Common Stock Option $34.135 05/10/2005 M 10,000 5/03/200511 05/03/2014 10,000 $ 0 790,000 D (fight to buy) Stock Non-Qualified Common Stock Option 834.135 05/10/2005 M 10,000 5/03/2005(1 05/03/2014 10,000 $ 0 780,000 D fi ht to buy) Stock Non-Qualified Common Stock Option 834.135 05/10/2005 M 5,000 5/03/200511 05/03/2014 5,000 $ 0 775,000 D ri ht to bu Stock $34.135 05/10/2005 M 5,000 5/03/2005(' 05/03/2014 5,000 $ 0 770,000 D Common Stock

Reporting Owners

Relationship s Re porting Owner Name /Address Director 10% Owner Officer Other BAX SIMON T 1200 PARK AVENUE Executive VP and CFO EMERYVILLE, CA 9460 8 Explanation of Responses :

1 25% of the shares subject to the option vest one (1) year after the Vesting Commencement Date, The Vesting Commencement Date is 5/3/04, and () 25% of the shares subject to the option vest each year thereafter.

Signatures Simon T. Bax 05/12/2005 ..signature of Report ing Person Date Reminder : Report on a separate line for each class of securities beneficially owned directly or indirectly . * If the form is filed by more than one reporting person, see Instruction 4(b)(v) . ** Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U .S .C . 1001 and 15 U.S .C . 78ff(a) .

Remarks : A 2-for-1 stock split of Pixar's common stock was effected at the close of business on Apri l 18, 2005, resulting in the stock option described above, which was granted prior to April 18, 2005, being adjusted to reflect the s tock split. Note : File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure . Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB number. EXHIBIT 13 PIXR - 04 2004 Pixar Animation Studios Earnings Conference Cal l

Feb. 10. 2005 / 5:00PM ET

CONFIDENTIAL TREATMENT PIXAR 1973 REQUESTED BY PIXAR CORPORATE PARTICIPANTS Simon Bax Pixar - CFO Steve Jobs Pixar - Chairman & CEO

CONFERENCE CALL PARTICIPANTS Michael Savne r Banc ofAmerica -Analyst Jessica Reif Cohen Merrill Lynch - Analyst Lowell Singer SG Cowen - Analyst Kathy Styponias Prudential - Analyst David Miller Sanders Morris Harris - Analys t Anthony DiClemente Lehman Brothers - Analyst Richard Green field Fulcrum Partners - Analyst Ralph Shakert William Blair - Analyst Debra Schwartz CSFB -Analyst

Spencer Wang J.P. Morgan Chase - Analyst Peter Mirsky Oppenheimer Funds - Analyst Robert Routh Jefferies - .Analyst Dennis McAlpin e McAlpine Associates - Analyst Jeff Logsdo n Harris Nesbitt - Analyst

Steve Lidberg Pacific Crest Securities - Analyst

CONFIDENTIAL TREATMENT REQUESTED BY PIXAR PIXAR 1974 PRESENTATIO N Film revenues for the fourth:,-,ter qt were 105.6 million, which included 40 .4 million for The Incredibles primarily from the film's worldwide theatrical release, together with associated consumer Operato r product sales. These revenues were offset by some initial upfront worldwide home video marketing and release costs . Ladies and gentlemen, thank you for standing by and welcome to the fourth-quarter and fiscal year-end 2004 earnings conference By the closing day of our fourth quarter, which ended on January call . (OPERATOR INSTRUCTIONS)- On today's conference call 1st, 2005, The Incredibles had generated approximately 530 we have the Executive Vice President and Chairman - sorry, Chief million of worldwide box office receipts . Since then the total Financial Officer Simon Bax and Chairman and Chief Executive worldwide box office has risen to approximately 617 million, Officer Steve Jobs . comprised of 258 million from its domestic release and 359 million from its international relators . Here now is your first speaker, Mr . Simon Bax. Please go ahead. Revenues from Finding Memo in the quarter were 38 .4 million, Simon Bax - Pixar -CFO mainly comprised of worldwide sales of home video and consumer product. In this period, we reduced our domestic home video return reserved for Finding Nemo, following our review of the most Hello and welcome to Pixar's conference call for the fourth quarter recent sell-through and inventory information obtained from and fiscal year-end 2004 . Before I begin a formal discussion of our Disney . We also reduced our estimated domestic home video financial results, I need to remind you that some of the statements marketing expenses to conform to changes that Disney had made made throughout the course of this presentation are forward- in how it estimates these costs . looking, and it is possible that actual results will differ materially . Among the factors that could cause these results to differ are By the end of the fourth quarter, we had recognized Nemo home timing and amount of worldwide revenues and distribution costs video sales of approximately 48 .6 million net units worldwide, of related to our film, and the timing, accuracy and amount of which 75 percent were DVDs . In the U .S . we also benefited from information received from Disney and other sources to determine significant margin improvement for Finding Nemo relative to revenues and associated gross profits . Monsters, Inc . due to both higher unit sales, as well as the increased proportion of DVDs relative to VHS . Looking ahead we These forward-looking statements should not be relied upon as would expect this margin improvement to apply to the home video representing our views as of any subsequent date, and we release of The Incredibles as well . undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date they Taken together the reduced domestic home video return reserve were made. Additional information concerning these and other and lower domestic marketing expenses resulted in fourth-quarter factors that could cause results to differ is contained in our 2003 revenues of 22 .7 million or 22 cents per fully diluted share . Form 10-K, third-quarter 2004 Form l0-Q, and our other filings with the Securities and Exchange Commission . Our remaining film revenues contributed 26 .8 million this quarter and were dri ven primarily by domestic network television revenues I will now review our full year and fourth-quarter 2004 results, from Monsters, Inc . as well as contributions from worldwide home followed by a discussion of our guidance for the first quarter of video sales, consumer product licensing and international 2005, along with our key assumptions for the full year . television sales of our lively titles .

I'm pleased to announce that revenues for our 2004 fiscal year In addition to film revenues, software licensing contributed 3 .3 were 273 . 5 million, net income was 141 . 7 million and diluted million to our net revenues for this quarter and 12 .6 million for the earn ings per share were $2 .38 . In fiscal 2003 revenues were 262.5 full year. Operating expenses for the fourth quarter were 11 .4 million, net income was 124 .8 million and diluted earnings per million compared to 6.8 million for the corresponding period last share were $2 .17 . Our 2004 results exceeded our previous year . guidance for the year of between $2.10 and $2.20, and I am proud to report that 2004 was Pixar's most profitable year to date . The majority of the increase in operating expenses over the prior year period was due to an employee bonus in recognition of their For the fourth quarter, revenues were 108 .9 million, net income contribution to the success of The Incredibles . The increase also was 55 .2 million and diluted earnings per share were 91 cents . reflects the ongoing growth of the studio, as well as our increased These results compared to revenues of 164 .8 million, net income of proportion of operating expenses previously borne by Disney . 83 .9 million and diluted earnings per share of $1 .44 reported in the fourth quarter of 2003, the period in which we released Finding Nemo on home video in the U .S..

CONFIDENTIAL TREATMENT PIXAR 1975 REQUESTED BY PIXAR For the full year, we generated revenues of 150 .8 million from remaining worldwide box office receipts being recognized almost Finding Nemo. This represented 55 percent of our total revenues, entirely by the end of the first quarter . In addition, we expect to the majority of which was from home video and consumer recognize continuing revenues from consumer product licensing, products. Revenues from The Incredibles made up 15 percent of international television and worldwide home video sales. Taken our 2004 total, mainly from worldwide theatrical rentals generated together, we expect to report diluted earnings per share for the first from its release in the fourth quarter . The remainder of our film quarter of 2005 of between 85 cents and 95 cents . library contributed 25 percent to total revenues throughout the year, underscoring the long-term value of these highly successful Looking ahead we expect continuing international home video franchises. revenues from The Incredibles to drive our results for the second quarter, particularly from its release in Japan, France, Germany The overall tax rate for fiscal 2004 was 35 .9 percent, which and Australia. Revenues from domestic pay TV licensing of the reflected the utilization of certain tax benefits related to the The Incredibles are expected in the third quarter, domestic free TV international income exclusion for the years 2000 through 2004 . licensing of Finding Nemo in the fourth. Worldwide consumer Although we expect some benefit in 2005, tax code section product licensing and home video sales from our film library are governing the exclusion has now been amended, which will reduce likely to continue throughout 2005 . the level of benefit in future years . In conclusion, 2004 stands out as our most successful year thus far . Cash, cash equivalents and investments were approximately 855 We posted record results that highlight a number of significant million at the end of the year or over $14 .60 per fully diluted share. achievements . First, The Incredibles, our studio's sixth film, was This represents an increase of 333 million over our 2003 year-end released during a highly competitive holiday season and is balance. This was mainly attributable to cash received from Disney expected to generate over 625 million at the worldwide box office . for our share of film revenues, as well as proceeds from stock Second, the continuing success of Finding Nemo illustrates the option exercises offset by film production costs, taxes and capital value of our films on DVD, the most profitable segment of the film expenditures . business. And third, the solid performance of our library titles which delivered one.quarter of our revenues this year demonstrates Capitalized film costs at year-end were 140 million versus 107 .7 the evergreen value of our film properties . We expect this million at the end of 2003, reflecting production spending on our momentum to carry us into 2005 with the upcoming release of The work current film projects offset by film amortization of 28.5 Incredibles on home video and in 2006 with the release of Pixar's million . Our balance sheet remains debt free, and our shareholders next film, Cars. equity at the end of the fourth quarter was in excess of 1 .2 billion . So for more on these and other developments at Pixar, I would I would now like to address the events that are to reflected in our now like to turn the discussion over to Steve . results for the first quarter of 2005, as well as introduce our initial thoughts on the full year. We anticipate our earnings for the first Steve Jobs - Pixar - Chairman & CEO quarter to be driven by the continuing success of The Incredibles, particularly its home video release which is slated for March 15th, Thanks, Simon . As Simon reported, 2004 was the most successful 2005 in the U .S .. This is the first time since A Bug's Life in April year in our studio's history with over 270 million in revenues and of 1999 that we have released one of our films on home video over 140 million in profits. We exited the year with over 850 outside the holiday period . But preorders of The Incredibles home million of cash in the bank and zero debt and expect to have over I video indicate that its domestic release will be equally as billion of cash by the end of this year . We learned and successful as that of Monsters, Inc . accomplished a lot in 2004, and I would 'like to review some of that with you now. During the initial quarter of that film's domestic home video release, we recognized sales of approximately 15 .5 million net First, with the remarkable success of The Incredibles , our studio is units . We also expect initial international home video revenues in now six for for six, both financially and cri tically . To date the The the first quarter, most notably from the UK, Italy, Spain and lncredibles has grossed over $620 million worldwide and has Mexico where The Incredibles home video is scheduled for a gamered 10 ANI awards and four academy award nominations, release throughout late March. We anticipate that a portion of these including best animated feature film and best original sc reenplay . international home video revenues will be offset by certain To date our six films have earned an average worldwide box office marketing and release costs in markets where it will be released in subsequent quarters. of $535 million each . There remains no other studio with this track record .

Our box office projections assume The Incredibles will achieve a Second, in terms of the ancillary rights to our films, the most worldwide growth of more than 625 million, making it our second financially lucrative is videogames. Last year we announced tha t most successful film at the box office after Finding Nemo with the

CONFIDENTIAL TREATMENT REQUESTED BY PIXAR PIXAR 1976 we had chosen THQ as our post-Disney game partner . We already We face a simple choice for our post-Disney future. Do we fill the have a lot of experience working with THQ on the games for precious slots in our production schedule with sequels with which Finding Nemo, The Incredibles and Cars, and they are doing a we will earn only 50 percent of the profits from what, which we terri fic job working closely with us to create fantastic games for will never wholly owned, and which will be forever controlled by our films . To date they have sold over 7 million units of their Disney, or should we fill them with new original Pixar films, Nemo games and over 4 million units of their The Incredibles which we will earn 100 percent of the profits from, which we will game. And their game concepts for Cars look great . THQ's terri fic fully own and control ? performance on these gains makes us feel really good about our choice of a very important partner. It is not hard answer. That is why we have declined to make sequels under the terms of our current Disney agreement, and we Third, we made the right decision to move our films to the summer are confident that this is the right decision for the future growth of release window . Since our last earnings call, we now know that the our studio. domestic box office of The Incredibles, the best reviewed film of the year, will end within 2 percent of that of Monsters, Inc ., further Sixth, our investment in developing our creative talent is paying reinforcing the fact that the summer release window with its off. Let me talk a bit about what we're working on . Cars, our superior intra-week box office potential is the right time of the year studio's seventh feature animated film, directed by John Lassiter to release our films. Although we have delayed the release of our and starring Owen Wilson, Paul Newman and Bonnie Hunt is next film, Cars, by around six months to affect this change to a turning out super well. Cars will be finished this year and released summer release schedule, we are on track to finish Cars on its on June 9, 2006 in the U.S . . original schedule later this year. We think Cars is a summer movie if there ever was one and will do very well in the summer 2006 It is the most visually rich film we have made to date with amazing release window, and that all of our studio's future films will benefit and enduring characters and a fantastic story. We are all very by this move from holiday to summer. excited about Cars .

Fourth, Pixar's brand continues to grow and prosper . We have Cars will be the seventh and final film we will likely make for always placed a high-value on building our brand . We have always Disney . For 2007 and beyond we now have eight directors believed that our brand is a reflection of our audience's trust in us developing amazing new films, filling our pipeline with original to deliver them satisfying entertainment. That is if they love one or wholly-owned Pixar franchises for our post-Disney era . The first of more of our films, they are likely to trust us to deliver more of the these is already in production and is slated for release around 12 same in the future and, therefore, are far more likely to see our months after Cars in the summer of 2007, and we are planning to next film. release a film each summer after that. We will be telling you about about some of these films later this year. Well, it is working . The most recent brand channel survey was released earlier this month, and the five most influential brands in The key takeaway here is that the creative talent at Pixar is North America are Apple, Google, Target, Starbucks and you blossoming , and they are creating some of the best stori es and .guessed it, Pixar . Being ranked as the fifth most influential brand characters we have ever seen . in North America in the company of these other amazing brands is hard to believe . But then again over a 25 million people in the U .S . This has not happened overnight . Next year is Pixar's 20th experience each of our films in theaters and even more on DVD, anniversary, the 10th anniversary of Toy Story, and our 10th and we have been releasing our films for 10 years now since Toy anniversary as a public company. Developing talent takes time . Story in 1995 . Quality takes time . But the rewards can be timeless as many of our films will live on long after we are gone, renewing themselves with To us this amazing result is testament to two things. One, quality each generation . pays off. And two, audiences can tell the difference. So in closing please let join me in congratulating all the members Fifth, as you know we have made the decision to not actively of Pixar for creating The Incredibles, our studio's sixth blockbuster participate in creating sequels to our films co-financed by Disney . in a row and on Pixar's 2004 financial results, the best in our Here is our logic . Pixar has released three films subsequent to our studio's almost 20-year history . only sequel, Toy Story 2, and all three of them Monsters, Inc., Finding Nemo and The Incredibles have grossed more than Toy So let's open it up for questions . Story 2 at the box office . Pixar has clearly proven its ability to create original stories that can perform as well if not better than our sequels .

T CONFIDENTIAL TREATMEN REQUESTED BY PIXAR PIXAR 1977 QUESTION AND ANSWE R year starting in 2007 and beyond . And when we are comfortable that we have done that, you can bet we will. I e having some discussions internally about what to do with the rest of the creative bounty that we may have . But one foot in front of the other. Operator

Jessica Reif Cohen - Merrill Lynch - Analyst (OPERATOR INSTRUCTIONS) . Michael Savner, Banc of America . And then one more question . Consumer products, do you think that you will be affected by the sales of- by Disney's sale of their Michael Savner -Banc ofAmerica -Analyst stores ?

Two questions . First, Steve, this is a subtle point I guess, but when Steve Jobs - Pixar - Chairman & CEO you say you are still on track to finish Cars as planned for I guess November, will you actually deliver Cars to Disney in November, or will you continue to hold it up until before the release and tweak Their stores have actually comprised a very small part of the . it if necessary? consumer products revenues that we have enjoyed in the past

And the second question, again kind of a subtle nuance of what Simon Bax -Pixar-CFO you just said, would you consider any passive role with Disney if they were to go ahead with sequels without doing full We assume we will continue to work with the stores . participation, meaning as a consultant or an advisor and maybe dedicating a few people? Operato r

Steve Jobs - Pixar - Chairman & CEO Lowell Singer, SG Cowen .

To answer your first question, I believe - Pm not sure, .and we can get back to you on that . I assume were going to deliver the film as Lowell Singer - SG Cowen - Analyst soon as we are done, but we will check on that and get back to you . And one of the reasons to get it done is so that our team can go on I have two questions . First, Steve, for you, it was about a year ago to their next project. So tweaking it after it is finished would not be that you announced you were ending talks with Disney on the productive . distribution partnership (inaudible) of your deal in moving on . While you're clearly not pushing up against a deadline, why have I think in terms of our creative point of view I think we're going to you not signed a deal yet, and what are the gating items that you're make the films or we are not going to make the films, and we have waiting to see before you do? And is the Disney CEO search one elected to not make them. So I don't think we will be having any of those items? involvement with them. And then, Simon, for you I'm trying to understand why our EPS estimates have been consistently light, and I wonder if we have Operato r been underestimating the nontheatrical revenue buckets. So I'm wondering if you can give us a sense of what a film's revenue is Jessica Reif Cohen, Merrill Lynch. for, let's say, Finding Nemo by bucket? So the theatrical, home video, TV, merchandising. I know you have shown the data in the Jessica Reif Cohen - Merrill Lynch - Analyst past, and I just wonder if the nontheatrical bucket has simply become a larger percentage of the overall revenue for a film. Steve, you mentioned that you have eight directors who are Thanks . trained by the Company, all creative and obviously incredibly capable . So the question is, why don't you do more than one film Steve Jobs - Pixar - Chairman & CEO per year with that many directors ?

Well, let me take the first part of that question . Though it is likely Steve Jobs - Pixar - Chairman & CEO we will not forge a new relationship with Disney beyond our current deal, we clearly have slowed down the process of picking a Well, you know, the future is long, but right now we are just new partner to see how this game of musical chairs will end you trying to build a very solid pipeline for a great Pixar film every know and who the new CEO Disney will be . That could somebody

CONFIDENTIAL TREATMENT PIXAR 1978 REQUESTED BY PIXAR from another studio, which could affect the desirability of anoth-• And then the second question is, given the value of your brand as studio in our eyes. indicated by the survey that you cited, can Disney use your brand to co-brand the film, the sequel films, or do you have rights to So you know I think we have slowed things down, and it sounds prevent that? like we're going to know how this all turns out within not that many months from now . We have the time to take our time and And third and finally for you, Simon, I'm wondering when you're wait and see and make the right decision for our studio . going to adopt stock option expensing and whether there will be a change in how you compensate employees going forward, i .e . will you use restricted stock instead of stock options? Thanks . Simon Bax - Pixar - CFO

On the second part of the question, it is always difficult to be Steve Jobs - Pixar - Chairman & CE O estimating films like Nemo and The Incredibles, which our films that are two of the highest grossing films in history . So going into Let me answer the first part of that question . We have officially these, we try and be conservative in terms of what their passed on actively participating on the sequels to Monsters, Inc . performance will be. and Finding Nemo, and Disney does not have the right to use our brand in the marketing of those films. As' we said in the call, in Nemo we are now at over 48 million units. That is an extremely large number, and it is generating a lot Simon Rax - Pinar - CFO more revenue than our films in the past have performed .

I also mentioned in my script we saw margin improvement on And on the third part of your question , we intend to implement the in the third 'Finding Nemo. So these are having an effect. I cannot give you stock option expensing quarter of 2005 . precise buckets, as you said, by revenue line item, but clearly the video piece for Nemo was significantly larger than initial estimates Kathy Styponias - Prudential - Analyst back a year ago . And will you continue to use options , or might you use restricted Lowell Singer - SG Cowen - Analyst stock instead ?

Has the merchandising component of each film, has that gotten Simon Bax - Pixar - CFO bigger over time, or has that number been flat sort of from the Toy Story days through The Incredibles? At the moment, we are evaluating that, but we assume we will continue to use options . Simon Bax - Pixar - CFO

Operato r Toy Story was clearly a huge consumer product film, Toy Story and Toy Story 2. Nemo started actually much slower than we David Miller, Sanders Moms Hams . thought. Because of its enduring appeal and success around the world, you know we have seen - we have increased our estimates for consumer products over the last few months, as has Disney . David Miller - Sanders Morris Harris -Analyst

Steve, first of all, congratulations on the stellar numbers. About Operator two quarters ago you mentioned that in a possible development of a new coproduction deal post-Cars, that the three studios you (OPERATOR INSTRUCTIONS) . Kathy Styponias, Prudential . would highly consider would be Time Warner, Fox and Sony just given their prowess overseas and their ability to effectively Kathy Styponias - Prudential - Analyst distribute films overseas.

I actually have three questions . First, Steve, can we take it from In a new Brad Grey-led Paramount, he has made it a mantra of his your comments that any proposal that you might have received indoctrination, if you will, to kind of beef up the international infrastructure of that particular studio . Given that, is Paramount from Disney on Monsters, Inc . and Nemo sequels have been officially rejected by Pixar? now under consideration post-Cars, or do you feel at this point that the three studios that you mentioned before are still the front runners? Thank you .

CONFIDENTIAL TREATMENT REQUESTED BY MAR PIXAR '~ 979 Steve Jobs - Pixar - Chairman & CEO Steve Jobs - Pixar - Chairman & CEO

You know, we haven't really ever talked about front runners, and I You know, people give us advice on splitting the stock from time would rather not get into that now . But what you mentioned is a to time and you know we talk about it from time to time, but w e perfect example of some of the musical chairs that have been don't have anything to announce today. happening this year at many of the studios and you know could continue with a selection of a new Disney CEO . So it is usually Operato r good to make a very important decision no sooner than you have to so you can make it on the latest available information . Richard Greenfield, Fulcrum Partners.

Operato r Richard Greenfield - Fulcrum Partners - Analyst

Anthony DiClemente, Lehman Brothers . A question for Steve. Disney management recently answered a question I asked at their Disney analyst meeting down in Orlando Anthony DiClemente - Lehman Brothers -Analyst by indicating that the animation of humans from Disney/Pixar films was "pretty pathetic" related to their Rapunzel movie that Just a couple of questions. Do you have any ongoing strategy as to they are working on . I was hoping to get your reaction to that things you are doing, new initiatives to continue to make the most statement, and if it in anyway impacts your thought process related of your existing franchises, high-definition DVD being a question to a new distribution agreement with the Walt Disney company? that I have ?

Steve Jobs - Pinar - Chairman & CEO And then secondly, any updates on what to do with the big cash balance, uses of that cash balance? And secondly, any updates on Well, you know I know our films don't stack up against films like thinking around splitting the stock? Thanks . Atlantis or The Emperor's New Groove or Treasure Planet, but we just kind of wrote that off to Michael being a loose cannon . Steve Jobs - Pixar - Chairman & CEO

Richard Greenfield - Fulcrum Partners -Analyst Okay . Let me take the first few of those. In terms of high- definition DVDs, you know once the industry settles on hopefully Thanks very much . one standard rather than two for high-definition DVDs, we think that format could begin to takeoff in the 2007 timeframe, 2008 timeframe .'Once there are enough high-definition DVD players in Operato r homes, we think it will be fantastic for our film library to be re- released inhigb-definition DVD . Ralph Shakert (ph), William Blair .

As you know , since our films are produced entirely digitally, we have all the bits to provide stunning high-definition DVDs. So at Ralph Shakert - William Blair - Analyst the right time, we will be there, and I think we will be putting out a tremendous product. Good afternoon . Can you comment a little bit on DVD wholesale pricing, how you think it stacks up for The lncredibles relative to What do we want to do with our cash balance? We want to let it sit Finding Nemo, and then also too can you talk about any effects of in the bank and not bum a hole in our pockets because as we foreign exchange during the quarter? negotiate with a new partner not too long down the road, we would negotiate from a pretty strong position of strength . We can fund Simon Bax - Pixar - CF O our own films and really fund whatever we want with that cash balance . So our business is - our films are expensive, and having On DVD wholesale pri cing , we're not seeing any reduction in the money in the bank helps a lot. DVD wholesale pri cing. So I think we are fortunate maybe that our movies command sort of the top end of the p ri cing . Simon Bax - Pixar - CFO

Stock split?

CONFIDENTIAL TREATMENT PIXAR 1980 REQUESTED BY PIXAR In terms of foreign exchange, clearly the, :ias been some benefit over the last few months with the decline of the dollar, probably Peter Mirsky - Oppenheimer Funds - Analyst added around 10 percent to our box office.

Just to beat a dead horse on the foreign currency issue, can you Operator just compare maybe versus Nemo or versus Monsters what the box office admissions were overseas? William Drury, CSFB .

Simon Bas - Pixar - CFO Debra Schwartz - CSFB - Analys t I don't have th at information by country. Debra Schwartz . When you think about the performance of The Incredibles internationally, which was very strong, so Peter Mirsky - Oppenheimer Funds -Analys t congratulations, but I was just wondering if there are any territories that you see a potential upside from with the release of Cars or the films post-Cars? But overall - would you have it overall?

Simon Bax -Pixar-CFO SimonBax -Pixar-CFO

Well, I think The Incredibles did really well internationally . It did I can get back to you on that, but I don't have it with me . - in Scandinavia and Germany, it was like Monsters, Inc . It carried an eight rating. So the film obviously could not - you could not Operato r take young children to see The Incredibles, and Cars will be rated the equivalent of the U.S . G, so that should probably help us in a Gordon Hodge, Thomas Weisel Partners. couple of those markets . Otherwise, I don't expect to see any major difference . Lauren - Thomas Weisel Partners - Analyst

Operato r This is Lauren (ph) dialing in for Gordon. I had a question on the P&A trends and how they have been looking relative to Nemo for Spencer Wang, J .P . Morgan Chase . The Incredibles whether they stayed relatively steady or whether they have gone up, and you can answer for both theatrical and Spencer Wang - J.P. Morgan Chase -Analyst video, please.

Just a follow-up on the question on foreign currency, Simon, the Simon Bax - Pixar - CFO 10 percent uplift to box office, is that relative to where you thought it would come in, or is that relative to some other metric? P&A trends were fairly consistent with the spend that we had in Nemo, and it is what we highlighted last quarter. On the DVD And also just in terms of the reversal of the home video reserves, again, we don't anticipate any major change. As I mentioned in my was that someth ing th at was budgeted for, or was that e large th script, we did see an improvement in the domestic margin for reason for th e upside in the quarter? Thanks. Nemo, and we would anticipate that we would see a similar margin for The Incredibles. Simon Bax - Pixar- CFO

Operator First on foreign currency, that is really what we -- that was an uplift from where we thought it would be . And on the video Robert Routh, Jefferies . reserve, clearly we looked at what the sales were of Nemo through the end of the quarter and felt that it has been fully so well that we reduced the reserve. Robe rt Routh - Jefferies - Analyst

Just two quick questions. First, Simon, you gave us what Operato r expectations were for the first quarter of '05 between 85 and 95 cents, but I don't think or I might have missed it - you did not giv e Peter Mirsky, Oppenheimer Funds .

CONFIDENTIAL TREATMEN T REQUESTED BY PIXAR PIXAR 1981 any guidance for the full year in terms; of expectations for'05, and ality film a year, and you know then all sorts of discussions are I am wondering if you could give us some kind of range as to what possible. you expect earnings per share to be for the full year? And second, I'm wondering if you could give us an update on the Toy Story Simon Bax - Pixar - CFO moratorium that is currently in effect and when you think that may be ending? In relati on to the MAX 3-D, I think Polar Express clearly was very successful as an IMAX 3-D release. We don't currently have Simon Bax - Pixar- CFO any plans to do any 3-D releases .

At the moment, we are just going to give guidance for the first Operator quarter, and we are going to see what the - obviously starting March 15th we've got the DVD release throughout the world . So (OPERATOR INSTRUCTIONS) . Jeff Logsdon, Harris Nesbitt . later on this year I will give guidance as to later quarters and potentially the full year . Jeff Logsdon - Harris Nesbitt - Analyst On Toy Story, we are talking with Disney about a rerelease of Toy Story to coincide with our 10th, 20th - 10th anniversary of Toy Steve, a question for you . It appea rs that it is more of a Story and 20th anniversary of Pixar. philosophical ques ti on or personal question, but it appears that du ri ng 2005 your ownership level is going to go below 50 percent Operato r as options are exercised. Does that change any of your thinking at all, or are you happy with your share ownership levels where they are? You have never really done anything with the stock you own? Dennis McAlpine, McAlpine Associates.

Steve Jobs - Pixar - Chairman & CEO Dennis McAlpine - McAlpine Associates - Analys t

Well, I have done a lot with it. I have held onto it, and it con ti nues If you let at the success apparent any way of Polar Express in the Isn't that would you guys do? 3-D market, what does that do to your thoughts about making your to appreciate. films available on a 3-D basis? Jeff Logsdon - Harris Nesbitt - Analyst And then second, if you have eight producers now working on different projects, how many of those are greenlite, and if you're We do not get to own your stock . We suffer . only doing one a year, that means that somebody is going to be way off in the future . How do you keep them happy and content for eight years ? Steve Jobs - Pixar - Chairman & CEO

I can tell you there is nothing that delights me more than to be a Steve Jobs - Pixar - Chairman & CE O rewarding or incredible talent at Pixar with stock options and to see them appreciate, and even though a part of that equation means We will be talking about some of these films a little later on in the that I get diluted some, I would rather own a slightly smaller slice year, and at that time, we will be glad to fill you in which ones are of a bigger pie. So I am thri lled , and my stock ownership of the greenlite and - so we will hold that maybe for another quarter Company will still hover around half, an d I could not be more conference call . delighted .

In terms of having eight directors working, it is really great to have more things in development than we may need to fi ll up our Jeff Logsdon - Harris Nesbitt - Analys t pipeline at one a year. But that does not mean that they are all going to be successful in development It means we may have Second question. Simon, perhaps could you just outline for us some things to choose from . once again facilities-wise what is going on with either expanding or extending your existing facilities and what that capacity is being And if it gets to the point where we have so many things to choose used for or anticipated to be used for? from that we cannot make all the films we want to make at one a year rate, then we will discuss doing something differently. But Simon Bax - Pixar - CF O again we are going to go a step at a time . The most important thing to us is quality, so we're going to get on a sure footing at one Pixar

DO REQUESTED BYEP X R T PIXAR 1982 Well, as you know, we got approval from the city for a long-term expansion of the campus in Emeryville. At the moment, we are just Michael Savner -Banc ofAmerica - Analyst looking at what those options might be in terms of additional buildings . I just wanted two quick follow-ups . Simon, can you give us a little bit more detail on the delta between the reversal on the Nemo Jeff Logsdon - Harris Nesbitt - Analys t reserve? You said it was more than you expected, but can you quantify what was built into the number? Was all 22x million Did you lease some facilities? upside to what you had expected, or what was your number so we can figure out what the upside relative to what was in the number ?

Simon Bax -Pixar-CFO And then second for Steve, you know you have made it clear that you want to hold onto your cash reserve until you have a new We do currently lease some facilities because we outgrew the distribution deal in place . It makes sense. But assuming you still main building some time ago . have a large cash cushion, would you look to do acquisitions to maybe vertically integrate some of the consumer products that Operato r have been so successful and will likely continue to be in the future? Thanks . Steve Lidberg, Pacific Crest Secu rities . Simon Bax - Pixar - CFO Steve Lidberg - Pacific Crest Securities - Analyst Michael, let me take the first part. As I said in the note, the Steve, I was hoping you could comment on the competitive reduced domestic home video return reserve and lower marketing environment in animation. Obviously a number of other studios costs were around 22 cents per share. I cannot comment on what pursuing various initiatives, and how is that impacting your ability our projections were. to attract talent? Thanks . Steve Jobs - Pixar - Chairman & CEO Steve Jobs - Pirar - Chairman & CEO And in terms of the cash, again one of the great things having Well, there are a bunch of folks making animated feature films some cash and no debt affords you is options . So I think we're real now, and certainly you can fill up one hand with them, which is focused on selecting a partner for our future over the next year, and terrific . We think a healthy animation industry helps us all . after that, you know I think we will have a lot of options .

We are very fortunate in that for quite some time we have been Operato r able to attract the best talent in the industry, both technical talent and creative talent, and that has not diminished with the advent of Thank you . At this time, speakers, I will turn the conference back some new competitors. We are still able to hire the best. The best over to you . want to be at Pixar and work with the rest of the best. So we're very lucky and fortunate to be in this position, and we see nothing that is going to change in the foreseeable future . Simon Bar - Pixar - CFO

I would like to thank you all for participating in what has been a Steve Lidberg - Pacific Crest Securities - Analyst very enjoyable quarter and year .

And where was headcount at the end of the quarter? Steve Jobs - Pixar - Chairman & CEO

Simon Bax -Pixar-CFO We will talk to you next quarter. Thanks .

It was around 770. Operator

Operator Ladies and gentlemen, today's conference is being made available for replay starting today at 8:30 PM Eastern time and running for Michael Savner, Banc of America . one week until February 17 . You may access the AT&T Replay

CONFIDENTIAL TREATMENT REQUESTED BY PIXAR PIXAR 1983 Service by dialing 1-800475-6701 and entering the ac. s code of 765599. Inte rnationally you may access our Replay Service by dialing 320-365-3844 . (Repeats numbers . )

That does conclude your conference for today . We thank you for your participation and for using AT&T Executive Teleconference . You may now disconnect .

CONFIDENTIAL TREATMENT PIXAR 1984 REQUESTED BY PIXAR EXHIBIT 14 7 of 10 DOCUMENT S

May 5, 2005 Thursday

TRANSCRIPT : 050505ai.79 1

LENGTH: 5948 words

HEADLINE : Q1 2005 Pixar Animation Studios Earnings Conference Call - Fina l

BODY: OPERATOR : Welcome to Pixar's first quarter 2005 earnings conference call . [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Mr. Simon Bax, Executive Vice President and Chief Financial Officer and joining Mr . Bax will be Mr. Steve Jobs, Chairman and Chief Executive Officer. Gentlemen, please go ahead. SIMON BAX, CFO, EVP, PIXAR ANIMATION STUDIOS : Thank you. Good afternoon and welcome to Pixar's conference call for the first quarter of 2005 . Before I begin today's discussion of our financial results I need to remind you that some of the statements made throughout the course of this presentation are forward-looking and it is possible that actual results will differ materially . Among the factors that is could cause these results to differ are the timing and amount of worldwide revenues and distribution costs related to our films, and the timing, accuracy, and amount of information received from Disney and other sources to determine revenues and associated gross profits . These forward-looking statements should not be relied upon as representing our views as of any subsequent date . And we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date they were made . Additional information concerning these and other factors that could cause results to differ is contained in our 2004 Form 10(K) and our other filings with the Securities and Exchange Commission . I would also like to remind you that today's results take into account our two for one stock split which took effect April 19, 2005. All earnings per share calculations have been adjusted to reflect our increased share count. With that I would now like to turn to our financial results . For the first quarter ended April 2, 2005, our revenues were 161 .2 million . Net income was 81 .9 million diluted earnings per share was $0 .67. These results compare to revenues of 53 .8 million, net income of 26 .7 million, and diluted earnings per share of $0 .23 recognized in the first quarter of 2004. The Incredibles contributed 127 .5 million of revenues in the quarter. The film has essentially completed its theatrical run with a worldwide gross of over $631 million . This was comprised of $261 million domestically and $370 million internationally . And represents our second highest grossing film after Finding Nemo . Building on the success of its theatrical performance we released The Incredibles on home video in the U .S. in March, . By the end of the first quarter we had recognized net unit sales of approximately 17 .7 million units of which 97% were DVDs . Because of the higher ratio of DVDs to VHS tapes we saw higher average wholesale prices and significant margin improvement in the U .S. on a per unit basis relative to Monsters Inc . Internationally The Incredibles home video was rolled out in several markets including the U .K., Spain, Italy, and Mexico, and for the first quarter we recognized combined sales of approximately 5 .7 million net units, 86% of which were DVDs . Revenues from Finding Nemo were 14 .4 million mainly from worldwide home video and consumer product sales . Since its release in 2003 worldwide home video sales of Finding Nemo have surpassed the 50 million mark, earning it the distinction of being the highest selling DVD of all time . Our library titles generated revenues of 14 .8 million in the first quarter from video, television and consumer products . Software licensing revenues were approximately 3 .3 million which demonstrates the continuing de- Page 2 FD (Fair Disclosure) Wire May 5, 2005 Thursday

mand for our in demand software . Operating expenses were 8 million compared with 6 .8 million for the same period in 2004 . Other income was 4.8 million and our tax rate was 37 .3%. Our earning of $0 .67 per diluted share exceeded our split adjusted guidance of between $0 .43 and $0 .48 . The main reason for the variance was higher than eApected initial sales of the Incredibles DVD in the U .S. which resulted in $0.11 of EPS upside . A further $0 .04 related to revenues from Finding Nemo and the remaining $0 .04 were from our library titles, particularly international television sales of Monsters Inc .

At the end of the quarter our shareholders equity was over 1 .3 billion. Our cash and investments totaled 876 million and our accounts receivable had increased to 193 million. The majority of which reflects cash due from Disney for our share of film revenues primarily from sales of The Incredibles home video. Other sources of cash this quarter were software revenues, interest income and proceeds from stock option exercises which were partially offset by film production costs and tax payments. Capitalized film costs were 132 million versus 140 million at the end of 2004 reflecting production spending on our current film projects offset by film amortization of 27 million. We expect capitalized film costs to increase throughout the year as we continue our transition from share income costs with Disney to bearing 100% of the production costs for our films beyond Cars. Looking ahead to the second quarter we expect to report earnings per diluted share of approximately $0 .15 . The primary driver of these results will be international home video revenues from The Incredibles due to its release in a number of territories including France, Germany, and Japan . We are not anticipating any material domestic shipments of the title over the next two quarters . However, we expect The Incredibles home video to sell a similar number of units to Monsters Inc. over its life time. As we look to the second half of 2005 other notable events will include the domestic pay TV debut of The Incredibles in the third quarter, the opening of the domestic television window for Finding Nemo in the fourth quarter, and the U.S. DVD release of Toy Story on September 6, in celebration of the films tenth anniversary.

As a reminder Toy Story falls under the terms of the original 1991 feature film agreement . As a result film revenues from the home video re-release will not be split evenly with Disney . We are also currently discussing with Disney the U. S. re-release of Toy Story 2 towards the end of the year as well as the international re-release of both Toy Story and Toy Story 2 . However we have not yet finalized these plans . With that I would now like to turn the discussion over to Steve for a few additional comments .

STEVE JOBS, CHAIRMAN, CEO, PIXAR ANIMATION STUDIOS : Thanks, Simon. I've only got a few things to add this quarter . Things are going great . The first thing is that we are on track to finish Cars this October and it's looking terrific . We are now very far along in production and, for example, over two-thirds of the animation is now finished . It's turning out to be even more stunning than we imagined. Cars is going to be the most detailed computer animated film ever made. It has a stunning level of modeling and shading in it. It's rendered with Pixar's state-of-the-art ray tracing to give amazing reflection off the cars and there is a level of subtlety in the lighting and the shadowing throughout the film that is simply gorgeous . Of course all this visual richness is matched by a wonderful story and what we hope will be timeless characters . We are all very excited about Cars .

Beyond Cars we plan to announce our next three films beyond Cars before the end of this year . In addition to Cars we now have several films in various stages of production and development and our post Disney pipeline is building very nicely. Speaking of Disney, I've had some nice conversations with Bob Iger but we are not yet in any negotiations to strike a new deal with Disney at this time . We are still waiting to see what happens and we will let you know when something, if something starts to happen .

Speaking of time, a wise person once told me overnight successes take a long time . Well, it's hard to believe it will be Toy Story's i0th anniversary this November and Pixar's 20th anniversary this coming February . To celebrate Pixar and Disney are re-releasing Toy Story as Simon mentioned, the world's first computer animated film in a 10th anniversary special edition this September and New York's Museum of Modem Art will be celebrating Pixar's 20th anniversary with a special exhibit entitled Pixar featuring Pixar's artwork which opens this December and runs through February of 2006. So Simon and I would love to answer any questions that you may have . OPERATOR : Thank you. [OPERATOR INSTRUCTIONS] Our first question from the line of Lowell Singer with SG Cowen. Please go ahead . LOWELL SINGER, ANALYST, SG COWEN : Actually, I have two questions . Steve, could you talk a little bit about the progress of the 2007 film? Is it at the same stage where The Incredibles and Finding Nemo were at this point Page 3 FD (Fair Disclosure ) Wire May 5, 2005 Thursday in their development relative to the release date? And, second, can you talk a little bit, as you talk to Bob I mean it seems to me that there are sequels that you guys feel passionately about . I don't want to negotiate this on the call but as you talk about the possibilities of working with Disney in the future are there sequels that you really do care more about than others or do you view the intellectual property as one entire element ? STEVE JOBS : Well, first let me talk about our 2007 film. We are well into production on our 2007 film . It's looking very good. And there is not going to be any issues with finishing it in time . So I assume that's what your question was about . LOWELL SINGER: Exactly.

STEVE JOBS : Yes, there will be no issues there . And as far as if we do enter into any negotiation with Disney all I really want to say is that sequels will play a part of it. And leave it at that . LOWELL SINGER: One follow up. On this Toy Story re-release why is it being re-released separately from Toy Story 2 as opposed to as a box set? STEVE JOBS : Disney has a very good home video marketing team and I think that they feel pretty strongly that re- releasing them separately will be more successful than re-releasing them only as a box set. And so I think we've got plans set for Toy Story and plans are firming up for Toy Story 2 . Not very long there after. So I think we will have them both out there and hopefully they will be as successful as they can be . LOWELL SINGER: Thanks, Steve. OPERATOR : Our next question from the line of Jessica Reif Cohen with Merrill Lynch. Please go ahead. JESSICA REIF COHEN, ANALYST, MERRILL LYNCH: Hi. I have a couple of questions all along the same lines. Steve, you just said with Disney, I don't want to belabor it but you did say that you will see what happens . Did you mean like who is going to be the next Chairman, is that what you were referring to ? STEVE JOBS : No, no, no, in terms of, as I mentioned I've had a few nice conversations with Bob Iger, getting to know him a little bit . He seems like a terrific guy and we will see when the conversations turn, if they turn to Disney wanting to strike a new deal with us we will see how things go .

JESSICA REIF COHEN : And then just longer term for you guys it seems like you are certainly increasing your physical space, you have a lot more experienced people working at Pixar now that you've been around for quite a while . Can you talk about potential plans for increasing the output per annum ? STEVE JOBS : At this time as you know we are just about to get to a film a year starting with Cars . And I think we would like to get that one under our belt before we start imagining what could be down the road . Were we are very focused on getting to a film a year and intend to do that starting in 2006 . JESSICA REIF COHEN : One last question if I may, on Toy Story re-release since you have so many other films that have done so well is the plan to re-release on the 10th anniversary of each of the movies that have been made and can you give us any idea of expectations on the sales on that ? STEVE JOBS : Well, I will handle the first part and let Simon handle the second . Remember that Toy Story has been in moratorium for a little while. You haven't been able to by it and that's not true of all of our other films . I think it's true of Toy Story and Toy Story 2 right now so they are coming out of moratorium for their tenth anniversary and we don't really have any plans for other films 10th anniversary's yet. I imagine if this does really well maybe we should make some,. SIMON BAX : On sales Jessica, I can't give you any specifics on sales now . We wouldn't be doing that before its release. JESSICA REIF COHEN : Thanks. SIMON BAX : Thanks. OPERATOR : Our next question from the line of David Miller with Sanders Morris Harris. DAVID MILLER, ANALYST, SANDERS MORRIS HARRIS : Good afternoon, and, Steve, congratulations once again on the stellar results. Another question concerning Disney, there seems to be two camps, if you will, on the Street right now, one camp believes that you really don't need Disney mostly because Pixar is its own brand name now and Page 4 FD (Fair Disclosure) Wire May 5, 2005 Thursday

because Disney will likely never give you the Lucasfilm style arrangement that you've said publicly many times that you are seeking . The other camp is somehow under the impression that there is still this kind of 50/50 or maybe 6040 creative collaboration with Disney and that a future deal with another distributor just won't yield the same box office results that we've nova gown accustomed to with a Pixar release . Could you speak to that and share with us how much creative input Disney really has at this point in your relationship? Thanks .

STEVE JOBS : Yes, I can answer that question . Disney really hasn't had -- has had almost no creative input really since A Bugs Life . There are a few people at Disney that we have -- always interested in hearing their notes on our films and they know who they are and we would welcome their notes on our films forever, but really the creative has been done 100% at Pixar for really since the beginning with Toy Story and after we got through Toy Story where we did get some help from Disney we have really been on our own since then . So at this point in time there is no dependency on anyone outside of Pixar's four walls for any of the creative or any of the production . And as you know we have enough cash to finance our own films as well . So we are pretty much completely independent .

DAVID MILLER: Okay . Well said . Thanks very much. OPERATOR: Our next question from the line of Spencer Wang wi th JP Morgan. Please go ahead . SPENCER WANG, ANALYST, JP MORGAN : Thanks. Good afternoon. Just a couple quick questions . Firstly, Simon, can you just re fresh our memory on how the economics of the Toy Story 1 re-release will work between you and Disney? And then secondly as you maybe talk with Disney about a new distribution deal, they obviously have their own pipeline of production that's ongoing . How does that factor into the negotiations ? In other words, would you -- would you pursue a relationship with Disney and let them still do their own internal CG? Thank you . SIMON BAX: Let me address the first part. We've never disclosed the specific terms of either the co-production agreement or the original film, feature film agreement . Given that this was the original agreement for -- under which Toy Story was made the terms are less favorable to Pixar than the current agreement is . I can't go further than that. In terms of the production, Disney's production pipeline . STEVE JOBS : I think you should ask Disney about their production pipeline . We would never seek to suggest, to tell Disney what they should do . So you should ask them about that . SPENCER WANG : Would you want your CG relationship to be exclusive with them? In other words, why have them competing?

STEVE JOBS : You know what's interesting. Again I've said this several times but I always remind myself so I will say it again, in the personal computer business it's a zero sum gain . You have winners and you have lovers. So if somebody buys a Mac they are probably not going to buy a Dell or vice versa . But in the film business, it's very different. If there is three bad films you might see none of them and if there is three good films you might see all of them . As long the films do not overlap in their release windows, if we have a competitor that comes out with a good film . As an example, Shrek 2 comes out and it does very well, does that hurt The Incredibles, I don't think so . You could argue that it helps The Incredibles by renewing the peoples -- reminding people how much they love to go to see animated films . If Shrek 2 had done terribly, would that have helped The Incredibles? I don't see how . So it's not a zero sum gain as long as the films are not overlapped in their distribution windows . We are really competing against, can we make a film that audiences want to go see and hopefully go see again and by on DVD . That's our competition. And so it's a very . different, different industry. It's not a zero dum gain . SPENCER WANG : How about on the cost side, though, Steve, in terms of the potentially -- timing of the labor market?

STEVE JOBS: Pixar is enjoying a very fortunate position where we are able to attract and retain what we believe is the best talent in the industry. And we are very lucky. And we never take that for granted . And so we are not, we are not feeling any effects of some of the other studios in the animation business in that regard. SPENCER WANG : Thanks. That's very helpful. OPERATOR : Our next question is from the line of Kathy Styponias with the Prudential Equity. Please go ahead . KATHY STYPONIAS, ANALYST, PRUDENTIAL EQUITY: Hi. Thanks. I have a couple of questions . First with respect to the Toy Story re-release , is the re-release also going to include a theatrical release or is it just going to be DVD? And could you remind us when the last time Toy Story was released on DVD, if at all? And then second, the Page 5 FD (Fair Disclosure) Wire May 5, 2005 Thursday

second question is a hypothetical one for you, Steve? If and when Apple comes out with a video iPod could you make the Pixar movies available on that device or does Disney have to give approval of that, too? Thanks . SIMON BAX : Let me do the first one . There are no plans to do a theatrical re-release of Toy Story . It's just going to be the DVD re-release. And it's an all new version of the film. It looks f.tastic. We've also completely redone the music and the sound . And the last time it was available, from memory, is around three years ago . It was available in a couple of different box sets and it was available for a short time as a single disc . Steve, do you want to address the iPod? STEVE JOBS : Sure. We co own own our films with Disney in perpetuity . So to exploit them in any new ways Dis- ney would have to agree . And that's the way it is . KATHY STYPONIAS : Just as a quick follow up, have you ever had any discussions with them about pursuing new distribution channels like a video device , mobile video device? Thanks . STEVE JOBS: Yes, we do have discussions with them about such things, sure . KATHY STYPONIAS : Thank you. OPERATOR: Our next question from the line of William Drewry with Credit Suisse First Boston, please go ahead. BILL DREWRY, ANALYST, CREDIT SUISSE FIRST BOSTON : Hi, thanks. It's Bill Drewry. Three quick questions. First off, Steve, or Simon, could you tell us how many pictures or how many sc ripts that you internally green lit with and how many of those you pictures you currently have in production ? Two, as we understand it Disney has notified you they intend to produce sequels of Toy Story 3 and Monsters 2, and Nemo 2 and that you have turned down participation in all three of those . Can you confirm or deny that? And then finally, Steve, I think Bob said in a pretty public forum recently with investors that they were happy that you guys didn't pick up their last offer that was on the table and they had no intention of making that offer again and I got to assume that you are still dissatisfied with their last offer. So I'm just curious where any common ground for a new significant agreement could exist. Thanks. STEVE JOBS: We have -- we don't discuss how many films we've internally green lit but we have, let me just say at least four films in some stage of production or development. That's the first part of your question . As far as, again, details in negotiating with Disney I would just like to say I've had some good conversations with Bob Iger and as you know we have not struck a deal with anybody else . We have been waiting to see what would happen at Disney. And so as Bob -- as Bob assumes control of the company we will probably figure out fairly quickly whether there's some common ground or not. When we reach any conclusions we will let you know . BILL DREWRY: Have you notified them that you are not participating in those three sequels? SIMON BAX: Yes, we have. Toy Story 3 actually was several years ago and Monsters , Nerno, and A Bugs Life was more recently.

BILL DREWRY : So there is four actually that they intend to do and you won't be a participant . SIMON BAX : Well, we don't know if they intended to them but they've certainly asked us if we wanted to actively participate in them if they were made and we declined. STEVE JOBS : And we will passively participate in them . BILL DREWRY : Thanks very much. OPERATOR: And our next question from the line of Gordon Hodge with Thomas Weisel Partners . GORDON HODGE, ANALYST, THOMAS WEISEL PARTNERS : A couple of questions, one, you had some great international success with home video with Incredibles . I'm just curious if you haven't released in Germany, France, and Japan, where you did release, I think it was in the UK for sure but I didn't know where else . And then curious on the network television revenue you are expected to enjoy later this year, I understand you will get all of the domestic and I'm just wondering how we should think about the international piece of that, if you can help us there? And then I guess that's good for now . Thanks. SIMON BAX : Okay. On The Incredibles we released it in tons of major markets, UK, Spain, Italy, Mexico . It's also been in other markets like Scandinavia. STEVE JOBS: Canada. Page 6 FD (Fair Disclosure) Wire May 5, 2005 Thursday

SIMON BAX : And we have Germany actually was released on April 14, France is going out towards the end of May and Japan is in middle of June . In terms of television, usually international television comes after the U .S. television. So there will be some pay TV revenues from international markets but no real free television revenues from Nemo . Usual:;-the rule of thumb think that's around three years after its domestic theatrical release, if that's helpful. GORDON HODGE : Very helpful . Thank you. OPERATOR: Next question from the line of Richard Greenfield with Fulcrum Global Partners .

RICHARD GREENFIELD, ANALYST, FULCRUM GLOBAL PARTNERS : Hi, two questions . One, Steve, can you just follow up on Kathy's question, just maybe talk about the opportunities for film just broadly in terms of portable video devices? What do you see as a rough time line in terms of that evolution and how big of an opportunity is it and then just a question strategically? You've been so successful creatively. Your balance sheet is so strong . What is the core reason for being public at this point and might you consider going private at some point ? STEVE JOBS : Okay. We can talk about portable video devices . There are a lot of portable video devices already out there and the most successful ones, there is a lot of failures . But there is one successful class of portable video devices and that's portable DVD players . You can by a portable DVD player for anywhere from a few hundred bucks to 5 or $600 depending on the screen size and the battery life, et cetera, and they play the same media which everybody is buying which is the industry standard DVD . So you can watch it at home in your home theater and you can take the same DVD in your travel bag and watch it on an airplane or wherever you happen to be on one of these portable DVD players . So far nothing else has been very successful . Sony is going to try with their PSP, their PlayStation Portable to create a platform for portable movie watching. The problem with that platform is after you've bought your DVD for your home you have to go buy the same movie again on a different piece of media that players only in the PSP . And we will find out whether they are successful with that or not . And there are other people that have other devices where you can get video content in digital form and download it onto the a hard disc of a device and those device haven't been successful yet . So far there really hasn't been a successful portable video device other than those that play industry standard DVDs and that we participate in just because we sell DVDs. So who knows what's down the road. But it's, so far been fraught with not too much success outside of the portable DVD players .

Second part of the question is why are we public? I think, again, we have a certain amount of cash in the bank which gives us negotiating flexibility to be able to finance and even fund the marketing of our films if we chose to and that's going to, I think, come in handy as we negotiate with the'studios in the coming months . As far as why we are a public company. We would like investors to be able to participate in our success, number one. Number two, we have a lot of employees who we would like to participate in our success as well as be able to be investors in the Company through company stock options and through buying stock in the public markets . And, third, we enjoy having a credible track record in the public markets . Who knows when we might ever need to raise funds in the public markets again and having a long, established track record in those markets can only be a good thing . RICHARD GREENFIELD : Thanks. OPERATOR : Thank you. Our next question from the line of Doug Mitchelson With Deursche Sec, cities . Please go ahead. DOUG MITCHELSON, ANALYST, DEUTSCHE SECURITIES : Thanks, it was a nice quarter but I'm disap- pointed you won't tell when I'm getting my video iPod but three questions . You've talked about Disney's creative input to your films. Can you also talk about Disney's marketing prowess, do you feel that they do a better job marketing than others might do, even if they are not contributing to the creative of the film. Secondly, you indicated that wholesale pricing is moving up as a mix shift more towards DVDs . When you look at the wholesale pricing for DVDs and the wholesale pricing for VHS how are they both trending relative to the sales . And then lastly I think what Jessica was trying to get at is you have an embarrassment of riches in terms of producers and directors there does not seem to be any variable that would stop you from releasing more than one video per year by say 2007 or so . So I guess what I'm asking is how do you manage your senior creative team in the light of such a limited number of release spots? Thanks . STEVE JOBS : In terms of the marketing, I will just say two things . Number one we have tremendous respect for Dick Cook and his marking team at Disney . We worked very well with them. We think they do a terrific job . As far as how they stack up against the other studios, you are a consumer just like we are and you can make your own judgments about how films are marketed. And just as much as we can. So I will leave that to you. In terms of more than one film a Page 7 FD (Fair Disclosure) Wire May 5, 2005 Thursday

year, again, we are focused on getting to one film a year in 2006 and beyond . We think we are going to execute that well and we're really not prepared tow talk about anything beyond that at this time . SIMON BAX : Just in terms of pricing, VHS tapes were being discounted . What we did -- I'm not sure if we are alone in doing this but at Disney's recommendation we dic ft discount the VHS tapes for the release of The Incredibles . If people want to continue to buy VHS tapes they were available but they weren't at any substantial discount to the DVD and we haven't seen any weakness in the pricing of DVDs, quite the contrary we feel like our films are able to support a high price DVD or a reasonable price DVD . DOUG MITCHELSON : When you look at the wholesale pricing for, say, Finding Nemo and the wholesale pricing for The Incredibles a little bit later in time it's the same level or up or down . SIMON BAX: Well, for us the wholesale pricing for the DVD on The Incredibles was slightly higher than Nemo. DOUG MITCHELSON : Okay. Interesting, thanks. STEVE JOBS : Yes. OPERATOR : Our next question from the line of Robert Ross with Jefferies. Please go ahead . ROBERT ROSS (ph), ANALYST, JEFFERIES : Good afternoon. Just two quick questions . First I was wondering if you could comment a little bit on how you see the HD DVD Blue Ray situation playing out and how that could impact Pixar on a going forward basis given the type of content that you have. And second I was wondering if you could comment given the recent rep rieve on the expensing of stock options whether or not the Company still intends on expensing them in the third qua rter, whether you are going to delay that, the six months that is permitted? STEVE JOBS: I'll take the first part, Simon can take the second. As far as the HD DVD format war as it's called, I think that that will get itself resolved in the next six months and there will be one standard . And I think that the Blue Ray camp is in the stronger position right now frankly, but different people have different points of view on that. But I don't think that it would make sense for anybody with really popular films to be an early adopter of that format because there's no players out there . And I think by the time there gets to be a significant number of high-def DVD players out there we are probably talking 2008, 2009, maybe even 2010 . So this is not something that's going to be particularly relevant to Pixar in the next few years . SIMON BAX: Because all of our films were made digitally we can create an HD version of all of them which is to our advantage . In terms of the stock option pricing given the latest change in the announcement that companies no longer have to adopt in the third quarter we are going to do what everybody else I believe is going to be doing and we are going to now start to adopt in the first quarter of 2006 . ROBERT ROSS (ph) : Great. Thank you very much . OPERATOR : Our next question from the line of Anthony DiClemente with Lehman Brothers. Anthony. ANTHONY DICLEMENTE, ANALYST, LEHMAN BROTHERS : Steve, a couple quick ones . Steve, what is the latest month that you can reasonably strike a distribution agreement for that '07 film if you can just remind us , is it De- cember, '05? Another question , what was your headcount at the end of the quarter and maybe you can give us color as to which direction that's going. And finally, if you can help out with how many Incredibles DVD unit sales in the 2Q does your $0 . 15 guidance imply. Thank you. STEVE JOBS: Because we have moved to a summer release schedule we have -- we would like to strike a distribution agreement by the end of this year and I see us doing that. And I think we have about 775 employees at the end of last quarter. SIMON BAX: That's obviously been increasing over the last few years, particularly as we build up for the one film a year which we've been with the current schedule that we are on now . ANTHONY DICLEMENTE : Okay. And then on the DVD units implied in your guidance? SIMON BAX: I'm sorry? ANTHONY DICLEMENTE : In other words, you provided 2Q earnings guidance, I'm just curious as to how many incremental Incredibles DVD units is implied in that forecast? SIMON BAX: Well, I can't give you that. Page 8 FD (Fair Disclosure) Wire May 5, 2005 Thursday

ANTHONY DICLEMENTE : Okay. Just a final follow-up question is there a specific date for the Toy Story DVD re-release or, I'm sorry if you said that but I think you said fall of '05. SIMON BAX : It's September 6 . ANTHONY DICLEMENTE: Got it. Okay. Thank you. OPERATOR: Our next question is from the line of Steve Lidberg with Pacific Crest Securi ties. Please go ahead STEVE LIDBERG, ANALYST, PACIFIC CREST SECURITIES : Good afternoon, guys. I was hoping you could provide some color with regards to some of the other revenue opportunities around The Incredibles and specifically the video game market and maybe provide some color wi th regards to what kind of contribution you saw in the March quarter.

SIMON BAX : I can't give you specifics on the contribution but THQ announced their results this week and they talked about, they narrowed the 4 .5 million units on The Incredibles and around 7 million units on Nemo . So cleLrly there was a contribution on them in the quarter .

STEVE LIDBERG : And one point of clarification, Simon, the 17 .7 million units, was that strictly U.S.? SIMON BAX : Yes, that was just a U.S. number. STEVE LIDBERG : Thank you very much .

OPERATOR : Thank you and our last question is from the line of Gordon Hodge with Thomas Weisel Partners . Please go ahead sue .

GORDON HODGE : I'm sorry, I'm curious on the question of cash and the cash balance that you have . Have you proposed buying back the sequel rights to one of your -- one of the pictures from Disney? Is that something that's been discussed or that you would entertain? Like, for instance, The Incredibles? STEVE JOBS : We just can't go into any details about that sort of thing at this point . GORDON HODGE : We can assume that would be of interest . SIMON BAX : I don't think we can comment any further . GORDON HODGE: Thanks. OPERATOR: We have no further questions . Please continue . STEVE JOBS: Well, thank you everybody and we will talk to you next quarter . OPERATOR : Thank you. Ladies and gentlemen , this conference call will be made available for replay starting today, May 5, at 8:30 p.m. eastern time. The replay will run for one week until the date ofMay 12, at midnight eastern time. You may access the AT&T teleconference replay system by dialing 1(800)475-6701 . Please enter the access code 778313 . International participants may dial (320)365-3844 . Those numbers again are 1(800)475-6701 . And international participants dial (320)365-3844 . The access code is 778313 . That does conclude our conference call for today . I would like to thank you for your participation and for using AT&T's executives teleconference service. You may now disconnect .

[CCBN reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes . in the conference calls upon which Event Transcripts are based, companies may make projections or other or avard- looking statements regarding a variety of items. Such forward -looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward -looking statement based on a number of important factors and risks, which are more specifically identi fied in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward- looking statements are reasonable , any of the assumptions could prove inaccurate or incorrect and, therefore , there can be no assurance that the results contemplated in the forward -looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN Page 9 FD (Fair Disclosure) Wire May 5, 2005 Thursday

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Q2 2005 Pixar Animation Studios Earnings Conference Call - Final

OPERATOR : Ladies and gentlemen, thank you for standing by, and please continue to hold . Pixar Animation Studios Second Quarter 2005 Earnings Conference Call will be underway in just about 2 minutes . So once again, we do thank you for you r patience . We ask that you please stand by .

Ladies and gentlemen, thank you very much for standing by . We do appreciate your patience, today . And good afternoon! Welcome to Pixar Animation Studios Second Quarter 2005 Earnings Conference Call . [operator instructions ]

As a reminder, ladies and gentlemen, today's conference is being recorded today, Thursday August the 4th 2005, for replay purposes . The replay information will be announced at the conclusion of today's earnings call .

So with that being said, let's get right to the second quarter agenda . With us today, we have Pixar Animation Studios Chairman and CEO, Mr . Steve Jobs . And here with our opening remarks is EVP and CFO, Mr . Simon Bax . Please go ahead, sir .

SIMON BAX, EVP, CFO, PIXAR ANIMATION STUDIOS : Good afternoon, and thank you for joining us for Pixar's 2005 Second-Quarter Earnings Conference Call . Before I begin today's discussion of our financial results, I need to remind you that some of the statements made throughout the course of this presentation are forward-looking . And it is possible that actual results will differ materially .

Among the factors that could cause these results to differ are the timing and amount of worldwide revenues and distribution costs related to our films . And the timing, accuracy and amount of information received from Disney and other sources to determine revenues and associated gross profits .

These forward-looking statements should not be relied upon as representing our views, as of any subsequent date . We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date they were made .

Additional information concerning these and other factors that could cause results to differ is contained in our 2004 Form 10K, our 2005 First Quarter Form 10Q, and our other filings with the SEC .

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I would now like to turn to our financial results .

For the second quarter, ended July 2, 2005, our revenues were $26 .4 million . Net income was $12 .7 million . And diluted EPS were $0 .10 -- which was in line with our updated guidance of June 30th .

These results compared to revenues of $66 .3 million, net income of $37 .4 million, and diluted EPS of $0 .32 in the second quarter of 2004 .

For the 6-months ended July 2nd 2005, our revenues were $187 .7 million, net income was $94 .6 million, and diluted EPS were $0 .77 . These results compared to revenues of $120 .1 million, net income of $64 .1 million, and diluted EPS of $0 .55 in the first 6 months of 2004 .

In the second quarter, The Incredibles," contributed $2 .2 million of revenues . This includes consumer products and pay-per-view revenues, as well as a reduction to our home video revenues . The reduction resulted from increases to our domestic and international reserve for returns, based on the most-current information from Disney .

As of the end of the second quarter, we have recognized total worldwide sales of 27 .1 million units of, "The Incredibles ." Comprised of 16 .7 million domestic, and 10 .4 million international units . This equates to gross wholesale revenues before distribution fees of over $450 million, recognized to date .

Although unit sales for "The Incredibles," are approximately 10% less than "Monsters," after its first 2 quarters of release, the average wholesale price to date is approximately $2 higher . As a result, wholesale revenues are tracking at similar levels to "Monsters," for the equivalent period of its home video cycle .

Domestically, the 16 .7 million units reflect a reduction of around 1 million units from sales recognized through the end of the first quarter . The international figure of 10 .4 million units represents an increase of 4 .7 million over the prior quarter .

We have now completed the film's initial home -video release in all key international markets . Overall , the release has been very successful . But there have been a few markets where sales have fallen below expectations . Particularly, France -- released on May 24th , and Japan -- released on June 15th .

Currently, sales in these two markets, in total, are approximately 600,000 units below our original forecast . Although unit sales in both markets are tracking very closely to those of "Monsters . "

Our expectations were higher for these two territories, because in France, "The Incredibles," enjoyed a higher box office than "Monsters," and in Japan, Disney has reduced the average retail price of DVDs since the release of, "Monsters ." For the remainder of the year, we're not anticipating any material worldwide shipments of "The Incredibles . "

Revenues from "Finding Nemo," during the second quarter, were $7 .7 million -- primarily from consumer products . Our library titles generated revenues of $13 . 5

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million in the second quarter, and software licensing revenues were approximately $3 million . Operating expenses in the second quarter were 7 .8 million . Other income was $5 .8 million, and our tax rate was at 37% .

At the end of the quarter, cash and investments were over $900 million . And our accounts receivable were $150 million -- the majority of which reflects cash due from Disney for our share of film revenues .

Other sources of cash this quarter were software revenues, interest income, and proceeds from stock-option exercises, which were partially offset by film production costs and tax payments .

Capitalized film costs were $147 million versus $140 million at the end of 2004 -- reflecting production spending on our current film projects, offset by film amortization of $31 million .

Looking ahead to the third quarter, we are projecting earnings per diluted share of between $0 .08 and $0 .12 . We expect our results in the quarter to be driven by the domestic pay-TV debut of "The Incredibles," as well as the 10th anniversary domestic re-release of the "Toy Story," DVD on September 6th 2005 .

Under the terms of the Feature Film Agreement for "Toy Story," film revenues from the re-release will not be split evenly with Disney . Based on initial sales projections from Disney, we're currently estimating the "Toy Story," re-release to contribute approximately $0 .02 in diluted EPS to our third-quarter 2005 results .

In the fourth quarter, we expect our results to be driven by domestic network television licensing for "Finding Nemo ." The domestic DVD re-release of "Toy Story II," on December 26th, and the International DDD re-releases of "Toy Story," and "Toy Story II," in November and December . We'll talk more about these events on our next call .

With that, I would now like to turn the discussion over to Steve, who is joining the call from Tokyo .

STEVE JOBS, CHAIRMAN, CEO, PIXAR ANIMATION STUDIOS : Thanks, Simon . To put our last quarter's results in perspective, we should remember that the $6 million shortfall in earnings was small, in comparison with our overall business . And tha t it was magnified in importance by the fact that we were in a quarter that falls between major releases . Overall, we're still ahead of our first-half guidance by $0 .15 . Or, over 20% . And "The Incredibles" DVD is far and away the highest-selling DVD of the year, so far -- selling over 27 million units, worldwide .

It may be useful to compare the performance of "The Incredibles," to that of, "Monsters, Inc ." -- our most-recent film before "The Incredibles," that was released theatrically during the same holiday season window .

Domestically, the box-office of "The Incredibles," was just 2% higher than, "Monsters, Inc ." And home-video revenues after the first 2 quarters were identical .

Internationally, "The Incredibles," box-office was 27% higher than that of ,

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"Monsters, Inc ." But home-video revenues after the first 2 quarters were only 10% higher .

So, "The Incredibles," performed exactly the same as, "Monsters, Inc .," domestically . But internationally, though it performed better in both box-office and home-video revenues, it performed less better in home-video revenues than it did in box-office .

Each film performs differently -- particularly when it's being released in over 50 different territories across the globe . But no matter how you look at it, it's still our highest-grossing holiday film, to date .

I'd now like to speak for a moment about, "Cars ." "Cars" is almost done . It is a very, very strong film . And I think it's going to be quite well-received . We'll all know this-coming June .

The Disney Pixar marketing machine is gearing up for the most comprehensive marketing campaign yet, for a Pixar film -- which we'll discuss on our next call . There is no doubt in my mind that "Cars" is going to be one of our strongest films, to date . And I'm not sure I've ever seen John Lassiter more excited than he is, right now -- in the home stretch of making this remarkable film .

On or before our next conference call, we hope to announce our slate of upcoming films that we have green-lit for release, post-"Cars," and post- our current Disney deal . We're very excited about all of them . And we're very excited about the fact that these films get us to our long-stated goal of releasing one film a year .

As far as a future distribution deal is concerned, we are now engaged with Disney, trying to figure out if "Cars," will be our last movie together, or the beginning of a new, longer-term partnership between our studios . The discussions so far have been very productive, and professional . And as I have said before, I like the two principal players from Disney -- Bob Iger and Dick Cook, a lot . .

I am cautiously optimistic, but there are still several hurdles to cross before we will know if a deal will happen or not . However, given that we plan to release our first post-current Disney deal film in the summer of 2007, we want a new deal in place with our chosen studio by the end of this year .

So until then, Simon and I would like to try to answer any questions you may have .

q-and- a

OPERATOR : Indeed, and thank you very much for that update, Mr . Jobs . Ladies and gentlemen, as you just heard, if you do have any questions or comments, we invite you to queue up at this point . [operator instructions ]

Lowell Singer, SG Cowan .

LOWELL SINGER, ANALYST, SG COWAN : Thanks . Simon, for you -- can you talk a little bit about what your expectations are for ultimate unit sales on "The Incredibles, "

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and also what the impact would be on ultimates for future films? Are you still comfortable with whatever internal functions you had before you released, "The Incredibles?" And Steve -- can you just talk a little bit about the importance of the marketing partnership that Disney had with McDonalds for your films, and with DreamWorks signing a deal with McDonalds? A -- does that rule out a potential Pixar deal with McDonalds? And B -- if it does, does that matter? Thanks .

SIMON BAX : Lowell, let me answer your questions . No . We don't believe that the performance of the "The Incredibles," has any sort of bearing on our future films . Each film is a different entity, and we're very confident about the likely performance of our future films . So I don't think there's any change, there .

In terms of "The Incredibles," we're 2 quarters into a film . The ultimates are based on 10-year revenues . We look at our ultimates, obviously, on a regular basis . But there's no significant change as a result of "The Incredibles" performance .

LOWELL SINGER : And for "The Incredibles," itself . Have you -- presumably, you've taken down your ultimates, some .

SIMON BAX : Well, in terms of what I was saying on the call, our revenues are at similar levels to "Monsters," and that's made up of our unit sales being around 10% less than, "Monsters ." But our average wholesale price-to-date is currently $2 above where we were with "Monsters ." So if you're using, "Monsters," as a guide, we're currently tracking to, "Monsters . "

STEVE JOBS : Lowell, this is Steve . I hope that every film we release in the future in the holiday window performs as well as, "The Incredibles ." We could be so lucky .

As far as the McDonald's relationship goes, we have had discussions with McDonalds . I believe we were the first folks that they came and talked to . Those discussions are continuing, but we have nothing to announce with McDonalds, at this time . I think the marketing that they've done in the past has certainly provided a lot of free Happy Meal toys out there, which has made a lot of kids happy -- and a lot of toy manufacturers not so happy . So there is value in it .

But there are also some concerns, as our society becomes more conscious of some of the implications of fast food . We've discussed some of those concerns with McDonalds, and we continue to have ongoing discussions with them .

OPERATOR : Anthony DiClemente, Lehman Brothers .

ANTHONY DICLEMENTE, ANALYST, LEHMAN BROTHERS : I was wondering if you could talk a little bit more about the sell-through and why internationally, it wasn't quite as good as expectations . I know that every sale performs differently, but as yo u compare it to, "Monsters, Inc .," over the time period where DVD penetration presumably had only grown in France and Japan, I'm just wondering if you could give us any more color . was it the marketing spend in those territories? Perhaps piracy? Thank you .

SIMON BAX : Let me take that one . Internationally, as I said, DVD-penetratio n

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doesn't make a huge difference, to us . People were buying VHS units before they were buying DVD units . So there may be a difference, in terms of the average wholesale price that you realize on those sales, but there's not a significant difference in terms of the market -- for us, as a result in market penetration of DVDs increasing .

I think in terms of -- as I said -- in France, we were actually performing and we were tracking pretty much where we were with, "Monsters ." The box-office was stronger than "Monsters ." So our expectations were a little higher .

In Japan, the actual box-office for, "The Incredibles," was lower than, "Monsters ." But the average wholesale price of, "The Incredibles," is around 2,800 yen -- which was down from about 3,800 yen from when "Monsters," was released . But there again, we're tracking on a very similar unit level .

So yes, that's come in below our expectations, but as I said, at a very similar level to where, "Monsters," was .

OPERATOR : Did you have any follow-up questions, Mr . DiClemente ?

ANTHONY DICLEMENTE : No . Thank you .

OPERATOR : Michael Savner, Banc of America Securities .

MICHAEL SAVNER, ANALYST, BANC OF AMERICA SECURITIES : Just 2 questions . 1 -- Simon -- when you say you don't expect any meaningful shipments for "Incredible" units for the duration of the year -- well, first, I want to make sure I understood you correctly . Then, if that is right, does that mean that we should assume you probably won't be recognizing any revenue for home-video of "The Incredibles," for the duration of the year ?

Then secondly, more macro . . . Just thinking about the "Toy Story," re-release . Can you just kind of take us through what the marketing plan is? Maybe how much, broadly, you would spend on the marketing for that re-release? Whether it's print-only or you would be buying TV time? Just so we can get a sense of the cost side of the equation for that re-release . Thanks .

SIMON BAX : Yes . We don't expect any material shipments . So, yes . There will be some shipments for "The Incredibles," worldwide for the remainder of the year . But it's now being released in all the major markets . So there's not . . . I just wanted to make it clear to people that there weren't going to be any significant shipments in the third and fourth quarter .

In terms of "Toy Story," release or re-release, "Toy Story," has been available on DVD before . And it actually hasn't been on moratorium a long time . But it is the 10th anniversary, and it's coming up to our 20th anniversary . I know we wanted to make sure, and Disney wanted to make sure that a really great copy of the DVD was available . And all of our films will be available during the 20th anniversary year .

STEVE JOBS : There is some television advertising planned for the marketing, but clearly not on the scale of one of our new films .

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MICHAEL SAVNER : But to the first question, Simon . Do you not expect any material revenue, then, for the duration of the year on, "The Incredibles? "

SIMON BAX : Yes . That's right .

MICHAEL SAVNER : Okay . I'm just trying to be clear . Thank you .

OPERATOR : Richard Greenfield, Fulcrum Global Partners .

RICHARD GREENFIELD, ANALYST, FULCRUM GLOBAL PARTNERS : Hi . Could you comment on the domestic number that you had to adjust downward for home videos for, "The Incredibles?" what did Pixar or Disney do wrong, in forecasting returns last quarter? And does it speak to a larger problem of the overall being disadvantaged after the first couple of weeks of release, when you're not controlling your distribution, and your distributor is putting out a tremendous number of other titles that might be displacing your shelf-presence in a catalogue phase? Thanks .

SIMON BAX : I don't think we did anything "wrong ." We worked with Disney in terms of looking at what the appropriate reserve levels are, based on the information that we have available . And there was certainly nothing that we did "wrong," in regard to that .

In terms of not controlling distribution, again, we're looking at and saying, "Well, we've sold 27 million units on a worldwide basis . Which is, by far, the biggest-selling DVD of the year . So, again, I don't think we feel like we've been negatively impacted by not controlling distribution . We work very closely with Disney and have a good relationship at the moment, on the distribution .

RICHARD GREENFIELD : Rather than, "did wrong," what do you think contributed to the higher return levels in the US -- versus what you had been expecting ?

SIMON BAX : I don't think we're in a position to really comment on that . There's lots of speculation, but I don't think we have anything to really add .

STEVE JOBS : I think the only thing I would say is that, again, the effect of Disney and Pixar guessing wrong on this was actually not giant . It just was magnified in its importance, by the fact that it occurred in a quarter where we don't have major earnings from a theatrical release or a home video release . As we pointed out, if you look at the first half of the year, taken in total, this kind of a course correction wouldn't have been material . So I think you have to look at this as being really magnified in materiality by the timing of it . Maybe not so large in its overall scope, relative to the incredible success of this DVD .

OPERATOR : Kathy Styponias, Prudential .

KATHERINE STYPONIAS, ANALYST, PRUDENTIAL : Two questions, as well . Simon, I just want to make sure I understand you correctly, as it relates to your ultimates, for both, "The Incredibles," and for future films . I know you're saying that it's tracking in line with "Monsters," but it also sounds like you are using a lower unit number and a higher price point than "Monsters ." I guess -- 1 -- is that correct?

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2 -- are you basically assuming that the lower unit number in "Incredibles," is unique to "Incredibles," and therefore, you're using potentially higher unit numbers for film ultimates for future films? Or are you making the same adjustment to those estimates ?

Then -- 3 -- could you talk a little bit about your library sales and what you're seeing with respect to either returns or to sell through, with respect to your library sales? Is it as-expected, better or worse? Thanks .

SIMON BAX : Let me take those in order . For, "Monsters," yes . You're correct . What we're saying is that our revenues are tracking to "Monsters"-level performance . Which is fewer units, but at a higher average wholesale price . In terms of lower units for future films -- no . We look at each film that we have as a distinct entity . And then we come up with ultimates, based on those films . So it's very early for "Cars ." We haven't released the film, yet . But there's no significant change in what our expectations would be .

And in terms of library sales, we haven't seen any material changes to our library sales . There are no material returns on our library titles . They're performing pretty much to our expectations, at the moment .

OPERATOR : William Drewry, Credit Suisse First Boston .

WILLIAM DREWRY, ANALYST, CREDIT SUISSE FIRST BOSTON : First off, just wondering, Simon . What might be an expectation for unit sales on the "Toy Story," DVD? I was just wondering if you knew how many DVD units, the "Toy Story," had previously sold, history-to-date . Then for Steve, just wondering on your discussions with Disney that are ongoing . If a sequel production in your reconsideration of participating in the sequels that they've notified you that they intend to make, factor in in either your decision or their decision, in terms of wanting to do a deal .

SIMON BAX : Should I take the first part? In terms of "Toy Story," DVD units, it's been, actually, available -- I think now 3 times, before . Total unit sales, I believe, are about 3 million units for "Toy Story," on DVD . But obviously, there's a very significant number of VHS units that have already been sold .

What I wanted to do was give a sort of earnings guidance for, "Toy Story," rather than getting into projected unit sales . I'll let Steve answer the question on sequels .

STEVE JOBS : In terms of our discussions with Disney, we're not going to make any comments on any particulars about that . Including anything related to sequels . We are just having some very productive discussions, and they're wide-ranging . So we'll see where they go .

WILLIAM DREWRY : Could I just ask you then . . . I mean I think previously, sequels were not of interest, from your viewpoint, for the Company -- as far as strategic direction . Could I just ask is it possible that you would revisit that outlook ?

STEVE JOBS : I think that anything's possible, and when we have something to announce either way, we'll let you know .

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OPERATOR : Steve Lidberg, Pacific Crest Securities .

STEVE LIDBERG, ANALYST, PACIFIC CREST SECURITIES : A couple of questions . First of all, I was wondering, looking back at "The Incredibles ." Do you think the older demographic of the film, or the film that it attracted, had any impact on the eventual sale of DVDs? Also, with regard to the '07 film -- can you give us an update on the production of that film? And lastly, what was the impact of foreign currency? Thanks .

SIMON BAX : Steve, would you ?

STEVE JOBS : I can take the '07 film, if you'd like .

SIMON BAX : Okay . Would you do that, and I'll take the rest .

STEVE JOBS : We're not really discussing our films beyond, "Cars," yet . But as I mentioned -- on or before the next earnings call, we're hoping to unveil the slate of films that we are working on . Post-Cars ." We're super-excited about them . Our '07 film is -- I think it'll be dynamite . I'm sorry to ask you for a little more patience on that, but we'd rather talk about more than one at once . And we would rather unveil them to you in a slightly more theatrical way, if you'll give us the license to do that .

SIMON BAX : And in terms of the other two parts of the questions . I don't think there's anything that we can say about it attracting an older demographic . Clearly, it was a PG film rather than a G film, but I don't know that that made any difference .

In terms of FX, the Euro has obviously come down in the last . . . from when we had the theatrical release . But there's not been a significant change as a result of foreign currency metrics .

OPERATOR : With that, Mr . Jobs -- Mr . Bax -- I'll turn the call back to you for any closing remarks .

SIMON BAX : Thank you all for joining us on this call . I don't know if you have anything to add, Steve .

STEVE JOBS : You know, we're working really hard . I don't think we've ever been as excited about the future of the Company as we are, right now . So we'll have some fun stuff to talk about on the next call .

OPERATOR : Thank you very much . Ladies and gentlemen, your host is making this call available for digitized replay for one week, all the way through August 11th of 2005 at midnight . To access AT&T's Executive Replay Service, dial 800 .475 .6701, and at the voice prompt, enter today's conference ID of 789073 . Internationally, please dial 320 .365 .3844 -- again with the conference ID of 789073 . That does conclude our earnings call for this second quarter . Thank you very much for your participation, as well as for using AT&T's Executive Teleconference Service . You may now disconnect .

(Thomson Financial reserves the right to make changes to documents, content, o r

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other information on this web site without obligation to notify any person of such changes .

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---- INDEX REFERENCES ----

COMPANY : PIXAR

NEWS SUBJECT : (Corporate Financial Data (1X059) ; Business Management (lBU42) ; Business Strategy (1BU97) ; Sales (1SA20) ; Major Corporations (1MA93) ; Joint Ventures (1JO05) ; Corporate Strategy & Strategic Planning (1X003) ; Corporate Groups & Ownership (1X009) )

INDUSTRY : (Theoretical Analysis (1TH79) ; Business Services (1BU80) ; Advertising Campaigns (1AD39) ; Advertising (1AD82) ; Financial Services (1FI37) ; Wholesale Trade & Distribution (1WH58) ; Entertainment (1EN08) ; Science & Engineering (1SC33) ; Advertising & Public Relations (1AD83) ; Business Theory (lBU14) )

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REGION : (North America (1N039) ; Western Europe (1WE41) ; Eastern Asia (1EA61) ; Europe (1EU83) ; Americas (1AM92) ; New England (1NE37) ; Japan (1JA96) ; Asi a (1AS61) ; Mediterranean (1ME20) ; Massachusetts (1MA15) ; USA (1US73) ; France (1FR23))

Language : E N

OTHER INDEXING : (CREST ; CREST SECURITIES ; DISNEY ; DISNEY PIXAR ; DVD ; DVDS ; EARNINGS ; EPS ; EURO ; EXECUTIVE REPLAY SERVICE ; EXECUTIVE TELECONFERENCE ; FEATURE FILM AGREEMENT ; FINANCIAL ; FULCRUM GLOBAL PARTNERS ; FX ; INCREDIBLES ; MCDONALD ; MCDONALDS ; MONSTERS ; MONSTERS INC ; MORNINGSIDE PARTNERS ; MORNINGSIDE PARTNERS LLC ; OPERATOR ; PG ; PIXAR ; PIXAR ANIMATION STUDIOS ; PIXAR ANIMATION STUDIOS EARNINGS ; SEC ; SG ; SITE ; TRANSCRIPTION ; TRANSCRIPTS ; USERS ; VHS) (Anthony DiClemente ; Bax ; Bob Iger ; Cars ; Dick Cook ; DiClemente ; Happy Meal ; Jobs ; John Lassiter ; Lowell ; Lowell Singer ; MICHAEL ; Michael Savner ; Mr . Steve Jobs ; Richard Greenfield ; Simon ; Simon Bax ; Steve ; Steve Lidberg ; Story ; Toy ; Toy Story ; WILLIAM ; William Drewry)

Word Count : 538 0 8/4/05 FINDISCLOSURE 21 :30 :00

END OF DOCUMENT

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1 2 IN THE UNITED STATES DISTRICT COUR T 3 FOR THE NORTHERN DISTRICT OF CALIFORNI A 4

5 In re APPLIED SIGNAL TECHNOLOGY, Master File No. C 05-1027 SBA 6 INC . SECURITIES LITIGATION CLASS ACTION 7 ORDER 8 [Docket Nos. 25, 35, 36] 9 This Document Relates To : All Actions. 10 i 11 o A 12

13 This matter comes before the Courton the Motion to Dismiss Plaintiffs Consolidated Amended , .~ U 14 Class Action Complaint (the "Consolidated Amended Complaint") [DocketNo . 351 filed by Defendants .E 15 es o Applied Signal Technology, Inc ., Gary Yancey, and James Doyle (collectively "Defendants") and z 16 •o Plaintiffs Motion for Class Certification [Docket No . 25]. Having read and considered the papers 17 presented by the parties, the Court finds this matter appropriate for disposition without a hearing . The 18 Court hereby GRANTS Defendants' Motion to Dismiss [Docket No . 351 and DISMISSES Plaintiffs 19 Consolidated Amended Class Action Complaint WITH PREJUDICE . Accordingly, the Court DENIES 20 Plaintiffs Motion for Class Certification [Docket No . 25] AS MOOT . 21 BACKGROUND 22 A. Background Regarding the Partie s 23 1. Applied Signal Technology, Inc . 24 Defendant Applied Signal Technology, Inc . ("Applied Signal" orthe "Company") is a California 25 corporation and a publicly traded company with over I 1 million shares of stock outstanding . CAC' at 26 ¶ 15. The Company's financial year is not concurrent with the calendar year . Instead, it ends on the last 27

28 'The Consolidated Amended Complaint is referred to herein as "CAC ." 5 34 05 v-0102 JSBA Bacument 611 2 File'de02908124bUEi06 Pagen of T'4 3

day of October of each calendar year and commences on the first day of November for that calendar

2 year. See Harris-Sutton Decl. at Ex. H (FY04 Form 10-K) .2

3 Applied Signal's corporate headquarters are located in Sunnyvale , California . CAC at 1$ 7, 23- 4 24; Harris-Sutton Decl. at Ex. H. The Company also maintains engineering offices in Annapolis

5 Junction , Maryland; Salt Lake City, Utah ; Herndon, Virginia ; and Hillsboro, Oregon . Harris-Sutton

6 Decl. at Ex. H. As of January 24, 2004, the Company had 425 employees . CAC at ¶¶ 27, 38(a). This

7 number increased to 450 in February 2004, and to 480 employees in May 2004 . Id. As of December

8 17, 2004, the Company had a total of 498 employees . Harris-Sutton Decl. at Ex. H. Of these 498

9 employees, 290 employees worked within the Company 's engineering organizations. Id.

1 0 Applied Signal is in the business of supplying various United States government agencies with 4- customized communications signal processing systems, which it designs, develops, and installs. CAC

U w 12 at ¶ 27. Since 1984, the United States government and various governmental agencies have accounted v R 1. o 13 for almost all of the Company's revenues . Id. Although the government agencies are the Company's 14 A Q primary customer, purchases occur in two ways : (1) contracts directly with the government, and (2) u 15 subcontracts to prime contractors . See Harris-Sutton Decl . at Ex. H. Within the Company's primary a o rA 16 customer agencies, the Company has contracts with approximately twenty different offices, each with d o Z W 17 separate budgets and contracting authority . Id. 18 In the past two fiscal years , just under three quarters of the Company 's contracts were "cost 19 i reimbursement" contracts, including contracts for the design, installation, and/or servicing of customize d 20 products . CAC at ¶ 25 . Under these contracts, the Company is reimbursed for direct and indirect costs

21 and paid a negotiated profit. Id. However, the Company is not entitled to payment until after its 22 employees provide the services delineated in the contract . Id. Further, most of the Company's contract s 23 contain a provision that allows the Company's customers to force Applied Signal to stop work on all o r 24

25 'For example, for fiscal year 2004, the first quarter consisted of the months of November 2003, December 2003, and January 2004 ; the second quarter consisted ofthe months of February 2004, March 26 2004, and April 2004; the third quarter consisted of the months of May 2004, June 2004, and July 2004 ; and the fourth quarter consisted of the months of August 2004, September 2004, and October 2004 27 .

28 2 ase 3~$-v-0~~ ,, V [document g?2 Fil~g 0%1124 . 36 Page 4 of 35 ase cv- 2t- A ocumen Fie 2606 Page o 34

any part of a contract at any time through what is referred to as a "stop-work order" ("SWO") . Id.

2 The federal regulations governing stop-work orders further describe the applicable process a s

3 thus:

4 (a) The Contracting Officer may, at any time, by written order to the Contractor, require the Contractor to stop all, or any pa rt, of the work called for by this contract for a period of [up to]' 90 days after the order is delivered to the Contractor, and for any further period to which the parties may agree . The order shall be specifically identified as a stop-work order issued under this clause . Upon receipt of the order, the Contractor shall immediately comply with its terms and take all reasonable steps to minimize the incurrence of costs allocable to the work covered by the order during the period of work stoppage . Within a period of 90 days after a stop-work order is delivered to the Contractor, or within any extension of that period to which the parties shall have agreed , the Contracting Officer shall either- . 1 0 (1) Cancel the.stop-work order; or

(2) Terminate the work covered by the order as provided in 12 the Default, or the Termination for Convenience of the a Government, clause of this contract. V 13 L a U (b) If a stop-work order issued under this clause is canceled or the period 14 of the order or any extension thereof expires, the Contractor shall a E resume work. The Contracting Officer shall make an equitable 15 adjustment in the delivery schedule or contract price , or both, and the 00 contract shall be modified, in writing, accordingly, if- z 1E 0 (1) The stop-work order results in an increase in the time 17 required for, or in the Contractor's cost properly allocable to, the performance of any part of this I 18 contract; and is (2) The Contractor asserts its right to the adjustment within 30 days after the end of the period of work stoppage; 2C provided, that, if the Contracting Officer decides the facts justify the action, the Contracting Officer may receive and act upon a proposal submitted at any time before final payment under this contract. 2~ (c) If a stop-work order is not canceled and the work covered by the order 22 is terminated for the convenience of the Government, the Contracting Officer shall allow reasonable costs resulting from the stop-work order 24 in arriving at the termination settlement. 2_4

2E 'Revisions to the regulations provide that the 90-day period may be reduced to less than 90 days . 2 See 48 C.F.R. 52.242-15. 2 cv0-010- BA Document 602 Filed /0 208/20066 Page 4 of 34 3

(d) If a stop-work order is not canceled and the work covered by the order is terminated for default, the Contracting Officer shall allow, by 2 equitable adjustment or otherwise, reasonable costs resulting from the stop-work order.

41 48 C.F.R. 52.242-15. Thus, when a SWO is issued, it is possible, but not necessarily definite, that future revenues may be affected. Id. ; CAC at ¶ 26.

6 As such, the Company does not recognize revenue on its cost-reimbursement contracts unti l

7 costs - including labor, materials, and other direct costs and estimated direct costs - are incurred. CAC

8 at ¶ 26. The Company refers to future revenues relating to uncompleted portions of existing contracts

9 as its "backlog ." Id. The Company's backlog is discussed in Company press releases, conference calls,

10 and formal Securities Exchange Commission ("SEC") filings . Id. However, in each of the Company's

L 11 public filings, with respect to future revenues, and other contingent events, the investing public is 0 U 0 1 2 expressly warned that any statements regarding future events are "not guarantees of future performance

U 13 ~L w and are subject to certain risks ." See Harris-Sutton Decl . at Ex. A (FY03 Form 10-K) . For example, it 0 ti 14 the Form l0-K for Fiscal Year 2003 states the following :

C 15 This Annual Reporton Form 10-K contains forward- looking statements made ca pursuant to the provisions of Section 21E of the Securities Exchange Act of 16 1934. These forward-looking statements are based on management's current a~ expectations and beliefs, including estimates and pro ections about our 17 industry. Forward-looking statements may be identified by the use of terms such as "anticipates," "expects," . "intends," "plans," "seeks," "estimates," 18 "believes," and similar expressions, although some forward-looking statements are expressed differently . Statements concerning financial position, business 19 strategy and plans or objectives for future operations are forward-looking statements . These statements are not guarantees of future performance and 20 are subject to certain risks , uncertainties, and assumptions that are .difficult to predict and may cause actual results to differ materially from 21 management's current expectations. Such risks and uncertainties include those set forth herein under "Summary of Business Considerations and Certain 22 Factors that May Affect Future Operating Results and/or Stock Price" and "Management's Discussion and Analysis of Financial Condition and Results 23 of Operations ." The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect management's outlook at 24 any other point in time . We undertake no obligation to update publicly any forward-looking statements,whether as a result of new information, future 25 events, or for any other reason. However, readers should carefully review the risk factors set forth in other reports or documents we file from time 26 to time with the Securities and Exchange Commission (SEC) after the date of the Annual Report. These SEC filings, as well as our latest annual report, can 27

28 4 5 4:b cv0-D10'2 - A uocument 61' Alei'8 ~/0'8/ 006J6 Page o of 43

be obtained through our website at www.appsig.com. In addition, hard copies can be obtained free of charge through our investor relations department . 2

3 Id. (emphasis added) .

4 Further, the Company provides the following explanation regarding its backlog to the investing 5 public:

6 Our backlog . . . consists of anticipated revenues from the uncompleted portions of existingcontracts[ .1 . . . Anticipated revenues included in backlog 7 may be realized over a multi-year period. We include a contract in backlog when the contract is signed by us and by our customer . We believe the backlog 8 figures are firm, subject only to the cancellation and modification provisions contained in our contracts. (See Item 7 : "Management's Discussion and 9 Analysis of Financial Condition and Results of Operations-Backlog .") Because of possible future changes in delivery schedules and cancellations of 10 orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for 4-0 11 I. the year may not meet or exceed the backlog represented. We may o „ experience significant contract cancellations that were previously booked U 12 and included in backlog. 13 +.0 0 Id. (emphasis added) . A 14 2. The Individual Defendants 15

~Q 0 At all times relevant to this action , defendant Gary Yancey ("Yancey") was the Chairman , L z 16 President, and Chief Executive Officer ("CEO") of Applied Signal . CAC at ¶ 8. As the CEO, Yancey .r' . 17 signed and certified all SEC quarterly and annual reports. Id. Additionally, he owned shares of th 18 e Company's stock; although, during the period between January 3, 2005 and January 18, 2005, he sol 19 d over forty percent of his holdings . Id. 20 Also during this period of time, defendant James Doyle ("Doyle") was the Company's Chief Financial Officer ("CFO") and Vice President of Finance 21 . Id. at ¶ 9. As the CFO, Doyle participated in quarterly earnings report conference calls for the quarters ending 22 in July and October 2004 and January and April 2005 . Id. 23 Doyle also signed and certified all SE C quarterly and annual reports. Id. 24 3. Plaintiffs 25

26 Lead Plaintiff Frank Whiting ("Plaintiff"), is a common stock purchaser who purchased share s II of Applied Signal during the relevant time period 27 , August 24, 2004 and February 22, 2005 (the "Class

28 5 5 'se 4:05 v 0M (-SBA Document 6 f 2 File 02/0812606 Page o of 4 3

Period"). CAC at ¶¶ 6,14. The other members of the proposed class are persons or entities - other than

2 the Company, its officers, directors, employees, affiliates, legal representatives, heirs, predecessors,

3 successors and assigns, and any entity in which the Company has a controlling interest or of which the

4 Company is a parent or subsidiary - who purchased Applied Signal common stock during the Class

5 Period. Id. at 114.

6 B. Background Regarding the Confidential Witnesses 7 The allegations contained in the Consolidated Amended Complaint are based, in part, on certai n

8 information obtained from the following Confidential Witnesses :

(a) Confidential Witness No . 1 . Confidential Witness No. 1 ("CW I ") was employed as a software engineer during the be ginning of the Class Period up until November, 2004 . 1 0 Id. at¶22(a). He worked in Applied Signal's Annapolis Junction, Maryland Office. Id. His duties included system and process design , implementation , testing, life cycle t documentation , design and code review, team tasking, and scheduling . Id. 0 U E 12 (b) Confidential Witness No . 2. Confidential Witness No. 2 ("CW2") was employed as a w software engineer in Applied Signal's Maryland office until some months before the 13 0 beginning of the Class Period. Id. at ¶ 22(b). - J 14 (c) Confidential Witness No . . Confidential Witness No . 3 ("CW3") was employed as a software engineer at Applied Signal's Utah office from well before the Class Period until E 15 January 2005 . Id. at¶ 22(c) . CW3's duties included the design and implementation of ez software. z 16 w (d) Confidential Witness No . 4. Confidential Witness No . 4 ("CW4") was employed as a 17 technical editor at Applied Signal's Sunnyvale office from before the beginning of the 7 Class Period until November 2004. Id. at ¶ 22(d). He was responsible for editing and 18 proofreading technical manuals, proposals, presentations, brochures, newsletters, and other technical and marketing material. Id. He was also responsible for creating 19 processes and flowcharts for the Finance Department in accordance with Sarbanes-Oxley requirements . Id. 20

21 C. The Factual Allegation s 22 This action is premised on Plaintiffs theory that Applied Signal and two of its individual 23 II officers, Yancey and Doyle, (collectively, "Defendants"), knowingly issued a series of false an d 24 misleading statements regarding Applied Signal in order to artificially inflate Applied Signal's stock 25 price throughout the Class Period. In particular, the Consolidated Amended Complaint is premised on 26 certain representations Defendants made regarding the Company's "backlog" and certain SWOs that 27

28 6 gp 5 se 4:050 cvC--%Z f=5BA uocument ~'I2 F ded~~ZlD~81/Zf0u 6 Pagae oq !43

were purportedly received by the Company during the relevant period! The Consolidated Amende d

2 Complaint is also premised on certain statements made by the Company concerning the hiring of

3 personnel . The pertinent facts are set forth below.

4 1. The Third Quarter of Fiscal Year 200 4

5 Applied Signal's third quarter for fiscal year 2004 ("FY04") commenced on May 1, 2004.

During that quarter, at some point in June 2004, Applied Signal received a stop-work order ("SWOl "),

which instructed the Company to stop work on a portion of the Company's largest'single contract . CAC

at ¶ 29(a). In accordance with the instructions provided by the customer, the Company prepared a

proposal that detailed the tasks that were stopped and estimated the reduction in contract costs . Id.

Also in June 2004 or possibly in May 2004, according to CWI, the Wireless Communications

L System Division of Applied Signal received another stop-work order ("SW02") on a project for the r7 O ,o United States military that was referred to as "Cowbird ." Id. at ¶ 30. CWI knew about SW02 because

13 it required employees at the Company's Maryland facility, where he worked, to stop performing services

V 14 for the government agency related to the contract . Id. at ¶¶ 22(a), 30(b) . According to CW2, who

E 15 worked at Applied Signal up until a few months before August 2004, the contract implicated by SW02 ? b 16 was worth about $8 million . Id. at ¶¶ 22(b), 30(b). 17 On August 24, 2004, Applied Signal issued a press release and hosted a conference call ("Augus t C 18 11 Conference Call") to discuss financial results for the third quarter of FY04. CAC at ¶ 28. Yancey an d

19 Doyle represented the Company during the August Conference Call. Id. In the course of that call , 20 Doyle reported that the Company's backlog was approximately $111 million .' Id.

21 Additionally, in the August 24, 2004 press release ("August 2004 Press Release"), Yancey was

22 11 quoted as saying that he was "pleased" that Applied Signal had "met the challenge" of meeting

23 "aggressive hiring requirements ." Id. at ¶ 39. During the August Conference Call, he also stated tha t 24

25 4Specifically, the following four SWOs are relevant to the instant discussion : ( l) a June 2004 SWO ("SWOT"), (2) a May or June 2004 SWO ("SW02"), (3) an August or September 2004 SWO 26 ("SW03"), and (4) a December 2004 SWO ("SW04"). CAC at ¶¶ 29, 30, 35 .

27 'Defendants did not discuss SWOT or SW02 during the call. CAC at ¶ 29. 28 7 P 1 gg 5 se 4:03 cv0-0 01/-5BA Documen 61 Al ld~~ /08/2'uuf 6 Page of 43

1 the Company had "been able to stay up with a fairly aggressive growth requirement , and in particular,

2 hiring of staff and staff that we can get cleared . . . ." Id. at ¶ 39. In response to an inqui ry from an

3 analyst regarding the amount of engineers that had been added during the third quarter, Doyle stated that

4 they had hired about 100 people "year-to-date " and approximately 30 people during the third quarter.

5 Id. Yancey then stated that the number for the quarter might be lower - possibly as low as twenty - but

6 that analysts could "go ahead and use 30 . . . and kind of assume we've been close to linear in our 7 increase." Id.

8 On September 9, 2004, Defendants filed a Form 10-Q ("Third QuarterForm l 0-Q") with th e 9 SEC, which reported the $111 million backlog amount that was disclosed during the August 2004

10 Conference Call. Id. at ¶ 29(a). The Third Quarter Form I0-Q also reported that the Company had

t 11 received SWOT and that, pursuant to SWO1, the Company was instructed to stop work on a portion of

U 12 its largest single contract . Id. Additionally, the report stated that "new orders and backlog [were] V a 13 expected to be reduced by approximately $11 to $13 million" after the completion of negotiations .r 14 A ^y relating to SW01 and that the Company "anticipate[d] the completion of these negotiations during the 15 d first or second quarter of fiscal 2005 ."' Id. z 16 2. The Fourth Quarter of Fiscal Year 2004 and Disclosures Concerning the Third o Quarter of Fiscal Year 2004 w w 17 According to CW3, who was employed as a software engineer at Applied Signal's Utah offic 18 e at the time, the Company also received another stop-work order ("SW03") in August or September 19 2004. Id. at IT 22(c), 35(b). SW03 was purportedly related to a contract with one of the Company's 20 largest customers that was worth more than $20 million . Id. at ¶¶ 35(b) 21 . CW3 was aware of SW03 because he had been working on the project, which 22 was known as "Excelsior." Id. at ¶ 35(b). SW03 affected the Multichannel Systems Division ("MSD") at the Utah facility, as well as the MSD group in 23 the Company's Sunnyvale, California facility . Id. 24 At the Sunnyvale facility, approximately 50 to 7 5 workers were involved in the project . 25 Id. CW4, who was employed as a technical editor at Applied 26 6The Third Quarter Form 10-Q did not mention SWO2 27 . CAC at 30 . In fact, to date, SWO2 has not been mentioned in any Company public filings . Id at ¶ 32 . 28 8 5 aL,ase04:0 - 020162/-'SBA DSocument o Freed 02/6 /2~ut?6 Page of 30 3

Signal's Sunnyvale office during August and September 2004, was aware of SW03 . Id at ¶1 22(d),

35(b). According to CW3, after the Company received SW03, work on "Excelsior" stopped for

3 approximately one week. Id. at ¶ 43 . The MSD project then resumed working on the project for the

4 remainder of the calendar year. Id. The project was abandoned in January 2005, leaving the Sunnyvale

5 office a "ghost town ." Id.

6 On September 13, 2004, following the issuance of the Third Quarter Form 10-Q, a securities

7 I analyst covering Applied Signal's stock informed investors that he was changing the rating of the

8 Company's stock from "buy" to "neutral ." Id. at 13 1 . The price of Applied Signal's stock dropped from

9 $37.64, when the market opened, to $31 .78 at the close of market on September 15, 2004 . Id.

10 3. The First Quarter of Fiscal Year 2005 and Disclosures Regarding Fiscal Year 200 4 t 11 According to CW3, the software engineer who worked in the Company's Utah office during this o R 12 II time, the Company also received a stop-work order in December 2004 ("SW04"). Id. at ¶¶ 22(c), 35(c) . v R 13 0 SW04 involved a government agency that had cancelled other large contracts with Applied yr o Signal in 14 the past. Id. at ¶ 35(c).

15 On December 21, 2004, 0 Applied Signal issued a press release (the December 2004 Pres s z (04) 16 Release") and hosted a conference call ("December 2004 Conference Call") to discuss financial results ~ wo 17 for the fourth quarter of FY04 C". . CAC at ¶ 33. Yancey and Doyle represented the Company during the 18 December Conference Call and reported that the backlog for the fourth quarter was $143 million . Id.

19 The December 2004 Press Release reported that the Company earned 21 cents per share during the 20 fourth quarter of FY04, which was below the analysts' consensus estimate of 29 cents per share . Id. at 21 ¶ 42 . Defendants did not mention SWO2, SW03 or SW04 during the call or in the press release . ld 22 at If 35(a)-(c) . 23 Additionally, Doyle reported, during the December 2004 Conference Call, that the Company had 24 added a "net" of 20 employees during the fourth quarter of FY04 . Id. at ¶ 40(a). Doyle then stated that 25 the Company had "about" 500 employees. Id. at ¶ 40(a). According to the Form 10-K for FY04, th e 26 exact number was 498 employees . Id. 27

28 9 5 e 05~cv3 ~0 i-SBA D°ocument 6 Fi~e~02~0~I/ZOUti36 Page~l~b o1 y4 3

The December 2004 Press Release also disclosed that revenue had only increased by 3% sinc e

2 the previous quarter. Id. During the December Conference Call, an analyst, Jay Meier ("Meier"), asked

3 whether anything unusual had occurred during the fourth quarter since the Company had not

4 experienced its usual increase in revenues . Id. at ¶ 42. Doyle and Yancey responded that Meier was

5 reading too much into the numbers and that nothing unusual had occurred . Id. After the December

6 2004 Conference Call, the price of the Company's stock declined from $37 .22 on December 21, 2004

7 to $35.74 at the market's close on December 22, 2004 . Id.

8 Beginning on January 3, 2005, and continuing through January 18, 2005, during an open tradin g

9 I window, Yancey sold -141,400 shares of Company stock, which represented 43% of his total stoc k 10 holdings, at prices ranging from $31 .40 to $34 per share. Id. at ¶ 48. 11 On January 14, 2005, Defendants filed a its Form 10-K for FY04. CAC at ¶ 34 . The Form 10-K

Uo 1 2 11 indicated that the backlog at the end of FY04 was $143 million but that the $143 million could be v_ A I. a 13 reduced by $11 million to $13 million in future quarters once negotiations relating to SWO ] concluded . A H 14 See Harris-Sutton Decl. at Ex. H. E 15 On February 22, 2005, the Company issued a press release (the "February 2005 Press Release") - 0 16 and hosted a conference call (the "February 2005 Conference Call") concerning the Company's financial w 17 results for the first quarter of FY05, which ended on January 31, 2005 . CAC at ¶ 44. During the

18 February 2005 Conference Call, the Company reported that revenue declined almost 25% from the

19 preceding quarter, with net income and earnings per share declining as well . Id. To explain these 20 financial results, Yancey stated : 21 [WJe are a bit behind on execution on our contracts. Part of this is for a• bit of healthy reason . We've seen higher-than-anticipated proposal activity in the first 22 quarter, which has diverted some of our labor resources to proposal activity . The other phenomena that we're experiencing is, as we become more an 23 integrating contractor on some of our programs, as we've stated before we are evolving to, we find that invoicing from our subcontractors can have some 24 impact on the revenue . And we saw that some of the invoicing was lagging 25 behind a bit compared to the work that they were putting in . So we feel that we wi it be back on our track of our projected revenue as we build up our own staff and as.the invoicing comes about. 26 27

28 10 e 3:04-cv-0267 :. 3W Document 102 Fil eed g3/1 4I .16 Page 12f Qf435 ase 4 :05-cv-01027-SBA Document 61 File 0 /08/2006 Page 1 0

1 See Applied Signal Form 8-K, dated February 22, 2005 at Ex. 99.2 .'

2 The Company's stock price subsequently dropped from $27.52 per share on February 22, 2005 3 to $23.24 at the close of the market on February 23, 2005 . Id. at ¶ 45.

4 I D. Procedural History

5 On March 11, 2005, plaintiff Brent Berson ("Berson") filed a complaint in this district on

6 behalf of himself and on behalf of all persons who purchased the securities of Applied Signal

7 between May 25, 2004 and February 22, 2005 (the "Berson complaint") . In the Berson complaint,

8 Berson alleged, inter alia, that Applied Signal and certain of its officers and directors violated

9 Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5

10 promulgated thereunder, and Section 20(a) of the Exchange Act, by issuing materially false and

11 misleading statements . ey o 0, 12 The proposed class period for the Berson complaint was May 25, 2004 through February 22,

U 13 2005 and the complaint was premised on the following allegedly false and misleading statements : (1) Q 14 Ao the Company's May 25, 2004 press release concerning the Company's operating results for the second 15 quarter of FY04; (2) the Company's second quarter FY04 Form 10-Q ; (3) the Company's August 24, o u 16 2004 press release concerning the Company's operating results for the third quarter of FY04 ; (4) the ai . 17 Company's third quarter FY04 Form 10-Q; (5) the Company's December 12, 2004 press release

18 concerning the Company's operating results for the fourth quarter of FY04 and year-end results for

19 FY04; and (6) the Company's FY04 Form 10-K . In the complaint, Berson alleged that the statements 20 were materially false and misleading because Defendants failed to disclose or indicate the following : 21 (1) that the Company lacked the staffing necessaryto execute on current projects while bidding for new 22 business ; and (2) that the Company "struggled to maintain adequate levels of backlog ." The Berson 23 complaint further alleged that the aforementioned false and misleading statements were proven fals e 24

25 7Although this SEC filing was not provided to the Court by the parties, since the Consolidated 26 Amended Complaint necessarily relies on it, the Court has taken judicial notice of it pursuant to Federal Rule of Evidence 201 . See Branch v. Tunnel!, 14 F.3d 449, 454 (9th Cir. 1994); Steckman v. Hart 27 Brewing, .Inc. 143 F.3d 1293, 1295 (9th Cir. 1998). 28 3:04-cv-0267 :. 3W Document 102 ile~l g~~246abJ6 PeOPeaga o 30 35 se 4:05-cv-01027-SBA Document 61 Fi ed 2

1 when the Company announced its operating results for the first quarter of FY05 on February 22, 2005 .

2 On April 19, 2005, plaintiff Shalomah Sameyah ("Sameyah") filed a complaint in this distric t

3 on behalf of himself and on behalf of all persons who purchased the securities of Applied Signal

4 between May 25, 2004 and February 22, 2005 (the "Sameyah complaint"). With the exception of the

5 name of the plaintiff, the Sameyah complaint - which was drafted by the same counsel representing

6 Berson - was identical to the Berson complaint. 7 On May 10, 2005, this Court ordered that the Berson case and the Sameyah case be deeme d

8 I related.

9 1 On May 10, 2005, plaintiff Frank Whiting filed a Motion for Appointment of Lead Plaintiff an d

10 Approval of Lead Plaintiffs Selection of Counsel ("Motion for Appointment of Lead Plaintiff').

11 On July 1, 2005, Defendants submitted a Statement of Non-Opposition to the Motion fo r o A V •0 12 1 Appointment of Lead Plaintiff. Defendants also requested that the Berson case and Sameyah case be

• u 13 consolidated by order of this Court pursuant to Federal Rule of Civil Procedure 42(a) . .- G A 14 On July 13, 2005, the Court consolidated the Berson and Sameyah cases.. Also on that date, the yam,, u 15 II Court granted the Motion for Appointment of Lead Plaintiff. Accordingly, Frank Whiting was 0 16 appointed to serve as Lead Plaintiff. Plaintiffs choice of counsel was also approved . P LU 17 On August 12, 2005, the instant Consolidated Amended Complaint was filed . In the

1 8 Consolidated Amended Complaint, Plaintiff asserts that defendants Applied Signal, Yancey, and Doyle

19 ("Defendants") made untrue statements of material fact and/or omitted statements of material fact in

20 violation of Section 10(b) of the Exchange Act and Rule 10b-5 . Plaintiff also contends that Yancey and 21 Doyle directly or indirectly influenced and controlled the alleged fraudulent conduct ofApplied Signal,

22 and, therefore, are also liable under Section 20(a) of the Exchange Act . Unlike the prior Berson and

23 Sameyah complaints, the proposed class period for the Consolidated Amended Complaint is August 24,

24 2004 through February 22, 2005 . The Consolidated Amended Complaint also differs from the prior

25 complaints in that it now alleges that Defendants' statements regarding the Company's backlog were

26 materially false and misleading because they failed to mention certain stop-work orders purportedl y 27

28 12 Case 05 c ~~~O -,'BA Bocumenf 6T2 File~Q2968/241)1 oi6 Page S3 of '4 35

I issued during May 2004 through December 2004 .

2 LEGAL STANDARD

3 A. Federal Rule of Civil Procedure 12(b)(6) 4 Under Federal Rule of Civil Procedure 12(b)(6), a motion to dismiss should be granted if it

5 appears beyond a doubt that the plaintiff "can prove no set of facts in support of his claim which would

6 entitle him-to relief." Conley v. Gibson, 355 U .S. 41,45-46 (1957). For purposes of such a motion, the

7 complaint is construed in a light most favorable to the plaintiff and all properly pleaded factual

8 allegations are taken as true . Jenkins v. McKeithen, 395 U.S . 411, 421 (1969) ; Everest and Jennings,

9 Inc. v. American Motorists Ins. Co., 23 F.3d 226,228 (9th Cir. 1994). All reasonable inferences are to

10 be drawn in favor of the plaintiff. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 983 (9th Cir.

11 1999). The court does not accept as true unreasonable inferences or conclusory legal allegations cas t

U 12 in the form of factual allegations . Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981); 0 13 see Miranda v. Clark County, Nev., 279 F.3d 1102, 1106 (9th Cir. 2002).

14 Although the court is generally confined to consideration of the allegations in the pleadings,

v 15 when the complaint incorporates documents or alleges the contents of documents, and no party

16 questions the authenticity of such-documents, a court may also consider such documents when

17 evaluating the merits of a Rule 12(b)(6) motion . See In re Stac Electronics Sec. Lit., 89 F.3d 1399,1405

18 (9th Cir. 1996).

19 When the complaint is dismissed for failure to state a claim, "leave to amend should be granted 20 unless the court determines that the allegation of other facts consistent with the challenged pleading

21 could not possibly cure the deficiency." Schreiber Distrib. Co. v. Serv-Well Furniture Co ., $06 F.2d 22 1393, 1401(9th Cir. 1986). The Courtshould consider factors such as "the presence or absence of undue

23 delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue

24 prejudice to the opposing party and futility of the proposed amendment ." Moore v. Kayport Package

25 Express, 885 F.2d 531,538 (9th Cir. 1989). Of these factors, prejudice to the opposing party is the most

26 important. See Jackson v. Bank of Ha i'aii, 902 F.2d 1385, 1387 (9th Cir. 1990) (citing Zenith Radio 27

28 13 g 5 e'4 :0 cvq- r-S'BA Document 612 File OZ/08~/20Uti 6 Pagegle4 o 4 3

Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 330-31 (1971)) . Leave to amend is properly denied

2 "where the amendment would be futile." DeSoto v. Yellow Freight Sys., 957 F.2d 655, 685 (9th Cir.

3 1992).

4 B. Federal Rule of Civil Procedure 9(b ) 5 Federal Rule of Civil Procedure 9(b) provides as follows :

6 In all averments of fraud or mistake , the circumstances constituting fraud or mistake shall be stated with particularity . Malice, intent, 7 knowledge, and other condition of mind of a person may be averred generally. 8 Fed . R. Civ. P. 9(b). 9 "[The Ninth Circuit] has interpreted Rule 9(b) to require that 'allegations of fraud are specific 10 enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud i 11 charged so that they can defend against the charge and not just deny that they have done anything o 12 wrong."' Neubronner v. Milken, 6 F.3d 666,671 (9th Cir. 1993) (quoting Semegen v. Weidner, 780 F.2d •r 13 727, 731 (9th Cir . 1985)). "The pleader must state the time, place, and specific content of the false 14 representations as well as the identities of the parties to the misrepresentation ." Schreiber Distributing 15 Co. v. Serv-Well Furniture Co ., 806 F.2d 1393, 1401 (9th Cir. 1986) (citing Semegen, 780 F.2d at 731) . IIu 16 ~v $ C. Pleading Requirements in Securities Fraud Actions wW. 17 Section 10(b) of the Exchange Act makes it unlawful "for any person . . . to use or employ, in 18 connection with the purchase or sale of any security . . . any manipulative or deceptive device or 19 contrivance in contravention of such rules and regulations as the Commission may prescribe[ .]" 15 20 U.S.C. § 78j(b). 21 Rule I Ob-5, promulgated under the authority of Section 10(b), in turn, provides that "[i]t shall 22 be unlawful for any person . . . (a) To employ any device, scheme, or artifice to defraud, (b) To make 23 any untrue statement of a material fact or to omit to state a material fact necessary in order to make the 24 statements made, in light of the circumstances under which they were made, not misleading, or (c) To 25 engage in any act, practice, or course of business which operates or would operate as a fraud or deceit 26 upon any person, in connection with the purchase or sale of any security ." 17 C.F.R. § 240.1 Ob-5 . Thus, 27 28 14 33 :05-4 -06671 Document A12 F e 02/ se 4:0-cv- 10 1- BA ocumen 081/260~i36 Pagp% 0 g4 35

1 the basic elements of a Rule I Ob-5 claim are: (1) a material misrepresentation or omission of fact, (2) 2 scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, an d

3 (5) economic loss. In re Daou Systems, Inc . 411 F.3d 1006, 1014 (9th Cir. 2005).

4 In order to survive a motion to dismiss, a Section 10(b) claim must satisfy three pleading

5 standards . First, it must meet the general requirements established by Federal Rule of Civil Procedure

6 8(a) that complaints give a short and plain statement of the claim . Second, it must conform with the

7 particularity requirements of Rule 9(b) . Neubronner v. Milken, 6 F.3d 666,671 (9th Cir. 1993) (quoting

8 Semegen, 780 F.2d at 731) . Third, it must satisfy the requirements of the Private Securities Litigation

9 Reform Act ("PSLRA") .

10 The PSLRA employs heightened pleading standards for claims brought under Section 10 (b) and,

11 similar to Rule 9(b), requires pleading with particularity for two elements in a Section 10(b) claim : (1)

V I 12 falsity and (2) scienter. See Gompper v . VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002) (citing Ronconi V A 13 v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001)). "If a plaintiff fails to plead either the alleged misleading o 14 Ac statements or scienter with particularity, the court must dismiss the complaint ." Carol Gamble Trust 86 15 v. E-Rex, Inc., 84 Fed.Appx. 975, 977 (9th Cir. 2004).

16 Thus, under both the PSLRA and Rule 9(b), a plaintiff must specify each statement alleged to

17 have been misleading and the specific reason or reasons why such statement is misleading . See 15 18 U.S.C. § 78u-4(b)(1); Fed . R. Civ. P. 9(b). This is accomplished by identifying either (1) inconsistent

19 contemporaneous statements; or (2) inconsistent contemporaneous information (such as an internal 20 document) that was made by or available to the defendants . In re Splash Technology Holdings, Inc. Sec. 21 Litig., 2000 WL 1727377, * 13 (N .D. Cal . 1997); see also Nursing Home Pension Fund, Local 144 v. 22 Oracle Corp., 380 F.3d 1226,1230 (9th Cir . 2004). "A plaintiff may satisfy [Rule 9(b)] through reliance 23 upon a presumption that the allegedly false and misleading 'group published information' complained 24 of is the collective action of officers and directors ." In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th 25 Cir. 1995). In cases where the falsities are conveyed in "group-published information," for example, 26 in press releases and annual reports, "it is reasonable to presume that these are the collective actions o f 27

28 15 ase 3:04-cv-0267 :. 3W Document 102 Filed 0341 4 . J6 Pa 1 7 of 35 Case 4:05-cv-01027-SBA Document 61 Filed 02/0 12 06 Page 16 of 34

the officers." Id. In such a case, a plaintiff satisfies Rule 9(b) "by pleading the misrepresentations with

particularity and where possible the roles of the individual defendants in the misrepresentations ." Id. ;

see also In re Cornerstone Propane Partners, L .P. Sec. Litig., 2005 U.S. Dist. LEXIS 21469 (N .D. Cal.

2005).

The "recent trend among the Ninth Circuit district courts is that plaintiffs must state wit h

6 particularity facts indicating that an individual defendant was directly involved in the preparation of

7 allegedly misleading statements published by an organization ." Cornerstone, 2005 U .S. Dist. LEXIS

8 at *21 ; see also In re ESS Tech., Inc. Sec. Litig., 2004 U.S . Dist. LEXIS 27203 (N .D. Cal . 2004).

9 However, "where the pleading gives some basis for ascribing knowledge, participation or authorship,

10 and/or control of the published information to an individual defendant" the doctrine may be applied .

11 Cornerstone, 2005 U.S.Dist. LEXIS at *22 . O 12 U 10 When dealing with allegations based on information and belief, and not plaintiffs persona l 13 knowledge, the PSLRA imposes further pleading requirements . "Allegations are deemed to be held on •I- .. +

V M 14 information and belief, and thus subject to the particularity requirements, unless plaintiffs have personal

v eu 15 knowledge of the facts." Cornerstone, 2005 U.S.Dist. LEXIS at *8 (citing In re Yantive Corp. Sec. . 0 Z. 16 Litig., 283 F.3d 1079,1085 n.3 (9th Cir . 2002)). Any allegation that is made on information and belief, w w,. 17 must "state with particularity all facts on which that belief is formed ." 15 U.S.C . § 78u-4(b)(1) . "Naming

18 sources is unnecessary so long as the sources are described with sufficient particularity to support the

19 probability that a person in the position occupied by the source would possess the information alleged

20 and the complaint contains adequate corroborating details ." Daou, 411 F.3d at 1015 (citing Nursing 21 Home, 380 F.3d at 1233) . Therefore, to sufficiently plead falsity, a plaintiff must : (1) identify each

22 alleged misstatement, and in the case of group published information, ascribe some authorship or control

23 .over the documents to the individual defendants ; (2) state the reasons why the statement is misleading;

24 and (3) in the case of confidential source information, supply an adequate factual basis to support the

25 source's basis of knowledge with regard to the information provided . See 15 U.S .C. § 78u-4(b)(1). 26 With respect to scienter, the PSLRA also requires that the plaintiff"state with particularity facts 27

28 16 g , 1 5 ~:D c~ vim A Document 6012 Filedd 02081 O066 Pageg17 of 343

1 giving rise to a strong inference that the defendant[s] acted with the required state of mind" for each

2 alleged act or omission. 15 U.S.C. § 78u-4(b)(2) . "Deliberate recklessness" is the required state ofmind

3 and will satisfy scienter if it "reflects some degree of intentional or conscious misconduct ." Nursing

4 Home, 380 F .3d at 1230 (citing Silicon Graphics, 183 F.3d at 977). A complaint will not survive if it 5 just relies on generic allegations . See Silicon Graphics, 183 F .3d at 974, 985 . To assess whether a

6 plaintiff has sufficiently pled scienter, a court must consider "whether the total of plaintiffs allegations,

7 even though individually lacking, are sufficient to create a strong inference that defendants acted with

8 deliberate or conscious recklessness ." Nursing Home, 380 F.3d at 1230. Additionally, a court must

9 consider "all reasonable inferences, whether or not favorable to the plaintiff ." Id. (citing Gompper, 298 101! F .3d at 897). t 11 ANALYSIS 12 I. Defendants' Request for Judicial Notice

EV o •r 13 0 As a preliminary matter, the Court notes that Defendants have requested that the Court take

A .o 14 judicial notice of the following documents, each of which is attached to the accompanying Declaration E 15 of Tiffany Harris-Sutton ("Harris-Sutton Declaration") : ez o z 16 (1) Applied Signal's Form 10-K for FY03, filed on January 27, 2004 ;

17 (2) Applied Signal's Form 10-Q for the second quarter of FY04, filed June 9, 2004 ;

18 (3) Applied Signal's Form 10-Q for the third quarter of FY04, filed on September 9, 2004 ; 19 (4) Applied Signal's Form 10-K for FY04, filed on January 14, 2005 ;

20 (5) Applied Signal's Form 8-K, filed on August 26, 2004 ;

21 (6) Applied Signal's Form 8-K, filed on December 23, 2004;

22 (7) A chart listing the closing stock prices of Applied Signal during the Class Period ;

23 (10) A copy of 48 C .F.R. 52.242-15 .

24 Pursuant to Federal Rule of Evidence Rule 201, documents that are alleged in a complaint and 25 are essential to plaintiffs al legations may be judicially noticed . See Brunch v. Tunnell,14 F.3 d 449,454 26 (9th Cir. 1994); Steckman v. Hart Brewing, Inc. 143 F.3d 1293, 1295 (9th Cir. 1998) . A court may also 27

28 17 5 ~~c9U~ .-513A D ocument 6q2 Fded~~2/0~/6UE 6 Pageg~8'of 43

1 take judicial notice of"well-publicized stock prices" on a motion to dismiss . Ganino v . Citizens Utilities

2 Co., 228 F.3d 154,167 n .8 (2nd Cir. 2000). Additionally, a court may take judicial notice of regulations

3 issued by federal agencies . Citizens for a Better Env't-Cal . v. Union Oil Co ., 861 F . Supp. 889, 897

4 (N.D. Cal . 1994) (citing Mark v. South Bay Beer Distributors, Inc., 798 F.2d 1279, 1282 (9th Cir .

5 1986)).

6 Since Plaintiff does not oppose the taking of judicial notice of any ofthese documents, and sinc e

7 judicial notice is proper, the Court hereby GRANTS Defendants' Request for Judicial Notice [Docket

8 No . 36] .

9 H. Defendants' Motion to Dismiss

1 0 In Defendants' Motion to Dismiss, Defendants argue that Plaintiffs Consolidated Amende d

L Complaint must be dismissed because : (1) the PSLRA's safe harbor provision precludes liability for any o W V w 12 of the purportedly false or misleading statements related to the Company's backlog ; and (2) Plaintiff has 13 Z 0 not stated, and cannot state, a cause of action under Section 10(b) of the Exchange Act or Rule I Ob-5 A n 14 for any of the allegedly false or misleading statements because the elements of falsity, scienter, and los s 15 causation are not supported by Plaintiffs allegations. Since Defendants as sert that no liability can be 0 , 16 established under Section 10(b) and Rule l0b-5, Defendants also argue that the Section 20(a) clai m PC -E 17 against Yancey and Doyle must be dismissed .

18 A. The Safe Harbor Provisio n

19 The first issue that must be addressed is whether the allegedly false and misleading statements

20 concerning the Company's backlog are rendered non-actionable because they are forward-looking

21 statements falling within the PSLRA's safe harbor provision . The PSLRA carves out a safe harbor from

22 liability for forward-looking statements that prove false if the statement "is identified as a

23 forward-looking statement and is accompanied by meaningful cautionary statements identifying

24 important factors that could cause actual results to differ materially from those in the forward-looking

25 statement." 15 U.S.C. § 78u-5(c)(l)(A)(i) ; Harris v. Ivax Corp., 182 F.3d 799,803 (1 Ith Cir.] 999). The

26 purpose behind this safe harbor is to encourage the disclosure offorward- looking information . See H .R. 27

28 18 3 :p4- v-0?~67 e 4:0-cv- 10.,-A~ Document 602 File~~2/08/ X006 6 Pagee19 of 3435

1 Conf. Rep . No. 104-369, 104th Cong. 1st Sess., at 53 (1995). Whether a statement qualifies for the safe

2 harbor is an appropriate inquiry on a motion to dismiss . So long as the safe harbor requirements are

3 met, liability cannot exist as a matter of law, regardless of the mind of the person making the statement .

4 Employers Teamsters Local Nos. 175 and 505 Pension Trust Fund v. Clorox, 353 F.3 d 1125, 1133 (9th 5 Cir. 2004).

6 Forward-looking statements include statements containing a projection of revenues, income, o r

7 earnings per share, management's plans or objectives for future operations, or a prediction of future

8 economic performance . 15 U .S.C. § 78u-5(i)(1)(A)-(C). In addition, any statement of "the assumptions

9 underlying or relating to" these sorts of statements fall within the meaning of a forward-looking

10 statement. 15 U.S.C . § 78u-5(i)(1)(D). A present-tense statement can qualify as a forward-looking

I I statement as long as the truth or falsity of the statement cannot be discerned until some point in time

O U a 12 after the statement is made . See Harris, 182 F .3d at 805 . Statements concerning historical or current

~. oU 13 facts are not forward-looking . See Gross v. Medaphis Corp ., 977 F. Supp. 1463, 1473 (N .D. Ga. 1997); 14 In re Valujet, Inc . Sec. Litig., 984 F.Supp. 1472, 1479 (N .D. Ga. 1997).

15 With respect to statements regarding backlog, only four purportedly false and misleading

16 statements are identified : (1) that the backlog as of the third quarter of FY04 was "[a]pproximately 11 II 17 million," made during the August 2004 Conference Call ; (2) that the backlog at the end of the fourth 18 quarter was about $143 million, made during the December 2004 Conference Call ; (3) that the backlog 19 at the end of the fourth quarter was $143 million, set forth in the December 2004 Press Release ; and (4) 20 that the backlog at fiscal year-end was $143 million, set forth in the FY04 Form 10-K . 21 The Court finds that each of these statements is a forward-looking statement that was 22 accompanied by the appropriate cautionary language . Specifically, for both the August 2004 23 Conference Call and the December 2004 Conference Call, Doyle stated the following : 24 I'll review our financial performance, but let me begin with the obligatory safe harbor statement . Our presentation today may contain forward-looking 25 statements which reflect the Company's current judgment on future events . Because these statements deal with future events, they are subject to risks and 26 uncertainties that could cause the actual results to differ materially . In addition 27 to the factors that may be discussed in this call, important factors which coul d 28 19 5 cv0-20~b~,-S~~A ~ocumenlt 692 FieA~lII960ub"~6 Page D of 3

cause actual results to differ materially are contained in the Company's recent 10-Qs and 10-K . 2 See Harris-Sutton Decl. at Ex. C (August 24, 2004 Form 8-K) ; see also id. at Ex. F (December 21, 2004

Form 8-K) (stating same) . 4 The Company's Form I0-Q filing, issued with respect to the previous quarter, provided th e following additional cautionary language : 6 Forward-looking statements may be identified by the use of terms such as 7 "anticipates," "expects," "intends," "plans," "seeks," "estimates," "believes," and similar expressions, although some forward-looking statements are 8 expressed differently . Statements concerning financial position, business strategy, and plans or objectives for future operations are forward-looking 9 statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to 10 predict and may cause actual results to differ materially from management's current expectations. Such risks and uncertainties include those set forth in this 11 document under "Summary ofBusiness Considerations and Certain Factors that May Affect Future Operating Results and/or Stock Price ." The forward-looking V a 12 statements in this report speak only as of the time they are made and do not necessarily reflect management's outlook at any other point in time. We u 13 0 undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or for any other reason . 14 However, readers should carefully review the risk factors set forth in other a reports or documents we file from time to time with the Securities and as 15 Exchange Commission (SEC) . es 00 z U 16 11 See Harris-Sutton Decl . at Ex. B.8 00 17 In the section entitled "Summary of Business Considerations and Certain Factors that May 18 Affect Future Operating Results and/or Stock Price," the Company also noted that Applied Signal 19 "depend[s] on revenues from a few significant contracts, and any loss, cancellation, reduction, or dela y 20 in these contracts could harm our business ." Id. 21 Additionally, the Form 10-Q for the third quarter of FY04, which was filed on September 9 , 22 2004, specifically stated: 23 Stop-work orders could negatively impact our operating results andfinancial condition . 24 Almost all of our contracts contain stop-work clauses that permit the other contracting party, at any time, by written order, to stop work on all or any part of the work called for by the contract for a period of ninety days 25 . Within the ninety-day period, the other contracting party may cancel the 26

27 'This same language was set forth in the FY04 Form l 0-K. See id. at Ex. H. 28 20 se 3:04-cv-O 07 ~ocument 102 File~f 9 ~~4 )6 Page 27 of 35 ase 4: 5-cv- ~r-~ ocument 61 Fi ed 2 26x6 Page 1 034

stop-work order and resume work or terminate all or part of the work covered by the stop-work order . During June 2004, we received a stop-work order 2 instructing us to stop work on a portion of our largest single contract . In accordance with the instructions received from the other contracting party, we prepared a proposal that detailed the tasks that were stopped and estimated the reduction in contract costs . If all the stopped tasks are terminated, the result 4 could be a significant reduction in orders and backlog in the period in which it occurs. There can be no assurance that stop-work orders will not be received in future periods.

See Harris-Sutton Decl. at Ex. E (emphasis in original) . Further, the December 2004 Press Release included the following language:

Except for historical information contained herein , matters discussed in this news release may contain forward-looking statements that involve risks and 9 uncertainties that could cause actual results to differ materially . Forward-looking statements discussed in this release include statements as to 10 the Company's continued growth throughout the year and into the foreseeable future; the future spending by the U .S. Government on intelligence gathering ; 11 the Company's ability to hire qualified personnel and such personnel's ability to obtain security clearances; the Company's plans for the future, including the 12 steps it may take and the programs it will emphasize; the Company's beliefs w concerning marketplace oppo rtunities for its products and services; and beliefs 13 concerning contractual oppo rtunities for orders . The risks and uncertainties associated with these statements include whether orders will be issued by 14 A procurers, including the U. S. Government ; the timing ofany orders placed by y procurers; whether the Com pany will be successful in obtaining contracts for E 15 these orders if they are forthcoming; whether any contracts obtained by the Company will be profitable and whether any such contracts might be z 16 V terminated prior to completion ; whether the Company will be able to hire 0 0 additional qualified staff as needed ; the ability to successfully enter new 17 marketplaces C ; the Company's ability to maintain profitability ; and other risks detailed from time to time in the Company's SEC reports including its latest 18 Form 10-K filed for the fiscal year ended October 31 , 2003. The Company assumes no obligation to update the information provided in this news release . 19

20 11 See id. at Ex. F (December 21, 2004 Form 8-K). 21 Plaintiff does not dispute that these cautionary statements were made, but attempts to dismis s 22 the language as mere "boilerplate" language, devoid of any meaning . In the context of this litigation, 23 however, Plaintiffs argument is unavailing. Indeed, in addition to all of the disclosures set forth above, 24 the Company consistently described the contingent nature of the Company's backlog figures in all o f 25 its public filings. For example, the following statement was set forth in the FY03 Form 10-K and thus 26 `I preceded all of the aforementioned cautionary language : 27

28 21 5 ase 4:05~cv--~'f02,-SBA Document 612 File~020/08/2~306J6 Page 22 of 34 3

Our backlog . . . consists of anticipated revenues from the uncompleted portions of existing contracts[ .] . . . Anticipated revenues included in backlog 2 may be realized over a multi-year period . We include a contract in backlog when the contract is signed by us and by our customer . We believe the backlog figures are firm, subject only to the cancellation and modification provisions contained in our -contracts . (See Item 7 : "Management's Discussion and 4 Analysis of Financial Condition and Results of Operations-Backlog .") Because of possible future changes in delivery schedules and cancellations of orders, backlog at any pa rticular date is not necessarily representative of actual sales to be expected for any succeeding period , and actual sales for the year may not meet or exceed the backlog represented . We may experience significant contract cancellations that were previously booked 7 and included in backlog.

See Harris-Sutton Decl. at Ex. A (FY03 Form 10-K) (emphasis added). Given the complete and

9 thorough nature of the Company 's disclosures regarding the unique structure of its business model, and

10 the attendant risks, Plaintiffs bare and unsupported conclusion that the Company' s cautionary statements

"lacked meaning" is completely disingenuous .

U 12 Plaintiffs alternative -argument that the allegedly false and misleading statements do not qualify I. C) 13 0 for safe harbor protection because the statements were not, in fact, forward-looking is equally without y V A 14 merit. Indeed, for the Court to accept Plaintiffs argument, it would have to completely ignore the fact W A 0 E 15 that Plaintiffs Consolidated Amended Complaint expressly identifies the allegedly false and misleading c~ Z0 r 16 statements as statements concerning the Company's backlog. See, e.g., CAC at 129 ("The amounts 0 w 17 reported as'backlog' by the Defendants on August 24, 2004 . . . were materially false and misleading

18 because the Defendants failed to disclose that the Company had received a'stop-work order' in June 19 2004") and ¶ 35 ("The amounts reported as 'backlog' by the Defendants on December 21, 2004, and 20 January 14, 2005. . . . were materially false and misleading") . The Court would also have to ignore the 21 fact that Plaintiff admits, in the Consolidated Amended Complaint, that it was widely understood that 22 the term "backlog" relates to future revenues. See, e.g., CAC at ¶ 26 . Thus, according to Plaintiffs own 23 allegations, which are based on Plaintiffs own information and belief, the Company's backlog is, by 24 definition, merely a "projection of revenue" or a "prediction of future economic performance," thus 25 falling squarely within the safe harbor. See 15 U.S.C. § 78u-5(i)(1)(A)-(C) . Id. at ¶ 26. 26 Further, contra ry to Plaintiffs current assertion, the fact that the Company used the word "firm " 27

28 22 I 5 -BHA ~ocumentt 612 F Ietl~~/Ol /200b~6 Pageg 3 of X3

to describe its backlog figures in the FY03 Form 10-K is not sufficient to equate the Company's

2 "backlog" with "historical data," such as the Company's actual, recognized quarterly revenue .9 Indeed,

3 even the passage in the FY03 Form 10-K that Plaintiff relies on makes clear that "backlog at any

4 particular date is not necessarily representative of actual sales to be expected for any succeeding period,

5 and actual sales for the year may not meet or exceed the backlog represented ." See Harris-Sutton Decl.

6 at Ex. A. Additionally, the Company's quarterly filings continuously reiterated the fact that the

7 "backlog" consisted of the uncompleted portions of existing contracts .

8 Finally, Plaintiffs argument that the safe harbor is inapplicable because the Company did no t

9 adequately inform investors with regard to certain events in the "past" - i.e. "that the government had

10 already issued'stop-work orders,"' - is unpersuasive because it is premised on Plaintiffs own failure to

11 understand the inherently contingent nature of a stop-work order . Indeed, Plaintiffs entire securities o A 12 fraud theory relating to backlog is based on Plaintiffs belief that "the receipt of a 'stop-work order' u a ~. o 1 3 means that any previously reported 'backlog' amounts attributable to revenue within the scope of the 14 A N 'stop-work' order are no longer valid ." See CAC at ¶ 26 . However, this statement is not supported by 1 5 the applicable regulations or the Company's actual manner of accounting for its backlog . See 48 C .F.R. R r Z 16 52 ^ct .242-15 (describing how the receipt of a stop-work begins the negotiation process and how a stop- .d'. 17 work order is subject to cancellation at any time during this negotiation period) ; see also Harris-Sutton 18 Decl. at Ex. E (Third Quarter FY04 Form 10-Q) (stating that the Company's backlog would not be

19 reduced until the negotiations relating to SWO I were completed and the Company was able to ascertain 20 whether parts ofthe applicable contract would actually be terminated) . Even under the lenient pleading 21 standard afforded to a plaintiff on a I2(b)(6) motion, this Court "need not accept as true'allegations that 22 contradict facts which may be judicially noticed ." Mullis v. United States Bankruptcy Ct., 828 F.2d 23 1385, 1388 (9th Cir.1987), cert. denied, 486 U .S. 1040 (1988). Accordingly, Defendants hav e 24

25 9This is a distinction with a significant difference in the context of a publicly traded company . See, e.g., Release No. SAB - 101, 1999 WL 1100908 (SEC bulletin providing guidance with respect to 26 revenue recognition) . Ironically, had the Company actually characterized its potential revenue as "real" revenue in the manner that Plaintiff suggests is appropriate, the ramifications under the applicable SEC 27 rules and regulations would have likely been catastrophic . 28 23 3:04-cv-0~~~` $i V ~ocument 102 il 0g/ 4 _ 16 PPag2e 2 35 a 4 :05-cv- fir- A ocument 61 Fie 2/082606 Page 4 o

persuasively shown that the safe harbor precludes liability for all of the allegedly false and misleadin g

statements relating to the Company's backlog . Therefore, Plaintiffs claims pertaining to the backlo g are hereby DISMISSED WITH PREJUDICE .

B. Plaintiffs Failure to State a Claim under Section 10(b) of the Exchange Actor Rule 10b-5 5 Additionally, Defendants have also shown that Plaintiff has not stated a claim under Section 6 10(b) the Exchange Act or Rule lob-5 with respect to both: (1) the allegedly false and misleading 7 statements pe rtaining to the Company's backlog ; and (2) the allegedly false and misleading statements 8 pertaining to the Company's hiring of personnel. The sufficiency of Plaintiffs claims regarding the 9 Company's backlog will be discussed first. 10 1. Statements Regarding the Company's Backlo g 11 es o .. a. The False and/or Misleading Element V o 12 w As noted in the previous discussion of the safe harbor provision , supra, Plaintiffs Consolidated u V 13 C Amended Complaint is premised on the following four allegedly false and/or misleading statements 14 A concerning the Company's backlog: (1) the August 2004 Conference Call ; (2) the December 2004 V 15 +~ o Conference Call ; (3) the December 2004 Press Release ; and (4) the FY04 Form 10-K. Plaintiff alleges 16 that the statement concerning the Company's backlog made during the August 2004 Conference Call 17 was materially false and/or misleading because Defendants failed to disclose that, prior to the time the 18 call took place, the Company had received two stop-work orders, S WOl and SWO2 . Plaintiff alleges 19 that statements concerning the Company's backlog made during the December 2004 Conference Call, 20 the December 2004 Press Release, and the FY04 Form 10-K were materially false and/or misleading 21 because Defendants failed to disclose that, at the time the statements were made, the Company had 22 received SW02, SW03, and SWO4 . 23 As an initial matter, the Court notes that Plaintiff has not alleged any facts sufficient to show tha t 24 any of the statements concerning the Company's backlog were actually false when made . Indeed, the 25 theory set forth in Plaintiffs Consolidated Amended Complaint is that : (I) the statement made in Augus 26 t 2004 regarding the $111 million. backlog was false because the $111 million backlog figure did not 27

28 24 3:04-cv-0267 : SW Document 102 File 93024 . J6 Paag 2 ~ 35 s 4 :05-cv-01021 -SBA Document 61 Fie 2 26U6 Page o

1 account for SWO1 and SW02; (2) the statements made in December 2004 and January 2005 regarding

2 the $143 million backlog was false because the $143 million backlog figure did not account for SW02 ,

3 SW03, or SW04 . However, the Company's public statements make clear that anticipated revenues are

4 not "debooked" from the total backlog figure until the contract affected by the stop-work order is

5 actually terminated. See Harris-Sutton l)ecl . at Ex. E (Third Quarter FY04 Form l0-Q) (confirming that

6 the backlog for the third quarter of FY04 was $111 million, but indicating that it might be reduced i n

7 FY05 ifthe "stopped tasks are [actually ] terminated."). 8 For example, duringthe December 2004 Conference Call, an analyst specifically asked whether 9 the $143 million included any potential "debookings," and Yancey replied as follows:

10 Q : And does the - one more question for you, or two more questions, please . Does the $143 million include - is that net of any potential debooking ? t 11 o A: That includes the $12 million that has not been debooked. V 12 w Q: So its not net of any potential debooking? Includes ? u W 13 o : That's right. ~ V A AH 14 ~A See Harris-Sutton Decl. at Ex. F (December 2004 Form 8-K) (emphasis added) . 15 Again, on February 22, 2005, Yancey responded to the following questions regarding backlog: ~ z 16 ~ y Q : Okay. During the last quarter, you had a nice - Q4 of 2004 was a big bookings quarter 17 and also backlog came in pretty robust . Can you give us an idea of where your backlog is right now? 18 A: Sure, at the end of the first quarter, Jay, it's a little over $ 124 million . 19 Q: And that is not net of any potential debooking, correct? 20 A : Well, that's correct. 21 A: Yes. We had to - we had to figure out how many negatives was in there, but you're 22 correct. You're correct.

23 A : So it still includes the $12 million - the 11 to 13 million in that range - $12 million of anticipated debooking. 24 See SEC Form 8-K, filed on February 22, 2005, at Ex . 99.2 (transcript of February 22, 2005 Conference 25 Call). 26

28 25 8se 3:04-cv-0 7' SW Bocument 1 p2 i1 1 9 ~~24 16 Pag~%O 0 30 35 ase 4:05-cv- 10 i- B ocument 6 f Fie 2 6W Pa e

1 Thus, with respect to SW02, SW03 , and SW04,10 Plaintiff would have to prove both: (1) that

2 the stop-work orders actually resulted in a termination of all or a portion of the relev ant contracts ; and

3 (2) that the effect of the termination was immediately calculable in the third or fourth quarters of FY04

4 or the first quarter of FY05 . Even construed in the light most favorable to Plaintiff, Plaintiffs

5 Consolidated Amended Complaint does not contain any allegations sufficient to meet these

6 requirements.

7 Additionally, in order for Plaintiff to prove that Defendants' statements were misleading, Plaintiff

8 would have to show that the Company had a duty to disclose SWO I prior to September 9, 2004 ; that

9 the Company had a duty to disclose SW02 during the August 2004 Conference Call or thereafter ; and

10 that the Company had a duty to disclose SW03 and SW04 as of the-time of the December 2004

I 1 Conference Call or thereafter . See Gallagher v. Abbott Labs., Inc., 269 F.3d 806, 809 (7th Cir. 2001)

12 ("Much of plaintiffs ' argument reads as if firms have an absolute duty to disclose all informatio n

• u 13 material to stock prices as soon as news comes into their possession . Yet that is not the way the

14 securities laws work. We do not have a system of continuous disclosure . Instead firms are entitled to

15' keep silent (about good news as well as bad news) unless positive law creates a duty to disclose ."). As Z 16 Defendants point out, however, Plaintiff has not affirmatively alleged such duty, and it clear to the tis $ 0 ..•a+r' Cou17 rt, based on the applicable facts and the law that has been presented , that no such du ty existed. For

18 example, as to the pertinent facts, the allegations in the Consolidated Amended Complaint are

19 ambiguous, at best, as to the : (1) dates the stop-work orders were issued ; (2) the dates the stop-work

20 orders were to expire; (3) whether the stop-work orders affected all or part of the relevant contracts ; (4)

21 whether the stop-work orders were subject to any extensions ; (5) whether the stop-work orders actually

22 resulted in any contract terminations ; and (6) the amount of future revenues affected by the contract

23 terminations, if such terminations occurred . 24

25 "Plaintiffs argument that the August 2004 Conference Call statement was false is foreclose d 26 by the fact that Plaintiff admits that the statement that backlog was "approximately $111 million" was, 7 in fact, correct. See CAC at¶ 29(a) ("The Third Quarter Form 10-Q reported the same 'backlog' number 2 that the Defendants had announced in the August Conference Call .").

28 26 g 5 e 4:(15 c -M, -~'6A Bocumentt6~f 2 Fife~d~Q21 8 MI~ti 36 Page 7 0 304{ 3

1 Further, in his opposition, Plaintiff does not identify a single statute or regulation that require s

2 a company to disclose either the possibility that contracts with customers may be terminated or the

3 actual termination of the customer contract . Indeed, as Defendants aptly note, although the SEC

4 considered proposing such a regulation, it ultimately decided against it . See SEC, Final Rule:

5 Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release Nos . 33-8400,

6 34-49424 (Mar . 16, 2004) (declining to adopt Proposed Item 1 .03, "Termination or Reduction of a

7 Business Relationship with a Customer ."). Where, as here, a plaintiffs complaint is devoid of the

8 pertinent details and fails to otherwise affirmatively plead the basis for the duty of disclosure, the Court

9 must dismiss the claim. See, e.g., In re Digital Island Sec. Litig., 357 F.3d 322, 329 n . 10 (3rd Cir .

10 2004).

11 b. Scienter U 12 Plaintiffs Consolidated Amended Complaint also fails to sufficiently establish scienter . Under w 13 the PSLRA, Plaintiff must allege particular facts giving rise to a strong inference of scienter. 15 U .S.C. y o 14 A sec 78u-4(b)(2) . With respect to SWO 1, the Consolidated Amended Complaint does not plead any facts y u 15 showing that the decision to disclose the stop-work order on September 9th, rather than August 24th, 0 16 was the product of fraud or even the product of recklessness . In fact, the Consolidated Amended

17 Complaint does not say anything at all with regard to Doyle or Yancey's state of mind as of August 24,

18 2004, other than the conclusory assertion that Doyle and Yancey "did not deny" in the Form l0-Q that

19 they "knew about [SWOT] at the time that it was first issued by the government contractor ." See CAC

20 at ¶ 29(b) . Not only is this insufficient, but the fact that Defendants disclosed the SWO1 in the

21 Company's Form 10-Q only two weeks later cuts heavily against an inference of scienter. See, e.g., In

22 re Segue Software, Inc. Sec. Litig.,106 F. Supp. 2d 161, 170 (D. Mass. 2000). The inference of scienter 23 is further negated by the fact that neither Yancey nor Doyle sold any stock during this two-week period . 24 With respect to SW02, SW03, and SW04, the Consolidated Amended Complaint also fails t o 25 II set forth any allegations sufficient to show that Yancey or Doyle even knew of the stop-work orders , 26 much less that Yancey and Doyle deliberately attempted to deceive stockholders by providing false o r 27 28 27 3:04-cv-0267L 3W Document 102 Filed 03/141. J6 Paqe 29 of 35 B 4:05-cv-01 02't-SBA Document 61 Filed 02/0812006 Page Z8 of 34

misleading information pertaining to the Company's backlog . To the contrary, as noted previously,

Yancey and Doyle candidly disclosed during the relevant period that potential debookings affecting

future revenue were not excluded from the Company's backlog. See Harris-Sutton Decl . at Ex. F

(December 2004 Form 8-K). The Company also repeatedly warned shareholders in its public filings

5 that the Company's backlog was not necessarily representative of actual future sales or revenue .

6 Further, with respect to Doyle, there is no allegation that he sold any stock during the Clas s 7 Period. As to Yancey, it has not been sufficiently shown that his stock sales - which occurred during

8 January 2005 -were "dr matically out of line with prior trading practices" orthatthey took place during

9 a time specifically "calculated to maximize the personal benefit from undisclosed inside information ."

10 See Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir . 2001). To the contrary, the allegations in the

11 Consolidated Amended Complaint plainly state that Yancey -like most of the other shareholders - sold U W 12 stock after the Company announced fourth quarter operating results for FY04 that did not meet the

13 analysts' expectations. See CAC at ¶ 42 ("Only once in the preceding six months had more than I

•~ u 14 million shares of Applied Signal stock traded in a day A ^+ ; at no other time did volume exceed 600,000

E 15 shares in a day ."). The only allegation in the Consolidated Amended Complaint that even suggests an 0o PZ 16 inference that the stock sales were suspicious is Plaintiffs bare assertion that "Yancey had complete as o 17 knowledge of the'stop-work orders' and their expected impact on the Company's revenues and earnings

18 for the quarter ." See CAC at ¶ 49. However, this assertion is completely undermined by the fact that 19 Plaintiffs Consolidated Amended Complaint does not actually allege any facts showing that the stop- 20 work orders had any impact on the Company's recognized revenue or earnings for the first quarter of 21 FY05 . See CAC at $1 44-47.

22 C. Loss Causation 23 Finally, Defendants correctly argue that the Consolidated Amended Complaint does not provid e 24 an adequate basis for the required element of loss causation for SW02, SW03, or SWO4 ." Indeed, the 25

26 " Defendants concede in their Motion that loss causation relating to 27 SWO l is adequately plead . 28 28 se 3:04v-O~ a', ~ocument 1 p2 File! 3 4 36 Pag2~ 3 V 35 ase 4 :05-ev-f-~ ocument 6T Fie 290 26Ut5 Page o

internal inconsistencies of the Consolidated Amended Complaint actually defeat a finding of loss

2 causation. For example , as noted above , although Plaintiffs securities fraud theory is premised on his

3 contention that the Company's misleading statements regarding backlog resulted in substantial financial

4 loss to the shareholders, Plaintiff actually states, in his Consolidated.Amended Complaint, that the price

5 per share of the Company's stock declined in December 2004 because the Company announced that: (1)

6 the earnings would only be 21 cents per share for the fou rth quarter ofFY04, as opposed to the analysts'

7 consensus estimate of 29 cents per share; and (2) the Company's revenue had only increased by 3%.

8 See CAC at ¶ 42. Plaintiff also . states that the price per share of the Company's stock declined in

9 February 2005 because the Company reported that "revenue declined almost 25 percent from the

10 preceding qua rter, with net income and earnings per share declining as well ." See CAC at ¶ 44 .

Although Plaintiff vigorously contends, in his Opposition brief, that the stop-work orders were

U W 12 the actual cause of the losses in revenue , the Consolidated Amended Complaint does not actually state w A 13 this. Indeed, o the Consolidated Amended Complaint does not set forth any facts establishing a causal 14 A N connection between the contracts purpo rtedly affected by the stop-work orders and the actual revenue

15 for the fourth quarter of FY04 or the first quarter of FY05 . Plaintiffs argument that it is "facially yC- oC Z 16 absurd" to assume anything other than that SW02, SW03, and SW04 directly impacted revenue in the Ls ~ ` 17 fourth quarter of FY04 and the first qua rter of FY05 is undermined considerably by the relevant

18 government regulations concern ing stop -work orders , which expressly provide that stop-work orders

19 are contingent for a nine ty-day period and are otherwise subject to negotiations , revisions, and 20 extensions . Plaintiffs argument is further undermined by the fact that contracts are included in the 21 "backlog" precisely because the revenue is not recognizable until the relevant portion of the contract

22 is completed and the fact that it is undisputed that anticipated revenues included in the backlog are

23 typically realized over a multi-year period . 24 2. Statements Concerning Hirin g 25 Next, with respect to Plaintiffs allegations concerning the Company's purportedly false and 26 II misleading statements regarding the hiring of personnel, Defendants have effectively shown tha t 27

28 29 Qly 5 h-gv-0?70Aocment102c-v z , Fil e d%2/0/~bu~6 Page 3D of 343

Plaintiff's Consolidated Amended Complaint fails to state a claim under Section 10(b) or Rule I Ob-5 .

2 1 Over the course of the entire Class Period, only three statements concerning hiring are challenged in the

Consolidated Amended Complaint : (1) two statement made during the August 2004 Conference Call ;

41 and (2) a statement made in the August 2004 Press Release.'

Plaintiff first challenges the fact that Yancey stated , during the August 2004 Conference Call,

6 1 that he was "pleased that we've been able to stay up with a fairly aggressive growth requirement and,

in particular, hiring of staff and staff that we can get cleared and hiring cleared staff and we believe that

we're keeping our program performance on par with adequate performance to where we will continue

9 to be looked upon as an asset to the defense community by the U .S. government ." See Harris-Sutton

10 Decl. at Ex. C.

11 The second August 2004 Conference Call statement challenged by Plaintiff is as follows : 0 12 V E Q : Okay. Thank you. Secondly, how many engineers did you add wI during the quarter? 13 L a U A (Doyle): We've had total hiring of about 100 people year-to-date . Let's 14 see, I don't know Gary, what, about 30 through the quarter? 0 E 15 A (Yancey) : I would have actually guessed maybe 20 . It slowed a bit into z the summer, although perhaps not . The simple answer would W 16 be to go ahead and use 30, Steve, and kind of assume we've 0 been close to linear in our increase . 17 3c4 See Harris-Sutton Decl . at Ex. C. 7 18 As to the August 2004 Press Release, Plaintiff alleges that the following statement was false and 19 misleading : 20 Regarding the third quarter operating results, Mr . Gary Yancey, President and 21 Chief Executive Officer of the Company, commented, "The greatly increased level of orders compared to fiscal 2003 has challenged us to meet aggressive 22 hiring requirements and to control capital expenditures . I am pleased that we have met these challenges and have been able to meet our contractual 23 commitments. This has resulted in our increase in revenue compared to fiscal 2003." 24

26 "The Consolidated Amended Complaint makes mention of other statements of similar nature made by Defendants, but these statements fall outside of the relevant Class Period . See CAC'at ¶ 38. 27 28 30 3:p4- v-0267] W Document 102 File d p3/14/. J6 Page 32 Qf~ 35 se 4:0b-cv-010 ,-SBA Document 61 Filed 02/08/2006 Page 31 of :34

1 See id. 2 a. The False and/or Misleading Element

3 Plaintiff alleges that the aforementioned statements were materially false and misleading becaus e

4 "[i]f Applied Signal had, in fact, added 100 employees'year-to-date' as of August, 2004, as reported by

5 Defendant Doyle during the August Conference Call, the Company would have had 525 employees"

6 at the time of the December 2004 Conference Call and "should have had approximately 545 employees

7 at the end of the year." See CAC at 40(b). As an initial matter, given that Plaintiffs entire argument

8 is based on the fact that the Company had 498 employees in December instead of Plaintiffs speculation

9 that it should have had 525 or 545 employees, Plaintiffs claim borders on frivolous. See, e.g., Central

10 Laborers Pension Fund v. Merix Corp ., 2005 WL 2244072, * 4 (D . Or. 2005) ("Plaintiff cannot meet

2. 11 the heightened pleading standards applicable to fraud claims by simply characterizing Defendants'

U4 12 statements, embedding in those characterizations assumptions not found in the statements themselves, 11, 13 ~L a and then explaining why Plaintiffs own assumptions are false ."). r.+ 14 Further, with respect to the element of falsity, Plaintiffs securities fraud "theory" is hopelessly

E u 15 flawed. First, as Defendants point out, the statement made by Doyle in the August 2004 Conference

z 16 Call makes clear that Doyle is not referring to a "net" gain of 100 employees . Thus, a theory that G> O ..r G. ,1 17 attempts to prove falsity by comparing Doyle's statement with the total number of employees within the

18 Company in December 2004 is inherently defective . Indeed, there are no allegations in the Consolidated 19 Amended Complaint showing that the Company did not, in fact, hire the indicated number o f 20 employees . As such, Plaintiff has not adequately plead that the statements made by Doyle or Yancey

21 were false. Second, and more importantly, Plaintiff utterly fails to show how Doyle and Yancey's 22 statements were misleading . Indeed, it does not appear that Plaintiff could show this, as Doyle's an d 23 Yancey's answers regarding hiring are replete with qualifiers such as "I don't know," "maybe," and "I 24 would have guessed." 25 b. Scienter 26 The fact that Doyle and Yancey expressly stated in the August 2004 Conference Call that the y 27

28 31 4 y :R` & c9~ 6 -SE3A -ITocUrnentt 6'12 FFe8~9S/ZOub'16 Page t 0 455

1 were not expressing a firm opinion with regard to the exact number of employee hires, and were only

2 guessing, also negates a finding that Doyle or Yancey acted out of deliberate recklessness or with an

3 intent to defraud shareholders. The inference of scienter is further negated by the fact that Doyle an d

4 Yancey did not experience any personal gain as a result of the allegedly false or misleading statements .

5 Indeed, even Plaintiff admits that Yancey did not sell any Company stock until after the December 2004

6 disclosure which clarified the exact number of Company employees .

7 c. Loss Causatio n

8 Additionally, the Consolidated Amended Complaint does not establish a causal connection

9 between the August 2004 statements regarding hiring and the December 2004 decline in stock price .

10 To the contrary, as set forth previously, Plaintiff alleges, instead, that the stock price fell in December

I. 11 because the Company announced that it was not meeting the analysts' consensus estimate and because

U 12 the Company's revenue only increased by 3% . See CAC at 1 42 . Plaintiffs contention that the February u w 13 2005 decline in stock price is also attributable to the Company's August 2004 statements is foreclosed 0 14 by the fact that Plaintiff admits that the investing public was apprised of the .true number of employees

.E 15 in December 2004. 0 z 16 In sum, Plaintiff has failed to state claim under Section 10(b) of the Exchange Act and Rule 1Ob-

U. 17 5 promulgated thereunder . Accordingly, these causes of action are hereby DISMISSED .

18 C. Liability Under § 20(a) of the Exchange Act

19 With respect to Plaintiffs second cause of action, to establish "control person" liability under

20 Section 20(a) of the Exchange Act, Plaintiff must show that a primary violation of Section 10(b) or Rule

21 I Ob-5 was committed and that each individual defendant "directly or indirectly" controlled the violator . 22 See Paracor Finance, Inc. v. General Electric Capital, 96 F.3d 1151, 1161 (9th Cir .1996). Since 23 Plaintiff has not stated a viable Section 1 .0(b) or Rule I Ob-5 claim, Plaintiffs claim under Section 20(a) 24 of the Exchange Act necessarily fails. Accordingly, the entire Consolidated Amended Complaint i s 25 I DISMISSED.

26 III. Dismissal with Prejudice 27 28 32 5 4:0~ c~D~O I_& Document 612 Filed 02108/2 06 6 Page~333of 343

Further, given the deficiencies in Plaintiffs Consolidated Amended Complaint identified herein ,

2 the Court has concluded that it is appropriate to DISMISS the Consolidated Amended Complaint WITH

3 PREJUDICE . In making this determination, the Court finds it important to point out that this case

4 departs from the usual circumstances where dismissal with leave to amend is appropriate because the

5 plaintiff has merely failed to allege, with sufficient particularity, facts supporting a viable legal theory

6 of securities fraud. In this case, by way of contrast, the Consolidated Amended Complaint is defective

7 because Plaintiffs theory of fraud, itself, is legally flawed and is premised on either a fundamental

8 misunderstanding of Applied Signal's business model, at best, or a blatant misrepresentation of the

9 pertinent facts. Since Plaintiff could only amend his Consolidated Amended Complaint to allege

10 additional facts that are consistent with the facts that have already been plead, the Court finds that i 11 granting Plaintiff leave to amend in order to augment the Consolidated Amended Complaint with . 0 12 additional facts would be futile . Further, since Plaintiff has already changed his theory of fraud twice," 13 .- w granting further leave to amend would be highly prejudicial to Defendants . The typically liberal 14 standard of allowing leave to amend should not be employed to require Defendants to defend against

E 15 an amorphous, "moving target" securities fraud case that is not well thought-out or well supported .

z v~ u 16 Further, the Court finds that dismissal without leave to amend is also appropriate given th e ro~ o 17 length of time that has passed since the initial complaint was filed . Indeed, the initial complaint was

18 filed on March 11 , 2005 and the Consolidated Amended Complaint was fi led five months later, on

19 August 12, 2005 . Plaintiff has been on notice with regard to the defects of his Consolidated Amended

20 Complaint since September 14, 2005, when Defendants filed the instant Motion to Dismiss.

21 Accordingly, dismissal with prejudice is warranted on this basis as well . See Lipton v. Pathogenesis

22 Corp., 284 F.3d 1027,1038-39 (9th Cir. 2002) (affirming district court's dismissal with prejudice after 23 finding that: (1) more than six months had elapsed between the filing of the original lawsuit and the

24 filing of the consolidated amended complaint, and (2) three additional months had passed between the 25

26 "As noted in the discussion of the procedural history ofthis case, the complaints initially filed set forth a different class period and were not expressly premised on the statements concerning the 27 Company's stop-work orders and backlog .

28 33 5 ooc merlt t42 de8d v9 d/& 6 Page 4 of 843

1 time the defendants filed their motion to dismiss and the district cou rt's ruling)-14

2 CONCLUSION

3 For all of the reasons set forth above, IT IS HEREBY ORDERED THAT Defendants' Motion

4 to Dismiss [Docket No. 351 is GRANTED . The Court hereby DISMISSES the Consolidated Amended

5 Complaint WITH PREJUDICE .

6 IT IS FURTHER ORDERED THAT Defendant's Request for Judicial Notice [Docket No. 36] 7 is GRANTED.

8 IT IS FURTHER ORDERED THAT Plaintiffs Motion for Class Ce rtification [Docket No . 25]

9 is DENIED AS MOOT . 10 IT IS SO ORDERED.

11 /Ej A U 12 I Dated: 2/6/06 SA I'TWDR BROWN A TRONG wo w A United States District Judg e 'ar w 13 .Yd 0 A Q 14 y E 15 Z Vi y 16

0 AI~1 17

.18

19 20 21

26 14 Further, the Court cannot overlook the fact that Applied Signal is currently in its 2006 fiscal year, and yet Plaintiffs Opposition does not even suggest that Plaintiff is aware of any additional facts 27 or events that have occurred during this passage of time that would lend further support to his case . 28 34 EXHIBIT 17

(Part 1 of 2) [pp. 1-29 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 8 9 10 In re AUTODESK, INC . SECURITIES LITIGATION No. C-00-1285 PJH t Z 11 0 CLASS ACTIO N Ur 12 This Document Relates to : v q ALL ACTIONS ORDER RE MOTION TO DISMISS L 2 13 Irw U) 0 14 Now before the court is defendants ' motion to dismiss the second amended N o 15 complaint . Having read the parties ' papers and carefully considered their arguments and cc z d 16 the relevant legal authority , and good cause appearing , the court hereby grants the motion (:L 17 for the following reasons . 18 INTRODUCTION 19 This is a proposed class action alleging violation of the federal securities laws. 20 Plaintiffs are individuals who purchased stock of defendant Autodesk, Inc . ("Autodesk")

21 during the period .between September 14, 1998, and May 4, 1999 ("the class period") . 22 Defendants are Autodesk, and three Autodesk officers - Carol A. Bartz ("Bartz"), the Chief 23 Executive Officer and Chairman of the Board of Autodesk ; Eric B. Herr ("Herr"), the

24 President and Chief Operations Officer; and Christine Tsingos ("Tsingos"), who served as 25 Treasurer.

26 Plaintiffs allege securities fraud in violation of section 10(b) of the Securities 27 Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and also allege control 28 person liability, in violation of section 20(a) of the 1934 Act . On November 14, 2000, the 6

1 court dismissed the consolidated first amended complaint with leave to amend . See In re

2 Autodesk, Inc. Sec. Litig . , 132 F_Supp. 2d 833, 845-46 (N .D. Cal. 2000). Plaintiffs filed the 3 second amended complaint on December 20, 2000,1 and defendants now move to dismis s

4 for failure to state a claim.

5 A. Backgroun d 6 Autodesk creates and sells personal computer software for design drafting, 7 visualization applications, and multimedia content creation . Autodesk's computer-aided 8 design ("CAD") software is used by architects, civil and mechanical engineers, mapping 9 and geographic information systems designers, educators, and students . Autodesk's 10 principal product is the AutoCAD . Sales of AutoCAD and AutoCAD upgrades provided t Z 11 approximately 80% of Autodesk's revenues in its fiscal year 1996 (FY96), an d 0 12 approximately 70% in FY97 and FY98. 13 Plaintiffs allege that during the 1990s, the price of Autodesk's stock rose in N U z 14 I response to the introduction of upgraded versions of AutoCAD , and declined as revenue

VI O 15 from the upgraded products slowed . Plaintiffs claim that fluctuations in the stock price - cc Ts N Z 16 referred to as the "upgrade cycle" - were particularly erratic during calendar years 1995 1p

c 17 through 1997 because the R13/AutoCAD upgrade, introduced in 1995, was bug-ridden

18 and technically flawed. Although the price of the stock during the period 1995-1997

19 ranged from a high of $50 7/8 to a low of $21 3/8, the price of the stock on January 3, 20 1995, closed at $37 3/8, while the price on December 31, 1997, closed at $37 .2 Plaintiffs

21 claim that Autodesk achieved no real growth in earnings per share during that three-yea r 22 period. 23 24 1 The consolidated first amended complaint also alleged claims against U .S. Bancorp Piper Jaffray, which served as Autodesk's financial advisor and underwriter of the March 1999 25 secondary offering. The court dismissed those claims in the November 20, 2000, order, and plaintiffs do not name Piper Jaffray in the second amended complaint . 26 2 The court may consider any matter that is subject to judicial notice , such as public 27 records that are "capable of accurate and read y determination by resort to sources whose accuracy cannot reasonably be questioned ." F.R.E. 201 (b); see also MGIC lndem . Corp. v. 28 Weisman , 803 F.2d 500, 504 (9th Cir. 1986) (public records); Ravens v . Iftikar, 174 F.R.D. 651, ( N .D. Cal. 1997) (closing stock prices).

2 I Plaintiffs allege that Autodesk's top management team - defendants Bartz, Herr, 2 and Tsingos -- came under increasing pressure from Autodesk's Board of Directors and 3 large investors to lessen Autodesk's dependence on the AutoCAD product line b y

4 diversifying the company's business and revenue sources, thereby eliminating th e 5 AutoCAD upgrade "boom or bust" cycle and enabling Autodesk to achieve consisten t 6 revenue and growth . Plaintiffs claim that despite Autodesk's acquisition of several small 7 companies and software technologies in the mid-1990s, defendants remained unde r 8 pressure to make more significant acquisitions to lessen Autodesk's dependence on

9 AutoCAD.

10 Plaintiffs allege that Bartz, Herr, and Tsingos knew that any significant acquisition

11 could be made only by using Autodesk's common stock as currency, as a cash purchase 0 O 12 of that size would be beyond Autodesk's means . Plaintiffs claim that defendants believed 13 that in order to limit the dilutive impact of such a large acquisition, they had to kee p H 14 Autodesk's stock trading at a price sufficiently high to limit the number of Autodesk shares 15 actually issued in the transaction. w Z 16 Autodesk's management began negotiating in the summer of 1997 for th e LL 17 acquisition of Discreet Logic, Inc ., a Canadian company that developed and marketed

18 software used to create animation characters for movies . By February 1998, Autodesk 19 and Discreet Logic had signed a nondisclosure and confidentiality agreement, and were 20 sharing information with a view toward a possible business combination . The price of 21 Autodesk's stock rose to $42 11/16 on February 5, 1998, and remained in the $40s until 22 the third week of June 1998, when it dropped back into the $30s . 23 On August 20,1998, Autodesk and Discreet Logic issued a joint press releas e 24 announcing the acquisition, in which Autodesk would issue .525 shares of Autodesk stock

25 for each of the 31 million shares of Discreet Logic stock outstanding, or 16 .3 million shares 26 of Autodesk stock. Autodesk also announced that it would issue 19 million new shares of 27 stock in connection with the acquisition . The price of Autodesk's stock, which had closed 28 at $32 1/2 on August 19, 1998, dropped to $27 7/16 on August 21, 1998, and remained at

3 1 a range between $23 and $27 during the following two months . 2 Plaintiffs allege that Autodesk's top officers were determined to ensure that the 3 company reported revenue and earnings growth, in an effort to halt the decline in the value

4 of Autodesk's stock and to push it higher . Plaintiffs claim that, to this end, defendants

5 embarked on a scheme in September 1998, which involved artificially reviving flagging 6 sales of the R14/AutoCAD (the then-existing version of the AutoCAD) to make it appear 7 that Autodesk's business was growing, and misrepresenting the status of the 8 RI 5/AutoCAD 2000 upgrade (the AutoCAD release that was in development during 199 8 9 and early 1999) . 10 Plaintiffs allege that throughout the class period, Bartz, Herr, and Tsingos made a

11 number of positive, but false, statements - specifically, that there was strong continuing 0 12 demand for the existing R14 product line; that Autodesk had diversified its business, an d 13 that strong sales of Autodesk's "vertical product" line had resulted in lessened dependenc e - o

O N 14 I on the AutoCAD product line, thereby enabling Autodesk to achieve more consisten t 15 revenue and earnings ; that Autodesk was successfully developing and testing the N z 16 R15/AutoCAD 2000; and that Autodesk was forecasting revenues of $1+ billion and

U. 17 earnings per share of $2 .45-$2.55 for FY00 (2/1/99-1/31100),' in addition yearly earnings 181 growth of 20%-25% over the next three to five years.

19 Plaintiffs claim that defendants made these statements throughout the class period, 20 starting September 15, 1998, continuing through the completion of the acquisition of

21 Discreet Logic and the associated public offering in March 1999, and on into April 1999 . 22 Plaintiffs assert that defendants made such statements during meetings or conferences

23 with financial analysts and large investors, and in various Autodesk press releases.

24 Plaintiffs claim that defendants falsely represented that sales of the R14 were 25 26 ' Autodesk operated on a fiscal year running from February 1 through January 31 . 27 Thus, for example, the first quarter of fiscal year 2000 (10 FY00) ran from February 1, 1999, through April 30, 1999 ; 2Q FY00 ran from May 1, 1999, through July 31, 1999 ; 3Q FY00 ran 28 from August 1, 1999, through October 31, 1999 ; and 4Q FY00 ran from November 1, 1999, through January 31, 2000.

4 1 strong, in that they did not disclose that the reason sales were strong was that Autodesk 2 had implemented a customer incentive program which encouraged retailers to order more

3 of the R14 product than they could reasonably expect to sell . Plaintiffs claim that 4 defendants used two methods to achieve this goal - the "VIP Upgrade" program and the

5 "product over quota/extra earn-back credits" program . 6 The "VIP Upgrade" program involved a subscription sold as part of the R1 4

7 package, which allowed the end user to upgrade to the R15 when it became available . 8 According to plaintiffs, the VIP Upgrade subscription regularly sold for $295 retail, but if

9 sold with the R14, its price was discounted to $100 . End users who purchased the R1 4 10 with the VIP Upgrade subscription were thus able to purchase the R15 at an extrem e 11 discount. Plaintiffs claim that by the 40 FY99, the reseller's price for the R14 had dropped 0 V 12 to cost, or $2200 to $2400. The suggested retail price for the R15 was $3750. 13 Purchasers of the VIP Upgrade subscription therefore received a $500 to $1000 discount N y p 14 on obtaining the R15 upgrade.

15 The second method was the "product over quota/extra earn back credits" program . 16 Autodesk's authorized dealer agreements provided for incentives in the form of quota ~aa, LL 17 discounts when a reseller reached quota . Under the agreement, failure to purchase the D 18 required amount of software could result in termination of the agreement by Autodesk . 19 Plaintiffs claim that in order to persuade resellers to purchase additional R14 product 20 during 3Q FY99 and 4Q FY99,'Autodesk gave them additional credits if they met quota,

21 and that large orders in excess of quota and in excess of resellers' credit limits were 22 pushed through, thereby artificially inflating Autodesk's sales for those two quarters . 23 Plaintiffs also allege that defendants falsely stated that the release of the R1 5 24 upgrade would have a positive impact on Autodesk's revenue and earnings per share in 25 FY00, despite having knowledge that there was no demand for the R15. Plaintiffs claim 26 that when Autodesk announced on May 4, 1999, that its 1 Q FY00 results would b e

27 significantly lower than defendants had forecast, the price of the stock "collapsed ." 28 /1/

5 1 B. Chronology of Events During the Class Perio d 2 Plaintiffs allege that during a period of approximately seven months, from 3 September 1998 through April 1999, defendants made false statements concerning sales 4 and development of Autodesk products, and concerning projected financial performance .

5 Plaintiffs claim that the false statements, made in analysts' meetings, conference calls,

6 interviews, and press releases during the seven-month period, consisted of 7 representations regarding both present fact and future predictions . 8 The representations regarding present fact include statements (made prior to the 9 release of the R15)4 that there was strong continuing demand for the R14 because 1 0 customers were buying vertical products based on the R14, that the reorganization into t 11 vertical product lines was enabling Autodesk to smooth out revenue and earnings growth, 0 U• 12 and that the development (including the testing) of the R15 was proceeding successfully . v p 13 The future predictions include statements (made both prior to and immediately following N ° 14 the release of the R15) that the reorganization into vertical product lines would enable r+ 1 5 Autodesk to achieve more consistent revenue and earnings growth in the future, and that

- Z 16 the R15 was likely to be commercially successful, plus forecasts of revenues and earnings 4) LL 17 for the coming fiscal year (FY00, or the period February 1, 1999, through April 30, 1999) C 18 and beyond.

19 1 . September 1998 20 On September 14, 1998, Autodesk filed its Form 10-Q for 2Q FY995 with the SEC .

21 The Form 10-Q stated that it contained trend analysis and other forward-looking 22, statements relative to markets for Autodesk products and trends in revenue, and that 23 Autodesk's actual results could differ materially from those set forth in the forward-looking 24 statements. The 10-Q included a lengthy section headed, "Certain Risk Factors Which 25 May Impact Future Operating Results," which identified potential future risks such a s 26 27 " The R15 was released during the week of March 29, 1999 . 28 This was the quarter ending July 31, 1998 . See n.3 above .

6 1 increased competition ("could result in price reductions , reduced revenues and profit 2 margins, and loss of market share "); fluctuations in quarterly operating results (" result of

3 periodic release cycles , competitive factors , and general economic conditions" as well as 4 "fluctuations in operating results in interim periods in ce rtain geographic locations") ; 5 product concentration ("any factor adversely affecting sales of AutoCAD and AutoCAD

6 upgrades , including such factors as product life cycle , market acceptance , product

7 performance and reliability , reputation , price competition, and the availability of third-party 8 applications" could have materially adverse effect on the company 's business) ; and

9 product development and introduction (software products offered by Autodesk are complex 10 and may contain errors or defects (' bugs') especially when first introduced . . . such 11 defects or errors could result in corrective releases to the Company 's software products, 0 V 12 damage to Autodesk's reputation, loss of revenues , an increase in product returns, or lack +~s 13 of market acceptance of its products"). In addition , the 10-Q stated that Autodes k p 14 expected that revenues derived from both developed and in -process technologies could

0 15 decline over the next several fiscal years. 16 Also on September 14, 1998, Autodesk held a conference for securities analysts d LL 17 during its "Design World Conference" in Philadelphia . Plaintiffs claim that Bartz and D 18 Tsingos told the analysts that

19 -- because of "Autodesk's reorganization into vertical product, more of its customers were willing to purchase ve rtical products based on th e 20 R14/AutoCAD technology , rather than wait for the . . . R15/AutoCAD 2000;" 21 - because of the reorganization into vertical product , "Autodesk was seeing unusually strong continuing demand for its R14 /AutoCAD product , 22 even though that product was entering the later pa rt of its l ifecycle;" 23 -- the reorganization into vertical product lines was enabling Autodesk 24 to "smooth out its revenue and EPS growth ; " -'with the initiation of the R15/AutoCAD 2000 product cycle," the 25 reorganization into vertical product lines "would allow Autodesk to achieve more consistent revenue and EPS growth going forward than had historically 26 been the case ;"

27 -- Autodesk was "successfully completing the development and testing 28 of the R15/AutoCAD 2000 product;"

7 1 -- R15/AutoCAD 2000 was "now in alpha-testing at thousands of customers'' seats' and was pe rforming exceedingly well ;" 2 -- the progress of the testing "indicated that there would be strong 3 demand for the product upon its commercial release;" 4 -- because of the 'successful development" of the R15/AutoCAD 2000, including the "enthusiastic response it was receiving in alpha-testing," 5 Autodesk was "likely going to be able to advance the commercial release date of this product to earlier in C[alendar] Year] 99 than originally planned ;" 6 and 7 - "as a result of the foregoing ," Autodesk was forecasting 20%-25% EPS growth over the next three to five years and FY00 EPS of $2.45 - $2 .55. 8 Cplt¶51 .6 9 Plaintiffs allege that the statements made at the Philadelphia conference were 10 published in a report issued the following day, September 15, 1998, by Piper Jaffray . The t 11 0 Piper Jaffray report allegedly stated that U •g 12 - Autodesk's current business "appears strong, with Autodesk's ` o 13 product mix shift driving an increase in sales visibility;" N o 14 - "AutoCAD cycles are becoming less pronounced ;" Q .>n m E 15 - the AutoCAD R15 was expected "Early CY99;"

N 16 - the acquisition of Discreet Logic "would be at most 3% dilutive ;" L LL 17 - factors such as "a stronger more diversified business model, appealing new product shipment schedule , upcoming new market 18 opportunities from the Discreet merger , lean channel inventories, favorable upside given the R15 upgrade is expected to ship early FY00, and cost 19 saving opportunities" could generate substantial revenue gains during the succeeding four qua rters; 20 -- Autodesk continued to "benefit from the longevity in the AutoCAD 21 R14 upgrade ;" 22 -- "given the feedback from some of the early Alpha R15 users, the program is solid with a substantial number of new features and better 23 performance ;" and 24 -- "with only one-third of the installed base upgrading to R14, we believe that R12 and R13 users will flock to R15." 25 Cplt ¶ 52. 26 Plaintiffs allege that the statement that Autodesk was seeing strong continuin g 27 28 6 Citations to the Second Amended Complaint are indicated in this order as "Cplt ¶ _.'

8 1 demand for the R14 as a, result of Autodesk ' s reorganization into vertical product was false 2 because the continued demand for the R14 was not due to the company 's move to vertical 3 product lines, but rather, was based on the VIP Upgrade program, which offered dee p

4 discounts on the purchase of the R15 to end users who purchased the R14 during the end 5 of calendar year 1998 . Plaintiffs claim that the VIP Upgrade program " effectivel y 6 cannibalized" Autodesk sales of the R15 when it was finally released in 1999 because

7 many of Autodesk's customers had already purchased use of the R15 when they had 8 acquired the VIP Upgrade program .

9 Plaintiffs also claim that sales and revenues during the latter half of calendar year 10 . 1998 appeared larger than they actually were because of a "duplication problem" in the

11 software used to record sales . Plaintiffs allege that beginning in early 1998 , Autodesk 0 V C 12 began combining different products and selling the combination as one package , and each 13 associated product division recorded the same sale as part of its division's total revenue 14 for a given qua rter. 15 Plaintiffs allege that the statement that Autodesk was "successfully completing the

C n Z 16 development and testing " of the RI 5 and was "likely going to be able to advance th e LL 17 commercial release date" of the R15 was false because the R15 had serious glitches and c 18 software bugs , which would result in the product release being delayed . 19 Plaintiffs also claim that Autodesk's forecast of 20%-25% earnings-per-share growth 20 over the next three to five years , and FY00 earnings per share of $2 .45-$2.55 was false

21 because Autodesk was "incapable " of achieving such results . Plaintiffs assert that Bartz 22 and Tsingos made the financial forecasts based on the representation that Autodesk had 23 smoothed out its revenue and earnings cycles due to reorganization into vertical product

24 lines , and that the R15 was testing successfully , but that the cause of Autodesk 's success 25 during the latter half of 1998 was the VIP Upgrade program , which had made sales of the 26 R14 at the expense of future sales of the R15 . 27 /// 28 1/1

9 2. November 1998 On November 19, 1998, in conjunction with its release of 3Q FY997 results ,

Autodesk held a conference call for analysts, money and portfolio managers, institutional

investors, and large Autodesk shareholders. Plaintiffs allege that during the conference

5 call, and in follow-up-one on one conversations with analysts, Bartz, Herr, and Tsingos

6 stated that 7 - because of "Autodesk's reorganization into vertical product, more of its customers were willing to purchase vertical products based on the 8 RI 4/AutoCAD technology, rather than wait for the . . . R15/AutoCAD 2000 ; " 9 - because of the reorganization into vertical product, "Autodesk was seeing unusually strong continuing demand for its R14/AutoCAD product, 10 even though that product was entering the later part of its lifecycle; "

M 11 -- the reorganization into vertical product lines was enabling Autodesk to 0 "smooth out its revenue and EPS growth ;" U 12 - oc v W -"with the initiation of the R15/AutoCAD 2000 product cycle," the 13 reorganization into ve rtical product lines "would allow Autodesk to achieve more N consistent revenue and EPS growth going forward than had historically been the 0 14 case;' y o E 15 - Autodesk was "successfully completing the final development and ea testing of the R15/AutoCAD 2000 product; " 16 -- the R15/AutoCAD 2000 was "now in `alpha-gold' phase, wherein key W U. 17 customers were using the product in production ; "

D 18 - the current testing phase would be followed by a brief "beta" phase, "setting the stage for a successful formal release ;' and 19 - because of the "successful development" of the R15/AutoCAD 20 2000, including the "enthusiastic response it was receiving in beta-testing," Autodesk "had been able to advance the final release date of this product to 21 early 99." 22 Cplt¶54.

23 Plaintiffs also allege that during "a follow-up one-on-one conversation" with Piper

24 Jaffray analyst Nada, Bartz, Herr, and Tsingos stated that "as a result of the favorabl e

25 factors benefitting Autodesk's business," Autodesk was forecasting 20%-25% EPS growth 26 over the next three to five years and FY00 revenues and earnings per share of $1+ billio n

27 28 This was the quarter ending October 31, 1998.

10 1 and $2.45 - $2.55 per share, respectively. Cplt ¶ 54 . 2 These allegations are substantially identical to the allegations regarding statements 3 made to the analysts at the Philadelphia conference on September 14, 1998, with th e 4 exception of the statements regarding the testing phase and anticipated release date of

5 the R15. 6 As with the September 14th statements, plaintiffs claim that the November 19th

7 statement that Autodesk was seeing strong continuing demand for the R14 as a result of 8 Autodesk's reorganization into vertical product was false because the continued demand 9 for the R14 was not due to the company's move to vertical product lines, but rather, wa s

10 based on the VIP Upgrade program, which offered deep discounts on the purchase of the

11 R15 to end users who purchased the R14 during the end of calendar year 1998 . Plaintiffs 0 U 12 also allege that the R14 sales were lower than reported because of the duplication of sales

13 revenues described above with reference to the September 14th statements . M ° C1 14 In addition, as with the September 14th statements, plaintiffs claim that th e U) E -S _V 15 statement that Autodesk was successfully completing the development and testing of the y 16 R15 was false because the R15 had serious glitches and software bugs that would result a LL 17 in the product release date being delayed . Plaintiffs also claim that the financial forecasts 18 were false because Autodesk was incapable of seeing such results during FY00 and the

19 coming three-five years . 20 Also on November 19, 1998, Autodesk issued a press release, in which Bartz was 21 quoted as stating that Autodesk had "overcome many obstacles this quarter such a s 22 seasonality and uncertain economic conditions," and that "we are extremely satisfied with 23 our performance . . . . Customers are continuing to validate our strategy by integrating 24 vertical products in their business ." CpIt ¶ 55 . Plaintiffs claim that the "statement" is false 25 because the continued demand for the R14 through September 1998 was not due to the 26 company's move to vertical product lines but rather due to the deep discounts offere d 27 through the VIP Upgrade program . Plaintiffs contend that Herr and Tsingos are also liable

28 for any false statements in the press release, under the "group-published" doctrine .

11 Plaintiffs allege that "these false statements" (presumably referring to some or all of the statements in the November 19, 1998, conference call and press release) were 2 J published in a report issued on November 20, 1998 by Piper Jaffray . The Piper Jaffray

report forecast $886 .1 million in revenues and $2 .50 in earnings per share for FY00, and stated that the "growth in non-AutoCAD business is testimony that Autodesk's vertical

product strategy is working, adding greater revenue growth opportunities ." Cplt ¶ 56.

3 . December 1998 On December 15, 1998, Autodesk filed its Form 10-Q for 3Q FY998 with the SEC . As did the Form 10-Q for 2Q FY99, the 3 0 Form 10-Q stated that it contained trend

10 analysis and other forward-looking statements relative to markets for Autodesk products 1C Z 11 and trends in revenue, and that Autodesk's actual results could differ materially from those 0 12 set forth in the forward-looking statements . The 3Q Form 10-Q included a section headed

'L U 13 "Certain Risk Factors Which May Impact Future Operating Results," which identified N `o 14 potential future risks such as increased competition, fluctuations in quarterly operating 1 5 results, product concentration, and product development and introduction . 16 On December 28, 1998, Piper Jaffray issued a report on Autodesk, authored by its 1 7 analyst Hani Nada after he allegedly had discussions with either Bartz, Herr, or Tsingos . C 181 As alleged with regard to the September 14, 1998, Philadelphia conference, the November

19 19, 1998, conference call, and the November 20, 1998, Piper Jaffray report, plaintiffs claim

20 that this report forecast FY00 earnings per share of $2 .50 and a 20%-25% three- to five-

21 year growth rate for Autodesk . Cplt ¶ 58 22 The report also stated that 23 - the R14 "continues to sell well . . . despite the aging R14 cycle ; " 24 - in calendar 1998 "Autodesk moderated the boom and bust AutoCAD cycles;" 25 -- in calendar 1999 "Autodesk is well positioned to successfully 26 diversify its business, and break the boom and bust AutoCAD earnings cycle;" 27

28 8 This was the quarter ending October 31, 1998 .

12 1 -- "for the first time in five years, [Piper Jaffray is] modeling for 2 sequential earnings improvement in each of the quarters in calendar 1999 ;" 3 -- the result of the growth of Autodesk's non-AutoCAD business, in combination with the addition of the Discreet business, will be "smooth 4 sequential earnings growth and more predictable share price growth ;" and

5 -- based in part on Autodesk's "increased vertical product strength," Piper Jaffray believed that "normalized revenue growth of 20% is 6 conservative . " 7 Cplt 58. 8 Plaintiffs claim that these statements were false because Autodesk had not broken 9 the upgrade cycle through a move to vertical product lines, and because the evenness of 1 0 Autodesk's revenues during the latter half of calendar year 1998 was because of the VIP ~ 11 Upgrade program, which sacrificed future sales in order to "raise cash now ." 0 O 12 4. January 1999

'V v_ 13 On January 5, 1999, an article in Bloomberg quoted Tsingos as stating , "On our last H 'N 14 conference call, we affirmed the marketplace consensus and we still do that today ." Cplt a w 15 ¶ 59. Plaintiffs allege that at the time of this statement, the "marketplace consensus" was - L

Z 16 FY00 revenues of $900 million - $1 billion and FY00 earnings per share of $2 .45-$2.55,

0) U. 17 with 20%-25% earnings-per-share growth over the next three to five years. Plaintiffs claim 1 8 that the statement attributed to Tsingos was false because Autodesk was "incapable" of 1 9 achieving $2.45-$2.55 earnings per share in FY00 and 20%-25% growth over the next 20 three years . 21 Plaintiffs assert that Tsingos made these forecasts based on the representation that 22 Autodesk had smoothed out its revenue and earnings cycle, and had effectively broken the 23 upgrade cycle during the end of calendar year 1998 because of its reorganization into 24 vertical product lines . Plaintiffs claim, as with reference to the September 14, 1998, 25 analysts meeting, and the November 19, 1998, conference call, that it was the VIP 26 Upgrade program, not the reorganization into vertical product lines, that was the cause of 27 Autodesk's success during the latter half of calendar year 1998 . Plaintiffs also allege that 28 the poor results that the R15 had received during testing also "assured" that revenu e

13 1 would fall short. 2 Plaintiffs allege that because of "these favorable comments and forecasts," the price J 3 of Autodesk's stock continued to move higher, and reached over $45 by early January 4 1999. Plaintiffs claim that this "upsurge" in the stock price was engineered by defendants, 5 and that it put the value of the Autodesk shares to be issued in the Discreet Logic

6 acquisition at over $630 million and enabled Autodesk to cut the number of shares it had 7 to issue to acquire Discreet Logic, as well as to complete the three-million-share public 8 offering of Autodesk stock at a higher per-share price . Cplt. ¶ 60 9 On January 19, 1999, the high bid on Autodesk's stock, which had closed at $45 10 1/16 on the previous trading day, was $49 7/16 . The stock closed that day at $48 112 . t 11 Autodesk announced that it was cutting the number of shares it would issue to acquire 0 O 12 Discreet Logic to .33 shares of Autodesk stock for each share of Discreet Logic, reducing •I r, 2 v A y„ U 13 the number of Autodesk shares to be issued to 10 million, compared with the 16 .3 million - O 14 to have been issued under the original acquisition terms. N'o 15 5. February 1999 16 On February 4, 1999, Autodesk filed an amended Form 10-K for FY98, and

17 amended Form 10-Qs for 1 Q FY99, 2Q FY99, and 3Q FY99, each of which contained a 18 "forward-looking statements - risk factors" discussion similar to those described above with 19 reference to the originally filed 10-Qs for 2Q FY99 and 3Q FY99 . 20 On February 24, 1999, subsequent to its release of its 4Q FY99 results, Autodesk

21 held another conference call for analysts, money and portfolio managers, institutional 22 investors, and large Autodesk shareholders . Plaintiffs allege that during the conference 23 call, and in foilow-up one-on-one conversations with analysts, Bartz, Herr, and Tsingos 24 stated that

25 -- because of "Autodesk's reorganization into vertical product, more of its customers were willing to purchase vertical products based on the 26 R14/AutoCAD technology, rather than wait for the . . . R15/AutoCAD 2000 ;" 27 -- because of the reorganization into vertical product, "Autodesk was seeing unusually strong continuing demand for its R14/AutoCAD product, 28 even though that product was entering the later part of its Iifecycle ;"

14 1 - the reorganization into vertical product lines was enabling Autodesk 2 to "smooth out its revenue and EPS growth ;" 3 -- "with the, initiation of the R15/AutoCAD 2000 product cycle," the reorganization into vertical product lines "would allow Autodesk to achieve 4 more consistent revenue and EPS growth going forward than had historically been the case;" - 5 -- Autodesk was "successfully completing the final development and 6 testing of the R15/AutoCAD 2000 product ;" 7 -- the R15/AutoCAD 2000 was "now in beta-testing and performing exceedingly well ;" and 8 -- "there would be strong demand for this product upon its commercial 9 release." 1 0 Cplt62. 1r 11 Plaintiffs allege that in a follow-up one-on-one conversation, either Bartz, Herr, or 0 U •~ 12 Tsingos told Nada that Autodesk was forecasting 20%-25% EPS growth over the next

., q 13 three to five years and FY00 revenues and earnings per share of $1+ billion and $2.45 -

DN 14 $2 .55, respectively . Cplt 162. N 15 These allegations are substantially identical to the allegations regarding statements -'o 16 made to the analysts at the Philadelphia conference on September 14, 1998, and during 17 the November 19, 1998, conference call, with the exception of the statements regarding C 18 the testing phase and anticipated release date of the R15 . As with the September 1998 19 and November 1998 statements, plaintiffs allege that the statement that Autodesk was 20 seeing unusually high continuing demand for the R14 was false because the strong sales 21 of the R14 were not due to the reorganization into vertical product lines, but rather

22 because of the demand generated by the VIP Upgrade program . Plaintiffs allege that the 23 statement that there would be strong demand for the R15 upon its release was false 24 1 because defendants knew there was not strong demand for the R15, based on their 251 discussions with unidentified individuals during an Autodesk reseller conference held in 26 Palm Springs, California, in late January or early February 1999 . Plaintiffs claim that the

27 financial forecasts were false because Autodesk was "incapable" of achieving such results . 28 Also on February 24, 1999, Autodesk issued its 4Q FY99 press release, in whic h

15 I Bartz was quoted as stating, "We are proud to have achieved revenue growth of twent y

2 percent or better for the second consecutive year . . . Our goal was to expand our product 3 line with vertical solutions that satisfy the design needs of our customers . We have

4 achieved that goal ." Cplt ¶ 63. Plaintiffs contend that Herr and Tsingos are also liable for 5 making this statement under the "group published" doctrine . Plaintiffs allege that thi s 6 statement was false because the continued demand for the R14 and the evenness of the 7 revenues were based on the sales of the VIP Upgrade, not on the reorganization int o 8 vertical product lines. Plaintiffs also allege that the R14 sales were lower than reported 9 because of the duplication of sales revenues described above with reference to th e 10 September 1998 and November 1998 statements . 11 Plaintiffs allege that on February 25, 1999, the day after the conference call and 0 O 12 issuance of the press release, Piper Jaffray issued a report based on "the false statements 13 by Bartz, Herr, and Tsingos" (presumably referring to the previous day's conference cal l *J -6 : 14 and press release), stating that Autodesk had just reported a "solid" quarter, and that p 15 results were 'particularly impressive given the quarter was the final quarter before the ec L 16 AutoCAD 2000 upgrade, and pre-AutoCAD upgrade quarter typically experiences a d U_ 17 dramatic sales drop off.' Cplt 164. 18 Plaintiffs assert that these statements were false because Autodesk was not

19 transforming from a one-product company with an arsenal of products, but was still heavily 20 dependent upon the AutoCAD for the majority of its sales revenue. Plaintiffs claim that the 21 evenness of Autodesk's revenues and earnings during the latter half of 1998 were due to 22 sales of the VIP Upgrade program and not to the reorganization into vertical product lines . 23 Also on February 25, 1999, Bartz was interviewed on the Bloomberg Forum , where 24 she stated that "we're pretty excited" about Autodesk's "business outlook," and about "new

25 product cycles ." She added that "things look great" and that "this fiscal year will be ou r 26 first billion-dollar year and hey, that's pretty exciting, a lot of zeros ." Cplt ¶ 65. Plaintiffs 27 allege that these statements were false because defendants knew there was not a strong 28 demand for the R15 and that Autodesk was incapable of achieving $1 billion in revenue in

16 1 the fiscal year beginning February 1, 1999, as Bartz stated in the interview . 2 6. March 1999

3 On March 10, 1999, the shareholders of Autodesk and the shareholders of Discreet 4 Logic voted to approve the acquisition . Autodesk issued 9.9 million shares to acquire

51 Discreet Logic, and also completed a public offering of three million shares at $41 per 6 share. The price of the stock remained in the $37-$43 range until the first week of April 7 1999. 8 On March 14, 1999, Dow Jones published an article about Autodesk, in which 9 Tsingos was quoting as stating that the acquisition of Discreet Logic, which had been 1 0 approved by the shareholders of Autodesk and Discreet Logic on March 10, 1999, would t 11 "lower Autodesk's overall fiscal 2000 revenue growth to the high teens as a percentage," 0 U 12 and that "excluding Discreet, Autodesk's revenue continues to grow in the low 20% range ."

'L U 13 Cplt 167. ++ o N U O .r 14 Plaintiffs allege that this statement was false because Autodesk was "incapable' of N a a, 15 achieving 20% growth. Plaintiffs claim that Tsingos made this forecast based on the .5 16 representation that Autodesk had smoothed out its revenue and earnings cycle, and had r a~iw 17 effectively broken the upgrade cycle during the end of calendar year 1998 because of its c 18 reorganization into vertical product lines . Plaintiffs claim, as with reference to the 19 September 14, 1998, and November 19, 1998, analysts meetings, and the January 5, 20 1999, Bloomberg article, that it was the VIP Upgrade program, not the reorganization into 21 vertical product Iines, that was the cause of Autodesk's success during the latter half of

22 calendar year 1998, and that the sales of the R14 with the VIP Upgrade were made at the 23 expense of future sales of the R15 . Plaintiffs also allege that neither testing of nor 24 demand for the R15 was positive . 25 7. April 1999

26 On Thursday, April 1, 1999, Bartz, Herr, and Tsingos appeared at an Autodesk 27 analysts' meeting in New York City . Plaintiffs allege that the three executives told the

281 assembled analysts, money and portfolio managers, institutional investors, brokers, an d

17 1 stock traders that the "success of Autodesk's reorganization" was enabling Autodesk to 2 "smooth out its revenue and EPS growth and, with the initiation of the R15/AutoCAD 3 product cycle, would allow Autodesk to achieve more consistent revenue and EPS growth 4 going forward than had historically been the case ." Cplt ¶ 68. This statement is

5 substantially identical to statements allegedly made at the September 1998 analysts' 6 conference and the November 1998 and February 1999 conference calls . 7 Bartz, Herr, and Tsingos also allegedly stated that Autodesk had completed the 8 final testing of the R15/AutoCAD 2000 product, that the product was "now released and 9 selling well," and that the R15 upgrade "would be at least as successful as the R14 10 upgrade" had been . In addition, "(tjhe successful early release date of R15/AutoCAD r - Z 11 would significantly benefit Autodesk's revenue and EPS growth during F00 ." As in the 0 U 12 I September 1998 analysts conference, the November 1998 conference call, and the 13 February 1999 conference call, Bartz, Herr, and Tsingos allegedly forecast 20%-25% co o billion, and FY00 earnings Vi 14 growth over the next three to five years, FY00 revenues of $1 + 15 per share of $2 .45-$2.55. Cplt ¶ 68. Z Co 16 Plaintiffs allege that the statement that the success of Autodesk's reorganization 17 was enabling the company to smooth out its revenue and earnings growth was false

D 18 because the continued demand for the R14 was not due to reorganization of the company 19 into vertical product lines, but was instead due to sales of the R14 VIP Upgrade . Plaintiffs 20 also allege that the R14 sales were lower than reported because of the duplication of sales

21 revenues described above with reference to the September 1998 and November 1998 22 statements and the February 1999 press release . 23 As for the statement regarding the release of the R15, plaintiffs allege that the 24 statement that the R15 was selling well, and would be at least as successful as the R14

25 was false because defendants knew that there was not strong demand for the R15, and, 26 because the VIP Upgrade program had "effectively cannibalized" the R15, sales of the 27 R15 would provide little or no benefit to Autodesk during FY00 . Plaintiffs claim that the

281 financial forecast was false because Autodesk was "incapable" of achieving such results .

18 I On April 5, 1999 , the first trading day following the April 1st analysts meeting, Piper 2 Jaffray issued a report authored by Nada , allegedly based on information provided b y 3 Bartz, Herr, and Tsingos at the April 1 st analysts conference, and in follow-u p 4 conversations . Piper Jaffray forecast 20%-25% growth over the next three to five years,

5 and stated that "[e]arly indications of the [R15] upgrade are this cycle should [be ] 6 successful [and] as strong if not strong[er] than the R14 cycle ." The report added that 7 "[w]e believe this is the year Autodesk can break the AutoCAD cycle ." Cplt ¶ 69. Plaintiffs 8 allege that this statement was false because Autodesk knew there was not strong demand

9 for the R15. 10 On April 9, 1999 , Piper Jaffray issued another report on Autodesk, in which Nada, 11 allegedly after discussions with Bartz, Herr, and Tsingos , stated that "this cycle will be as 0 U Sc 12 strong if not stronger than the R14 cycle ." The report also stated that the R15/AutoCAD 0 13 2000 was "reliable ," adding that "Autodesk 's 20,000 seat AutoCAD 2000 beta program H p 14 appears to have paid off. . . . We believe if AutoCAD 2000 reliability and pe rformance was 15 [sic] at an issue , dealers would begin to be aware by now ." Cplt ¶ 70 . Plaintiffs allege that

Co 16 these statements were false because Autodesk knew there was not strong demand for the 17 R15.

D 18 Plaintiffs allege that "as a result of these positive - and false - representations and

19 reassurances , Autodesk's stock "recovered" to $30 15/16 on April 29, 1999 .9 Cplt ¶ 71 . 20 On May 4, 1999, it closed at $28 1/2. After the close of trading on May 4, Autodes k 21 announced that its 1 Q FY00 results - the results for the qua rter ending April 30, 1999 - 22 would be below the levels previously forecast, in pa rt (according to plaintiffs) because the 2 3

24 9 Plaintiffs do not specify which "positive -- and false -- . representations and 25 reassurances" they claim caused the price of Autodesk 's stock to "recover " to $30 15/16 on April 29 , 1999, or from which point it is alleged to have recovered . The price of the stock 26 began to fall at the end of March 1999 , after reaching a high for the month of $43 1/4 on March 29, 1999. By April 1 , 1999, the price had fallen to $37 316, and it closed at $37 7/8 on 27 April 3, 1999 ; at $35 3/4 on April 6 , 1999; at $30 1/2 on April 7, 1999; at $29 1 /2 on April 8, 1999; and at $28 3/4 on April 9, 1999. It reached a low for the month of $24 15/16 on April 28 22, 1999. The price began to rise again on April 23 , 1999, reaching a high for the month of $30 15/16 on April 29, 1999, but dropped into the $20s again on April 30, 1999 .

19 1 R15 had failed to "achieve commercial success ." Plaintiffs claim that "upon thi s

2 revelation," the price of Autodesk's stock "immediately collapsed -- falling by almost 25% in 3 one day to $22 1/4, and later to as low as $19 3/4."t0 Cplt ¶ 72 . 4 DISCUSSION 5 A. Legal Standar d 6 1 . Motions to dismiss under Federal Rule of Civil Procedure 12(b)(6) . 7 A court should dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to 8 state a claim only where it appears beyond doubt that plaintiff can prove no set of facts in 9 support of the claim which would entitle the plaintiff to relief . See Conley v . Gibson, 355 10 U .S. 41, 45-46 (1957) ; Williamson v. Gen'I Dynamics Corp., 208 F.3d 1144, 1149 (9t h 11 Cir.), cert . denied, 531 U .S. 929 (2000). All allegations of material fact are taken as true 0 U o 12 and construed in the light most favorable to the nonmoving party . Smith v. Jackson, 84 13 F.3d 1213, 1217 (9th Cir . 1996). p 14 Review is limited to the contents of the complaint . Allarcom Pay Television, Ltd . v. U) a 15 Gen. Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). When matters outside•the Z 16 pleading are presented to and not excluded by the court, a Rule 12(b)(6) motion is to be d LL 17 treated as one for summary judgment, and all parties shall be given opportunity to present

18 all material made pertinent to such a motion by Rule 56 . See Fed. R. Civ. P. 12(b). 19 However, material that is properly presented to the court as part of the complaint may be

20 considered as part of a motion to dismiss. Branch v. Tunnell, 14 F .3d 449, 453 (9th Cir . 21 1994). If a plaintiff fails to attach to the complaint the documents on which it is based, 22 defendant may attach to a 12(b)(6) motion the documents referred to in the complaint to 23

24 'o Autodesk's stock closed at $28 1/2 on May 4, 1999, and at $23 9/16 on May 5, 25 1999. The prices cited by plaintiffs - $29 1/8 on May 4th and $22 1/4 on May 5th - are misleading because the May 4th price is the high-bid price and the May 5th price is the low- 26 bid price . Moreover, by May 7th, the price had risen again, closing at $26 9/16 . The price remained in the range of $23 to $28 until June 25, 1999, when it rose to $29 1/4, remaining 27 in the range of $28-$29 until July 13, 1999, when it dropped back into the $24-27 range . The price slowly declined over the following three months, but did not reach the low of $19 3/4 28 cited by plaintiffs until October 12,1999, and that was the low bid price for that date .

20 show that they do not support plaintiffs claim. Id . at 454; see also Lee v . City of Los

Angeles , 250 F.3d 668, 688-89 (9th Cir. 2001). 2. Federal Rule of Civil Procedure 9(b ) Generally, plaintiffs in federal court are required to give a short, plain statement of

5 the claim sufficient to put the defendants on notice . Fed. R. Civ. P: 8. In actions alleging fraud, however, "the circumstances constituting fraud or mistake shall be stated with

particularity." Fed . R. Civ. P . 9(b). Under Rule 9(b), the complaint must allege specific facts regarding the fraudulent activity, such as the time, date, place, and content of the alleged fraudulent representation, how or why the representation was false or misleading, 10 and in some cases, the identity of the person engaged in the fraud . See Kaplan v . Rose ,

11 49 F .3d 1363, 1370 (9th Cir. 1994), cert. denied, 516 U .S. 810 (1995) ; In re GlenFed Sec . 0 12 Liti ., 42 F.3d 1541, 1547-49 (9th Cir . 1994). A plaintiff may explain why a statement is v 13 false or misleading by pointing to facts that were later revealed, but which were, because H_ ° 14 of their nature, necessarily in existence at the time the statement was made . In re N E 1 5 GlenFed , 42 F.3d 1548. Alternatively, a plaintiff may explain that the statement was Z 16 untrue or misleading when made by identifying inconsistent contemporaneous statements

V 17 or information made by or available to the defendants. Id. at 1549.

D 18 3. Claims under the Securities Exchange Act of 1934 19 Section 10(b) of the Securities Exchange Act of 1934 provides, in part, that it is 20 unlawful "to use or employ in connection with the purchase or sale of any security

21 registered on a national securities exchange or any security not so registered, any 22 manipulative or deceptive device or contrivance in contravention of such rules and

23 regulations as the [SEC] may prescribe ." 15 U.S .C. § 78j(b) . 24 Rule 1 Ob-5 promulgated under § 10(b) makes it unlawful for any person to use 25 interstate commerc e

26 (a) To employ any device, scheme, or artifice to defraud , 27 (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light 28 of the circumstances under which they were made, not misleading, o r

21 1 (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person , . 2 in connection with the purchase or sale of any security 1 3 17 C .F.R. § 240.1Ob-5. 4 In order to state a claim under § 10(b) and Rule 1 Ob-5, the plaintiff must allege 1) a

5 misrepresentation or omission 2) of material fact 3) made with scienter 4) on which th e

6 plaintiff justifiably relied 5) that proximately caused the alleged loss . Binder v . Gillespie,

7 184 F.3d 1059, 1063 (9th Cir. 1999), cert. denied, 528 U.S. 1154 (2000). Scienter is a 8 "mental state embracing intent to deceive, manipulate, or defraud ." Ernst & Ernst v-

9 Hochfelder, 425 U .S. 185, 193-94 n .12 (1976) . A presumption of reliance is available to 10 plaintiffs alleging violations of § 10(b) based primarily on omissions of material fact, but not 11 in cases alleging significant misrepresentations in addition to omissions, or alleging onl y 0 12 misrepresentations . Id. at 1063.64." 13 Under § 20(a) of the 1934 Act, joint and several liability can be imposed on persons y oAT, . 15 U .S.C. § 78t(a). F N 14 who directly . or indirectly control a violator of the securities laws C U) r 15 Violation of § 20(a) is predicated on a primary violation under the 1934 Act. Plaintiffs 16 alleging a claim that individual defendants are "controlling persons" of a company mus t LL 17 allege 1) that the individual defendants had the power to control or influence the company, 18 2) that the individual defendants were culpable participants in the company's allege d

19 illegal activity, and 3) that the company violated the federal securities laws . See Durham 20 v. Kelly, 810 F.2d 1500, 1503-04 (9th Cir. 1987). 21 4 . The Private Securities Litigation Reform Ac t

22 The Private Securities Litigation Reform Act ("PSLRA") was enacted by Congress in

23 1995 to establish uniform and stringent pleading requirements for securities fraud actions,

24 and "to put at an end to the practice of pleading 'fraud by hindsight."' In re Silicon

25 Graphics Sec . Litig ., 183 F .3d 970, 958 (9th Cir . 1999). The PSLRA added heightened 26 27 11 A presumption of reliance is also available in a "fraud on the market" case, where the plaintiff alleges that a defendant made material representations or omissions concerning 28 a security that is actively traded in an "efficient market ." Id. at 1064 (citing Basic, Inc . v. Levinson, 485 U.S. 224, 247 (1988)) .

22 1 pleading requirements for alleging violations of the 1934 Act . If the complaint does not 2 satisfy these pleading requirements, the court, upon motion of the defendant, must dismiss 3 the complaint. See 15 U.S .C. § 78u-4(b)(3)(A) . 4 Under the PSLRA -- whether alleging that a defendant "made at an untrue

5 statement of a material fact" or alleging that a defendant "omitted to state a material fac t 6 necessary in order to make the statements made, in the light of the circumstances in which

7 they were made, not misleading" -- the complaint must 1) "specify each statement alleged 8 to have been false or misleading," and 2) specify "the reason or reasons why th e

9 statement is misleading ." In addition, if an allegation regarding the statement or omission 10 is made on information and belief,12 the complaint must 3) "state with particularity all facts

11 on which that belief is formed." 15 U.S .C. § 78u-4(b)(1) . 0 0 .9 12 In addition, with regard to pleading scienter - whether alleging that a defendan t L) 13 "made at an untrue statement of material fact" or alleging that a defendant "omitted to state 14 a material fact" -- the complaint must, with respect to each alleged act or omission, "state

Z t 15 with particularity facts giving rise to a strong inference that the defendant acted with th e eu ~ 16 required state of mind ." 15 U.S .C. § 78u-4(b)(2) . In the Ninth Circuit, the requirement that ' 17 the facts must give rise to a "strong inference . . . [of) the required state of mind" means , j 18 for claims under § 10(b), that 'the evidence must create a strong inference of, at a 19 minimum, 'deliberate recklessness ."' In re Silicon Graphics , 183 F .3d at 977. 20 B . Inactionable Statements

21 1 . Vague statements of corporate optimis m 22 The court finds that a number of statements alleged by plaintiffs to be false are

23 vague statements of corporate optimism and, as such, are inactionable . If a statement is

24 too vague to qualify as a material misstatement of fact, it cannot be said to "have been

25 viewed by the reasonable investor as having significantly altered the 'total mix' o f 26 27 lZ Matters that are not alleged on personal knowledge are considered to be alleged on information and belief. See In re Secure Com utin Corp. Sec. Liti ., 120 F.Supp. 2d 810, 28 816-17 (N .D. Cal. 2000) (citing In re Silicon Graphics, 183 F.3d at 985); see also In re Splash Tech. Holdings, Inc. Sec. Litio., 2000 WL 1 27377 .12 (N.D. Cal., Sept. 29, 2000) .

23 1 information made available ." TSC Indus ., Inc. v . Northway, Inc. , 426 U .S. 438, 449 (1976) 2 (citation omitted), cited in Kane v. Madge Networks N .V. , 2000 WL 33208116 `3 (N.D.

3 Cal., May 26, 2000) ; see also In re Splash Tech . Holdings, Inc. Sec. Litia. , 160 F.Supp. 2d 4 1059, 1076-77 (N.D. Cal. 2001); Wenger v. Lumisys. Inc. , 2 F.Supp. 2d 1231, 1245 (N.D. 5 Cal. 1998) . 6 In this case, statements such as "Autodesk's business appears strong" or "Autodesk

7 is well-positioned in the coming year ;" statements that "we are extremely satisfied with our 8 performance" or "we are pretty excited about our business outlook;" and statements tha t

9 "we affirmed the marketplace consensus" or "we overcame many obstacles this quarter"

10 are too vague to be material . See In re PETsMART, Inc., Sec. Litig. , 61 F .Supp. 2d 982,

0 11 997 (D . Ariz. 1999) ("[g]eneric forecasts such as 'We believe our prospects for continued 0 U T 12 growth in 1997 are exciting' . , . and 'We remain optimistic about our long-term revenue 13 and earnings growth prospects as the Company continues to grow its business' . . . simply ••U)2o p 14 do not alter the total mix of information available and important to investors") . Similarly, 15 references to "upcoming new market opportunities" and "cost saving opportunities" tha t cnl 16 "could generate substantial revenue gains" are vague, optimistic statements relating to 17 possible future market demand . See Fitzer v. Sec, Dynamics Tech ., Inc. , 119 F.Supp. 2d 18 12, 26 (D . Mass. 2000). Such statements offer no details on which a reasonable investor 19 would rely. 20 Inactionable statements in the second amended complaint include the following : 21 - "(Autodesk's) current business appears strong, with Autodesk' s 22 product mix shift driving an increase in sales visibility .

23 Cplt ¶ 52 (September 15, 1998, Piper Jaffray report) ; --"[F]actors such as "a stronger more diversified business model, 24 appealing new product shipment schedule, upcoming new market opportunities from the Discreet merger, lean channel inventories, favorabl e 25 upside given the R15 upgrade is expected to ship early FY00, and cost saving opportunities . . . could generate substantial revenue gains" during 26 the succeeding four quarters . 27 Cplt ¶ 52 (September 15, 1998, Piper Jaffray report) ; 28 1/1

24 1 -- "AutoCAD cycles are becoming less pronounced . The company 2 continues to benefit from the longevity in the AutoCAD R14 upgrade ." 3 Cplt ¶ 52 (September 15, 1998, Piper Jaffray report); 4 -- "We overcame many obstacles this quarter such as seasonality and uncertain economic conditions and are extremely satisfied with our 5 performance . . . . Customers are continuing to validate our strategy by integrating vertical products in their business." 6 Cplt ¶ 55 (November 19, 1998, press release) (quoting Bartz) ; 7 - The "growth in non-AutoCAD business" (50% of sales, compared to 8 45% in the previous quarter, up from 25% at end of last year) "is testimony that Autodesk's vertical product strategy is working, adding greater revenue 9 growth opportunities ."" 10 Cplt 56 (November 20, 1998 Piper Jaffray report) ; 11 - "In Calendar 1998, Autodesk moderated the boom and bust 0 AutoCAD cycle ."" 12 Cplt ¶ 58 (December 28, 1998, Piper Jaffray report); V p 13 N `o - Autodesk is "well-positioned" in calendar year 1999 "to successfully 14 diversify its business, and break the boom and bust AutoCAD earnings N o cycle. " 15 a Cplt ¶ 58 (December 28, 1998, Piper Jaffray report) ; 1 6 - "For the first time in five years, we are modeling for sequential w41 17 earnings improvement in each of the quarters in calendar 1999. " c 18 Cplt ¶ 58 (December 28, 1998, Piper Jaffray report) ;

19 20 I// / 21 22 23 'II 24 25 " The reference to the growth in the non-AutoCAD business over the previous quarter and year is a statement of historical fact, and is not actionable because plaintiffs do not allege 26 that defendants falsified Autodesk's reported sales results . Disclosure of accurate historical facts is not misleading . See Wenger, 2 F .Supp. 2d at 1245. 27 1d The vague reference to Autodesk's having "moderated " the AutoCAD earnings cycle 28 during the calendar year just ending follows the equally vague statement that the cycle "somewhat existed " during that same calendar year.

25 1 -"On our last conference call, we affirmed the marketplace consensust5 and we still do that today ."16 2 Cplt ¶ 59 (January 5, 1999, Bloomberg article) (quoting Tsingos); 3 --"We are proud to have achieved revenue growth of twenty percent or 4 better for the second consecutive year " . . Our goal was to expand our product line with vertical solutions that satisfy the design needs of our 5 customers . We have achieved that goal ."'8 6 Cplt ¶ 63 (February 24, 1999, Autodesk press release) (quoting Ba rtz); 7 -- "Autodesk reported a solid . . . quarter . . . . Results are particularly impressive given the quarter was the final quarter before the [release of the 8 R15 upgrade."19 9 Cplt ¶ 64 (February 25, 1999, Piper Jaffray report) ; 10 -- The R15 is "in the hands of 20,000 daily users around the world who are pretty enthusiastic about it, so again, looking forward to a nice Q1 and a 1` 11 great fiscal year that we just started, based on a nice new product cycle . " 0 v p. 12 Cplt ¶ 65 (February 25, 1999, interview in the Bloomberg Forum ) (quoting Bartz) ; w E ` U 13 -"[W]e're pretty excited" about Autodesk's business outlook, and In o "excited about new product cycles, geographically, things look great ." D N 14 Cplt ¶ 65 (February 25, 1999, interview in the Bloomberg Forum) (quoting Bartz) . E 15 cc o Because they consist of statements that are "so 'exaggerated' or'vague' that n o Z 16 reasonable investor would rely on them," In re Splash , 160 F .3d at 1076, the court find s U. 17

D 18 19 's Although plaintiffs claim that the "marketplace consensus " at the time of this statement was FY00 revenues of $900 million - $1 billion, FY00 earnings per share of $2 .45- 20 $2.55, and 20 %-25% earnings growth over the next three to five years , they allege no facts to support such a conclusion . 21 '6 The vagueness of the phrase "affirm the marketplace consensus" aside, the 22 reference to "our last conference call" is an inactionable statement of historical fact, as plaintiffs do not contend that defendants did not "affirm the marketplace consensus ." 23 The reference to Autodesk's release of financial results for the prior fiscal year is an 24 inactionable statement of historical fact, as plaintiffs do not allege that Autodesk falsely reported its financial results. 25 The reference to' achieving the goal of expanding Autodesk's product line with 26 vertical solutions is partly a statement of historical fact and partly an assertion of present fact, but is nonetheless too vague and amorphous to be material . 27 'y To the extent that this statement refers to the financial results released by Autodesk, 28 it is an inactionable statement of historical fact, as plaintiffs do not allege that Autodesk falsified its financial results .

26 1 that the following cannot provide a basis for a claim of securities fraud : the two Autodesk

2 press releases, dated November 19, 1998 and February 24, 1999, Cplt ¶¶ 55, 63 ; the

3 Bloomberg article dated January 5, 1999, Cplt ¶ 59 ; the Piper Jaffray report dated

4 February 25, 1999, Cplt ¶ 64 ; the Piper Jaffray reports dated November 20, 1998, and

5 December 28, 1998, Cplt. ¶¶ 56, 58, with the exception of the financial forecasts ; and the 6 Bloomberg interview with Bartz on February 25, 1999, Cplt ¶ 65, with the exception of th e

7 $1 billion revenue projection . 8 2. Safe harbor forfinancial forecasts 9 Defendants argue that any forward-looking statements (including financial 10 forecasts) attributed to them are protected by the PSLRA's "safe harbor" provision.20 A t 11 forward-looking statement is "a statement containing a projection of revenues, income 0 L)C 12 (including income loss), earnings (including earnings loss) per share, capital expenditures,

V q 13 dividends, capital structure, or other financial items;" or "a statement of the plans and

O .~ 14 objectives of management for future operations ;" or "a statement of future economi c o 15 performance ;" or "a statement of the assumptions underlying or relating to" any statement ~•cv Z CA 16 falling within the above-described categories . 15 U .S .C. § 78u-5(i)(1) . Whether a

V W LL 17 statement qualifies under the safe harbor provision is an appropriate inquiry on a motion to 18 dismiss. 15 U.S.C. § 78u-5(e).

19 A forward-looking statement cannot as a matter of law be the basis of liability under 20 § 10(b) either if it is identified as a forward-looking statement and is accompanied b y

21 meaningful cautiona ry statements identifying factors that could cause actual results to 22, differ materially from those in the forward-looking statement , or if the plaintiff fails to prove 23 that the forward-looking statement was made with actual knowledge that the statement was 24 false and misleading . 15 U .S.C. § 78u-5(c)(1). In this case, defendants contend that an y 25 26 20 Defendants do not identify all the forward-looking statements, and the court addresses only the financial forecasts and revenue projections because either the remaining 27 forward-looking statements are too vague to be material, or plaintiffs fail to allege the falsity of such statements with particularity. E.g., Cplt ¶ 52 (statements in September 15, 1998, Piper 28 Jaffray report that "[w]e believe this odd cycle will be strong" and "we believe that R12 and R13 users will flock to R15") .

27 11 forward-looking statements attributed to them are not actionable because in numerous 2 public SEC filings throughout the class period , they provided detailed warnings of risks / 3 associated with releasing a new or updated product.

4 Plaintiffs allege that defendants issued revenue and earnings projections during

5 analysts meetings and conference calls, and in communications with financial analysts and

6 journalists . First, plaintiffs claim that during the September 14, 1998, analysts meeting in

7 Philadelphia ; the November 19, 1998, conference call, the February 24, 1999, conference

8 call; and the April 1, 1999, analysts meeting in New York, defendants (Bartz, Herr, an d

9 sometimes Tsingos) stated that as a result of the strong sales of the R14, th e 10 reorganization into vertical product lines, the smoothing out of the revenue and earnings, 11 and the successful development and testing of the R15, Autodesk was forecasting 20%- 0 V " 12 25% growth in earnings per share over the next 3-5 years , FY00 revenues of $1+ .million, v a 'L U 13 and FY99-FYOI earnings per share of $2.45-$2.55. Plaintiffs also claim that defendant s -. o 14 communicated these forecasts to Piper Jaffray financial analyst Hani Nada, who repeated

9 t 15 them in reports issued on September 15, 1998, November 20, 1998, and December 29, N Z 16 1998. Finally, plaintiffs claim that Bartz stated in a February 25, 1999, interview with

w LL 17 Bloomberg Forum that the fiscal year beginning February 1, 1999, would be Autodesk's 18 "first billion-dollar year ;" and that Tsingos was quoted in an article published by Dow Jones 19 on March 14, 1999, that "Autodesk's revenue continues to grow in the low 20% range ." 20 Plaintiffs assert that these projections were false because Autodesk was "incapable

21 of achieving" these results. They allege that the projections were made based upon the 22 representations that Autodesk had smoothed out its revenue and EPS cycles and had 23 effectively broken the upgrade cycle during the end of 98 due to organization into vertical 24 product lines and that R15 was testing successfully . See Cplt ¶¶ 51(c), 54(c), 62(c), 68(c) . 25 In their opposition to the motion to dismiss, plaintiffs argue that the defendants' 26 forward-looking statements are not protected by the "safe harbor" provision because they 27 were not identified as forward-looking at the time they were made, and because they were 28 not accompanied by any cautionary language . They also contend that the warnings in the

28 1 SEC filings were insufficient because they merely warned of generalized possible business

2 risks. They maintain that defendants knew that the R15 actually suffered from a number of 3 significant bugs and that there would be little demand for the product upon its release, and

4 that based on this knowledge, defendants must have known that their forward-lookin g

5 statements were false at the time they were made . 6 The court finds that, whether or not the financial forecasts were accompanied b y

7 adequate and meaningful cautionary language, plaintiffs fail to allege actual knowledge of 8 falsity, and therefore, as discussed more fully below, fail to establish that the forecasts fall

9 outside the PSLRA's safe harbor .

10 C. Defendants' Motion to Dismis s 11 Defendants move to dismiss the second amended complaint on the basis that 0 E 12 plaintiffs fail to plead falsity with particularity and fail to plead facts raising a strong +r s o 13 inference of scienter. As stated above, pleading in federal courts is governed generally by p 2 14 Federal Rule of Civil Procedure 8 ("a short and plain statement of the claim showing that 00 44 =1 15 the pleader is entitled to relief"), and the pleading of violations of the 1934 Act is also ea Z 16 governed by Rule 9(b) and the PSLRA. If plaintiffs in this case had any doubt of th e U. 17 appropriate standard at the time they filed the original complaints and the consolidated 18 first amended complaint, they were certainly put on notice of the standard after they read 19 the court's November 14, 2000, order dismissing the first amended complaint .

20 In that order, the court dismissed the consolidated first amended complaint because 21 it did not allege fraud with particularity . The court granted plaintiffs leave to amend, and 22 provided specific instructions with regard to pleading both falsity and scienter. The court 23 provided those instructions in the hope that the resulting second amended complain t 24 would be clear and coherent, in line with Rule 8 ; that it would comply with the particularity 25 requirements of Rule 9 and the PSLRA ; and that plaintiffs' counsel would abandon th e 26 puzzle-style pleading format disapproved by the Ninth Circuit . See In re GlenFed, 42 F.3d 27 at 1554. 28 Undeterred, however, plaintiffs filed a second amended complaint that fails in

29 EXHIBIT 1 7

(Part 2 of 2) [pp. 30-59] 1 numerous respects to comply with the court's instructions. While plaintiffs do allege the

2 time and place of the misleading statements , they repeatedly fail to indicate, statement-by-

3 statement, which statements are alleged to be false , which individual defendant made 4 each of the allegedly false statements , and why each of those statements was false at the

5 time it was made . They do not adequately state facts suppo rting the claims made o n 6 information and belief. And they fail to allege facts sufficient to raise a strong inference of 7 deliberate recklessness. 8 1 . Pleading Falsity 9 Under the PSLRA, plaintiffs alleging claims of securities fraud must follow three 10 steps in pleading falsity . First, they must specifically identify "each statement alleged to 11 have been misleading ;" second, they must specify "the reason or reasons " that each such /0~ V EE 12 statement is misleading ; and third, for any allegations made on information and belief , - 3 V w •` v 13 plaintiffs must "state with particularity all facts on which the belief is formed ." 15 U .S.C. n O 14 § 78u-4 (b)(1). Defendants argue that the second amended complaint must be dismissed N o 15 because plaintiffs satisfy none of these requirements . Defendants contend that plaintiffs R z Z 16 do not specify which defendant made each statement alleged to be false, and that (as in

U. 17 the first amended complaint ), plaintiffs allege, as false, multiple, lengthy statement s c 18 containing more than one asse rtion. Defendants also contend that plaintiffs fail to specify 19 why each such statement was false at 'the time it was made , and fail to allege all fact s 20 supporting each allegation of falsity made on information and belief. 21 The section of the second amended complaint entitled " False and Misleading 22 Statements During the Class Period " commences with ¶ 51 . In that paragraph , plaintiffs 23 allege that Bartz and Tsingos made false or misleading statements on September 14, 24 1998, at the Philadelphia analysts conference . The paragraph is separated into three 25 subparts, the first two of which contain several statements each , and the last of which 26 contains one statement regarding Autodesk 's financial forecasts. 27 /// 28 //1

30 I In % 51, subpart (a), plaintiffs allege that Bartz and Tsingos made the following oral 2 statements to analysts at the conference :

3 Due to Autodesk's reorganization into vertical product, more of its customers 4 were willing to purchase vertical products based on the R14/AutoCAD technology, rather than wait for the next generation's technology, i .e. , 5 R15/AutoCAD 2000 . Consequently, Autodesk was seeing unusually strong continuing demand for its R14/AutoCAD product, even though that product 6 was entering the later part of its life-cycle . 7 Moreover, the reorganization into vertical product lines was enabling the Company to smooth out its revenue and EPS growth and, with the initiation of 8 the R15/AutoCAD 2000 product cycle, would allow Autodesk to achieve more consistent revenue and EPS growth going forward than had historically been 9 the case.

10 Cplt 1.151 11 Contrary to the instructions in the order dismissing the first amended complaint, 0 U 12 plaintiffs fail to allege falsity with particularity . First, they do not separately specify the 0 13 statements they allege were false or misleading . The passage quoted above contains at N 14 least four statements : 1) Because of Autodesk's reorganization into vertical product, more d s 15 of Autodesk's customers were willing to purchase products based on the R14, rather than

U) 16 wait for the R15 ; 2) Because of Autodesk's customers' purchase of vertical products based d LL 17 on the R14, Autodesk was seeing unusually strong demand for the R14, even though i t

D 18 was entering the later part of its life-cycle ; 3) Autodesk's reorganization into vertica l 19 products was enabling Autodesk to smooth out its revenue and EPS growth ; and 4) With 20 the initiation of the R15 product cycle, the reorganization into vertical product lines would

21 allow Autodesk to achieve more consistent revenue and EPS growth going forward than

22 had historically been the case. Thus, when plaintiffs assert later in 151 (a) that " t his

23 statement is false because . . . " and "[p]laintiffs' belief that this statement was false is

24 based on . . . ," it is not obvious which "statement" plaintiffs are referring to .

25 Moreover, plaintiffs allege that Bartz and Tsingos made the statements to th e 26 "analysts," but do not clarify which defendant made which statement, or to whom . Indeed, 27 they do not identify a single attendee at the conference . Nor do they state any facts 28 supporting their belief that Bartz and/or Tsingos made the statements at all, or that they

31 1 made the statements on September 15, 1998, or that they made them in Philadelphia . 2 Plaintiffs follow the allegations in 151 (a) with the assertion: I/ 3 This statement is false because the continued demand for Autodesk's R14 product through 9198 was not due to the Company' s move to vertical product 4 lines. Rather the continued demand was based upon Autodesk's VIP Upgrade program which offered deep discounts on use of RI 5 with the 5 purchase of R14 during the end of 98. This VIP Upgrade program effectively cannibalized Autodesk sales of the R15 when the R15 was officially released 6 in 99 because many of Autodesk's customers had already purchased use of the R15 when they had acquired the VIP Upgrade program in conjunction 7 with purchase of the R14 during the latter half of 98 .

8 This passage, which consists of three sentences, purports to articulate the reasons that 9 the statements attributed to Bartz and Tsingos were false at the time they were made .. The 10 first sentence essentially asserts that the statement that Autodesk was seeing a strong t 11 demand for the R14 because of the reorganization into vertical product lines was false 0 U E 12 because it was not true . An assertion that a statement is false because it is not true

L. o 13 cannot logically qualify as a "reason" that the statement is false .2' The third sentence w• 14 alleges that the effect of the VIP Upgrade program was to "cannibalize" sales of the R15 uI ° 15 when that product was released . Since the release of the R15 did not occur until the last Z 16 week of March 1999, the third sentence cannot provide at an explanation of why the

W LL 17 statement that Autodesk was seeing continuing strong demand for the R14 in 1998 was

18 false at the time it was made . 19 The remaining sentence alleges that the "statement" was false when made because 20 I the continued demand was based on the VIP Upgrade program, which offered an incentiv e 21 to users to buy the R14 .22 This sentence might provide a "reason," but, as discusse d

22 below, plaintiffs fail to state facts adequately supporting their belief that the strong deman d 23 24 71 See T. Edward Darner, Attacking Faulty Reasoning (Wadsworth, 4th ed ., 2001) at 25 98 (defining "arguing in a circle" as a "fallacy [that] consists in either explicitly or implicitly asserting, in one of the premises of at an argument, what is asserted in the conclusion of that 26 argument").

27 22 Plaintiffs do not allege that defendants misrepresented the dollar amounts of R14 sales or Autodesk's revenue or income . Nor do they allege accounting violations or 28 misstatements in SEC filings . Rather, plaintiffs claim that, whatever the sales of the R14 were, defendants misrepresented the reasons that customers were buying the RI 4 .

32 1 for the R14 was based on the VIP Upgrade program , rather than on reorganization into

2 vertical product lines .23 3 In their opposition to defendants ' motion, plaintiffs maintain that the second 4 amended complaint alleges how and why defendants ' statements concerning "strong 5 demand" for the R14 were false when made, pointing to assertions in ¶¶ 42-45 that 6 defendants failed to disclose on September 14, 1998, that Autodesk "was actually

7 experiencing declining sales and demand for its products and was only able to get product 6 out the door by giving excessive discounts and extending credit that defendants kne w

9 could not be repaid ." However , the paragraphs cited by plaintiffs do not allege fact s 10 supporting a claim that R14 sales were up , were down , or were anywhere in between .2' 11 Nowhere in their discussion of Autodesk's system for producing sales reports do 0 O C 12 plaintiffs cite to a single individual sales report or indicate a single detail contained in any 0 13 sales report, much less explain how the information allegedly contained in these sale s N p 14 repo rts was inconsistent with the representations that defendants made throughout the

, E 15 class period. If unsupported generalized claims such as those alleged by plaintiffs were cv -S r j L 16 sufficient to satisfy the pleading requirements , "plaintiffs could eliminate the falsity

17 requirement because they could merely identify a given statement by the defendants and 18 then simply allege that the substance of the statement was contradicted by. 19 contemporaneous information contained in internal repo rts." Yourish v. Calif. Amplifier ,

20 191 F. 3d 983, 994 (9th Cir. 1999). 21 22 2' Additionally, the court cannot determine whether this allegation states a claim for fraud because the second amended complaint does not clarify what "vertical products" are or 23 what a "vertical product line" is, or how Autodesk's business was purpo rtedly "reorganized." 11 Nor is the connection apparent between "vertical product " and the R14 product line . In 24 particular, the connection between the asserted claim of " reorganization into vertical product" and the asse rted claim of increased R14 sales and sales of "vertical product based on the 25 R14/AutoCAD technology " is murky at best.

26 24 Plaintiffs' position with regard to the sales of the R14 is inconsistent . On the one hand, they allege that defendants falsely stated that sales of the R14 were strong because 27 of the reorganization into ve rtical product lines, when in fact the VIP Upgrade program wa s the reason for the continuing sales of the R14 at the end of the product cycle. See, etc, 28 IN 51 (a), 54(a), 55, 62, 63 (suggesting that sales were in fact "stron ). On the other hand, plaintiffs allege that R14 sales were in "severe decline ." See, e ., 45, 46.

33 1 In their opposition to defendants' motion, plaintiffs also argue that the allegatio n 2 that the R14 was still seeing . . . strong . . . demand" was false when made because 3 defendants failed to disclose that Autodesk was able to get product out the door only by 4 giving excessive discounts and extending credit that defendants knew could not be repaid

5 - a practice that plaintiffs describe as "channel stuffing ."25 However, while plaintiffs do

6 allege in the second amended complaint that Autodesk engaged in this practice, see Cplt . 7 ¶¶ 40-42, they do not include this allegation in ¶ 51(a) as a "reason" that defendants' 8 representation of strong R14 sales was false when made . As emphasized in the order

9 dismissing the first amended complaint, the court is unwilling to search through the 10 complaint to match up the allegations of false statements with the "reasons ." See In re

11 Autodesk, 132 F.Supp. 2d at 841-42 . 0 12 A more serious problem is that the allegations made on information and belief ar e v -q 13 not adequately supported . Plaintiffs assert that their belief that the "statement" in 11 51 (a) N 5 14 was false when made is "based on several conversations and interviews with forme r

15 Autodesk employees and resellers ." First, plaintiffs allege that "Confidential Witness"

16 ("CW") #6, "a major Autodesk reseller ," told plaintiffs that

r 17 Bartz and Tsingos told him in the second half of 98 prior to the 9/98 analyst c conference in Philadelphia that the VIP Upgrade program was the reason for D 18 the evenness of revenue and that Bartz and Tsingos made it clear that Autodesk was looking for "cash now" notwithstanding the fact that the R15 19 had not been officially released .

20 Second, plaintiffs allege that two "former Autodesk sales representatives," CW #5 and CW 21 #7, "confirmed that the bundling of the VIP Upgrade program with the R14 was the reason 22 that the R14 sales continued well during the second half of 98 ."

23 Third, plaintiffs asse rt that a "former Autodesk designer ," CW #1, told plaintiffs that

24 "sales and revenues during the latter half of 98 appeared larger than they actually were 25 cially inflate 26 25 Channel stuffing is "the oversupply of distributors in one quarter to artifi sales, which will then drop in the next qua rter as distributors no longer make orders while 27 depleting their excess supply." Steckman v . Hart Brewing, Inc., 143 F . 3d 1293, 1298 (9th Cir. 1998). Plaintiffs do not allege that the practice they describe here as channel stuffing 28 constituted a fraudulent act . In any event, the Ninth Circuit has rejected "chahnel stuffing" claims. In re Splash , 160 F .Supp. 2d at 1075-76 (citing Steckman).

34 1 because of a significant duplication problem in Autodesk's computer program which 2 recorded sales and revenues ." CW #1 allegedly reported to plaintiffs that beginning in 3 early 98, "Autodesk began combining its products into suites and selling them as a 4 package," but 5 failed to establish a methodology for how the resulting sales revenue from product suites would be recorded, i.e., which associated product division 6 would receive credit for the sale . As a result, each division would record the same sale as part of its division's total revenue for a given quarter, and the 7 sales were accordingly counted twice . 8 Cplt 151 (a) . CW #1 also allegedly told plaintiffs that "he knew that Bartz, Herr, and 9 Tsingos were aware of this situation and that it was a common topic of discussion betwee n 10 Bartz, Herr, and Tsingos ."28 t 11 These allegations are deficient for two reasons . First, the identifying information 0 12 provided (CW #1 is a "former Autodesk designer," CW #5 and CW #7 are "former

'L U 13 Autodesk sales representatives," and CW #6 is a "major Autodesk reseller") is insufficient - o 14, to constitute the detailed pleading of factual allegations required by the PSLRA as 0 ~ 151 construed by the Ninth Circuit. In Silicon Graphics , the Ninth Circuit interpreted the

4.' z N 16 language "plead all facts with particularity" (referring to the requirement in 15 U .S .C. 17 § 78u-4(b) that a plaintiff alleging securities fraud "state" facts "with particularity") to mean

MA 18 that "a plaintiff must provide a list of all relevant circumstances in great detail ." In re 19 Silicon Graphics , 183 F.3d at 984 . The court found that the complaint at issue in that case

20 did not comply with the PSLRA because the section entitled "Basis of Allegations" did no t

21 provide adequate corroborating details . Id. at 985.

22 Similarly, in this case, plaintiffs do not identify their sources, except by job titles that

23 are so general as to be almost meaningless .27 For example, plaintiffs do not indicate whe n 24 25 26 Plaintiffs do not explain the connection between the alleged duplication in the recording of sales and revenues, and their claim that sales of the R14 were strong because 26 of the VIP Upgrade program . 27 Z' Because of the wide variation in the factual circumstances underlying securities fraud actions, the court is not inclined to posit a hard-and-fast rule that plaintiffs must name . 28 their sources . That is not to say, however, that it is sufficient under the PSLRA simply to identify informants by a "witness" number and a general job description, as plaintiffs hav e

35 1 the confidential witnesses were employed as resellers, designers, or sale s

2 representatives ; where the witnesses worked; what their duties were ; what regular J 3 professional contact they had with Bartz, Herr, or Tsingos ; or how the witnesses had 4 access to the information they are alleged to have possessed . Nor do plaintiffs explain

5 how or when they themselves obtained the information from the witnesses, or under wha t 6li circumstances .

7 Second, even had plaintiffs provided adequate corroborating details, the statements 8 attributed to the witnesses are at best vague and insubstantial . Both Bartz and Tsingo s 9 are alleged to have told CW #6 sometime during the period between July 1, 1998, and 10 September 15, 1998, that the VIP Upgrade program was "the reason for the evenness of t Z 11 revenue," and that Autodesk was "looking for cash novel" despite the fact that the R15 ha d 0 VC 12 not been released. Plaintiffs do not associate the claims about "evenness of revenue" an d 13 "looking for cash now" with any particular date or event. They do not indicate th e ° significance of "looking for cash now," nor do they explain the basis of their suggestion that O Ti 14 v1 ° 15 "looking for cash now" was inconsistent with the fact that the R15 had not been released . Z 16 CW #5 and CW #7 allegedly stated to someone (unidentified) that R14 sales 17 continued strong during the second half of 1998 because of the VIP Upgrade program . C 18 However, this statement, which refers to sales "during the second half of 1998" canno t

19 provide a factual basis for plaintiffs' belief that statements allegedly made on September 20 15, 1998, concerning financial results for the quarter ending July 31, 1998, were not true

21 when made . Moreover, plaintiffs provide no indication that these two "Autodesk sales 22 representatives" were in a position to know the details of Autodesk's sales and revenue 23 numbers or the reasons that customers were buying the R14, or even whether customers

24 were buying the R14 . 25 26 done here. Plaintiffs are required to state with particularity all relevant facts upon which they base allegations made on information and belief. Silicon Graphics , 183 F.3d at 985. Thus, 27 where plaintiffs have obtained information from a non-plaintiff witness, they must allege all facts about the witness that were material to the formation of their belief that the witness gave 28 them accurate information . See in re Secure Computing , 120 F.Supp. 2d at 817. Under some circumstances, it will be necessary that such sources be identified by name .

36 4

1 CW #1 allegedly told plaintiffs at some unspecified time that sales and revenues 2 during the latter half of 1998 (no indication whether calendar year 1998 or FY98) appeared 3 "larger" than they actually were because of a duplication problem in the recording of sales . 4 However, the issue in this case is not whether defendants fraudulently misrepresente d

5 Autodesk's sales figures . The allegation that sales appeared larger than they were does 6 not provide factual suppo rt for the plaintiffs' belief that R14 sales continued strong 7 because of the VIP Upgrade program -- indeed, the two assertions seem to have little 8 connection with each other . 9 In ¶ 51, subpart (b), plaintiffs allege that Bartz and Tsingos stated at the 10 Philadelphia conference that t 1 1 o Autodesk was successfully completing the development and testing of the V E 12 R15/AutoCAD 2000 product . R15/AutoCAD 2000 was now in alpha-testing +W0 at thousands of customers' "seats' and was pe rforming extremely well . This 13 indicated that there would be strong demand for this product upon it s N ° commercial release.

0 14 Because of the successful development of the R15/AutoCAD 2000 product, U) E 15 including the enthusiastic res ponse it was receiving in alpha-testing, Z Z Autodesk was likely going to be able to advance the commercial release date CO 16 of this product to earlier in CY99 than originally planned . d LL 17 Cplt ¶ 51(b) . The quoted passage is followed by the allegation that "[t]his statement" is 18 false because Autodesk was not successfully developing the R15 , and that, "[in fact, the 19 R15/AutoCAD 2000 had serious glitches and software bugs which would result in the

20 product release being delayed ." 21 Again, plaintiffs fail to separately specify statements that are alleged to be false, 22 and do not clarify which defendant made which statement , or to whom , and do not state 23 any facts upon which they base their belief that Bartz and/or Tsingos actually made the 24 statements attributed to them . The quoted passage consists of five statements : 25 1) Autodesk was successfully completing the development and testing of the R15 ; 2) The 26 R15 was in alpha testing at thousands of customers' "seats ;" 3) The R15 was performing

27 well in the alpha testing ; 4) The fact that the testing was going well indicated that there 28 would be strong demand for the R15 upon its release; and 5) Because of the successful

37 1 development and testing of the R15, Autodesk was likely going to be able to advance the

2 commercial release date . Thus, it is not obvious which "reason" goes with whic h 3 statement. 4 Plaintiffs allege that their belief that the "statement" is false is based on an interview 5 with "former Autodesk designer" CW #1, who told plaintiffs that "there were so many bug s

6 and glitches that Bartz had to chair weekly meetings during 98 to discuss the problems 7 with the development of the RI 5/AutoCAD 2000 ." These weekly meetings (the "QIA Bu g Meetings"), which both Bartz and Herr attended, were held at Autodesk's San Rafael,

9 California, headquarters . CW #1 allegedly told plaintiffs that during the meetings, Bartz 1 0 "constantly 'harangued' the engineers about the numerous problems with the development It M 11 of the R15/AutoCAD 2000 and was especially troubled by the number of 'Class A' bugs i n 0 .e; 12 the R15 which could cause failure in a business trying to use the product . " 13 Again, plaintiffs do not adequately identify CW #1, the witness alleged as the N St 14 source of the information, and the statements attributed to that witness either do not in 15 correlate with the claim of falsity asserted by the plaintiffs, or are irrelevant. Plaintiffs nZ 16 assert that the statements, attributed to Bartz and Tsingos, that development and testing o f

C6D0 17 the R15 were proceeding successfully, were false as of September 14, 1998 . Setting E D 18 aside the question whether references to "successful development" or "testing" in which a 19 product is "performing extremely well" are too vague to be actionable'28 the court finds 20 nothing inconsistent between a claim of "successful development and testing" and th e

21 holding of meetings with engineers to discuss software bugs during the development

22 process, months before the product release date. Indeed, if there had been no bugs in the 23 R15 software, the development process would have been complete and there would hav e

24 been no need for testing . 25 26 28 As the Seventh Circuit put it, "The heart of a reasonable investor does not begin to 27 flutter when a firm announces that some project or process is proceeding smoothly, and so the announcement will not drive up the price of the firm's shares to at an unsustainable leve l 28 " Eisenstadt v. Centel Corp. , 113 F.3d 738, 745 (7th Cir . 1997), quoted in In re Actribiotech Sec . Litia. , 2000 WL 1277603 .8 (D. Nev., March 2, 2000) . 38 1 Plaintiffs allege that "weekly reports were sent to Bartz, Tsingos, and Herr during 98 2 and 99 which reported the numerous problems and bugs in the R15/AutoCAD 2000 ." 3 These reports, which were "generated by the Scopus database and were prepared by the 4 Customer Support Department headed by Sanders," allegedly "told Bartz, Tsingos, an d

5 Herr that the R15/AutoCAD 2000 was experiencing significant problems in testing ." 6 Plaintiffs claim that the bug reports "reported the numerous bugs and glitches" in the R15, 7 but fail to cite to any specific information in the reports or explain how such information 8 was at odds with the statements attributed to the defendants at the time those statement s

9 were made. 10 Neither the fact that Bartz chaired the meetings, nor the fact that the meetings wer e t 11 held at Autodesk's San Rafael headquarters, nor the fact that Bartz "harangued" the 0 Vr 12 engineers, nor the fact that weekly "bug reports" were generated and circulated among v W "L o 13 Autodesk executives during 1998 and 1999, nor the fact that many of the bugs wer e N o

Q N 14 allegedly "Class A bugs" provides sufficient factual support for plaintiffs' assertion on 15 information and belief that defendants lied to the analysts at the September 14, 1998 ,

16 conference when they discussed the progress of the development and testing of the R15 .

17 In addition, plaintiffs provide no facts to support their belief that the release date of the 18 R15 was delayed . Indeed, they do not state what the originally scheduled release date 19 was, when the date changed (if at all), or by how much it was delayed (if at all) . 20 In ¶ 51, subpart (c), plaintiffs allege that Bartz and Tsingos stated during th e 211 September 14, 1998, analysts conference that "[a]s a result of the foregoing, Autodesk 22 was forecasting 20%-25% EPS growth over the next three to five years and F00 EPS o f

23 $2.45-$2.55, respectively ." This passage is followed by the allegation that "[t]his

24 statement is false because Autodesk was incapable of achieving $2 .45-$2.55 for F00 EP S

25 and 20%-25% EPS growth over the next three years ." Plaintiffs assert that "Bartz and 2611, Tsingos made these forecasts based upon the representation that Autodesk had smoothed 27 out its revenue and EPS cycles due to organization into vertical product lines and that the

28 R15 was testing successfully," and that "it was the VIP Upgrade program, not

39 1 reorganization into vertical product lines that was the cause of Autodesk's success during

2 the latter half of 98 ." Cplt ¶ 51(c) . They allege further that "by giving customers deepl y 3 discounted use of the R15, the VIP Upgrade program made its success at the expense of

4 future sales of the R15, when the R15 was officially released in 99," and also asserts that 5 the R15 "was not testing successfully as represented by defendants." Cplt ¶ 51(c).

6 As in subsections 151 (a) and (b), plaintiffs do not clarify in ¶ 51(c) whether Bartz or 7 Tsingos made the statement regarding the financial projections, and provide no facts upon 8 which they base their belief that Bartz and/or Tsingos actually made the statement or that

9 they made the statement on September 15, 1998 . Nor do plaintiffs allege with particularity 1 10 the facts upon which they base the allegation that Autodesk was "incapable" (as of 11 September 14, 1998) of achieving the results forecast for the fiscal year beginning 0 O 12 February 1, 1999, and for the "next three to five years ;" or the allegation that Bartz and 13 Tsingos made the forecast "based upon" the representation that "Autodesk had smoothed p N 14 out its revenue and EPS cycles due to organization into vertical product lines and that the

15 R15 was testing successfully." Moreover, to the extent that they allege that the reason the

N ? 16 forecast was false when made is dependent upon the facts alleged in ¶ 51(a) and (b), the 17 inadequacy of the allegations in those subsections negates the asserted basis of the

18 allegations regarding the forecasts. 19 Plaintiffs allege in ¶ 52 that "these false statements" made by Bartz and Tsingos at

20 the Phiiadelphia analysts conference (referring to the allegations in 1151 (a), (b), and (c)) 21 were published in a report issued by Piper Jaffray the day following the conference . 22 Defendants in securities fraud suits can be liable for intentional misrepresentations t o

23 securities analysts, if the defendants made the false and misleading statements "with the

24 intent that the analysts communicate those statements to the market." Cooper v. Pickett ,

25 137 F.3d 616, 624 (9th Cir. 1997). Absent such intentional misrepresentations, 26 defendants are liable for forecasts made by third-party analysts only if the defendants 27 have "put their imprimatur, express or implied, on the projections ." In re Stac Elec. Sec.

28 Liti ., 89 F .3d 1399, 1410 (9th Cir. 1996), cert. denied , 520 U .S. 1103 (1997) ; see also In

40 1 re Syntex Corp . Sec. Litig. , 95 F.3d 922, 934 (9th Cir . 1996). 2 In this case , plaintiffs asse rt that it is unnecessa ry to plead entanglement because 3 they allege that defendants deliberately lied to the analysts . However, under the PSLRA, 4 plaintiffs must allege that specific individual defendants made specific false statements to

5 specific analysts , and must also allege the reason or reasons the statements were 6 misleading . See in re Splash, 2000 WL 1727377 *17-18 . In the order .dismissing the first 7 amended complaint, the court found that plaintiffs alleged no facts suppo rting their belief 8 that the statements alleged to have been made by the individual defendants during th e 9 analysts conferences and conference calls were actually made by those defendants . 10 Plaintiffs have not remedied that deficiency .

11 In addition , as discussed above , the statements alleged to have been published in 0 U E 12 the September 15, 1998, Piper Jaffray repo rt are, for the most pa rt, too vague to form the •L 3 13 basis of a § 10(b) complaint. The remaining statements - that "the acquisition of Discreet p 14 Logic would at most be 3 % dilutive," that the R15 was expected early in calendar year

2 15 1999, that "with only one-third of the installed base upgrading to R14 , we believe that R12 ca o Z 16 and R13 users will flock to R15," and that "given the feedback from some of the earl y LL 17 Alpha R15 users, the program is solid with a substantial number of new features and better

M 18 performance' - cannot form the basis of a fraud claim as alleged here because plaintiffs 19 do not state who (whether Bartz or Tsingos) made the statements , to whom the statements 20 were made, or why the statements are false ; and do not state any facts supporting thei r 21 belief that the statements were actually made by Bartz and/or Tsingos , or that the

22 statements were false when made . Indeed, plaintiffs provide no information regarding the

23 dilutive effect of the Discreet acquisition , the number of customers upgrading to R14, the

24 experiences and feedback from the R15 alpha-testers , or the features of the R15.

25 In 154, plaintiffs allege that Bartz, Herr, and Tsingos made false statements in a 26 November 19, 1998 , conference call for analysts , money and po rtfolio managers,

27 institutional investors , and large Autodesk shareholders , held to discuss Autodesk's 3Q 28 Ill

41 1 FY99 results.29 The allegations in ¶ 54 are substantially similar to those in ¶ 51 . As with 2 ¶ 51, plaintiffs divide the paragraph into subsections . In ¶ 54(a), they allege that Bartz, 3 Herr, and Tsingos made a statement identical to the statement attributed to Bartz and

4 Tsingos in 151 (a). The "reason" asserted in ¶ 54(a) is identical to the reason in ¶ 51(a) 5 (except that plaintiffs refer to the demand for the R14 "during the latter half of 98," rather

6 than to the demand "through 9/98"), as is the allegation of facts on which plaintiffs base 7 their belief that the statement was false (referring, again, to sales "through the latter half of 8 98," rather than to the period up to September 15th) . 9 In ¶ 54(b), plaintiffs allege that defendants made statements similar to those allege d 10 in 151 (b), except that the testing was at a more advanced phase, and defendant s t 11 allegedly asserted that, based on the successful development of the R15 and the 0 O f 12 "enthusiastic response" it was receiving in beta-testing, Autodesk had been able to 13 advance the release date of the R15 to early 1999. Plaintiffs claim that this "statement " •+ o 14 was false, citing exactly the same reasons as in 151 (b). Plaintiffs do not explain why the U) o 15 statement that the R15 was receiving an "enthusiastic response" in beta-testing was false, ea A ~ 16 if it was, nor do they assert that defendants lied when they stated that Autodesk wa s

LL 17 advancing the release date of the R15. 18 In ¶ 54(c), plaintiffs allege that Bartz, Herr, and Tsingos, "during a follow-up one-on- 19 one conversation with Piper Jaffray's analyst Hani Nada," stated that "[a]s a result of the

20 favorable factors benefitting Autodesk's business," Autodesk was projecting FY00

21 revenues and earnings of $1 + billion and $2 .45-$2.55 per share, respectively, and 20%- 22 25% earnings growth over the next three to five years . For the reasons discussed with 23 respect to ¶ 51(c), these allegations do not state a claim because they lack the requisite 24 particularity. Plaintiffs allege that the three individual defendants made the statemen t 25 during a "follow-up one-on-one conversation," but do not indicate which defendant 26 communicated the information to Nada (or whether all three made identical statements t o

27 28 29 This was the quarter ending October 31, 1998 .

42 Nada), Plaintiffs are required to specify which defendant made which statement . As the

court noted in the order dismissing the first amended complaint, group liability does not apply to oral statements . In re Autodesk , 132 F.Supp. 2d at 844; see also In re Gupta

Corp. Sec. Litig. , 900 F.Supp. 1217, 1239 (N .D . Cal. 1994). Nor does it apply to information presented in analysts reports . In re Network Equip. Tech., Inc., LitiQ. , 762 F.Supp 1359, 1367 (N .D. Cal . 1991). Similarly, with regard to the financial forecast in the December 28, 1998, Piper Jaffray report, alleged in ¶ 58, plaintiffs fail to specify whether Bartz, Herr, or Tsingos spoke to the analyst. To state a claim of fraud based on the communication of false

1 0 information to analysts, and the subsequent publication of that information in analysts 11 reports, plaintiffs must allege the dates and contents of specific conversations between 0 12 specific defendants and specific analysts, and must link those conversations to specific

'` U 13 analysts reports containing the false information . Having failed to do this, plaintiffs have U) 1 4 not alleged falsity with particularity in connection with the December 28, 1998 analyst U) 15 report. Plaintiffs also fail to provide any reason that the forecast was false when made, ev 1 161 and allege no facts to support the allegations made on information and belief .

W LL 17 In ¶ 62, plaintiffs allege that Bartz, Herr, and Tsingos made false statements in a 18 February 24, 1999, conference call for analysts, money and portfolio managers, 19 institutional investors, and large Autodesk shareholders, held to discuss Autodesk's 4Q 20 FY99 results.30 As with the allegations regarding the September 14, 1998 analysts

21 meeting (¶ 51) and the November 19, 1998, conference call (1 54), this paragraph is 22 divided into three subparts . The statements alleged to be false in ¶ 62(a) are identical to 23 the ones in ¶ 51(a) and ¶ 54(a) . The "reasons" the statements in ¶ 62(a) are alleged to be 24 false are also essentially the same -- i .e ., the continued demand for the R14 during the last 25 half of 1998 was based on the VIP Upgrade program, not on reorganization into vertical 26 product lines. In addition, plaintiffs include allegations concerning a reseller conference - 27

28 I 'o This was the quarter ending January 31, 1999.

43 1 the "One Team Meeting" -- held in Palm Springs, California, in late January or early

2 February 1999. 3 Plaintiffs claim that CW #5, variously described in the second amended complaint 4 as a "major Autodesk reselier," Cplt ¶ 45, or as a "former Autodesk sales representative," 5 Cplt ¶ 51, told plaintiffs that the decline in sales of the R14 was "a common them e 6 discussed with Bartz and Tsingos" at the Palm Springs reseller conference, as was th e

7 "'pre-booking' of the R15 through the VIP Upgrade program ." CW #5 allegedly stated that

8 it was "well-known" that because of the VIP Upgrade program, "there was little expectation

9 for any sales of the R15/Autodesk 2000 upon its release" and that "resellers expected little

10 in the way of sales for the R15 ." Plaintiffs also claim that CW #5 told them that Bartz and

11 Tsingos told him "in the second half of 98" that the VIP Upgrade program was "the reason 0 O E 12 for the evenness of revenues in the latter half of 98," and that Bartz and Tsingos "made it 0 13 clear that Autodesk was looking for 'cash now' in the latter half of 98 notwithstanding the

14 fact that the R15 had not been officially released yet ." Cplt ¶ 62(a) . 15 These allegations are inadequate for the same reasons as the previously-discussed j 16 allegations regarding plaintiffs' confidential witnesses and statements attributed to them . 17 Moreover, allegations that a particular subject "was discussed" with Bartz and Tsingos, or

18 that at an asserted fact was "well-known" do not provide the specificity required by th e 19 PSLRA . Such generalized assertions fall far short of satisfying the requirement that 20 plaintiffs "state with particularity all facts" on which they base their belief that these 21 discussions took place at the Palm Springs reseller conference . For example, wh o 22 discussed these subjects with Bartz and Tsingos? What was the source of the information 23 possessed by the person or persons who related that information to Bartz and Tsingos? 24 And, most importantly, if it was "well-known" that there was "little expectation for any sales

25 of the R15" because of the R14 Upgrade program, why was that knowledge not equall y 26 available to the market? 27 Similarly, in % 62(b), plaintiffs allege that Bartz and Tsingos stated in the February 28 24, 1999, conference call that Autodesk was completing final development and testing of

44 1 the R15, that the R15 was performing well in beta-testing, and that there would be strong

2 demand for the R15 upon its release . Plaintiffs reiterate the meaningless incantation that 3 the statement that there would be strong demand for the R15 was false because it was not 4 true, and assert they know that the statement was false because a confidential witness told

5 them that the lack of demand for the R15 "was discussed" with Bartz and Tsingos at the

6 Palm Springs conference. However, plaintiffs allege no facts to support the claim that

7 there was in fact no demand for the R15 . For example, they point to no specific internal 8 reports or forecasts showing "little interest" or "no demand" for the product . Instead, they 9 simply assert that an unidentified "major Autodesk reseller" (who may also have been a

10 "former Autodesk sales representative") held that opinion . It is impossible to tell from the 11 complaint whether the opinion about anticipated demand for the RI 5 was based on some 0 12 survey of customers or resellers, or whether it was merely idle speculation . If based on a 0 13 survey, when was it conducted, and by whom? Who participated in it? What were the 0 h 14 results ? Cna; E 15 In ¶ 62(c), plaintiffs one-on- allege that Bartz, Herr, or Tsingos, "during a follow-up one-on- 0 ~ 16 one conversation with Piper Jaffray's analyst Hani Nada," stated that "[aJs a result of the d 17 favorable factors benefitting Autodesk's business," Autodesk was projecting FY0 0

18 revenues and earnings of $1 + billion and $2 .45-$2.55 per share, respectively, and 20%- 19 25% earnings growth over the next three to five years . For the reasons discussed with 20 regard to ¶¶ 51(c) and 54(c), the allegations do not state a claim 'because they lack th e

21 requisite particularity . Plaintiffs fail to specify whether Bartz, Herr, or Tsingos spoke to the

22 analyst. In addition, they fail to provide any reason that the forecast was false when made,

23 and allege no facts upon which they base their belief that Bartz, Herr, and/or Tsingo s 24 actually made the statement or that they made the statement on February 24, 1999 . 25 Nor do plaintiffs allege with particularity the facts upon which they base th e

26 allegation that Autodesk was "incapable" (as of February 24, 1999) of achieving the results 27 forecast for the fiscal year beginning February 1, 1999, and for the "next three to fiv e

28 years ;" or the allegation that Bartz, Herr, and/or Tsingos made the forecast "based upon"

45 1 the representation that "Autodesk had smoothed out its revenue and EPS cycles and had 2 effectively broken the upgrade cycle during the end of 98 due to the Company's move to 1 3 vertical product lines and that the R15 was going to be successful." Moreover, to the

4 extent that they allege that the reason the forecast was false when made is dependent

5 upon the facts alleged in ¶ 62(a) and (b), the inadequacy of the allegations in thos e

6 subsections negates the asserted basis of the allegations regarding the forecasts . 7 In ¶ 67, plaintiffs allege that Tsingos was quoted in a March 14, 1999, Dow Jones 8 article as stating that the Discreet Logic acquisition "will lower Autodesk's overall fiscal

9 2000 revenue growth to the high-teens as a percentage," and that "[e]xcluding Discreet, 10 Autodesk's revenue continues to grow in the low 20% range ." Plaintiffs claim that "this 11 statement" was false because Autodesk was incapable of achieving 20% growth . As in 0 12 IT 51(c), 54(c), and 62(c), plaintiffs claim that Tsingos made this statement "based on the 13 representation that Autodesk had smoothed out its revenue and EPS cycle and ha d 14 effectively broken the upgrade cycle during the end of 98 due to the Company's move to

15 vertical product lines and that the R15 was successful ." For the reasons set forth above, ( 16Z with regard to ¶¶ 51(c), 54(c), and 62(c), these allegations are insufficient to state a claim 4) U. 17 under the PSLRA. 18 In ¶ 68, plaintiffs allege that Bartz, Herr, and Tsingos made false statements during

19 an April 1, 1999, analysts conference in New York City. Plaintiffs claim that the thre e 20 defendants told analysts, money and portfolio managers, institutional investors, brokers,

21 and stock traders that "[t]he success of Autodesk's reorganization" was enabling the

22 company to "smooth out its revenue and EPS growth," and, with the initiation of the R15

23 product cycle, "would allow Autodesk to achieve more consistent revenue and EPS growth

24 going forward than had historically been the case." ¶ 68(a) . This allegation i s

25 substantially identical to the second half of ¶¶ 51(a), 54(a), and 62(a) . And, as in those 26 paragraphs, plaintiffs assert that this statement was false because the continued demand

27 for the R14 was not due to the reorganization of the company into vertical product lines, 28 but rather on the VIP Upgrade program.

46 I Plaintiffs again assert that CW #5 told plaintiffs that Bartz and Tsingos told him in

2 the second half of 98 that the VIP Upgrade program was the reason for the evenness o f

3 the revenues, and that the "bundling" of the VIP program with the R14 was the only reason

4 that R14 sales continued well into the second half of 98 ; and that they made it clear that 5 Autodesk was looking for "cash now" during the latter half of 98 to the detriment o f

6 potential sales in 99 . Plaintiffs also repeat the allegation that CW #1 stated that sales and 7 revenues in the latter half of 98 appeared larger than they were because of the duplication

8 in the recording of sales and revenues . 9 The R15 was officially released during the week immediately preceding the April 1, 10 1999, New York conference . The statement asserted as false in ¶ 68(a) refers to th e 11 "initiation" of the R15 AutoCAD cycle, and does not mention the R14 . However, plaintiffs' 0 12 "reasons" that the statement was false refer to the continued demand for the R14, and to iA 13 R14 sales during the latter half of 1998 (presumably calendar year 1998) . Thus the H 2 p 14 "reason" proffered by plaintiffs in ¶ 68(a), essentially the same as the "reason" alleged in

y 15 ¶¶ 51(a), 54(a), and 62(a), has no correspondence with the statement alleged to hav e

? 16 been false when made in April 1999 . This is yet another example of plaintiffs' tendency to 17 repeat allegations from one paragraph to the next, whether appropriate or not, to the c 18 detriment of the intelligibility of the complaint . 19 In ¶ 68(b), plaintiffs allege that Bartz, Herr, and Tsingos stated that the R15 was 20 "now released and selling exceedingly well," that the R15 upgrade "would be at least as 21 successful as the R14 upgrade," and that the "successful early release date" of the R15

22 "would significantly benefit Autodesk's revenue and EPS growth" during FY00 . Plaintiffs 23 assert that "this statement" was false because defendants knew there was not stron g 24 demand for the R15, and that there would be little or no benefit to Autodesk revenue and 25 earnings in FY00, the VIP Upgrade program having "effectively cannibalized" the R15 .

26 Plaintiffs claim that their belief that the statement was false is based on an interview with 27 CW #5, who allegedly told plaintiffs that the lack of demand for the R15 was discusse d 28 with defendants during the Palm Springs reseller conference, and also on the statement of

47 1 a "major reseller," who told plaintiffs that he (the reseller) had "personally" told Bartz in

2 March 1999 that there was little interest in the R15 . Again, as explained above in some 3 detail with regard to ¶ 62(b), plaintiffs fail to allege facts sufficient to support thei r

4 allegation concerning customer demand for the R15 . 5 In ¶ 68(c), plaintiffs allege that Bartz, Herr, and Tsingos made the same 6 representations regarding anticipated revenues and earnings as alleged in ¶¶ 51(c), 54(c),

7 and 62(c). For the reasons stated above with regard to those paragraphs, the court finds 8 that the allegations in ¶ 68(c) regarding financial forecasts do not state a claim . The fact 9 that the forecasts were allegedly made on April 1, 1999, little more than a month befor e 10 Autodesk announced on May 5, 1999, that the results for 1 Q FY00 (the quarter ending 11 April 30, 1999) would be below the level previously forecast, is not sufficient to support the 0 V E 12 allegation that the April 1st statement was false when made . Temporal proximity between 0 13 positive statements regarding a company's strengths and an announcement of poo r 14 performance, without more, does not create an inference that the earlier statement was

15 fraudulent . Yourish, 191 F.3d at 997 . 16 In ¶ 69, plaintiffs allege that a Piper Jaffray report issued April 5, 1999, stated that d LL 17 "early indications" were that the R15 cycle would be successful -- "as strong if no t D 18 strong[er] than the R14" -- and that "[w]e believe that this is the year that Autodesk can 19 break the AutoCAD cycle! In ¶ 70, plaintiffs allege that a Piper Jaffray report issued April 20 9, 1999, reiterated that "we believe that this cycle will be as strong if not stronger than the 21 R14 cycle ." The same report also stated that "Autodesk's 20,000 seat AutoCAD 2000 beta

22 program appears to have paid off . . . We believe if AutoCAD 2000 reliability an d

23 performance was at an issue, dealers would begin to be aware by now. "

24 As with the allegations in ¶ 68(b) regarding the statements allegedly made at the 25 April 1, 1999, New York conference, plaintiffs allege that the statements in ¶¶ 69 and 70

26 were false because Autodesk knew there was not strong demand for the RI 5. Plaintiffs 27 claim that their belief that the statements were false is based on an interview with CW #5,

28 who allegedly told plaintiffs that the lack of demand for the R15 was discussed wit h

48 1 defendants during the Palm Springs reseller conference, and also on the statement of a 2 "major reseller," who told plaintiffs that he (the reseller) had "personally" told Bartz i n

3 March 1999 that there was little interest in the R15 . For the reasons set forth above with 4 regard to ¶¶ 62(b) and 68(b), the court finds that these allegations do not state a claim .

5 2. Pleading sciente r 6 Defendants argue that the second amended complaint must be dismissed because

7 plaintiffs fail to state sufficient facts giving rise to a strong inference of scienter . Under the 8 PSLRA's heightened pleading standard, plaintiffs must "state with particularity facts giving 9 rise to a strong inference that the defendant acted with the required state of mind ." 1 5 10 U.S.C . § 78u-4(b)(2) . In the Ninth Circuit, the heightened standard requires plaintiffs to 11 plead actual knowledge, or, "at a minimum, facts giving rise to a strong inference of 0 U E 12 deliberate or conscious recklessness," a degree of recklessness that strongly suggests

2 13 actual intent. In re Silicon Graphics , 183 F.3d at 977-79 . Defendants contend that 31 14 plaintiffs' claims that defendants knew their statements were false when made are L~ y L 15 unsupported by facts, and that they fail to allege any economic motive for or benefit

.2Z 16 derived from the alleged fraud sufficient to establish scienter. The court must consider the U. 17 complaint in its entirety in order to determine whether plaintiffs have adequately ple d

18 scienter. Id., at 985. The court finds that plaintiffs fail to allege the required state of mind 19 with regard to each statement alleged to be false .

20 a. Actual knowledg e 21 In their opposition to defendants' motion, plaintiffs argue that the second amended 22 complaint is "replete with detailed factual allegations" that demonstrate actual knowledge. 23 Plaintiffs assert that defendants had actual knowledge that the alleged misrepresentations 24 were false at the time they were made, either because they had access to

25 contemporaneous reports containing relevant information, or had access to information by 26 virtue of their status as "hands-on" executives, or because someone told them . 27 Specifically, plaintiffs allege that defendants knew that sales of the R14 were declining 28 because of information in daily and weekly sales reports, that they knew that the R15 had

49 1 technical problems because of information communicated to them in the bug meetings and 2 the bug reports, and that they knew that there would be no demand for the R15 because of 3 statements that were made to them by various confidential witnesses and because o f 4 matters that were "discussed" at the 1999 Palm Springs reseller conference . 5 For example, plaintiffs allege that defendants "knew of the substantial decline i n

6 R14 sales" and that both before and throughout the class period, Bartz, Herr, and Tsingos 7 closely monitored the sales of Autodesk's products via Autodesk's SAP/EIS program, "an 8 integrated system that provided real-time data on actual revenues from product orders , 9 shipment status, and product shipments ." Cplt ¶ 31 . Plaintiffs provide a detaile d 10 explanation of how the .SAP/EIS system functioned to produce daily and weekly sales

11 reports, Cplt ¶¶ 32-33, concluding with the assertion : 0 U 12 Thus, Bartz, Herr, and Tsingos were apprised of the status of orders for and 13 sales of every Autodesk product, including the R14/AutoCAD an d RI 5/AutoCAD 2000 products, so that they knew precisely where Autodesk 14 stood in terms of the sale of and demand for the R14/AutoCAD an d o R15/AutoCAD 2000, as well as Autodesk's actual results compared to 15 budget. Z 16 Cplt 34 . w LL 17 With regard to the progress of the development and testing of the R15, plaintiffs D 18 allege that Bartz was familiar with the nature and extent of the bugs identified during the 19 testing phase of the R15 during the summer of 1998 because she participated in th e 20 weekly bug meetings, which Herr also attended, and because she received and reviewed

21 the bug reports. Cplt ¶¶ 20-22, 27-29 . Plaintiffs also claim that defendants "knew" that in 22 early 1999 that sales of the R15 release would not be strong because "there was simply no 23 demand" for the R15 . Plaintiffs base this assertion on information obtained from CW#5, 'a 24 major Autodesk reseller," who allegedly stated that "dealers had been discussing a tota l 25 lack of interest in the market" for the R15 release, and "this was certainly a topic of 26 discussion" during meetings attended by Bartz and Herr at the "One Team" meeting in

27 Palm Springs, held in January or February of 1999 . Cplt ¶¶ 45-46 . 28 None of these allegations are sufficient to establish actual knowledge . Apart from

50 1 their verbosity, the allegations in 1131-34 (R14 sales reports) and ¶¶ 20-22, 27-29 (bug

2 meetings and bug reports) differ little from the allegations in the first amended complaint 3 that defendants knew adverse non-public information about the slowing sales of the R14 4 based on their review of internal reports, and by virtue of their executive positions wit h 5 Autodesk and their involvement in the day-to-day management of the business. See In re

6 Autodesk, 132 F. Supp. at 844 ("plaintiffs must do more than allege that these key officers 7 had the requisite knowledge by virtue of their 'hands on' positions, because that woul d 8 eliminate the necessity for specially pleading scienter, as any corporate officer could be 9 said to possess the requisite knowledge by virtue of his or her own position") . 10 The second amended complaint merely alleges that Bartz, Herr, and Tsingos

11 "continued to closely monitor the sales of Autodesk's products via the SAP/E IS (Executive 0 V E 12 Information System) program . . . [which] broke down real-time orders, shipments, and 13 sales revenue day by day, month-to-date, and quarter-to-date . . . [and] was the most y o 14 complete database for Autodesk's sales ." Cplt ¶ 31 . Similarly, regarding the bug reports, , € 15 plaintiffs merely allege that "weekly reports were prepared . . . and went to Autodesk' s 16 executives, including Bartz and Herr," Cplt ¶ 29, and that the reports documented technical

LL 17 difficulties encountered by the company during the development and testing of the R15 .

18 CPIt ¶¶ 20-22 . Nowhere, however, do plaintiffs identify any portion of any specific report 19 that demonstrates that defendants knew that the statements they made publicly about the 20 R14 or the R15 were false at the time they were made . 21 The second amended complaint also contains conclusory assertions that

22 defendants "knew," "believed," "hoped," "feared," "were well aware," and "realized" various 23 facts. For example, plaintiffs claim that defendants "hoped" the acquisition of Discree t 24 Logic would diversify Autodesk's revenues away from the AutoCAD, and "feared" that if

25 they did not move quickly, Discreet Logic would be sold to someone else, Cplt ¶ 1 ; and 26 that defendants "knew" that any significant acquisition of the size that would enabl e 27 Autodesk to lessen its dependence on AutoCAD would be so expensive that Autodesk 28 could make such an acquisition only by using Autodesk's common stock as "currency" to

51 1 pay for such acquisition, Cplt ¶ 15 . 2 Plaintiffs allege that defendants "knew" that analysts and investors would b e 3 focused during 1998 on the pending R15 product upgrade because, as an odd-numbered 4 upgrade, the R15, like the R13, was a major product upgrade involving a large number of

5 new features that would carry a risk of technological problems that could adversely impact

6 its commercial success; that defendants "knew" that it was imperative that they assur e 7 analysts and investors that Autodesk was taking all necessary steps and time to properly 8 evaluate and test the R15 prior to its commercial release to assure that the product would

9 deliver the levels of performance promised and not contain an excessive number of bug s 10 and operational deficiencies ; and that defendants "knell" that the development of the R15 0 11 was following a course "eerily similar to the disastrous R13 upgrade release ." Cplt ¶ 24 . (J ! 12 Plaintiffs also claim that defendants "knew" that the only way to inflate Autodes k 13 stock to a level where they could force Discreet Logic to accept a lower exchange ratio for

14 the acquisition and, at the same time, sell off 3 million shares of Autodesk stock on a 15 nondilutive basis, was to persuade investors that the development of the R 1 5 was U) L 16 proceeding so successfully that the product would be launched early, and as a result, d 17 Autodesk would achieve substantial growth in revenue and earnings per share in FY00 - 1 18 FY02, Cplt 130; that defendants "were determined" to proceed with the Discreet Logic 19 acquisition because they "believed" it represented an excellent fit with Autodesk's Kinetix 20 division and would diversify Autodesk's business away from its dependence on AutoCAD,

21 Cplt ¶ 35; that defendants "knew" that Discreet Logic was being actively shopped by its 22 investment banker, and that if Autodesk did not move quickly with the acquisition , 23 defendants' opportunity to make what they "believed" to be an extraordinarily desirable

24 acquisition for the company in the long term would be lost forever, Cplt ¶ 35 ; and that 25 defendants "realized," in light of the "collapse" of Autodesk's stock following the August 26 1998 announcement of the Discreet Logic acquisition, that something had to be done

27 quickly to halt the decline in Autodesk stock and push the stock back up to much higher

28 levels so the acquisition would occur, Cplt 138.

52 1 Such allegations contribute nothing to the complaint because defendants do not

2 state any facts giving rise, to a strong inference that defendants in fact "knew" any of these 3 things. Moreover, none of these assertions are relevant to the primary issue in the case -- 4 whether defendants made false material statements during the class period . Plaintiffs 5 apparently seek to create at an impression of actual knowledge in the second amended 6 complaint by repeatedly asserting that defendants acted knowingly, but such allegations 7 are insufficient to satisfy the requirements of the PSLRA . See In re Silicon Graphics , 183 8 F.3d at 985. Lengthy and irrelevant speculations about defendants' mental state cannot 9 substitute for the requirement that plaintiffs "state with particularity facts giving rise to a 1 0 strong inference" that defendants acted with deliberate recklessness . Id. (citing 15 U.S.C .

11 § 78u-4(b)(2))- 0 12 b. Motive and opportunit y 13 Plaintiffs assert that deliberate or conscious recklessness is also shown by the N O 14 "strong financial motives" that drove defendants to engage in "the scheme to defraud ." y o 15 Cplt ¶ 48. Under Ninth Circuit law, however, motive and opportunity, standing alone, are .ra2 Cl) d 16 insufficient to established the required state of mind under the PSLRA. In re Silicon dI 17 Graphics , 183 F.3d at 974 ("although facts showing mere recklessness or a motive to c 18 commit fraud and an opportunity to do so may provide some reasonable inference of 19 intent, they are not sufficient to establish a strop inference of deliberate recklessness") 20 (emphasis in original) .

21 Plaintiffs allege that defendants were motivated by the desire to inflate the price of

22 Autodesk's stock so that Discreet Logic could be acquired using the fewest possible

23 Autodesk shares as "currency," and the related desire to obtain monetary bonuses as a

24 reward for completing the acquisition at terms favorable to Autodesk . Cplt ¶ 48. Plaintiffs

25 assert that "[t]his put tremendous pressure on Autodesk's executives to present Autodesk's

26 business in a very favorable light to the investment community to inflate Autodesk's stock,

27 thereby increasing or at least maintaining its value for use as consideration in

281 acquisitions ." Cplt ¶ 48 .

53 1 These allegations do not create a "strong inference" of deliberate recklessness, but 2 rather simply suggest a motive for committing fraud - a motive that is weak, at best , 1 3 because every corporation and large shareholder would have such a motive . See In re 4 PETsMART, 61 F.Supp. 2d at 999 (allegation of motive to facilitate acquisition of another

5 company was not sufficient pleading of scienter) ; Malin v . (VAX Corp . , 17 F.Supp. 2d 1345, 6 1360-61 (S .D. Fla. 1998) (allegation of general motive of maintaining stock price t o 7 maintain reputation of company and to facilitate mergers and acquisitions failed to raise 8 strong inference of knowing or reckless conduct because such motives can be ascribed to 9 virtually all corporate officers and directors) .31 10 Where a plaintiff alleges that motive to maintain stock price at an artificially inflated 11 level establishes the inference of conscious recklessness, courts generally require tha t 0 U 12 plaintiff allege that insider defendants sold their own stock or personally profited from the v 4 0 13 alleged inflation in the stock price during the relevant period ; moreover, to constitut e

14 circumstantial evidence of scienter, stock sales by corporate insiders must be "unusual" or 5 15 "suspicious." In re Silicon Graphics . 183 F .3d at 986. The present case is not one where L 16 corporate insiders made "rosy characterizations of company performance to the market 17 while simultaneously selling off all their stock for no apparent reason ." Ronconi v. Larkin, 18 253 F.3d 423, 435 (9th Cir . 2001). Indeed, although Autodesk's SEC filings indicate that 19 the individual defendants held large numbers of shares and vested options of Autodesk 20 stock, plaintiffs do not allege that defendants sold any stock at all during the class period .

21 Absent allegations of some tangible economic benefit, the court can find no basis fo r 22 inferring from circumstantial evidence that defendants engaged in conscious or deliberate 23 wrongdoing . 24 Rather than allege that Bartz, Herr, or Tsingos profited from the sale of their own 25

26 Moreover, Autodesk's SEC filings suggest that when the terms of the Discreet 27 acquisition were ultimately modified in January 1999, the changes were not based on an increase in the value of Autodesk's stock, but on the fluctuating price of Discreet's stoc k 28 resulting from lower-than-anticipated quarterly results in October 1998 and January 1999. See, e.g_, Autodesk's Form S-4/A, filed February 5, 1999 .

54 1 shares, plaintiffs assert that the opportunity of receiving bonuses provided the financial

2 motive. Plaintiffs claim that Autodesk's executive compensation program provided fo r 3 Bartz and Herr to receive a cash bonus each year, the size of which depended on whether 4 they had caused Autodesk to achieve specific corporate goals for that particular year . 5 Plaintiffs assert that Autodesk's primary corporate objective in FY99 was to make a large 6 acquisition that would assist the company in its goal of diversifying its business . Plaintiffs 7 allege that "[b]ecause of how Bartz pulled off the Discreet Logic acquisition, Autodesk' s 8 board rewarded her with an $800,000 cash bonus" for FY99 -- the largest cash bonus any

9 Autodesk executive had ever received . Cplt ¶ 49 .

10 Courts have commonly rejected the "bonus-as-motive" argument . See, etc ., in re

11 PETsMART , 61 F.Supp.2d at 998-99. "Companies routinely provide their executives with 0 U 12 compensation packages that are tied to the price of their stock as an appropriate means of r a 13 linking pay to performance ." In re Orbital Sciences Corp . Sec. Litia. , 58 F.Supp. 2d 682 N y 14 (E .D. Va. 1999) (citing Tuchman v. DSC Communications Corp ., 14 F.3d 1061, 1068-69

15 (5th Cir. 1994)). Characterizing incentive compensation as a substantial motive for fraud ea t j v 16 "would effectively eliminate the state of mind requirement as to all corporate officers and U- 17 defendants ." Melder v . Morris, 27 F.3d 1097, 1102 (5th Cir. 1994), quoted in In re

18 McKesson HBOC, Inc., ec. Litig. , 126 F.Supp. 2d 1248, 1274 n.14 (N.D. Cal. 2000).

19 Moreover, plaintiffs' allegations are not supported by detailed facts that "constitute

20 strong circumstantial evidence of deliberately reckless or conscious misconduct ." Silicon

21 Graphics , 183 F .3d at 974 . Plaintiffs claim that Bartz received the bonus "because of how

22 [she] pulled off the Discreet . . . acquisition." Plaintiffs offer no further explanation of what 23 part of "pulling off the acquisition" Bartz was rewarded for, and provide no facts to support

24 a claim that Bartz made false statements because of her desire for a bonus . Nor d o 25 plaintiffs allege that either Bartz or Herr was promised a bonus if the price of Autodesk's 26 stock rose to a certain point or did not fall below a certain point, or if the Discreet Logic

27 acquisition was completed on certain terms . In short, plaintiffs fail to allege facts that 28 create a strong inference that defendants acted with deliberate recklessness, let alone

55 n

1 facts creating such an inference "with respect to each act or omission alleged to violate

2 [the 1934 Act]." 15 U.S.C. § 78u-4(b)(2) . ,i 3 3. Section 20(a) claims 4 Plaintiffs also allege violations of § 20(a) of the Securities Exchange Act of 1934, 5 as to the individual defendants. Under § 20(a), "[e]very person who, directly or indirectly,

6 controls any person liable under any provision of this chapter . . . shall also be liable jointly 7 and severally with and to the same extent as such controlled person ." 15 U .S .C. § 78t(a) . 8 To establish liability under § 20(a), plaintiffs would be required to show, as to each 9 defendant, that he or she controls a person upon whom liability could be imposed for a 10 violation of the 1934 Act . Plaintiffs allege that Bartz, Herr, and Tsingos are liable under t 11 § 20(a) as controlling persons of defendant Autodesk. Because the court finds that 0 v E 12 plaintiffs have failed to state a claim under § 10(b) and Rule 1Ob-5, there can be no liability ++v 'Ws 'L U 13 under § 20(a) and the claim must be dismissed . N ° 0 ~ 14 CONCLUSION 15 In accordance with the foregoing, the court finds that defendants' motion to dismiss N Z 16 the second amended complaint must be GRANTED for failure to allege fraud with

Wu. 17 particularity. Moreover, based on plaintiffs' failure to file a second amended complaint c 18 complying with the instructions in the order dismissing the first amended complaint, the

19 court finds that granting further leave to amend would be futile . Therefore the dismissal is 20 WITH PREJUDICE . 21

22 IT IS SO ORDERED.

23 Dated: November 21, 2001 P Is J. HAMILTON 24 United States District Judg e 25

26 Copies mailed to counsel of record 27 28

56 , _ United States District Court for the Northern District of California November 21, 200 1

* * CERTIFICATE OF SERVICE * *

Case Number :3 :00-cv-0122 5

Prebl e

Autodesk Inc

I, the undersigned, hereby certify that I am an employee in the Office of the Clerk, U .S . District Court, Northern District of California .

That on November 21, 2001, I SERVED a true and correct copy(ies) of the attached, by placing said copy(ies) in a postage paid envelope addressed to the person(s) hereinafter listed, by depositing sai d envelope in the U .S . Mail, or by placing said copy(ies) into an inter-office delivery receptacle located in the Clerk's office .

William S . Lerach, Esq . Milberg Weiss Bershad Hynes & Lerach LLP 600 W Broadway Ste 180 0 One America Plaza San Diego, CA 9210 1

Kirk B . Hulett, Esq . Milberg Weiss Bershad Hynes & Lerach LLP 600 W Broadway Ste 180 0 One America Plaza San Diego , CA 9210 1

Patrick J . Coughlin, Esq . Milberg Weiss Bershad Hynes & Lerach LLP 100 Pine Stree t Ste 260 0 San Francisco, CA 9411 1

David R . Stickney, Esq . Milberg Weiss Bershad Hynes & Lerach LLP 100 Pine Stree t Ste 260 0 San Francisco, CA 9411 1

Reed R . Kathrein, Esq . •~ Milberg Weiss Bershad Hynes & Lerach LLP 100 Pine Stree t Ste 260 0 San Francisco , CA 9411 1

David R . Kathrein, Esq . Milberg Weiss Bershad Hynes & Lerach LLP 100 Pine Street, Suite 260 0 San Francisco, CA 9411 1 ,i

Jack L . Chestnut, Esq . Chestnut & Cambronne 3700 Piper Jaffray Tower 222 South Ninth Street Minneapolis, MN 5540 2

Karl L . Cambronne, Esq . Chestnut & Cambronne 3700 Piper Jaffray Tower 222 South Ninth Street Minneapolis, MN 5540 2

Brian N . Toder, Esq . Chestnut & Cambronne 3700 Piper Jaffray Towe r 222 South Ninth Street Minneapolis, MN 5540 2

Ignacio E . Salceda, Esq . Wilson Sonsini Goodrich & Rosati 650 Page Mill Roa d Palo Alto, CA 94304-105 0

Boris Feldman, Esq . Wilson Sonsini Goodrich & Rosati 650 Page Mill Roa d Palo Alto, CA 94304-105 0

William F . Alderman, Esq . Orrick Herrington & Sutcliffe LLP Old Federal Reserve Bank Building 400 Sansome S t San Francisco , CA 94111-314 3

Denise M . Alter, Esq . Orrick Herrington & Sutcliffe LLP Old Federal Reserve Bank Building 400 Sansome S t San Francisco , CA 94111-314 3

Francis M . Gregorek, Esq . Wolf Haldenstein Adler Freeman & Herz LLP Symphony Tower s 750 B St Ste 277 0 San Diego , CA 9210 1

Francis A . Bottini Jr ., Esq . Wolf Haldenstein Adler Freeman & Herz LLP Symphony Towers 750 B St Ste 277 0 San Diego, CA 9210 1

Betsy C . Manifold, Esq . Wolf Haldenstein Adler Freeman & Herz LLP Symphony Towers 750 B St Ste 277 0 San Diego, CA 9210 1

Fred T . Isquith, Esq . Wolf Haldenstein Adler Freeman & Herz 270 Madison Av e New York, NY 1001 6

Shane T . Rowley, Esq . Wolf Haldenstein Adler Freeman & Herz 270 Madison Ave New York, NY 1001 6

Brian S . Cohen, Esq . Wolf Haldenstein Adler Freeman & Herz 270 Madison Av e New York, NY 1001 6

Charles J . Piven, Esq . Law Offices of Charles J . Piven The World Trade Center-Baltimore 401 East Pratt S t Ste 252 5 Baltimore, MD 21202

Richard D . Kranich, Esq . Law Offices of Richard D . Kranich 531 Main St Ste 40 7 New York, NY 10044-0107

Richard W . Wieking, Clerk

BY : Deputy Clerk EXHIBIT 18 Case 3:02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 1 of 1 7

6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNI A ,8

9 CHRISTINE KUEHBECK, on behalf of herself and all others similarly situated, 1 0 No. C 02-5344 JSW Plaintiff, 11 CLASS ACTIO N V. 12 ORDER GRANTING MOTION TO U w° GENESIS MICROCHIP INC, AMNON DISMISS WITHOUT PREJUDIC E 13 FISHER, ERIC ERDMAN, and ANDERS - a FRISK, 14 Defendants . E 15 1 ea z 16 1 W 17 1 Now before the Court is the Motion to Dismiss the First Amended Complaint ("FAC")

18 filed by defendants Genesis Microchip Inc . ("Genesis"), Amnon Fisher, Eric Erdman, and

19 Anders Frisk (collectively "Defendants "). Defendants bring this motion on the grounds that 20 plaintiff Christine Kuehbeck has not satisfied the heightened pleading requirements of the

2 1 Private Securities Litigation Reform Act ("PSLRA") and has failed to state a claim upon which

22 I relief can be granted under Federal Rule of Civil Procedure 12(b)(6) . Having carefully reviewed

23 the parties ' papers and considered their arguments and relevant legal authority , and good cause

24 appearing, the Court hereby GRANTS Defendants ' motion to dismiss with leave to amend .

25 FACTUAL BACKGROUND

26 Ms. Kuehbeck brings this class action under Sections 10(b) and 20 (a) of the Securities

2 7 Exchange Act of 1934, 15 U .S.C. §§ 78j(b) and 78t(a), and the rules and regulations

28 I promulgated thereunder , including SEC Rule IOb-5, 17 C .F.R. 240. 1 Ob-5 . Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 2 of 1 7

1 Genesis is in the business of supplying integrated circuits ("ICs" or "chips") used in flat

2 screen LCD monitors for computers and other devices . The end users combine Genesis' IC s

3 with flat screen panels and other products to manufacture flat screen monitors. (FAC ¶¶ 18, 19 .)

4 Genesis conducts much of its business with a limited number of customers or vendors .

5 Genesis' sales are heavily concentrated among approximately twelve manufacturers of flat

6 screen monitors. (FAC ¶ 40.) Additionally, Genesis derives a substantial portion of its

7 revenues from the development and sale of a limited number of products, primarily in the LCD

8 market. (FAC ¶ 41 .)

9 The individuals named in this lawsuit as defendants were all high-ranking employees of

10 Genesis during the class period (April 29, 2002 to June 14, 2002) . (FAC ¶¶ 20-24 .) At all

11 relevant times, these individuals held the following positions : Mr. Fisher was a Director and

U 12 Chief Executive Officer, Mr . Erdman was Chief Financial Officer, and Mr . Frisk was Vice

U 13 President of Marketing . (FAC IT 20-24.) r .+ U A 14 On April 29, 2002, Defendants issued a press release and hosted a conference call with a~ E 15 investors to announce the fourth quarter financial results and forecast the following quarter's 16 financials . Mr. Frisk stated: ba~ 17 In the current environment of tight panel supply, it is important to note that not all monitor markets are equally affected . The leading brand nam e 18 monitor and PC vendors have been the first to receive panels, and since they make up the majority of our volume, we are not seeing any shrinkage 19 in our volumes due to panel supply constraints . In fact, we have seen a modest increase of about 4 percent in our LCD [liquid crystal display ] 20 monitor controller unit volume, between the December and March quarters . We understand that some of the tier 2 and tier 3 monitor manufacturer s 21 have experienced difficulties in receiving sufficient panel supply ; and as a result have turned monitor controllers back to some of our competitors . 22 These transactions may have confused the controller reporting published by market analysts . 23

24 (FAC ¶ 107-108 .) Mr. Frisk went on to say later during the same call that he anticipated I C

25 controller products and flat screen monitors "shipping in synch with one another ." (FAC ¶ 111 .)

26 In reference to the flat-panel monitor market, Mr . Erdman stated, "[W]e anticipate our

27 revenues will mirror the growth of that market ." (FAC ¶ 110.) Lastly, Mr. Erdman stated, "[I]n

28 the foreseeable future we don't see any substantial change in our market share ." (FAC ¶ 113 .)

2 Case 3: 02-cv-05344-JSW Document 43 Filed 03 /29/2004 Page 3 of 1 7

1 Analysts responded well to these statements and this encouraged investors to purchase

2 Genesis stock . Following the April 29, 2002 statements, Genesis ' stock price increased fro m

3 $20 .275 to $24.01 per share and continued to rise in May to close at a high of $28 .40 on May

4 16, 2002. (FAC ¶ 118.)

5 In a press release and conference call on June 14, 2002, the end of the class period ,

6 Genesis reduced its revenue estimates and acknowledged that the lower revenue expectation wa s

7 caused by customer inventory build ups . (FAC ¶ 134.) Mr. Fisher stated during the call that ,

8 "We believe orders have slowed primarily because of customers working off of their inventories

9 built up over the last few quarters." (FAC ¶ 135 .) Following these statements, Genesis' stock

10 price dropped from $12 .24 to close at $9.02. (FAC ¶ 132-33 .)

11 In June 2002, Genesis brought on a new CEO , James Donegan. After taking the helm of

V 12 Genesis, Mr. Donegan made statements in an investor conference call on June 26, 2002,

• w 13 emphasizing the close relationship between Genesis and its customers . (FAC ¶ 53 .) 0 A 14 Additionally , on December 2, 2002, in another investor conference call, Mr. Donegan stated, 15 "We're watching the channel like a hawk." (FAC ¶ 54.)

16 On November 7, 2002 Ms. Kuehbeck filed this suit alleging that the Defendants were b y Q 17 under pressure to keep stock prices higher because Mr . Fisher was criticized after a February 27,

18 2002 conference call where he predicted a slowdown in future growth . (FAC ¶ 83.)

19 Additionally, Ms. Kuehbeck alleges that Genesis was under pressure to keep its stock price u p

20 due to merger discussions; therefore, Genesis wanted to keep its stock price higher so that it

21 would have more leverage in merger discussions. (FAC ¶¶ 84-87.) Ms. Kuehbeck alleges that

22 due to these pressures, Defendants made the aforementioned statements to cover up an inventory

23 glut built up by Genesis customers because of panel supply constraints . (FAC ¶ 119 .) 24 REQUEST FOR JUDICIAL NOTIC E

25 In addition to the Motion to Dismiss Ms . Kuehbeck' s First Amended Complaint,

26 Defendants fi led a Request for Judicial Notice, and ask the Court to take notice of a number of

27 documents attached as exhibits to the Declaration of Natalie Bridgeman . Federal Rule of

28 Evidence 201 authorizes a cou rt to take judicial notice of facts "not subject to reasonabl e

3 Case 3:02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 4 of 1 7

1 dispute in that it is . . . capable of accurate and ready determination by resort to sources whos e

2 accuracy can not reasonably be questioned ."

3 The documents at issue in Defendants' request include the April 29, 2002 press releas e

4 and the transcripts of the April 29, 2002 investor conference call . These documents are

5 explicitly referred to in the FAC . The incorporation by reference doctrine permits a court t o

6 consider documents alleged in a complaint and whose authenticity no party questions, but tha t

7 are not physically attached to a complaint. Branch v. Tunnell, 14 F .3d 449, 454 (9th Cir. 1994).

8 Here, Ms . Kuehbeck does not challenge the authenticity of the documents directly and generall y

9 referred to them in the complaint . Defendants provide these documents as Exhibits D and F t o

10 the Bridgeman Declaration; accordingly, the Court may take judicial notice of these document s

6 11 and GRANTS Defendants' request. The remaining exhibits are not necessary to the resolution

12 of this motion and the Court declines to consider the request as to those exhibits.

• w 13 ANALYSIS 0 ° 14 I N . Pleading Standards for Private Securities Litigation

15 Section 10(b) of the Securities and Exchange Act provides, in part, that it is unlawful "to

Z Z 16 use or employ in connection with the purchase or sale of any security registered on a nationa l

,°r w 17 securities exchange or any security not so registered, any manipulative or deceptive device o r

18 contrivance in contravention of such rules and regulations as the [SEC] may prescribe ." 1 5 19 U.S.C. § 78j(b).

20 Rule I Ob-5 makes it unlawful for any person to use interstate commerce :

21 (a) To employ any device, scheme, or artifice to defraud; (b) To make any untrue statement of material fact or to omit to state a material fac t 22 necessary in order to make the statements made, in light of the circumstance s under which they were made, not misleading, or 23 (c) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person, in connection with the purchase o r 24 sale of any security .

25 17 C.F.R. § 240.1Ob-5.

26 To be actionable under section 10(b) and Rule IOb-5, a plaintiff must allege (1) a

27 misrepresentation or omission, (2) of material fact, (3) made with scienter, (4) on which th e

28 plaintiff justifiably relied, (5) that proximately caused the alleged loss . Binder v. Gillespie, 184

4 Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 5 of 1 7

1 F .3d 1059, 1063 (9th Cir. 1999) . Additionally, as in all actions alleging fraud, plaintiffs mus t

2 state with particularity the circumstances constituting fraud. Fed. R. Civ. P. 9(b).

3 Section 20(a) of the Securities and Exchange Act provides derivative liability for thos e

4 who control others found to be primarily liable under the Act . In re Ramp Networks, Inc. Sec.

5 Litig., 201 F.Supp. 2d 1051, 1063 (N .D. Cal. 2002). Where a plaintiff asserts a section 20(a)

6 claim based on an underlying violation of section 10(b), the pleading requirements for bot h

7 violations are the same . Id.

8 In order to limit the number of frivolous private securities lawsuits, Congress enacted th e

9 Private Securities Litigation Reform Act ("PSLRA") in December of 1995 . The PSLRA created

10 heightened standards for pleading such lawsuits . 15 U.S.C. § 78u-4(b) . The PSLRA requires

11 that "the complaint shall specify each statement alleged to have been misleading, the reason o r

V 12 reasons why the statement is misleading, and, if an allegation regarding the statement o r

• w 13 omission is made on information and belief, the complaint shall state with particularity all facts

A N 14 on which that belief is formed ." 15 U.S.C. § 78u-4(b)(1)(B) . Furthermore, the PSLRA requires

15 that the plaintiff "state with particularity facts giving rise to a strong inference that the defendan t

16 acted with the required state of mind ." 15 U.S.C. § 78u-4(b)(2) . For forward looking

17 statements, the PSLRA requires that this statement "was made with actual knowledge by tha t

18 person that the statement was false or misleading ." 15 U.S.C. § 78u-5(c)(1)(B)(I) .

19 The heightened standard set by the PSLRA was intended to put an end to securities frau d

20 lawsuits that plead "fraud by hindsight ." In re Silicon Graphics Inc. Sec. Litig., 183 F .3d 970,

21 988 (9th Cir. 1999) . These standards require more than a mere poor fiscal quarter after an

22 optimistic prediction is made. "The PSLRA significantly altered pleading requirements in

23 private securities fraud litigation by requiring that a complaint plead with particularity bot h

24 falsity and scienter." In re Vantive Corp . Sec. Litig., 283 F.3d 1079, 1084 (9th Cir. 2002) (citing

25 Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir . 2001)). "Thus the complaint must allege that th e

26 defendant made false or misleading statements either intentionally or with deliberat e

27 recklessness or, if the challenged representation is a forward looking statement, with `actua l

28 knowledge . . . that the statement was false or misleading ."' Id. at 1085 (citing 15 U .S.C. § 78u-

5 Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 6 of 1 7

1 5(c)(1)(B)(i)) . Ms. Kuehbeck must support her allegations of fraud with specific references t o

2 facts that plead with particularity that Defendants made false or misleading statements and kne w

3 or were reckless in not knowing the falsity of the statements based on information available t o

4 Defendants at the time the statements were made .

5 A. False or Misleading Requirement

6 Ms. Kuehbeck alleges that Defendants made false or misleading statements regardin g

7 demand for their product to cover up their customer's inventory glut of Genesis ICs . The

8 offending statements were made in a press release and conference call on April 29, 2002 . Six

9 such statements or portions of larger statements have been identified in Ms . Kuehbeck's FAC as 10 false or misleading .

11 1 . "The leading brand name monitor and PC vendors have been th e first to receive panels ." (FAC ¶ 107.) V o 1 2

• w 13 Ms. Kuehbeck does not allege any facts indicating that leading brand name monitor an d

14 PC vendors were not the first to receive panels . Ms . Kuehbeck relies primarily on hindsigh t

15 statements made by Mr. Fisher indicating that an inventory build up occurred over the last fe w ,6e~.0 0x 16 quarters. (FAC ¶ 135 .) Ms. Kuehbeck also refers to a June 2002 report by Display Search, a ^v Y r 17 LCD research company, which states that the inventory build up occurred before Defendants ' 18 April 29, 2002 statement . (FAC ¶ 141 .)

19 These facts may sufficiently allege that leading vendors ultimately did not receiv e

20 enough panels; however, this does not make the statement that leading vendors were the first t o

21 receive panels false . Ms. Kuehbeck's FAC does not allege with particularity that this statement

22 was false or misleading when made . There are no details in the allegations that would suppor t

23 the finding that leading vendors, during the class period, were not the first to receive panels i n

24 the LCD market. The 2002 Display Search adds nothing to Ms . Kuehbeck's contention

25 regarding shipping to leading brand name monitor and PC vendors or that the statement wa s

26 false or misleading when made . Plaintiffs have failed to state with particularity the factual basi s 27 for the allegations .

6 Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 7 of 1 7

1 2. "[W]e are not seeing any shrinkage in our volumes due to panel supply constraints ." (FAC ¶ 107.) 2

3 To support the allegation that this statement is false or misleading, Ms . Kuehbeck point s

4 to prior quarters where at the time Genesis made their revenue forecast, they had alread y

5 received 75, to 80% of orders to achieve revenue estimates . On April 29, 2002, when thi s

6 statement was made, Genesis only had 30% of the orders to achieve the revenue forecast tha t

7 was made in the same conference and press release . Ms. Kuehbeck argues that this shows that

8 there was a shrinkage in volume .

9 The facts alleged do not explain with particularity why this disputed statement was fals e

10 or misleading when made . The comment regarding the 75 to 80% of orders being booke d

6 11 originated from a question asked to Mr . Fisher during the June 2002 conference call . The

V 12 question inquired about a possible quotation of having 80% of the quarters forecast booked .

• w 13 Mr. Fisher responded that this did not apply to the forecast made on April 29, 2002, and that thi s 0 A y 14 quotation is "probably relevant to quarters preceding that." (FAC ¶ 138.) This statement doe s r 15 not allege with particularity that in prior conference calls where revenue projections were mad e

16 that 80% of orders were booked at the time the projection . Rather, this statement appears to be 17 irrelevant as to a showing of falsity .

18 Ms. Kuehbeck also refers to a statement made by Mr . Fisher in the June 14, 2002

19 conference call to support her allegation that the shrinkage in volume statement was false o r

20 misleading and was made intentionally or with deliberate recklessness. Mr. Fisher stated, "As

21 you know, about two-thirds of our business is turns business . Normally we would expect to b e

22 able to book the rest of the quarter during the Compudex Show or during the last month of the

23 quarter." (FAC ¶ 137.) This statement does not support Ms . Kuehbeck's position . It indicates

24 that Genesis "normally" expects to satisfy their estimates later in this quarter through the

25 Compudex Show or in the last month of the quarter . The June 2002 statement does not indicat e

26 that at the time of this statement, there was a shrinkage in volume and, moreover, that Mr . Frisk

27 knew about the shrinkage and nevertheless made this false statement . The FAC does not plea d

28 with particularity either the falsity of the shrinkage in volume statement or the scienter of Mr .

7 Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 8 of 1 7

1 Frisk. As such, Ms. Kuehbeck has provided no particularized information demonstrating th e

2 falsity of Defendants' statement .

3 3. "We understand that some of the tier 2 and tier 3 monitor manufacturers have experienced difficulties in receiving sufficient 4 panel supply; and as a result have turned monitor controllers back t o some of our competitors . These transactions may have confused th e 5 controller reporting published by market analysts." (FAC ¶¶ 107 - 108 .) 6

7 Ms. Kuehbeck alleges that this statement was false or misleading because marke t

8 analysts were not confused, but correctly assessed the risk of controller inventory building in th e

9 channel. In support, Ms. Kuehbeck refers to the same hindsight statements made by Mr . Fisher

10 stating that there was an inventory build up during the April 2002 statements . (FAC ¶ 135 .)

6 11 Additionally, she refers to the June 2002 report by Display Search stating that an inventory buil d

V 12 up occurred before Defendants' April 2002 statement . (FAC 1141 .) For the same reasons

• w 13 mentioned above in connection with the first statement, these facts do not support th e A N 14 conclusion that this third statement was false or misleading .

15 Moreover, in Ms. Kuehbeck's FAC, she relies upon a report made by Display Search i n 8n*.a Z0 16 early April 2002 alluding to a panel supply constraint . However, in that same repo rt, Display P 17 Search indicated that they could not determine whether its estimates were accurate or whethe r

18 the chips were being used for other purposes . (FAC ¶ 103 .) Display Search's report itself

19 indicates that it is unclear whether their data was correct about a slowdown in panel shipment s

20 or, even if a panel supply constraint existed, or whether IC's were being used for other purposes .

21 This report supports the claim that analysts were confused as to the status of the IC demand .

22 Specifically, there are no alleged facts suggesting that any of Genesis' customers returned an y

23 controllers back to them or put Genesis or market analysts on notice of an inventory glut . The

24 facts provided by Ms . Kuehbeck do not show that this statement is false . Furthermore, the fact s

25 do not sufficiently allege that Mr . Frisk intentionally or with deliberate recklessness made thi s 26 statement to mislead investors . 27 // 28

8 Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 9 of 1 7

1 4. "As a result, we anticipate our revenues will mirror the growth of that market." (FAC ¶ 110 .) 2

3 In alleging that this statement is also false or misleading, Ms . Kuehbeck reiterates that

4 there was an inventory glut and therefore Defendants' revenues would not mirror the growth of

5 the market. Examining this statement in its entirety, Mr. Erdman stated: 6 For fiscal 2003, the majority of our revenues are expected to come from the flat-panel monitor market. As a result, we anticipate our revenues will 7 mirror the growth of that market. That growth is paced by the supply o f LCD panels. Current expectation by industry analysts are for there to be 8 modest growth in panel availability in the next few quarters with indications of more robust levels of supply growth in the second half o f 9 the fiscal year. Consequently, we anticipate a modest increase in revenues in the June quarter to about $60 million, and that revenues for the 200 3 10 fiscal year as a whole will grow to between $250 and $270 million, with growth accelerating in the second half of the year. 11

12 (FAC ¶ 110.) This statement as a whole warns about a pacing of the flat-panel monitor market

U 13 due to a constraint in the supply of LCD panels . 0 V A 14 Ms. Kuehbeck relies on the following facts to allege that this statement is misleading . a~ s 15 She relies on Mr. Fisher's June 14, 2002 conference call statements in which Mr . Fisher C~ 0 z 16 identified the existence of the inventory glut that he stated was "built up over the last fe s w 0 w 17 quarters." (FAC ¶ 135.) He further stated that Genesis normally would expect to book the rest C 18 of the quarter during the Compudex Show or in the last month of the quarter . (FAC ¶ 137 .) 19 Additionally, in being asked about a possible quotation of having 80% of the quarters forecast

20 booked, Mr . Fisher responded that this did not apply to the forecast made on April 29, 2002, and

21 that this quotation is "probably relevant to quarters preceding that." (FAC ¶ 138 .) A further , 22 fact alleged to support this claim is the June 2002 Display Search report reiterating Genesis'

23 comments that the actual decline in demand for Genesis' products had occurred befor e

24 Defendants' April 29, 2002 statements . (FAC ¶ 141 .) Ms. Kuehbeck refers to these facts to 25 allege that Genesis' revenue would not mirror the market because the build-up of inventory in

26 the channel had already reduced orders from Genesis customers .

27 In reading the statement in its entirety, the Court understands it to say that Genesis '

28 revenues will mirror the slower pace of the flat-panel monitor market . The facts alleged by Ms .

9 Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 10 of 1 7

1 Kuehbeck do not plead with particularity that this statement was false or misleading when it was

2 made. This statement does not attempt to mislead the public into believing that higher revenues

3 were anticipated. This statement indicates that the flat-panel monitor market will grow at a

4 modest pace due to panel constraints and that Defendants' revenues will mirror this growth and

5 also grow at the same modest pace of the flat-panel monitor market . Furthermore, Ms.

6 Kuehbeck does not allege any facts that indicate the market did not grow or shrink at the same 7 pace .

8 5. Mr. Frisk stated that he anticipated IC controller products and flat screen monitors "shipping in synch with one another." (FAC ¶ 111 .) 9

10 In alleging that this statement is false, Ms . Kuehbeck relies on the same facts mentione d

11 in statement four. Through these facts, Ms . Kuehbeck emphasizes that because there was an

U 12 inventory glut at the time the statement was made, shipments of Genesis controllers would not 13 w be in synch with shipment of flat screen monitors because customers would have to work J ..~ 0 14 through their inventories first.

15 Ms. Kuehbeck alleges that this statement was made by Mr . Frisk. However, she does

16 not cite where in the conference call the statement was made . The Court is unable to find this a~ o 17 statement in the transcript of the April 29, 2002 conference call . The statement on its own is

18 unclear as to what will be shipped in synch . The statement says that Mr . Frisk anticipates IC

19 controller products shipping in synch with flat screen monitors . The facts alleged do not plead

20 with particularity the falsity of this statement . It is unclear whether the ICs could have been

21 shipped in synch with the monitors once the monitors received a proper amount of panels . 22 6. "[I] n the foreseeable future we don't see any substantial change in our market share ." (FAC ¶ 113.) 23

24 In alleging this statement is false, Ms. Kuehbeck relies on the same facts alleged in 25 statements four and five and also relies on Genesis July 25, 2002 press release where they

26 reported a lower revenue result. (FAC ¶148.) The facts alleged indicate that there was an

27 inventory glut that existed at the time the statement was made and that Genesis ultimately

28 reported a lower revenue result than projected in the April 29, 2002 statement . However, th e

10 Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 11 of 1 7

1 facts do not allege anything about Genesis losing any market share due to the inventory glut . It

2 may be true that the inventory glut caused Genesis to lose IC sales, but the facts alleged do no t

3 plead with particularity why the industry wide inventory glut would lead to Genesis alone losing 4 market share.

5 The facts as presented in the FAC are not convincing and do not support a fraud clai m

6 under the PSLRA . Ms . Kuehbeck relies primarily on hindsight statements made by Mr . Frisk

7 and Mr. Erdman, without a single supporting contemporaneous document or internal statement s

8 not made public. The Display Search report proffered to allege the existence of an inventor y

9 glut itself only speculates about a shortage in panel supply and was unclear as to whether thi s

10 possible shortage correlated to less IC orders . Furthermore, the statements by Mr. Donegan

6 11 regarding his communications with Genesis customers are expected when a new CEO takes

12 over a company troubled by a discovered customer inventory buildup ; this does not indicate that

• w 13 the prior CEO, Mr . Fisher, had similar close communications with these customers . The

A N 14 allegation that Defendants conspired to keep Genesis' stock price up to have more leverage in r 15 merger negotiations is also speculative ; there are no facts alleged to suppo rt this conclusion. cl t 16 8^o zY B. Revenue Projection 17 The FAC, not being very clear as to which statements are at issue, does refer to a n

18 additional statement regarding a revenue projection made by Defendants during the April 29 ,

19 2002 investor conference call . It is unclear whether this statement is challenged as to its falsit y

20 or misleading intent. Nevertheless, Genesis addresses this revenue projection in their motion t o 21 dismiss.

22 At this time, the Court does not address this statement because the FAC does not seem to

23 allege that the revenue projection was meant to mislead . This conclusion is supported by Ms .

24 Kuehbeck's opposition to the motion to dismiss, which does clearly list the statements that Ms .

25 Kuehbeck alleges are false and misleading . The revenue projection is not one of the liste d

26 statements. (See Opp. Br. at 14-15). 27

11 Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 12 of 17

1 C. Scienter Requiremen t

2 Defendants also assert that Ms . Kuehbeck has failed to adequately plead scienter under

3 the PSLRA . The PSLRA requires a plaintiff to allege particular facts giving rise to a stron g

4 inference of the required state of mind . 15 U.S.C. § 78u-4(b)(2) . The required state of mind is

5 that "the defendant made false or misleading statements either intentionally or with deliberate

6 recklessness." In re Vantive Corp. Sec. Litig., 283 F.3d at 1085 . Where the pleadings are not

7 sufficiently particularized or where, even taken as a whole, they do not raise a strong inference

8 of scienter, dismissal pursuant to Rule 12(b)(6) is proper . Lipton v. Pathogenesis Corp., 284 9 F.3d 1027, 1038 (9th Cir. 2002).

10 To meet her burden, Ms . Kuehbeck relies on alleged statements, motives an d

6 11 relationships pertaining to Defendants . Ms . Kuehbeck initially refers to statements made by

12 Defendants to allege actual knowledge by the Defendants . Ms. Kuehbeck mentions Defendants' • w 13 statements about "tier one" manufacturers receiving panels, Genesis not seeing any "shrinkage"

A y 14 in its volumes, and shipping in "synch" with the panels . In addition, Ms . Kuehbeck refers to

15 Mr. Donegan's statement about watching the channel like a hawk. r rA Z 16 These statements, as they are alleged, do not raise a strong inference that the above

w 17 discussed six statements alleged to be false or misleading were made intentionally or with

18 deliberate recklessness . The FAC does not support a conclusion that Defendants were aware or

19 were reckless in not being aware of an inventory glut and nevertheless made these statements .

20 The facts do not establish that Defendants knew about the inventory glut and intentionally o r

21 with deliberate recklessness made these statements to cover up the inventory glut . Ms.

22 Kuehbeck's reliance on hindsight statements and lack of documentary evidence, such as internal

23 documents, or contemporaneous statement not made public further support a finding of n o

24 knowledge or deliberate recklessness on the part of Defendants.

25 Ms. Kuehbeck further alleges that Defendants were motivated to commit fraud t o

26 maintain a higher stock price to facilitate ongoing merger negotiations and for personal stock 27 sales. First, the Ninth Circuit has clarified that under the PSLRA pleading standards, a court can

28 no longer aver intent in terms of motive and opportunity . See In re Silicon Graphics Sec. Litig.,

12 Case 3:02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 13 of 1 7

1 183 F .3d at 978-980. Second, the merger negotiations were on-going for a long period of time

2 and moreover, none of the Defendants sold any stocks during the class period . Although

3 unusual or suspicious stock sales may constitute circumstantial evidence of scienter, the Court

4 also considers the timing of the sales and prior trading history . See Id. at 985-86. The facts

5 alleged are not sufficiently particularized to allege that these sales were unusual or suspicious .

6 In arguing that Defendants had knowledge of an inventory glut, Ms . Kuehbeck also

7 alleges that Defendants had close relationships with a number of their customers and therefore

8 knew or should have known about the glut. In support of this allegation, Ms. Kuehbeck refers

9 to conference calls where Mr . Donegan emphasized Genesis' close relationship with its

10 customers (FAC ¶ 53), and how Genesis was watching the channel like a hawk (FAC ¶ 54). Ms.

11 Kuehbeck concludes that because Genesis had a limited number of customers , Defendants knew

U w 12 or were reckless in not knowing that their venders were not receiving panels and that an 13 inventory glut existed. (FAC IT 39-52.) o A Q 14 These facts are insufficient to conclude that Defendants had knowledge of the inventor y 15 glut. Ms. Kuehbeck must allege facts that demonstrate more than a close working relationship

Z 16 between Defendants and their customers . Ms . Kuehbeck must allege particular facts giving rise a~ o w 17 to a strong inference of the required state of mind . Mr. Donegan's statements support the fact

18 that upon Mr . Donegan becoming CEO in June 2002, Genesis touched base with all of its

19 customers and began watching the inventory channel like a hawk . This does not translate to the

20 same conditions necessarily existing prior to Mr . Donegan taking over . This statement does not

21 amount to an admission . Rather it is an acknowledgment that Mr. Donegan, who was taking

22 over after the publication of a major inventory glut in the supply chain, emphasized close

23 relations with Genesis' customers and monitored the status of inventory very closely.

24 Plaintiff's allegations, taken as a whole, do not raise a strong inference that Defendant s

25 had the required state of mind when making the six statements listed above . The facts alleged in 26 the FAC indicate that an inventory glut did exist at the time the April 29, 2002 statements were

27 made ; however, the facts do not create a strong inference that Defendants knew of the glut, its

28 effect going forward and further that they had the intent to mislead or spread false informatio n

13 Case 3 :02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 14 of 1 7

1 intentionally or with deliberate recklessness . Therefore , Ms. Kuehbeck's FAC fails to satisfy

2 the scienter pleading standards of the PSLRA.

3 Ms. Kuehbeck's FAC, considered in its entirety, does not satisfy the PSLRA's pleadin g

4 requirements and therefore must be dismissed . Ms . Kuehbeck

5 is required to state facts giving rise to a strong inference of deliberate recklessness or intent . It is not enough for her to state facts giving rise 6 to a mere speculative inference of deliberate recklessness, or even a reasonable inference of deliberate recklessness . . . . [Ms. Kuehbeck] 7 must plead in great detail facts demonstrating, at a minimum, a degree of recklessness that strongly suggests the required degree of intent . 8

9 In re Silicon Graphics Inc. Sec. Litig., 183 F.3d at 985. The current FAC only raises mere

10 speculative inference, not a strong inference of deliberate recklessness or intent . The statements

11 quoted in the FAC appear to be an optimistic view of the LCD market, particularly in the

U 12 second-half of the 2002, without an intent to mislead people . The statements caution the public !tot u ) 13 about the upcoming quarter's revenue in their prediction of an incremental increase in revenue o A Q 14 from last quarter and their warning about tight panel supply . Yet, the statements remain 15 optimistic about a rebound in the second half of the year . "In the absence of greater particularity z 16 and more incriminating facts, we have no way of distinguishing [Ms. Kuehbeck's] allegations

17 from the countless `fishing expeditions' which the PSLRA was designed to deter ." Id. at 988; 18 citing H.R. CONF . REP. 104-369, at 37 .

19 D. Forward-Looking Statement s

20 The Reform Act's safe harbor provision provides that one may not be held liable for a 21 securities fraud claim based on an untrue statement or omission of material fact with respect to

22 any forward-looking statement to the extent that the statement is "identified as a forward-

23 looking statement, and is accompanied by meaningful cautionary statements identifying

24 important factors that could cause actual results to differ materially from those in the forward-

25 looking statement." 15 U.S.C. § 78u-5(c)(1)(A)(I) . A person may be held liable, however, if

26 the forward-looking statement is made with "actual knowledge . . . that the statement was false

27 or misleading ." Id. at § 78u-5(c)(1)(B) ; No. 84 Employer-Teamster Joint Council Pension Trust

28 Fund v. American West Holding Corp., 320 F.3d 920, 936 (9th Cir . 2003).

14 Case 3:02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 15 of 1 7

1 Defendants contend that several of the statements alleged to be false or misleading ar e

2 forward-looking statements and are therefore further protected . Because the Court has already

3 decided the statements fail to satisfy the heightened pleading standards in establishing falsit y

4 and scienter, the Court will not address whether the statements are forwarding looking at thi s 5 point.

6 E. Section 20(a) Liability

7 Section 20(a) of the Securities and Exchange Act provides derivative liability for thos e

8 who control others found to be primarily liable under the Act . In re Ramp Networks, Inc. Sec.

9 Litig.,201 F .Supp. 2d 1051, 1063 (N .D. Cal. 2002). Where a plaintiff asserts a section 20(a)

10 claim based on an underlying violation of section 10(b), the pleading requirements for bot h

11 violations are the same . Id. Here, Ms . Kuehbeck asserts that individual defendants Amno n

V 12 Fisher, Eric Erdman, and Anders Frisk are liable under this section because of an underlyin g w • w 13 violation of section l Ob . Because Ms. Kuehbeck has failed to adequately plead the underlyin g

14 1Ob-5 violation, the section 20(a) claim must be dismissed as well . See, e.g., Employer-

15 Teamster Joint Counsel Pension Trust v. America West Holding Corp., 320 F .3d 920, 945 c~ z 16 (2003) . ^~ Y 17 III. Leave to Amend

18 Motions to dismiss are viewed with disfavor and are rarely granted . A complaint will not

19 be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiff ca n

20 prove no set of facts in support of her claim which would entitle her to relief . Conley v. Gibson,

21 355 U.S . 41, 45-46 (1957) . The complaint is construed in the light most favorable to the non -

22 moving party and all material allegations in the complaint are taken to be true . Sanders v.

23 Kennedy, 794 F.2d 478, 481 (9th Cir. 1986) .

24 Specific to private securities lawsuits, a court may dismiss a plaintiff's claim for failure to

25 meet the pleading requirements of the PSLRA. "In any private action . . . , the court shall, on 26

27 //

28 //

15 Case 3:02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 16 of 1 7

1 motion of any defendant, dismiss the complaint if the requirements of paragraph (1)1 and (2)2

2 are not met." 15 U.S.C . § 78i-4(b)(3)(A) . However, Federal Rule of Civil Procedure 15(a)

3 states that "`leave shall be freely given when justice so requires .' This policy is `to be applied

4 with extreme liberality."' Eminence Capital, LLC v. Aspeon, Inc., 316 F .3d 1048, 1051 (9th

5 Cir. 2003) (citing Owens v. Kaiser Found. Health Plan, Inc ., 244 F .3d 708, 712 (9th Cir .

6 2001)). "Dismissal with prejudice and without leave to amend is not appropriate unless it is

7 clear on de novo review that the complaint could not be saved by amendment ." Id. (citing

8 Chang v. Chen, 80 F.3d 1293, 1296 (9th Cir. 1996)). Because the standards in the PSLRA are

9 high," [a] dherence to these principles is especially important in the context of the PSLRA ." Id.

10 Ms. Kuehbeck's current FAC is speculative and insufficient to satisfy the PSLRA' s

11 pleading standards . However, in accord with the law favoring amendments and in

12 acknowledgment of the PSLRA's high standards, Ms . Kuehbeck will be permitted to amend her cJ U 13 complaint. It is critical to make allegations that go beyond mere speculation and that provide 0 U 14 A factual support for the falsity of each statement and the appropriate scienter of the proponent of E 15 the statement. c~ 0 z 16 // a~ 0 w 17 // C 18 //

19 //

20 //

21 //

23 ' Paragraph ( 1) states that "complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation 24 regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed ." 15 U.S.C. § 78u-4(b)(1)(B). 25 'Paragraph (2) states that the PSLRA requites that the plaintiff "state with 26 particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). The required state of mind for securities fraud 27 claims is "that the defendant made false or misleading statements either intentionally or with deliberate recklessness or, if the challenged representation is a forward looking statement, 28 with `actual knowledge . . . that the statement was false or misleading."' In re Vantive Corp. Sec. Litig., 283 F.3d at 1085 (citing 15 U. S.C. § 78u-5 (c)(1)(B)(i)).

16 Case 3:02-cv-05344-JSW Document 43 Filed 03/29/2004 Page 17 of 1 7

1 CONCLUSION

2 In light of the heightened pleading standards of the PSLRA and the requirements of

3 Federal Rule of Civil Procedure 12(b)(6), the Court GRANTS Defendants' motion to dismiss

4 without prejudice . Plaintiff may file an amended complaint remedying the pleading defects by

5 May 12, 2004, if she so chooses . Defendants' reply would be due 30 days thereafter .

6 IT IS SO ORDERED. 7

8 Dated : March 29, 2004 /s/ Jeffrey S. White JEFFREY S . WHITE 9 UNITED STATES DISTRICT JUDGE 10

U a 13

E 15 c~ z z 16 ^Q ~ a~ s 17 c 18

17 EXHIBIT 19 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 1 of 43

I u 3

5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7

8 In re TIBCO SOFTWARE, INC . Master File No. C 05-2146 SBA SECURITIES LITIGATION 9 CLASS ACTION 10 ORDER 11 [Docket Nos. 39, 401 U w 1 2 This Document Relates To: All Actions 13

14 LJ N_ This matter comes before the Court on Defendants' Motion to Dismiss Consolidated Amended

G 15 Complaint and Request for Judicial Notice . Having read and considered the arguments presented by o Z 16 the parties in the papers submitted to the Court, the Court finds this matter appropriate for resolution a~ o 1 7 without a hearing . The Court hereby GRANTS the Motion to Dismiss and GRANTS the Request for

18 Judicial Notice . 19 BACKGROUND

20 A. Background Regarding the Parties

21 1 . Tibco Software, Inc .

22 Defendant Tibco Software, Inc . (hereinafter "TIBCO" or the "Company") is a Delaware

23 corporation with its principal place of business in Palo Alto, California . Consolidated Amended Compl .

24 ("CAC") at ¶ 3 . TIBCO is engaged in the development and marketing of business services software

25 products that enable customers to collect, analyze, and distribute "real-time"' information about and 26

27 'The Company uses the term "real-time business" to describe doing business in such a way that 28 organizations can use current information to execute their critical business processes and make smarter decisions . Thompson Decl, at Ex. I (FY05 Form 10-K) . Case 4;05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 2 of 4 3

1 within an organization . Id. TIBCO also offers integration solutions products designed specifically to

2 assist with business consolidations following acquisitions, mergers, or similar restructurings . Id. The

3 Company's products are sold individually or as product "suites" and "complete solutions ."

4 TIBCO is a publicly traded company . As of the end of fiscal year 2005, it had approximatel y

5 211,136,985 shares of common stock outstanding . Thompson Decl . at Ex. I (FY05 Form 10 -K) . The

6 Company's financial year is not concurrent with the calendar year. Id. Instead, it ends on the. last day

7 of November of each calendar year and commences on the first day of December for that calendar year .

8 Id. For example, its 2004 fiscal year end was November 30, 2004 .

9 The Company has approximately 1,500 employees in offices located throughout Europe, Africa, 10 the Pacific Rim, and the Americas . Id.

11 2. The Individual Defendants

V o 12 At all times relevant to this action, Defendant Vivek Y. Ranadive ("Ranadive") was the

V R 13 President, Chief Executive Officer and Chairman of the Board of Directors of the Company . Id. at ¶ o 14 14. Defendant Christopher G . O'Meara ("O'Meara") was, during the relevant period, the Executive Vice E 15 President and Chief Financial Officer ("CFO") of the Company . Id at ¶ 15 . O'Meara stepped down c . ro Z 16 ~v L from the CFO position on October 11, 2005 . Thompson Decl . at Ex. D. 17 Defendant Sydney Carey ("Carey") was, during the relevant period, the Vice President,

18 Corporate Controller and Chief Accounting Officer of the Company . CAC at ¶ 16 . From March 2002

19 to September 2003, defendant Rajesh U . Mashruwala ("Mashruwala") was the Executive Vice President,

20 Office of the CEO . Id. at ¶ 17. Thereafter, Mashruwala served as the Company's Executive Vice

21 President, Chief Operating Officer .' Id.

22 3. Plaintiffs 23 Lead Plaintiffs ("Plaintiffs") Ralph Felton and Sathya Rajasubramanian are common stock 24 I holders who purchased the common stock of TIBCO during the relevant time period . Id. at ¶ 12. 25

26 ZRandavive, O'Meara, Carey, and Mashruwala are collectively referred to herein as the 27 "Individual Defendants."

28 2 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 3 of 4 3

1 Plaintiffs purport to represent a class of purchasers of TIBCO stock between September 21, 2004 and

2 March 1, 2005 . Id. at ¶ 1, 12.

3 B. Background Regarding the Confidential Witnesse s

4 The allegations contained in the Consolidated Amended Complaint are based, in part, on certai n

5 information obtained from the following Confidential Witnesses :

6 (a) Confidential Witness No. 1 . Confidential Witness No . I ("CW V) was a Managing Director of Channel Sales at TIBCO in Munich, Germany during most of the class 7 period until early 2005. CAC at ¶ 25(a).

8 (b) Confidential Witness No. 2 . Confidential Witness No. 2 ("CW2") was employed as T1BCO General Manager within the OEM sales channel in Austin, . Texas from 2003 9 through 2004 . Id. at ¶ 25(b).

10 (c) Confidential Witness No. 3. Confidential Witness No. 3 ("CW3") was a National Account Director at TIBCO in New York. He was employed by Staffware from 2001 11 to June 2004 and then by TIBCO from June 2004 through early 2005 . Id. at ¶ 25(c).

O R Uo 12 (d) Confidential Witness No. 4. Confidential Witness No . 4 ("CW4") first worked as a low Finance Director for the Staffware U .K. subsidiary from 1998 to June 2004 . After June 13 2004, he worked as a Finance Director for TIBCO until mid-2005 . Part of CW4's o responsibilities included the compilation of balance sheets, profit and loss statements, 14 and tracking assets and liabilities . CW4 was also responsible for reviewing the financials and interpreting the application of accounting rules before submitting the 15 compiled financials to Staffware corporate . Id. at ¶ 25(d) . - z 16 (e) Confidential Witness No . 5 . Confidential Witness No . 5 ("CW5") was employe d 0 as the Senior Manager of IT Operations for TIBCO for over five years until mid-2005 . U. 17 Id. at ¶ 25(e).

18 (f) Confidential Witness No. 6. Confidential Witness No. 6 ("CW6") was employed by TIBCO as a Pre- Sales Consultant from early 2005 through the fall of 2005 . CW6 was 19 responsible for supporting TIBCO sales representatives by explaining TIBCO's products and their capabilities to prospective customers. According to CW6, TIBCO had a 20 corporate training group at the Company 's headquarters where CW6 was educated about TIBCO products and sales pitches . Id. at ¶ 25(f). 21

22 C . The Factual Allegation s

23 On April 22, 2004, TIBCO announced that it would acquire Staffware, a European compan y

24 located in the United Kingdom and provider of business process management ("BPM") solutions. Id.

25 at ¶¶ 32-33 ; Thompson Decl . at Ex. E (April 23, 2004 Form 8-K) . The Company stated that th e

26 acquisition would allow TIBCO to broaden its solutions for automating and integrating busines s 27

28 3 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 4 of 4 3

1 processes, and to increase its distribution capabilities through cross-selling of products into new

2 geographies and an expanded customer base . Thompson Decl . at Ex. E. The Company cautioned 3 investors, however, in the following manner regarding its expectations pertaining to the acquisition of

4 Staffware:

5 This release contains forward-looking statements within the meaning of the "safe harbour" provisions of the United States securities laws . All statements 6 other than statements of historical fact are statements that could be deeme d forward-looking statements-including, without limitation, statements regarding 7 (i) the ability of the acquisition to broaden TIBCO's solutions for automating and integrating business processes, (ii) the ability of th e 8 combined offering of the TIBCO platform and the Staffware's technology to provide an unparalleled solution to today's marketplace , (iii) the ability 9 of the acquisition to create a larger software technology leader, (iv) the abilit y of TIBCO to deepen its industry expertise in finance, insurance, telecom and 10 government sectors as a result of the acquisition, (v) the ability of the acquisition to increase TIBCO' s distribution capabilities solutions , (vi) the 11 continued development and support for Staffware's iProcess product and TIBCO's BusinessWorks Workflow products, (vii) the optimisation of 12 Staffware's iProcess product to run with key TIBCO products, (viii) TIBCO's plan to continue to market, develop and maintain existing BPM and U 13 business integration products, (ix) TIBCO' s plan to deliver a fully 0 U interoperable, unified suite in mid to late 2005 and (x) TIBCO's plan t o 14 provide an upgrade or migration path to current Staffware customers and the E actual results could differ materially from what is envisaged by such s 15 forward-looking statements if TIBCO is unable to successfully integrate CC 0 the Staffware's business after the acquisition , if TIBCO is unable to z s 16 successfully develop , market and sell the Staffware business process

O management and workflow solutions or if the market for busines s w 17 integration solutions does develop and grow as is now expected . In addition, the acquisition may not occur or may not occur in the time currently 18 contemplated if the shareholders of Staffware do not accept the offer for thei r shares to TIBCO on the terms offered by TIBCO . TIBCO assumes no 19 obligation to update the forward -looking statements included in this release . 20

21 Thompson Decl . at Ex. E (emphasis added) ; see also id at Ex. F .

22 On June 7, 2004, during the third fiscal quarter 2004 ("Q3 04"), TIBCO closed the acquisition

23 of Staffware. Id. at IT 32-33 . The total cost of the Staffware acquisition was approximately $237 .1

24 million, comprised of $139 .7 million in cash and the issuance of 10.9 million shares of TIBCO common

25 stock, valued at $92.3 million. Id. TIBCO's acquisition of Staffware was the Company's first

26 acquisition since 2002 . Id. at ¶ 33 . 27

28 4 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 5 of 43

In a Company release dated April 21, 2004, Ranadive stated : 2 We believe business processes are rapidly becoming the most valuable corporate asset. This combination brings two best-in-class technologies together to more completely deliver value to customers investing in BPM solutions. The combination with Staffware will provide TIBCO with immediate 4 additional reach into new and emerging markets including retail banking, insurance, public sector and telecommunications, as well as increased geographic presence within Europe and Asia Pacific . We believe that the combined companies can accelerate market momentum relative to market peers, and set a new standard for what is needed to effectively compete in the BPM market. 7 Id. at ¶ 35. 8 In the Form l 0-Q for the second fiscal quarter of 2004 ("Q2 04"), filed on July 7, 2004, TIBCO 9 warned that a number of factors relating to the Software acquisition could affect future operating results : 10 Any failure to successfully integrate Staffware's business operations could 11 adversely affect our financial results.

12 We intend to complete our acquisition of Staffware in the third quarter R of fiscal 2004. We intend to integrate certain of our operations with those of u U 13 Staffware to reduce the expenses of the combined company . If we are unable a to integrate our operations with Staffware's operations in a timely manner, we 14 may be unable to achieve the anticipated synergies. The challenges of integrating Staffware include, among other things : d 15 • inconsistencies in standards, controls, procedures and policies, z 16 and compensation structures between TIBCO and Staffware ; 0C 17 • potential unknown liabilities associated with the acquired business and technology; 18 • demonstrating to our customers that the acquisition will not 19 result in adverse changes in product offerings, customer service standards or business focus ; 20 • coordinating and consolidating ongoing and future research and 21 development efforts;

22 • unanticipated delays in or expenses related to the integration of operations ; 23 • retaining and integrating key employees, as necessary, including 24 members of Staffware's sales force ;

25 • conducting adequate training of employees and modifying operating control standards in areas specific to U .S. 26 corporations such as U .S . GAAP and requirements under the Sarbanes-Oxley Act of 2002 and the rules and regulations 27

28 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 6 of 4 3

1 promulgated thereunder;

2 • costs and delays in implementing common systems and procedures, including financial accounting systems and 3 customer information systems ;

4 • consolidating corporate and administrative infrastructure, particularly in light of Staffware's decentralized international 5 corporate structure ;

6 • identifying and eliminating redundant and underperforming operations and assets ; 7 • using capital assets efficiently to develop the business of the 8 combined company;

9 • minimizing the diversion of management's attention from ongoing business concerns ; 10 • fluctuations in currency exchange rates; 11 • possible tax costs or inefficiencies associated with integrating 12 the operations of the combined company ; and

•~ U 13 • international rules and regulations that may limit or complicate o restructuring plans. Ac 14 15 Thompson Decl . at Ex. G (Q2 04 Form 10-Q) (emphasis in original) . z 16 On September 21, 2004, TIBCO published a release in PR Newswire that announced b 17 consensus-beating financial results for the fiscal third quarter of 2004, the period ending August 29,

18 2004 ("Q3 04"), as well as the adoption of a $50 million stock repurchase program . CAC at ¶ 38 . For

19 Q3 04, TIBCO reported total revenues of $105 .9 million, and net income of $8 .6 million or $0.04 per

20 share, up from $2 .7 million, which was two cents above the analysts' consensus earnings estimates fo r

21 the quarter. Id. at ¶ 38 . The press release also stated in part :

22 TIBCO Software Reports Third Quarter Financial Results ; Announces Stock Repurchase Program 23 "Increasingly, companies are turning to TIBCO to obtain value from 24 their existing assets, gain operational efficiencies and improve customer loyalty," said Vivek Ranadive, Chairman and CEO of TIBCO Software . "Our 25 third quarter performance reflects these trends and the commitment and contributions of both the TIBCO and Staffware organizations ." 26

28 6 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 7 of 4 3

Stock Repurchase Program

TIBCO's Board of Directors has approved a two-year stock repurchase program pursuant to which TIBCO may repurchase up to $50 million of its 3 outstanding common stock from time to time on the open market or through privately negotiated transactions . 4

5 Id. at ¶ 3 8 .

6 Following the publication of TIBCO's Q3 04 release, defendants hosted a conference call fo r

7 analysts and investors during which Ranadive stated, in part, the following :

VIVEK RANADIVE : In summary, I want to leave you with three points . First, we are at the tipping point in the integration market, where the technology has 9 received mainstream acceptance, and TIBCO has emerged as the clear winner . Second, we are better positioned today than at any time in our history. And 10 third, while there is always room for improvement, I believe that we are executing well across all segments of our business . 11

12 0 VIVEK RANADIVE : Well, maybe people will start believing us that we are at the tipping point of this business right now, and our franchise is very strong . 44 13 w And we are executing well ; Chris Larsen is doing a great job, and we have got C a good pipeline , and we feel good about where things are . 14

C 15 s Id. at ¶ 39. GC 0 z 16 Additionally, during the same call, the following exchange occurred : 0 17 TIM KLASELL, ANALYST, THOMAS WEISEL PARTNERS : I wonder if you can give us a little bit of color on how Staffware did relative to plan, 18 particularly in the license line .

19 VIVEK RANADIVE : We moved very quickly to offer a common storefront, and so we blended the sales quickly after the deal closed . And we had 20 significant success with that, so we had a common offering to our customers . . . we were offering essentially a blended product . . . . 21 CHRIS O'MEARA : [I] think we are pleased with the performance of both -- of 22 the TIBCO and Staffware organizations . . . . I think what I would leave people with is the fact that both organizations did a really great job, in terms of staying 23 focused and closing opportunities .

24 TIM KLASELL : And then I'll sort of take a derivative off that . Asia did particularly well; Europe was strong . Did you get leverage from the Staffware 25 sales forces in those territories with the TIBCO products ?

26 VIVEK RANADIVE : Not so much in Asia, but more in Europe . In Europe we absolutely did. 27

28 7 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 8 of 4 3

2 KASH RANGAN, ANALYST, WACHOVIA SECURITIES : Perhaps if you could give us an update on the integration with Staffware , both from a product 3 perspective and sales perspective, maybe touch upon when you expect to get leverage in the product acquisitions here locally in the US, following what 4 seems to be a good start in the UK ?

5 VIVEK RANADIVE : We integrated at kind of a storefront level in Q3 and Q4 . And then, next year we will have even more tight integration, in terms of sales 6 management and all of that . And we are very pleased with the way that it has gone, and we are very pleased with -- from all fronts , the way the customers 7 have reacted . We have several wins where it was really a joint product that allowed us to have not only the win but the type of pricing that we ended up 8 with . So that has all gone be tter than we had expected, and we are very happy with it. 9

1 0 Id. at ¶ 40.

11 On September 22, 2004, shares of TIBCO stock traded at $8 .27 per share, up 10% from the prior

12 day's close of $7 .51 per share, on a volume of over 14.23 million shares traded . Id. u A 13 Between September 24, 2004 and October 1, 2004, Mashruwala sold 30,000 shares of TIBCO y, C ,y u 14 I stock, for combined proceeds of $257,560. Id. at ¶ 88. a, e 15 On or about October 13, 2004, the Company filed with the SEC its Form 10-Q, reporting it s w o 16 financial results for Q3 04 . Id. at ¶ 42. The Form 10-Q was signed by defendants O'Meara, as as : 1 7 Executive Vice President, Finance and Chief Financial Officer, and Carey, as Corporate Controller and

18 Chief Accounting Officer. Id. The Company's Q3 04 Form 10-Q described the Staffware acquisition

19 in part, as follows :

20 In June 2004, we completed our acquisition of Staffware plc ("Staffware"), a provider of Business Process Management ("BPM") solutions that enable 21 business to automate, refine and manage their processes . The addition of Staffware's BPM solution enables us to offer our combined customer base a 22 more robust and expanded real-time business integration solution. The purchase price for Staffware exceeded the fair value of Staffware's net tangible and 23 intangible assets acquired ; as a result, we have recorded goodwill in connection with this transaction . . . . 24

25 Id. at 42. 26 In the Q3 04 Form 10-Q, the Company also described its system of internal financial , 27

28 8 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 9 of 4 3

operational, and disclosure controls as follows :

2 ITEM 4. CONTROLS AND PROCEDURE S

3 Evaluation of disclosure controls and procedures . We maintain 'disclosure controls and procedures,' as such term is defined in Rule 13a-15(e) 4 under the Securities Exchange Act of 1934 (the 'Exchange Act'), that are designed to ensure that information required to be disclosed by us in reports 5 that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and 6 Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief 7 Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure . . . .

Based on their evaluation as of the end of the period covered by this 9 Quarterly Report on Form l0-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, 10 our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made 11 known to them by others within those entities, particularly during the period in I which this Quarterly Report on Form I O-Q was being prepared . M 12 C,o 13 Id. at ¶ 43 . 0 rA U 14 g In the Form 10-Q, the Company also cautioned investors of the challenges it faced in integratin g a~ E 15 Staffware and the potential for difficulties that could adversely affect future financial results . Thompson t0 z 16 Decl. at Ex. I (Q3 04 Form 10-Q). a~ 0 w w 17 C Defendants Ranadive and O'Meara certified the Q3 04 Form I0-Q as accurate and complete . 18 CAC at ¶ 44 . Defendants Ranadive and O'Meara also certified, pursuant to 18 U .S .C. § 1350, as

19 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Q3 04 Form 10-Q fully

20 complied with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

21 that the information in the Form 10-Q presented, in all material respects, the financial condition and

22 results of operations of the Company . Id. at ¶ 45. 23 On October 12, 2004, the Company published a press release announcing the $3 .5 million 24 acquisition of General Interface . Id. at ¶ 46 . 25 Between October 21, 2004 and November 3, 2004, Mashruwala sold 45 ,000 shares of TIBCO 26 stock, for combined proceeds of $563,214. Id. at ¶ 88 . 27

28 9 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 10 of 4 3

On November 22, 2004, Bear Stearns raised the price target on TIBCO . Id. at ¶ 48 . On

2 December 13, 2004, Jefferies & Co. ("Jefferies") also raised its rating on TIBCO shares and issued a

3 "Buy" rating. Id. at ¶ 49. Following the Jefferies upgrade , TIBCO's stock rose from $11 .15 per share 4 to approximately $11 .90 per share. Id. at ¶ 50.

5 On December 22, 2004, TIBCO published a release announcing "record" results for the fourth

6 fiscal quarter of 2004 ("Q4 04") . The release stated, in pa rt:

7 TIBCO Software Reports Record Fourth Quarter and Annual Financial Results PALO ALTO, Calif., December 22, 2004 - TIBCO Software Inc. (Nasdaq:TIBX), a leading enabler of real-time business and the world's largest independent business integration software company, today announced results 9 for its fourth fiscal quarter and year ended November 30, 2004. Total revenues for the fourth quarter were $125.7 million . License revenues for the fourth 10 quarter were $70.6 million. Fiscal year 2004 revenues were $3 87 .2 million . Net income for the quarter calculated in accordance with accounting principles 11 generally accepted in the United States was $18 . 2 million or $.08 per share on a fully diluted basis. E 12

U 13

U "During 2004, we capitalized on the beginning of a secular growth 14 opportunity in the Integration market, increasing our market share of those e segments in which we offer products and on the hard work and dedication of 15 the people who work at TIBCO," said Vivek Ranadive, Chairman and CEO of e 0 r.~+ 0 TIBCO Software. "The growth we are experiencing is further validation that s 16 our integration platform has gone from a 'nice to have' to a 'must have' for v 0 companies operating in the ever more competitive global marketplace. " 17

18 Id. at ¶ 51 .

19 Also on December 22, 2004, the Company hosted a conference call for analysts and investor s 20 during which the following was said :

21 With respect to Q4, we reported another solid quarter with total revenues growing 19 percent sequentially and 72 percent year-over -year to 125 . 7 million 22

24 [W]e continued our track record of redefining the notion of integration by significantly expanding our solution range and adjustable market to new 25 products such as business events released in Q4, and through our merger with Staffware, we've solidified our position as the leader in business process 26 management and further increased our market footprint worldwide. We believe all of these events give us significant momentum as we head into 2005 an d 27

28 10 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 11 of 4 3

beyond .

We are in a very good position to capitalize on the secular growth opportunity ahead of us for the rest of this decade . This is what has me so very excited 4 about TIBCO's growth potential .

[W]e are . . . better positioned today than any time in our history .

6 Id. at ¶ 52. 7 When asked about the integration of Staffware, the following exchange took place : 8 JOHN DIFUCCI, ANALYST, BEAR STEARNS : Yes, thanks. And 9 congratulations, guys . This looks -- this looks pretty good . Looks better than pretty good. Quickly, a couple.1 guess, on some of your newer products just - 10 on -- just want to understand how they're developing . One, Staffware, how the cross-selling's doing. Is it -- it's still early, but are you having any traction 11 trying to cross-sell into your current customer base or traditional customer base with the Staffware products? Ct 12 Ct VTVEK RANADIVE : Yes, John, we fully integrated Staffware into -- into the v 13 product set and into our sales organization . So we actually had good success ri with cross-selling . . . . So we're very, very excited about both opportunities -- 14 the cross-selling of Staffware, as well as business events.

E 15 0 UZ 16 DINO DIANA [ANALYST, UBS] : Okay . And just lastly , in terms of Staffware C renewal rates , when should we start to see them really kicking in, in terms of L. 17 getting deferred revenue back?

18 CHRIS O'MEARA : I think you'll see that -- they, historically, had business cycles that led to a lot of license deals closing in the June and December time 19 frame. So I think you'll see a lot of renewal activity in Q I -- December, January time frame. They have their underlying license revenue weighted, due to a 20 couple of specific periods during the year . 21

22 STERLING AUTY [ANALYST, JP MORGAN] : Okay . And then at the beginning of the Q&A session , I think somebody had asked your success level 23 in possibly bringing the Staffware solution set to North America . Is that what's driving some of the growth in the -- in the insurance sector ? What is the 24 opportunity to bring Staffware to North America.

25 VIVEK RANADIVE : It's huge. It's huge. 26 Id. at ¶ 53 . 27

28 ,ase 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 12 of 4 3

Additionally, during the call, defendant O'Meara issued positive guidance for the first fisca l

2 quarter of 2005 ("Q1 05"), stating : "For Q1, we expect revenues in the range of 116 to 120 million,

3 which represents year-over-year growth of between 56 and 60 percent ." Id. at ¶ 54 . However, the

4 Company also warned investors that any forward-looking statements were "subject to [certain] risks an d

5 uncertainties ." Thompson Decl. at Ex. L.

6 On or about December 23, 2004, the Company approved over $2 .2 mill ion in performance-based

7 bonuses to the Company's senior-most executives . 1d. at ¶ 58. Also on December 23, 2004, defendant Ranadive appeared on a show called "Kudlow & Cramer" on CNBC and the following exchange too k

9 place :

10 JIM CRAMER, co-host:

11 All year on KUDLOW & CRAMER we have highlighted this stock . It has now doubled since we first talked about it. It's called TIBCO Software, and it is 12 looking great . This is Vivek Ranadive; he is TIBCO's CEO . Vivek, welcome back to the show. 13 wu 0 Mr. VIVEK RANADIVE (TIBCO CEO) : Hello . 14 A A CRAMER: A monster quarter . I want people to understand--now I saw you on E wa~ 15 a competitive network, and I felt that the guy--hey, I didn't think the guy did ce t that good a job, but that's OK. But one of the things that he did was he did not z 16 give you a chance to talk about what TIBCO Software does . I'm gonna give v s 0 that. You picked up some new clients, Lehman, Procter, Lockheed Martin . Tell 17 me what you do for those companies . a 18 Mr. RANADIVE : Well, it's really simple, Jim . What we allow companies to do is manage all of their assets at real time . Companies have assets: software, ERP 19 systems, databases, factories. And our software brings it all together for the benefit of a company . 20 LARRY KUDLOW, co-host: Vivek, let me throw something out I haven't seen 21 yet; I just thought of this. It looks like we 're kind of in the beginning of a merger and acquisition wave , an M&A wave, lots of takeovers and 22 consolidations. Now wouldn't that be right up TIBCO's alley? I mean, you can make these systems mesh and reintegrate for companies that are consolidating? 23 Mr. RANADIVE : Absolutely . That represents huge opportunity for us. We 24 allow you to quickly tie your systems together. In fact, if you speak to Gary Loveman at Harrah's, he's doing exactly that with our software . 25

26 Id. at ¶ 59 27

28 12 ;ase 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 13 of 4 3

By December 28, 2004, shares were trading at a high of $13 .45 per share. Id. at ¶ 50 . Between

2 December 27, 2004 and December 30, 2004, defendant Mashruwala sold 50,000 shares of TIBCO stock ,

for combined proceeds of $645,890. Id. at ¶ 56.

4 On January 7, 2005, O'Meara sold 20,000 shares at a price of $12 .57, for a total amount of

$251,400. Id. at ¶ 88.

6 On January 21, 2005, Computer Wire issued a report regarding TIBCO and the Staffware

integration. The ComputerWire report stated , in part, the following;

Tibco Software, Inc . said that it has completed the integration of the acquired Staffware personnel into its own sales and engineering organizations, 9 and it also said that the founder, former chairman and CEO of Staffware, John O'Connell, is leaving Tibco's management team . Tibco said O'Connell will still 10 act as a strategic consultant to the company, but he is said to be pursuing other non-executive director roles outside of Tibco . O'Connell is thought to have had 11 a big hand in promoting the initial approach for business process management (BPM) company Staffware by Tibco in April 2004 . E 12 w C, Tibco said in its latest quarterly report that it has made a number of .2m 'i. u 13 headcount reductions related to the acquisition of Staffware -- it set aside $3 0 to cover the liability incurred as a result of workforce reductions and the 14 cancellation of marketing programs, but has thus far not said what the total headcount reduction came to . E V 15 Id. at ¶ 61 . z 16 sV s On February 14, 2005, the Company published a release on PR Newswire announcing th e 17 following: 18 PALO ALTO, Calif., Feb. 14 /PRNewswire-FirstCall / -- TIBCO 19 Software Inc . (NASDAQ:TIBX), a leading enabler of real-time business and the world's largest independent business integration software company, today 20 announced that it achieved compliance with Section 404 of the Sarbanes-Oxley Act. Today TIBCO filed its Annual Report on Form 10-K with the Securities 21 Exchange Commission containing its Management's Report on Inte rnal Control over Financial Reporting. TIBCO management assessed the effectiveness of 22 TIBCO's internal control over financial repo rting and concluded that such controls were effective as of November 30, 2004 . 23 TIBCO is one of the first companies required to test for Section 404 24 compliance due to its November 30 year end and is also one of the first to obtain Section 404 compliance . Section 404 of the Sarbanes-Oxley Act requires 25 companies to establish and attest to an effective control structure for reporting financial results. 26 "TIBCO is pleased to have achieved Section 404 compliance -- this is 27

28 13 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 14 of 4 3

an affirmation ofthe integrity ofTIBCO' s financial statements , internal controls and systems ," said Vivek Ranadive, Chairman and CEO, TIBCO Software Inc . 2 "This achievement is a testament to the hard work and determined efforts of the individuals involved on this project . "

41 Id. at 1 64.

Also on February 14, 2005, the Company filed its year-end Form 10-K financial report for fisca l

6 year 2004 ("FY04") . The Form 10-K stated, in part:

7 On June 7, 2004, we acquired Staffware plc ("Staffware"), a provider of BPM solutions that enable businesses to automate, refine and manage their processes. 8 The addition of Staffware's BPM solutions enabled us to offer our combined customer base an expanded real-time business integration solution, by making 9 it easier for our customers to utilize their existing systems through real-time information exchange and automation and management of enterprise business 10 processes regardless of where such processes reside . BPM enables companies to save time and money by driving costs and time out of business processes (for 11 example, reducing error rates or manual steps), while at the same time ensuring that business processes are compliant with internal procedures and external 12 regulations . Our acquisition of Staffware also increased our distribution capabilities through the cross-selling of products into new geographic regions, U 13 0 as well as an expanded customer and partner base . U 14 Id. at ¶ 65 . The FY04 Form 10-K was ce rtified by defendant Ranadive and O'Meara. Id. at ¶ 66 . E V 15 On March 1, 2005, the Company announced that results for Q1 05, the period ending February 0 z 16 s 27, 2005, were below guidance. Id. at ¶ 69 . Defendants also announced that weakness in Europe and 0 ii 17 delays in closing deals would result in non-GAAP earnings per share between $0 .04 and $0.05, below Z) 18 analysts' consensus mean of $0.08 earnings per share. Id. at ¶ 69. The Company's preliminary data 19 showed that QI 05 revenues would reach only between $100 to $102 million, as compared to the

20 FirstCall consensus mean estimate of $119 million . Id. The Company stated that the "disappointing 21 results were primarily due to lack of execution in certain geographic areas, particularly in Europe" as 22 well as the fact that "several transactions were delayed near the end of the quarter ." Thompson Decl. 23 at Ex. M . 24 Also on March 1, 2005, the Company held a conference call, during which Ranadive explaine d 25 that "given the strength we were seeing in our business and pipeline coming into Q I and as late as th e 26 first part of last week, I did not expect us to produce such disappointing results ." See Thompson Decl . 27

28 14 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 15 of 4 3

at Ex. N .

2 Ranadive further explained :

Although we're still in the process of fully analyzing Q1, let me discuss with you what I do know today . First, we believe, at this point, the shortfall was 4 primarily due to a lack of execution in certain geographic areas, most specifically Europe. In fact, every region through Europe came in significantly under forecast . . . . Unfortunately, the fundamental issue was that the extent of the shortfall emerged only very late in the quarter, giving us little time to pursue other less-developed opportunities in our broader pipeline . . .

Secondly, we have several deals in both Europe and North America that were pushed out and did not close as planned . . . they're still in our pipeline, and we still expect to close them over the coming quarters .

9 Id.

10 Ranadive also stated that some of the problems were caused by the fact that he had been mor e

11 focused on helping the Company comply with Section 404 of the Sarbanes-Oxley Act during th e 0 U 0 12 quarter:

U 13 Finally, although hard to quantify, I must also cite my personal focus on c U achieving 404 compliance as part of the problem . As many CEOs would 14 appreciate, my intense focus during the quarter on making sure we successfully achieved 404 compliance took some of my attention away from sales activitie E s 15 . I was pleased to announce our success with this several weeks ago, but I CC z let myself get too distracted by this and was not as involved as I usually am in 16 various key deals until later in the quarter. This was entirely my mistake . 0 17 Id.

18 In the question-and-answer period of the conference call, Ranadive answered the following 19 questions: 20 JOHN DIFUCCI, ANALYST, BEAR STEARNS: [T]he way I understand it anyway, most of your country managers in Europe were previous Staffware 21 people. Staffware, as I understand it, was on a calendar year previously . Now they are on a TIBCO quarter year, ending in February versus March . . . I guess 22 I'm trying to get a feel for how much of a miss is still there and how much of it could likely come into the next quarter . . . because it sounds like Europe was 23 the issue in every region in Europe, and again these were run by pretty much the Staffware organization . . . 1 was wondering how much of an impact you 24 think that had on finishing this quarter. 25 RANADIVE : Yes, we think this is a blip . . . and you are absolutely right ; we did have mingled management , and quite honestly, that led to some paralysis 26 . There was an old TIBCO and a new TIBCO , and we had poor leadership. 27 We're going to fix that . . .

28 15 ,ase 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 16 of 4 3

. . .there were differences in terms of the calendar year versus the quarter 2 pressures, just in terms of even the process we apply to contracts, you know, the U.S. GAAP process being much more stringent, so there was a learning curve. You know, it just - they were paralyzed during that time . We came in at a fraction of the number that we were expected to come in at . . . 4 Id. 5 Additionally, Ranadive discussed TIBCO's failure to execute : 6 KATHERINE EGBERT, ANALYST, JEFFERIES & CO.: Do you think there 7 is any component of demand in Europe being weak , or is it just simply execution on your part? 8 RANADIVE: We believe it's execution, Katherine . I don't think Europe has 9 been particularly strong over the course of the last year , but we still managed to do okay over there . We don't think it got any worse, so we believe that the 10 fault is ours; it was execution .

11 Id.

12 Ranadive also discussed certain difficulties inherent in the transition from a European accountin g v U0 13 system to an American system : 14 . Understand that they were a European company and what they consider to A . . be revenue - they run on a yearly basis and we are on a quarterly basis, the way as E 15 that they looked at revenue under U.S . GAAP we wouldn't consider revenue . e~ 0 The point I'm making is, look , there were some cultural differences , there is z 16 some training to be done, and all of that combined with just 2 sets of people b a~ C caused paralysis . 17 Id. 18 Ranadive also stated that the disappointing financial results were not apparent until the end o f 19 the quarter: 20 STERLING AUTY, ANALYST, J .P . MORGAN : Okay, okay. Then last 21 question would be - and I think somebody asked and I apologize if I am making you repeat it, but going into the quarter kind of pipeline coverage - you 22 are comfo rtable with that right up to the end and it was just the close rate at the end? 23 RANADIVE: That is correct. 24

24- Id. 2( Finally, Ranadive was asked to explain why the problems with Staffware did not show up unti l 2,

2f 16 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 17 of 4 3

several quarters after the acquisition:

2 KATHERINE EGBERT, ANALYST, JEFFERIES & CO .: . . . I'm just wondering why this is basically your third quarter of integration with Staffware. What is it about the management complex that showed up in the February quarter that wasn't there previously? Did it have anything to do with 4 the end of the year ?

RANADIVE: Well, you know , there were a variety of factors, Katherine, but Q I is seasonally the tough quarter for us always, and we did have a number of 6 changes that we had made that really - something during this quarter. So we had Staffware people running many of the regions . So you know basically it all came to a head this quarter and what we saw there was complete paralysis, which - you know before things were still a different , you know, before, they were still new and we were still very involved in it ; I was involved , you know, I spent a lot of time in Europe and other senior members were involved, so you know, they were - this was the first quarter that we actually had the combined management fully functional ." 1 0 Id.

On March 2, 2005, the Company's stock price declined, falling from a close of $8 .90 per share E 12 in regular trading on March 1, 2005, to just above $7 .00 the following day, on a high trading volume U 13 0 U of over 52 million shares . Id. at ¶ 75 . Also on March 2, 2005, TheStreet.com noted that TIBCO's stock 14 had been falling for days before the Company's March 1, 2005 announcement . Id. at ¶ 76 . On March 15 4, 2005, the same publication commented that the volume of shares traded, and the decline in stock z 16

CIO-. 0 price, immediately preceding the Q 1 05 announcement was "suspicious ." Id. at ¶ 79. 17 D. Procedural History 18 On May 25, 2005, plaintiff Lance Siegall ("Siegall") commenced a class action litigation agains t 19 defendants TIBCO, Ranadive, O'Meara, Carey and Mashruwala for violations of Sections 10(b) and 20 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Rule i Ob-5 promulgated 21 thereunder ("the Siegall complaint"). In the Siegall complaint, Siegal] alleged , inter alia, that TIBCO 22 and certain of its officers and directors violated the Exchange Act by publishing a series of materially 23 false and misleading statements which Defendants knew , and/or deliberately disregarded, were false and 24 materially misleading . 25 On May 26, 2005, counsel for Siegall caused a notice to be published advising purchasers o f 26 TIBCO securities of (i) the pendency of the securities class action against Defendants ; (ii) the claims 27

28 17 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 18 of 43

1 asserted therein; (iii) the purported class period of the litigation, i.e. September 21, 2004 through March

2 1, 2005, inclusive; and (iv) the right of any member of the putative class to move the Court to serve as

3 lead plaintiff.

4 Subsequently , Ronald Bernheim ("Bernheim") and James J. Guzzetti ("Guzzetti ") each filed

5 separate class action complaints in this district , on May 31 , 2005 and June 10, 2005 , respectively, on

6 behalf of themselves , and all those who purchased the securities of TIBCO between September 21, 2004

7 and March 1, 2005 (the "Bernheim complaint" and the "Guzzetti complaint"). The allegations in the two

8 complaints were the same, namely, they alleged , inter alia, that TIBCO and certain of its officers and

9 directors violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated

10 thereunder, by publishing materially false and misleading statements .

I1 On July 25, 2005 , Fenton and Rajasubramanian filed a Motion for Consolidation and

12 Appointment of Lead Plaintiff. No other members of the putative class filed motions requesting to be

•C u 13 appointed as Lead Plaintiff . On July 26, 2005 this Court ordered that the Siegall, Bernheim, and - 0 A yj 1 4 Guzzetti cases be deemed related .

E 15 At the time the Motion for Consolidation and Appointment of Lead Plaintiff was filed, neither i 16 Fenton nor Rajasubramanian had complied with Civil Local Rule 3-7(c), which sets forth the filing and

17 certification requirements that parties must observe in private securities actions brought in the Northe rn

18 District of California. On September 13, 2005 , Defendants filed a limited opposition to the Motion for

19 Consolidation and Appointment of Lead Plaintiff, in which they stated that they did not oppose the

20 consolidation of the above -referenced cases, but opposed the appointment of Fenton and

2 1 Rajasubramanian as Lead Plaintiffs on the grounds that Fenton and Rajasubramanian had failed to

22 comply with Civil Local Rule 3-7 .

23 Consequently , on November 14, 2005, this Court ordered Fenton and Rajasubramani an to submit

24 within ten (10) days of the Order amended certifications in compliance with Civil Local Rule 3-7(c) .

25 The Court also ordered Defendants to file any objections within three days of the submission of the

26 amended certifications . On November 23, 2005, Fenton and Rajasubramanian filed their amended 27

28 18 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 19 of 4 3

1 certifications. No objections were filed.

2 On February 24, 2006, the Court granted the Motion for Consolidation and appointed Fenton

3 and Rajasubramanian as Lead Plaintiffs .

4 On March 16 , 2006, Lead Plaintiffs filed a Consolidated Amended Complaint . On April 17,

5 2006, Defendants filed the instant Motion to Dismiss.

6 LEGAL STANDARD

7 A. Federal Rule of Civil Procedure 12(b)(6 )

8 Under Federal Rule of Civil Procedure 12(b)(6), a motion to dismiss should be granted if it

9 appears beyond a doubt that the plaintiff "can prove no set of facts in support of his claim which would

10 entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). For purposes of such a motion, the

11 complaint is construed in a light most favorable to the plaintiff and all properly pleaded factual w 12 allegations are taken as true . Jenkins v. McKeithen, 395 U .S, 411, 421 (1969) ; Everest and Jennings, 13 Inc. v. American Motorists Ins. Co., 23 F .3d 226, 228 (9th Cir. 1994). All reasonable inferences are to o 14 be drawn in favor of the plaintiff. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 983 (9th Cir.

15 1999). The court does not accept as true unreasonable inferences or conclusory legal allegations cast ec o 16 in the form of factual allegations . Western Mining Council v . Watt, 643 F .2d 618, 624 (9th Cir. 1981); w w 17 see Miranda v . Clark County, Nev., 279 F .3d 1102, 1106 (9th Cir . 2002).

18 Although the court is generally confined to consideration of the allegations in the pleadings,

19 when the complaint incorporates documents or alleges the contents of documents, and no part y

20 questions the authenticity of such documents, a court may also consider such documents when

21 evaluating the merits of a Rule 12(b)(6) motion . See In re Stac Electronics Sec. Lit., 89 F .3d 1399, 1405

22 (9th Cir. 1996).

23 When the complaint is dismissed for failure to state a claim, "leave to amend should be granted

24 unless the court determines that the allegation of other facts consistent with the challenged pleading

25 could not possibly cure the deficiency ." Schreiber Distrib. Co. v. Serv- Well Furniture Co ., 806 F.2d 26 1393, 1401 (9th Cir. 1986). The Court should consider factors such as "the presence or absence of undu e 27

28 19 Case 4:05-cv-02146-SBA Document 53 Filed 05/2512006 Page 20 of 43

1 delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue

2 prejudice to the opposing party and futility of the proposed amendment ." Moore v. Kayport Package

3 Express, 885 F .2d 531, 538 (9th Cir. 1989) . Of these factors, prejudice to the opposing par ty is the most

4 important. See Jackson v. Bank of Hawaii, 902 F.2d 13 8,5, 1387 (9th Cir. 1990) (citing Zenith Radio

5 Corp. v. Hazeltine Research , Inc., 401 U .S . 321, 330-31 (1971)). Leave to amend is properly denied

6 "where the amendment would be futile ." DeSoto v. Yellow Freight Sys., 957 F .2d 655, 685 (9th Cir. 7 1 1992).

8 B. Federal Rule of Civil Procedure 9(b )

9 Federal Rule of Civil Procedure 9(b) provides as follows :

1 0 In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity . Malice, intent, knowledge, and other condition of mind of a person may be averred generally. 12 Fed. R. Civ . P. 9(b). v A 13 "[The Ninth Circuit] has interpreted Rule 9(b) to require that 'allegations of fraud are specific A N 14 enough to give defendants notice of the particular misconduct which is alleged to constitute the frau d n,~ E 15 ec charged so that they can defend against the charge and not just deny that they have done anything c v 16 wrong."' Neubronner v. Milken, 6 F.3d 666,671 (9th Cir. 1993) (quoting Semegen v. Weidner, 780 F.2d .r 17 727, 731 (9th Cir. 1985)). "The pleader must state the time, place, and specific content of the false 18 representations as well as the identities of the parties to the misrepresentation ." Schreiber Distributing 19 Co. v. Serv- Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir . 1986) (citing Semegen, 780 F.2d at 731). 20 C. Pleading Requirements in Securities Fraud Action s 21 Section 10(b) of the Exchange Act makes it unlawful "for any person . . 22 . to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or 23 contrivance in contravention of such rules and regulations as the Commission may prescribe[ 24 .]" 1 5 U .S .C . § 78j(b). 25 Rule I Ob-5 , promulgated under the authority of Section l 0(b), in tu 26 rn, provides that "[i]t shall be unlawful for any person . . . (a) To employ any device , scheme, or a 27 rtifice to defraud , (b) To make

28 20 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 21 of 4 3

1 any untrue statement of a material fact or to omit to state a material fact necessary in order to make the

2 statements made, in light of the circumstances under which they were made, not misleading, or (c) To

3 engage in any act, practice, or course of business which operates or would operate as a fraud or deceit

4 upon any person, in connection with the purchase or sale of any security ." 17 C .F .R. § 240.1 Ob-5 . Thus,

5 the basic elements of a Rule I Ob-5 claim are : (1) a material misrepresentation or omission of fact, (2)

6 scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and

7 (5) economic loss. In re Daou Systems, Inc. 411 F.3d 1006, 1014 (9th Cir . 2005) .

8 In order to survive a motion to dismiss, a Section 10(b) claim must satisfy three pleadin g

9 standards. First, it must meet the general requirements established by Federal Rule of Civil Procedure

1 0 8(a) that complaints give a short and plain statement of the claim . Second, it must conform with the

particularity requirements of Rule 9(b) . Neubronner v. Milken, 6 F.3d 666, 671 (9th Cir . 1993) (quoting

U w 12 Semegen, 780 F.2d at 731). Third, it must satisfy the requirements of the Private Securities Litigation

13 Reform Act ("PSLRA") . r.r o Ay 14 The PSLRA employs heightened pleading standards for claims brought under Section 10 (b) and,

C 15 similar to Rule 9(b), requires pleading with particularity for two elements in a Section 10(b) claim : (1) ee 0 z 16 falsity and (2) scienter . See Gompper v. V1Sh, Inc., 298 F .3d 893, 895 (9th Cir. 2002) (citing Ronconi w O 17 v. Larkin, 253 F .3d 423, 429 (9th Cir . 2001)). "If a plaintiff fails to plead either the alleged misleading

18 statements or scienter with particularity, the court must dismiss the complaint ." Carol Gamble Trust 86

19 v. E-Rex, Inc., 84 Fed.Appx. 975, 977 (9th Cir. 2004).

20 Thus, under both the PSLRA and Rule 9(b), a plaintiff must specify each statement alleged to

2 1 have been misleading and the specific reason or reasons why such statement is misleading. See 15

22 U.S .C . § 78u-4(b)(1) ; Fed. R. Civ. P . 9(b). This is accomplished by identifying either ( 1) inconsistent

23 contemporaneous statements ; or (2) inconsistent contemporaneous information ( such as an internal

24 document) that was made by or available to the defendants . In re Splash Technology Holdings, Inc . Sec.

25 Litig., 2000 WL 1727377, * 13 (N .D. Cal. 1997); see also Nursing Home Pension Fund, Local 144 v .

26 Oracle Corp., 380 F.3d 1226, 1230 (9th Cir . 2004). 27

28 21 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 22 of 4 3

When dealing with allegations based on information and belief, and not plaintiffs persona l

2 knowledge, the PSLRA imposes further pleading requirements . Allegations are deemed to be held on

3 information and belief, and thus subject to the particularity requirements, unless plaintiffs have persona l

4 knowledge of the facts . In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1085 n .3 (9th Cir. 2002) . Any

5 allegation that is made on information and belief, must "state with particularity all facts on which that

6 belief is formed." 15 U .S.C . § 78u-4(b)(1) . "Naming sources is unnecessary so long as the sources are

7 described with sufficient particularity to support the probability that a person in the position occupied

8 by the source would possess the information alleged and the complaint contains adequate corroborating

9 details." Daou, 411 F .3d at 1015 (citing Nursing Home, 380 F.3d at 1233) . Therefore, to sufficiently

10 plead falsity, a plaintiff must : (1) identify each alleged misstatement, and in the case of group published

11 information, ascribe some authorship or control over the documents to the individual defendants ; (2) o A 12 state the reasons why the statement is misleading ; and (3) in the case of confidential source information,

U A 13 supply an adequate factual basis to support the source's basis of knowledge with regard to the w o 1 4 information provided. See 15 U.S .C. § 78u-4(b)(1) .

15 With respect to scienter , the PSLRA also requires that the plaintiff "state with particularity facts I z 16 giving rise to a strong inference that the defendant[s] acted with the required state of mind" for each

17 alleged act or omission . 15 U .S .C. § 78u-4(b)(2) . "Deliberate recklessness" is the required state of mind

18 and will satisfy scienter if it "reflects some degree of intentional or conscious misconduct ." Nursing

19 Home, 380 F .3d at 1230 (citing In re Silicon Graphics Sec. Litig., 183 F.3d 970, 977 (9th Cir . 1999).

20 A complaint will not survive if it just relies on generic allegations . See Silicon Graphics, 183 F.3d at

21 974, 985 . To assess whether a plaintiff has sufficiently pled scienter, a court must consider "whether the

22 total of plaintiffs allegations, even though individually lacking, are sufficient to create a strong

23 inference that defendants acted with deliberate or conscious recklessness ." Nursing Home, 380 F .3d at

24 1230. Additionally, a court must consider "all reasonable inferences, whether or not favorable to the

25 plaintiff." Id. (citing Gompper, 298 F.3d at 897) . 26

28 22 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 23 of 4 3

ANALYSIS

1. Defendants' Request for Judicial Notic e

As a preliminary matter, Defendants have requested that the Court take judicial notice of the following documents, each of which is attached to the Declaration of Reginald S . Thompson

7 ("Thompson Declaration") :

8 (a) excerpts from TIBCO's Form 10-K for fiscal year 2005, filed with the SEC on February

9 10, 2006 ;

10 (b) excerpts from TIBCO's 2005 Revised Proxy Statement on Schedule 14A, filed with the

I- 1 ] SEC on March 18, 2005;

12 1 (c) a TIBCO Form 8-K and the press release attached thereto, filed with the SEC on October II 13 17, 2005;

14 (d) a TIBCO Form 8-K and the press release attached thereto, filed with the SEC on April

15 23, 2004; e~ r 16 (e) a TIBCO Form 8-K and the press release attached thereto, filed with the SEC on June 17, -cs a~ o 17 2004;

18 (f) excerpts from TIBCO's Form l0-Q for the quarter ended May 30, 2004, filed with the 19 SEC on July 7, 2004 ;

20 (g) a TIBCO Form 8-K and the press release attached thereto, filed with the SEC on

21 September 21, 2004 ;

22 (h) excerpts from TIBCO's Form l 0-Q for the quarter ended August 29, 2004, filed with the 23 SEC on October 13, 2004;

24 (1) a TIBCO Form 8-K and the press release attached thereto, filed with the SEC on

25 December 22, 2004 ; 26 (j) excerpts from TIBCO's Form 10-K for fiscal year 2004, filed with the SEC on February 2 7

28 23 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 24 of 4 3

1 14, 2005 ;

2 (k) a TIBCO Form 8-K and the press release attached thereto, filed with the SEC on March

3 1 1, 2005 ;

4 (1) several Forms 4 filed with the SEC on behalf of Mashruwala between September 21,

5 2004 and March 1, 2005 ;

6 (m) several Forms 4 filed with the SEC on behalf of Mashruwala between September 2003

7 and March 2004;

8 (n) excerpts from TIBCO's Form 10-Q for the qua rter ended February 27, 2005, filed with 9 the SEC on April 8, 2005 ;

10 (o) a TIBCO Form 8-K and the press release attached thereto, filed with the SEC on March

11 24, 2005 ; U w 12 (p) the transcript of TIBCO' s quarterly earnings conference call regarding its results for the U m 1 3 quarter and fiscal year ended November 30, 2004; .r o 14 Ca o (q) the transcript of TIBCO's quarterly earnings conference call regarding its preliminary 15 results for the qua rter ended February 27, 2005 ; and ea 0 16 (r) a January 21, 2005 Computer Wire article entitled "TIBCO Says Staffware Personnel 17 Integration Complete . "

1 8 The Court finds that judicial notice is proper for the following reasons . First, pursuant to Federal

1 9 Rule of Evidence 201 , documents alleged in a complaint and essential to a plaintiffs allegations may

20 be judicially noticed . See Branch v. Tunnell, 14 F .3d 449, 454 (9th Cir . 1994); Steckman v, Hart

21 Brewing, Inc. 143 F.3d 1293, 1295 (9th Cir. 1998) . A court may also take judicial notice of documents

22 on which allegations in the complaint necessarily rely, even if not expressly referenced in the complaint,

23 provided that the authenticity of those documents are not in dispute . In re Autodesk, Inc. Sec. Litig., 132

24 F . Supp. 2d 833, 837-38 (N.D . Cal. 2000). Additionally , a court may take judicial notice of Forms 4

25 filed with the SEC, which are deemed incorporated by reference into a complaint when a plaintiffs

26 allegations rely on a defendant's stock sales. Silicon Graphics, 183 F.3d at 986 . Further, Plaintiffs do 27

28 24 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 25 of 4 3

1 not oppose the taking of judicial notice of any of the aforementioned documents . Accordingly, the

2 Court hereby GRANTS Defendants' Request for Judicial Notice . 3

4 111. Defendants' Motion to Dismiss

5 In Defendants' Motion to Dismiss, Defendants argue that the Consolidated Amended Complain t

6 should be dismissed because : (1) Plaintiffs have not plead sufficient facts to establish the element of

7 scienter; (2) Plaintiffs have not alleged an adequate factual basis for their claims ; and (3) Plaintiffs have

8 not alleged any actionable false statements . Defendants also urge the Court to reject the "group

9 pleading" standard and therefore dismiss the claims against Mashruwala . Additionally, Defendants ask

1 0 the Court to dismiss Plaintiffs' Section 20(a) claim on the grounds that Plaintiffs have failed to establish

a Section 10(b) violation and/or have otherwise failed to allege that Mashruwala and Carey had th e 12 requisite power to control TIBCO, either directly or indirectly. v R •~ u 13 A. Scienter - o 14 Defendants correctly assert that Plaintiffs have failed to allege scienter with the requisite 15 particularity . To satisfy the PSLRA, Plaintiffs must state with particularity facts giving rise to a strong ea ra z 16 inference that either Defendants knew, at the time that certain forward-looking statements were made , w 17 that the statements were false , or, with respect to historical statements , that Defendants acted in a 18 conscious and reckless manner . See 15 U.S.C. § 78u-4(b)(2); Silicon Graphics, 183 F .3d at 974. In 19 reviewing the sufficiency of the complaint , the Court must consider "all reasonable inferences to be 20 drawn from the allegations, including inferences unfavorable to the plaintiffs ." Gompper, 298 F.3d at 21 897 . Thus, to survive dismissal, a strong inference of scienter must be "the most plausible of competing 22 inferences ." Id. 23 Here, the Company - and defendant Ranadive in particular - specifically stated that th e 24 disappointing Q1 05 results were not known until the week immediately preceding the close of the 25 quarter, after any of the allegedly false or misleading statements were made . See Thompson Decl. at 26 Ex . N ("[G]iven the strength we were seeing in our business and pipeline coming into Q1 and as lat e 27

28 25 Case 4 :05-cv-02146-S.BA Document 53 Filed 05/25/2006 Page 26 of 43

as the first part of last week, I did not expect us to produce such disappointing results ."). Defendant

2 Ranadive further explained that he was not as focused on sales activities during the first quarter of fiscal

3 year 2005 because he was involved in the Company's efforts to comply with the Sarbanes-Oxley Act .

4 Id. at Ex. N ("As many CEOs would appreciate, my intense focus during the quarter on making sure we

5 successfully achieved 404 compliance took some of my attention away from sales activities . . . . I was

6 pleased to announce our success with this several weeks ago, but I let myself get too distracted by this

7 and was not as involved as I usually am in various key deals until later in the quarter ."). From these

8 statements, the Court may reasonably infer that Defendants may not have been aware of the extent of

9 the Company's problems until after the purportedly false statements were made . As such, Plaintiffs must

10 allege facts that overcome Defendants' proffered reasons for the discrepancy in the actual Q 1 05 results

11 and the previous statements made by the Company . Plaintiffs have failed to do so . o , U o 12 For example, Plaintiffs rely heavily on allegations that merely show that Defendants "must have

U 1 ~L 3 known" about certain unspecified " adverse undisclosed information " because of their positions with the

14 Company. See CAC at ¶¶ 19, 71, 73, 86-87. However, in the Ninth Circuit, such allegations are

E 15 insufficient to establish a strong showing of scienter as a matter of law and Plaintiffs ' citation to a non- .rco oe 16 binding district court case outside of this circuit does not alter this conclusion . See In re Read-Rite was U °. 17 Corp. Sec. Litig., 115 F. Supp. 2d 1181, 1183 (N.D. Cal . 2000), affd, 335 F.3d 843 (9th Cir. 2003).

18 Plaintiffs' confidential witnesses also fail to provide information that would suggest tha t

1 9 Defendants either knew that the false statements being made were false when made or that they were

20 acting in a deliberately reckless manner . In fact, the only information attributed to CW3, who is a

21 former National Account Director working out of the New York office, is that Ranadive and

22 Mashruwala were. generally "responsible for the planning and execution of TIBCO's integration of

23 Staffware after its acquisition ." Id. at ¶ 71 . CW3 also asserts in a vague and conclusory manner that the

24 "issues with executing sales " were "attributable to the Staffware acquisition ."' Id. As to CW5, a Senior 25

26 'Elsewhere in the Consolidated Amended Complaint, Plaintiffs allege that CW3 "confirmed that after the Staffware acquisition until December 2004, Staffware and TIBCO remained separate for sales 27 purposes." CAC at ¶ 90 . CW I also states that he did not sell Staffware products until December 2004 . 28 26 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 27 of 4 3

1 Manager of IT Operations during the relevant period, Plaintiffs allege that he contends that it was

2 "known internally" that the failure to complete some Staffware-related deals contributed to the Q 105

3 earnings shortfall. Id. at ¶ 71 . CW5 also contends that Defendants' "knowledge" of "the connection

4 between the Staffware acquisition and TIBCO's QI 05 earnings miss" is "corroborated" by the fact that

5 Ranadive "blamed Staffware for the miss ." Id. at ¶ 71 . The insufficiency of these allegations is readily

6 apparent; Plaintiffs utterly fail to provide information showing who specifically knew the information,

7 how they knew it, what information was known, and when it was known .' In light of the fact that

8 defendant Ranadive has stated that he did not know that the Company was going to "miss" until the

9 week before the close of the quarter, and has provided plausible reasons as to why he was not aware of

1 0 this fact, neither CW3 nor CW5's allegations assist Plaintiffs in meeting the stringent pleading

.Ir 11 requirements regarding scienter . Further, even if this information were enough to establish scienter for

12 Ranadive and Mashruwala, which it is not, it provides no information pertaining to O'Meara or Carey's

. U 13 knowledge or intent .

.~ u 14 Q N The information provided by CW2, CW4, and CW6 is similarly deficient. CW2, who was a

1 5 TIBCO General Manager within the OEM sales channel in Austin c~ 0 , Texas from 2003 through 2004, COO 16 states only that Ranadive was "personally involved in major sales transactions" and that "each qua rter, 17 TIBCO seemed to be reliant on a large sales deal that would be finalized by Ranadive ." CAC at ¶ 72 . 18 Based on this information , Plaintiffs ask the Cou rtto conclude that "defendant Ranadive (among others), 19 was continually apprised of, and involved in, all significant sales deals and, therefore , knew about the 20 sales issues caused by the Staffware acquisition and its incomplete and/or unsuccessful intergration ."

21 Id. However, CW2's allegations are not inconsistent with the Company's proffered reasons for belatedly 22 realizing that the Company was going to miss its numbers for the first qua rter; in fact, defendant 23

24 Id. However, Plaintiffs fails to demonstrate how any of these statements relate to Defendants' 25 knowledge or intent to deceive the marketplace . 26 4CW5's information pertaining to whether Staffware' s email had been integrated is completely irrelevant. CAC at ¶ 74 27 . Plaintiffs have not alleged any facts showing how the integration of Staffware's email had any material effect, if any, on the Company's quarterly results , 28 27 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 28 of 4 3

1 Ranadive specifically stated that the reason why the Company failed to meet expectations was due to

2 the fact that he was not as involved in sales activities as he had been in prior quarters . As such, CW2,

3 who was employed only through 2004 and therefore was not at the Company during the months

4 preceding the close of the first quarter of 2005, provides very little clarity - if any - as to Ranadive's

5 knowledge, or lack thereof, during the critical period. And, again, the information provided by CW2

6 fails to speak to O'Meara, Carey, or Mashruwala's involvement in the alleged fraud at all .

7 As to CW4, a former Staffware/TIBCO Finance Director and the . only confidential witness to

8 1 supply any information pe rtaining to Carey, Plaintiffs only vaguely contend that CW4 has stated that

9 Carey was "responsible for, and directed , the financial accounting integration of the two companies,"

1 0 "visited Staffware headquarters in London frequently," and "spoke with Staffware personnel about the

6 integration of Staffware into TIBCO ." CAC at 173 . CW4 also contends that "TIBCO handled the

U o 12 Staffware acquisition horribly, and that there were difficulties with the integration, including a major

U a . r 13 ~ .y w culture clash between the two companies ." Id. Plaintiffs fail to allege, however, whether the

.~ V 14 "difficulties" with the integration are the same "difficulties " that caused the Q1 05 results , whether

~"d L 15 Carey knew that these "difficulties " were going to affect the Company 's financial results and , if so, when

V1 ~ 16 Carey became aware of this information . Finally, with respect to CW6, who was a Pre-Sales Consultant a~ o 17 at TIBCO from early 2005 through the fall of 2005, Plaintiffs allege only that CW6 was trained to

18 "pitch" TIBCO and Staffware products together, that the products did not, in fact, work together, and

19 that the Company was in the process of trying to make the products compatible . Id. at ¶ 92 . The

20 information provided by CW6 does not appear to suppo rt Plaintiffs' securities fraud theory because CW6

21 appears to have started working at the Company at the end of the class period and at the time , or after, 22 the "truth" was purportedly "revealed"; in any event, CW6's information is not clearly linked to any

23 knowledge or fraudulent intent of any of the named Defendants.

24 Plaintiffs' allegations regarding certain Individual Defendants' stock sales also fall short o f 25 + meeting the required pleading standard, even when considered together with all of the rest of th e 26 allegations in the Consolidated Amended Complaint. First, the only persons alleged to have sold any 27

28 28 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 29 of 4 3

stock during the purported class period are defendants Mashruwala and O'Meara .' Ranadive - who is

the person alleged to have the greatest access to "inside" information regarding the Staffware integration

- did not sell any stock during the relevant period, despite the fact that he holds more than 14 million

TIBCO shares and vested options . See Thompson Decl . at Ex. C . Carey, the Corporate Controller and

Chief Accounting Officer, also did not sell any stock .

Further, as stated by the Ninth Circuit, "not every sale of stock by a corporate insider shows that

7 the share price is about to decline," and as such, a plaintiff must allege "unusual" or "suspicious" stock

8 sales. Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir. 2001). "[I]nsider trading is suspicious only when

9 it is'dramatically out of line with prior trading practices at times calculated to maximize the personal

10 benefit from undisclosed inside information ."' Id. There are three factors relevant to this analysis : (1)

11 the amount and percentage of shares sold by insiders ; (2) the timing of the sales ; and (3) whether the o R E 12 sales were consistent with the insider's prior trading history . Id. Here, Defendants have shown that

1 3 O'Meara and Mashruwala are alleged to have sold only 2 .3% and 17.2% of their class period holdings w C 14 c for total proceeds of $251,000 and $1 .3 million, respectively . See Mot. at 22. While Plaintiffs are 15 correct that there is no "bright line test" as to the amount or percentage of stock that must be sold to z 16 constitute a "suspicious amount," courts within this district have consistently declined to categorize G~ . 17 stock sales similar to the ones alleged in the instant case as "suspicious ." In re Netflix, Inc. Sec. Litig.,

18 2005 WL 1562858, at *8 (N.D. Cal. 2005) (sales of 7 .5% of holdings for $12 million in proceeds, 1%

19 of holdings for $135,000 in proceeds, and 15 .7% for $2 million in proceeds not suspicious) ; The Wu

20 Group v. Synopsys, Inc., 2005 WL 1926626, at * 10 (N .D . Cal . 2005) (sales of 6% of holdings for $7

21 million in proceeds and 38% of holdings for $2 .9 million in proceeds not suspicious).

22 Moreover, the timing of O'Meara's stock sales is not necessarily suspicious because it coincide d 23

24 5The Consolidated Amended Complaint also alleges that certain other "insiders" - i.e. Murry 25 Rode (Executive Vice President) and William Hughes (General Counsel) - sold stock during the relevant period . However, as this Court has noted on a prior occasion, when there are no allegations in 26 the complaint pertaining to these other persons - and specifically, no allegations showing that the other "insiders" possessed non-public adverse information - such factual allegations are irrelevant . As such, 27 these allegations have not been considered . In re Splash, 160 F . Supp. 2d at 1082 n . 22 . 28 29 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 30 of 4 3

with TIBCO's announcement of its fourth quarter and year-end fiscal results . As the Ninth Circuit has

noted, "[o]fficers of publicly traded companies commonly make stock transactions following the public

release of quarterly earnings and related financial disclosures ." Lipton v. PathoGenesis Corp., 284 F.3d

1027, 1037 (9th Cir . 2002) . Thus, the fact that O'Meara sold a small portion of his total holdings

following the positive announcement of TIBCO's year-end and fourth quarter earnings does not support

a strong inference of scienter . Id. Further, the fact that O'Meara was only one of two Individual

Defendants to sell his stock during the class period actually negates a finding that the Defendants were

engaged in fraud . Id. Again, as the Ninth Circuit has repeatedly held, the well-timed sales of one or two

defendants' stock does not support the strong inference required by the PSLRA when the rest of the

equally knowledgeable defendants act in a way inconsistent with the inference that the favorable

characterizations of the company's affairs were known to be false when made . Ronconi, 253 F.3d at

U w 436 . Further, the 125,000 shares of stock that Mashruwala sold during the class period were not Q_ L o "dramatically out of line" with the 121,000 shares of stock he sold between September 2003 and March

1 4 2004, the same time period in the preceding year . See Thompson Decl . at Ex. Q . As such, the stock v 1 5 sales identified in the Consolidated Amended Complaint neither establish the requisite element of o Z 16 scienter nor bolster Plaintiffs' other scienter allegations. a~ s 17 Plaintiffs also rely on other additional facts in order to plead scienter, such as : (1) the fact that

18 $2 .2 million in bonuses were distributed to senior executives in December 2004 ; and (2) the fact that 19 TIBCO authorized a $50 million stock buy-back plan at the beginning of the class period.' These 20 additional facts, even when considered in the aggregate, do not support Plaintiffs' case. First, quite 21 tellingly, Plaintiffs do not identify a single Ninth Circuit or Northern District of California case in their 22

23 'Plaintiffs also point to the fact that TIBCO acquired General Interface during the class period, 24 but utterly fail to explain - in any way - how this creates a strong inference of scienter . As Defendants point out, General Interface was purchased for $3 .5 million in cash and no stock was used in the 25 acquisition. See Thompson Decl . at Ex. K. Plaintiffs' argument that "defendants would not have obtained support for that acquisition from investors and analysts unless they believed that TIBCO's 26 acquisition of Staffware had already proceeded smoothly and was substantially complete" is mere speculation unsupported by any factual allegations in the Consolidated Amended Complaint . See Reply 27 at 13 :15-21 ; Thompson Decl . at Ex. K. 28 30 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 31 of 4 3

Opposition brief that supports their assertion that any of these factors are legally relevant to establishing

2 scienter. In fact, with respect to the executive bonuses, Plaintiffs concede that allegations concerning

3 incentive compensation are insufficient as a matter of law to plead scienter . See Opp. at 23-24; see also

4 In re Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833, 845 (N .D. Cal. 2000) . Further, while Plaintiffs

5 clearly allege that the bonuses were tied to the year-end results for fiscal year 2004, Plaintiffs do not

6 ~ allege any facts showing that the fiscal year 2004 results were misstated or otherwise inaccurate . As

7 to the stock buy-back plan, Plaintiffs fail to respond to the authorities Defendants cited in their Motion

8 showing that stock repurchase programs actually negate a finding of scienter . See, e.g., Matthews v .

9 Centex Telemanagement, Inc., 1994 WL 269734, at * 8 (N .D. Cal . 1994) ("It would have made no sense

10 to purchase that stock if defendants knew the prices to be inflated .") .

11 In sum, the Ninth Circuit has clearly held that "[i]n order to show a strong inference of deliberat e

12 recklessness, plaintiffs must state facts that come closer to demonstrating intent, as opposed to mere

V A 13 motive and opportunity ." Silicon Graphics, 183 F.3d at 974 z. wo . Here, even when all of the factual ~y U 14 A Q allegations are considered together, Plaintiffs have not even shown that Defendants were motivated to .~ v 15 commit fraud, much less that they acted with deliberate or reckless intent c~ 0 . This failure, alone, merits ~• z 16 dismissal of the Consolidated Amended Complaint . a~ o 17 B. Factual Bases for Consolidated Amended Complain t 18 Defendants have also shown that the Consolidated Amended Complaint is deficient because its 19 I lacks sufficiently credible, reliable bases for its allegations . The PSLRA requires "that a plaintiff must 20 provide, in great detail, all relevant facts forming the basis for her belief." In re Silicon Graphics, 183 21 F.3d at 984-85 (emphasis added). In their Opposition brief, Plaintiffs correctly note that the basis for

22 a securities complaint "can come from any number of sources, including SEC filings, regulatory filings 23 and reports, securities analysts' reports, advisories about the Company, press releases, and other public 24 statements issued by the Company, so long as they indicate defendants committedfraud" Opp. at 7 25 (emphasis added) . The only sources that Plaintiffs have identified, however, which purport to show that 26 the Company's statements were false when made, or that the Defendants acted with the requisite intent , 27

28 31 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 32 of 4 3

are Plaintiffs' confidential witnesses . The allegations pertaining to the confidential sources, however,

2 fall short of the standard set forth in Daou Systems. Id. at 1015.

3 For example, in addition to the deficiencies already set forth above with regard to the

4 confidential witnesses' statements regarding the Individual Defendants' knowledge, motive, or intent,

5 Plaintiffs have not alleged sufficient facts showing that the confidential witnesses are reliable sources

6 for establishing falsity. In particular, Plaintiffs have not alleged that any of the confidential witnesses

7 took part in any decision-making processes at TIBCO . Plaintiffs also fail to state where two of the

8 witnesses worked, and, with respect to the other four witnesses, admit that they worked outside of the

9 Company's headquarters in Palo Alto, where all of the Individual Defendants are located. See California

1 0 Public Employees' Retirement System v . Chubb Corp., 394 F .3d 126, 148 (3rd Cir . 2004) (finding

allegations unreliable where "[p]laintiffs heavily rely on former employees who worked in Chubb's local

12 branch offices for information concerning" company-wide decisions made by senior management) .

13 Moreover, as Defendants point out in their Motion, the descriptions of the duties performed by y.1 O 14 A N most of the witnesses do not satisfactorily demonstrate that the witnesses would know the information E 15 that is ascribed to them. See, e.g., In re Business Objects S.A. Sec. Litig., 2005 WL 1787860, at *6 (N .D . o V 16 L Cal. 2005) (rejecting allegations where "the Amended Complaint provides no more than the job title of G~ O 17 the confidential witnesses . . . and fail[s] to provide any other detail regarding his or her job description

18 and responsibilities"). For instance, Plaintiffs do not make clear to whom the witnesses reported or who

19 reported to them . See, e.g., Daou Systems, 411 F .3d at 1016 (in assessing witness' reliability court should

20 consider whether plaintiffs have alleged witness' direct reports as well as to whom the witness reported) .

21 As to CW3, who is described as a "Staffware/TIBCO National Account Director in New York . . .

22 responsible for sales of Staffware product that were used globally," CAC ¶ 25(c), Plaintiffs do not allege

23 any facts showing whether CW3 was involved in TIBCO's forecasting or integration processes or even

24 had contact with the Individual Defendants . See, e.g., In re Silicon Storage Technology, Inc. Sec. Litig.,

25 2006 WL 648683, at * 14 (N .D. Cal . 2006) (holding allegations insufficient where "[p]laintiffs describe 26 th[e] informant's duties only briefly, without any indication of what is meant by'production control' o r 27

28 32 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 33 of 4 3

1 'tracking shipments and inventory "') . Similarly, the job descriptions provided for CW4 and CW6 do not

2 indicate whether those witnesses had any specific knowledge regarding the Staffware acquisition o r

3 TIBCO's forecasting process .

4 Thus, due to these noted deficiencies in the Consolidated Amended Complaint, Plaintiffs'

5 reliance on Novak v. Kasaks, 216 F.3d 300, 312-13 (2nd Cir. 2000) is misplaced. In contrast to the

6 instant case, the Novak complaint identified numerous documentary sources which provided specific

7 facts concerning the company's significant write-off of invento ry following the class period, which

8 supported the plaintiffs ' contention that the invento ry was seriously overvalued at the time the

9 purportedly misleading statements were made. Id. Again, Plaintiffs have not identi fied any such 10 documentary sources here.

11 C. Falsity o R 12 Plaintiffs have also failed to sufficiently establish falsity w . In order to establish falsity, Plaintiffs u R 13 ~. a must identify "each statement alleged to have been misleading" and state "the reason or reasons why .~ U 14 Ay the statement is misleading ." 15 U.S .C . § 78u-4(b)(1) . They must also allege, with particularity, 15 "contemporaneous statements or conditions" that are "inconsistent" with the challenged statement so c~ t 16 as to demonstrate that it was false when made . In re Read-Rite Corp. Sec. Litig., 335 F .3d 843, 846, 84 8

-. O 17 (9th Cir. 2003); Ronconi, 253 F .3d at 433-34 .

18 In the Consolidated Amended Complaint, Plaintiffs identify four types of allegedly false 19 statements : ( 1) statements describing the anticipated benefits from the TIBCO/Staffware merger; (2) 20 statements relating to the integration of Staffware; (3) certifications of TIBCO's financial statements and 21 a press release announcing its compliance with the Sarbanes -Oxley Act; and (4) TIBCO' s Q 1 05 revenu e 22 forecast.

23 1. Alleged Benefits of the TIBCO /Staffware Merger 24 With respect to the Company' s statements pertaining to the alleged benefits of the 25 TIBCO/Staffware merger, Plaintiffs challenge the fol lowing statements : (i) statements that TIBCO's Q3 26 04 and Q4 04 financial results reflected contributions from Staffware, CAC ¶T 38, 51 ; (ii) statements 27

28 33 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 34 of 4 3

to the effect that TIBCO had gained sales leverage in Europe as a result of the merger, CAC at ¶ 40 ; (iii)

a statement that TIBCO was, at the close of Q3 04, in a "better position . . . than at any time in [its]

3 history," CAC at ¶ 39; and (iv) statements to the effect that the addition of Staffware allowed TIBCO 4 to offer an expanded product/solution to an expanded customer base, CAC at ¶¶ 42, 65 .'

5 However, Plaintiffs do not identify any allegations in the Consolidated Amended Complaint tha t

6 actually support their contention that TIBCO's Q3 04 and Q4 04 financial results did not reflect

7 contributions from both TIBCO and Staffware. Further, Plaintiffs do not specifically contest the

8 accuracy of the results for those quarters and, instead, readily admit that TIBCO's Q3 04 and Q4 04

9 results exceeded expectations . CAC at IT 38, 51-52 . Plaintiffs also do not identify any facts

10 demonstrating that the Staffware acquisition did not create sales leverage in Europe, or that it did not 11 L allow TIBCO to offer an expanded product to an expanded customer base . In fact, with respect to the

12 latter, Plaintiffs cite only to CW6's allegation that the products did not "work together ." However,

13 iLr w CW6's belief that the products did not "work together" is not necessarily inconsistent with the y,r O 1 4 Company's assertion that the Staffware acquisition allowed TIBCO to offer a broader product solution

E 15 to an expanded customer base. CCj C w Z 16 2 . Integration of Staffware . a 17 Plaintiffs's allegations intended to show the falsity of statements relating to the integration o f

1 8 Staffware are also unavailing. The purportedly false statements regarding integration are : (i) a statement

19 by Ranadive during the Q3 04 conference call that TIBCO moved quickly to blend the two sales 20 organizations and offered a common "storefront," CAC ¶40 ; (ii) a statement by Ranadive on the Q4 04

21 conference call that Staffware was "fully integrated " into the product set and sales organization, CA C 22

23 'The Consolidated Amended Complaint also refers to several statements made by analysts . See 24 CAC IT 40, 48-50, 53, 55, 78, 87. However, as Defendants correctly point out, Plaintiffs never allege that the analysts' statements were false , that there was a flow of information between the Defendants and 25 the analysts , or that Defendants ever adopted the analysts' statements as their own . As such, Plaintiffs cannot rely on these statements to establish securities fraud . See Copperstone , 1999 WL 33295869, at 26 *7-8 . However, the statements published in Computer Wire discussed more fully below quote directly from the Company and are therefore clearly statements made by the Company 27 . They are therefore actionable. See Nursing Home, 380 F. 3d at 1234. 28 34 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 35 of 4 3

1 at T 53; and (iii) a statement in a January 21, 2005 ComputerWire report that TIBCO had completed th e

2 integration of Staffware personnel into the TIBCO sales organization , CAC at ¶ 61 .

3 To show that these statements were false, Plaintiffs rely on the allegations of CW1, CW3 and

4 CW5 . See CAC at ¶¶ 71-74 . CW5, however, was an IT Operations Manager, and is not described as

5 being personally knowledgeable about the Company's sales efforts, only whether the Company's email

6 was fully operational . CAC at ¶¶ 71, 74 . Further, as Defendants point out, CW3's contention that

7 TIBCO and Staffware remained separate for sales purposes until December 2004 is entirely consistent

8 with Ranadive's statement, in December 22, 2004, that the integration of the sales organization had just

9 been completed. Similarly, CW1's statement that "his commission structure" did not include any

1 0 Staffware products until December 2004 is also consistent with Ranadive's statement and therefore does

not clearly demonstrate that it was false . Nor do the Company's Q1 05 disclosures regarding a certain

12 "paralysis" of the sales team late in the first quarter indicate that the statements in the January 21, 2005

U J 13 Computer Wire article were false when made . In fact, the Q1 05 disclosures suggest that the Company w o 14 did not know that there would be problems until after the sales personnel were combined . See

E 15 Thompson Decl . at Ex N ("So you know basically it all came to a head this quarter and what we saw ~. o 16 there was complete paralysis, which - you know before things were still a different, you know, before, a~ s 17 they were still new and we were still very involved in it ; I was involved, you know, I spent a lot of time

18 in Europe and other senior members were involved, so you know, they were - this was the first quarter

19 that we actually had the combined management fully functional .") (emphasis added) .

20 3 . Certifications regarding Financial Compliance

21 Plaintiffs have also failed to sufficiently allege that certain financial statement certification s

22 made by Ranadive and O'Meara, as well as the press release announcing TIBCO's compliance with the

23 Sarbane-Oxley Act, were false . In their Motion, Defendants correctly point out that there are no

24 allegations in the Consolidated Amended Complaint demonstrating the falsity of any of the Company's

25 certifications. In their Opposition, Plaintiffs respond by arguing that the financial certifications 26 "omitted" the "material fact" that TIBCO lacked sufficient internal controls because Ranadive admitte d 27

28 35 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 36 of 4 3

1 that "Staffware's revenue recognition policies did not conform to the standards of GAAP ." However,

2 in making this assertion, Plaintiffs grossly mischaracterize Ranadive's statements regarding Staffware

3 and its revenue recognition policies . The statements Ranadive made during the March 1, 2005 4 conference call pertaining to GAAP were as follows :

5 • "[T]here were differences in terms of the calendar year versus the quarter pressures, just in terms of even the process we apply to contracts, you know, the U .S . GAAP process 6 being much more stringent, so there was a learning curve ."

7 • Understand that they were a European company and what they consider to be revenue - they run on a yearly basis and we are on a quarterly basis, the way that they looked at 8 revenue under U.S. GAAP we wouldn't consider revenue . The point I'm making is, look, there were some cultural differences, there is some training to be done . . ." 9 Thompson Decl . at Ex. N . These statements do not, in any way, even suggest that TIBCO lacked 10 "internal controls" or was improperly recognizing revenue . Moreover, Plaintiffs fail to adequately 11 address the fact that TIBCO's independent auditors, PricewaterhouseCoopers, confirmed that "the 12 Company maintained, in all material respects, effective internal control over financial reporting[ .]" Id. C 13 ~. wo at Ex. K. Accordingly, Plaintiffs have failed to state a claim based on the certifications and the .y U 14 statements regarding Sarbanes-Oxley compliance . See Morgan v. AXT, Inc., 2005 WL 2347125, at * 15 e 15 o (N .D . Cal . 2005) (dismissing action because plaintiff had not alleged particularized facts supporting his z 16 claim that Sarbanes-Oxley certifications were false) ; In re In Vision Techs., Sec. Litig., 2006 WL 538752, 17 at * 6 (N.D. Cal. 2006) (same) . 18 4. Ql 05 Revenue Forecast 19 Plaintiffs have also failed to demonstrated the falsity of the December 22, 2004 Q1 05 revenue 20 forecast. Plaintiffs only vaguely contend that there were certain unspecified "difficulties with sales in 21 Europe" and that the forecast had "no reasonable basis" and was "wholly unrealistic and unattainable 22 ." Significantly, Plaintiffs fail to identify any contemporaneous information or documents showing that 23 O'Meara's forecast was false at the time it was made . For example, while CW3 alleges that there were 24 "execution" issues with sales in Europe, CW3 does not specify what those execution issues were, when 25 they occurred, when they were known, and who knew about them . The information provided by CW5 26 - who states only that "it was known internally at the Company that the failure to complete som 27 e

28 36 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 37 of 4 3

1 Staffware-related sales deals contributed to the Q 1 05 earnings shortfall" - is even more deficient.

2 Indeed, the Company readily admitted that the failure to complete some Staffware-related sales deals

3 contributed to the earning shortfall ; Plaintiffs have not set forth any particularized allegations, however,

4 showing that the Company knew in December 2004 that the "problems" with Staffware meant that these

5 deals definitely would not close .

6 More importantly, Defendants have also shown that the statements made by O'Meara and

7 Ranadive during the December 22, 2004 conference call pertaining to the Q1 05 revenue forecast and

8 the Company 's outlook for the first quarter offiscal year 2005 were forward -looking statements that are

9 not actionable as a matter of law . The PSLRA carves out a safe harbor from liability for

10 1 forward-looking statements that prove false if the statement "is identified as a forward -looking statement

11 and is accompanied by meaningful cautionary statements identifying impo rtant factors that could cause

U 12 actual results to differ materially from those in the forward-looking statement ." 15 U .S .C . § v A w 13 78u-5(c)(1)(A)(i) ; Harris v. lvax Corp., 182 F.3d 799, 803 (11th Cir. 1999). The purpose behind this safe G 1 4 CA y harbor is to encourage the disclosure of forward-looking information . H .R. Conf. Rep. No. 104-369, E 15 104th Cong . I st Sess., at 53 ( 1995). Whether a statement qualifies for the safe harbor is an appropriate

16 inquiry on a motion to dismiss . 15 U.S.C. 78u-5(e) . w 17 A forward- looking statement includes a statement containing a projection of revenues , income,

18 or earnings per share, management's plans or objectives for future operations, and a prediction of future

19 economic performance . 15 U .S.C. § 78u-5(i)(1)(A)-(C) . In addition, any statement of "the assumptions

20 underlying or relating to" these sorts of statements fall within the meaning of a forward-looking

21 statement. 15 U .S .C. § 78u-5(i)(1)(D) . Although statements concerning historical or current facts are

22 not forward-looking, a present-tense statement can qualify as a forward-looking statement as long as

23 the truth or falsity of the statement cannot be discerned until some point in time after the statement is

24 made . See Harris, 182 F .3d at 805 ; Gross v. Medaphis Corp., 977 F. Supp. 1463, 1473 (N .D . Ga.1997); 25 In re Valujet, Inc . Sec. Litig.,.984 F. Supp. 1472, 1479 (N .D . Ga. 1997). Oral statements are also

26 protected by the safe harbor provision if the speaker refers to warnings in a "readily availabl e 27

28 37 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 38 of 4 3

document." 15 U.S .C. § 78u-5 (c)(1)(A) . So long as the safe harbor requirements are met, liabilit y

2 1 cannot exist as a matter of law, regardless of the mind of the person making the statement . Employers

3 Teamsters Local Nos. 175 and 505 Pension Trust Fund v. Clorox, 353 F .3d 1125, 1133 (9th Cir . 2004).

5 Here, the following statements qualify as forward-looking under the safe-harbor provision : (1 )

6 that Staffware would see "a lot of renewal activity in [the] Q 1 - December, January time frame," CAC

7 at ¶ 53 ; (2) that TIBCO's opportunity to bring Staffware to North America was "huge ," CAC at ¶ 53 ;

8 and (3 ) that Staffware "expect[ed] revenues in the range of 116 to 120 million " in Ql, CAC at ¶ 54 .

9 These statements clearly pertain to projected revenues , management's plans or objectives for future

10 operations , and/or predictions regarding future economic performance . 15 U.S.C . § 78u-5 (i)(1)(A)-(C).

U E 12 Additionally, all of these statements were accompanied by the appropriate cautionary language . tj -. •~ U 1 3 First, the conference call itself was preceded by cautionary language . See Thompson Decl . at Ex. L .

14 In fact, the warning at the outset of the call noted that the call would include forward-looking

15 statements, specified the types of such statements, cautioned that actual results could differ, and directed

16 listeners to the sections of TIBCO's most recent Forms 10-K and 10-Q that would provide further

17 information regarding the relevant risk factors . Id. Further, in the press release included in the Form it 18 8-K issued on December 22, 2004, the Company warned :

19 This release contains forward-looking statements within the meaning of the "safe harbor" provisions of the federal securities laws, including, without 20 limitation, statements regarding the growth of the Integration market, TIBCO's increased market share and the demand for TIBCO's integration platform . 21 Actual results could differ materially from such forward-looking statements if demand for TIBCO's products and services or economic conditions affecting 22 the market for TIBCO's products and services fluctuate, if TIBCO is unable to successfully compete with existing or new competitors or if TIBCO cannot 23 successfully execute its growth plans . Additional information regarding potential risks is provided in TIBCO's filings with the SEC, including its most 24 recent Annual Report on Form 10-K and its Form 10-Q for the quarter ended August 29, 2004. TIBCO assumes no obligation to update the forward-looking 25 statements included in this release . 26 Thompson Decl . at Ex. J. In the Form 10-Q for the quarter ended August 29, 2004, which was 27

28 38 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 39 of 4 3

1 referenced in the December 22, 2004 Form 8-K, the Company disclosed that "Any failure to

2 successfully integrate Staffware 's business operations could adversely affect our financial results ."

3 See Thompson Decl . at Ex. 1. Some of the "challenges" the Company identified in the Form I 0-Q with

4 respect to the integration of Staffware were : (1) inconsistencies in standards, controls, procedures and

5 policies, and compensation structures between TIBCO and Staffware ; (2) unanticipated delays in or

6 expenses related to the integration of operations ; (3) conducting adequate training of employees and

7 modifying operating control standards in areas specific to U .S . corporations such as U .S. GAAP and

8 requirements under the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated

9 thereunder ; (4) costs and delays in implementing common systems and procedures, including financial

10 accounting systems and customer information systems ; (5) consolidating corporate and administrative

11 infrastructure, particularly in light of Staffware's decentralized international corporate structure ; and

12 (6) minimizing the diversion of management's attention from ongoing business concerns . Id. Indeed,

•~ J 1 3 the public was repeatedly warned about the risks associated with the Staffware acquisition . See, e.g. o 14 Thompson Decl . at Ex. E ("[A]ctual results could differ materially from what is envisaged by such E 15 forward looking statements if TIBCO is unable to successfully integrate the (sic) Staffware's business w. o l z 16 ~ .y L after the acquisition") ; id. at Ex. F ("Actual results could differ materially from such forward looking

alV s w w 17 statements if . . . TIBCO is unable to successfully integrate Staffware and its products") ; id at Ex. G

18 ("Any failure to successfully integrate Staffware's business operations could adversely affect our

19 financial results") .

20 Given the complete and thorough nature of the Company' s disclosures regarding the risks

2 1 associated with the acquisition of Staffware, and its potential affect on future revenues, Plaintiffs have 22 not successfully established that the Company's cautionary statements "lacked meaning" or were not

23 "specific" enough. Accordingly, the Court concludes that the statements identified as "false" in

24 paragraphs 53 through 54 of the Consolidated Amended Complaint are immune from liability under th e 25

28 39 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 40 of 4 3

safe harbor provision of the PSLRA .B

2 D. Group Pleading

3 Defendants also argue that the claims against Mashruwala must be dismissed becaus e

4 Mashruwala is not al leged to have made any of the challenged statements . In support of this, Defendants

5 point to the fact that the Fifth Circuit has expressly rejected the "group pleading doctrinei' as contrary

6 to the PSLRA . Southland Sec . Corp. v. INSpire Ins . Solutions, Inc., 365 F.3d 353, 363-65 (5th Cir .

7 2004) (holding that PSLRA abolished group pleading) and Financial Acquisition Partners L .P. v.

Blackwell, 440 F.3d 278, 285 (5th Cir. 2006) (same) . Following this precedent, courts in this district

9 are increasingly finding that the group pleading doctrine is contrary to the PSLRA . See In re Nextcard,

10 Inc. Sec. Litig., 2006 WL 708663, at *3 (N .D. Cal. 2006) (Fogel, J.) ("This Court adopts the reasoning s 11 of the decisions concluding that the group published pleading doctrine no longer is viable after the Vt V E 12 PSLRA ."); In re Netopia, Inc ., Sec. Litig., 2005 WL 3445631, at *6 (N.D . Cal. 2005) (Whyte, J .) Ct V 13 ("[P]laintiffs cannot rely on the group-published information doctrine .").

u 14 A Plaintiffs, on the other hand, argue that the Court should not follow the Fifth Circuit precedent a~ E 15 because the Fifth Circuit never adopted the group pleading doctrine, even before the PSLRA . While ez t 0 z 16 v a~ s w 17 'Defendants have also demonstrated that the statements contained in paragraphs 53 and 54, as 18 well as similar remarks identified in paragraphs 39 and 40 of the Consolidated Amended Complaint, are not material because they are general statements of corporate optimism . See Grossman, 120 F.3d at 19 1121-22 (finding immaterial statements that (i) company was moving rapidly to integrate sales force of the two companies ; (ii) company had achieved "substantial success" in integrating the sales forces of 20 the two companies ; (iii) merger presented a "compelling set of opportunities" ; and (iv) company would "leverag[e] . . . combined knowledge" from the merger) . Plaintiffs' argument that the instant case 21 somehow differs from Grossman merely because TIBCO purported to have expertise in assisting customers with business integration is without merit. Although TIBCO is in the business of selling 22 software that allows companies to integrate information from two different companies, Plaintiffs have not persuasively shown that the Company held itself out as being an error-proof "expert" in mergers and 23 acquisitions.

24 'Under the "group pleading doctrine," a plaintiff may satisfy the pleading requriements through reliance upon a presumption that the allegedly false and misleading "group published information" 25 complained of is the collective action of officers and directors . In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th Cir . 1995) . In such a case, a plaintiff satisfies Rule 9(b) "by pleading the 26 misrepresentations with particularity and where possible the roles of the individual defendants in the misrepresentations." Id. ; see also In re Cornerstone Propane Partners, L.P. Sec. Litig., 2005 U.S. Dist. 27 LEXIS 21469 (N.D. Cal . 2005).

28 40 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 41 of 43

1 this is somewhat persuasive, Plaintiffs do not identify any recent Northern District of California cases

2 that support their position. The most recent case cited in Plaintiffs' brief is from 2002 . As Defendants

3 correctly note, the more recent authorities expressly support Defendants' assertion that Plaintiffs cannot

4 state a claim against Mashruwala by relying on the group pleading doctrine .

5 However the Court need not make this determination in the instant case because , here, the Court

6 finds that Plaintiffs have not satisfied the requirements of the group pleading doctrine . Even under the

7 group pleading doctrine, Plaintiffs still have to satisfy the particularity requirements of the PSLRA .

8 Copperstone, 1999 WL 33295869, at *16. Specifically, Plaintiffs must plead that the officer was

9 directly involved not only in the day-to-day affairs of the company in general but also in the preparation

1 0 of its allegedly misleading statements in particular. See In re ESS Tech ., Inc. Sec. Litig., 2004 WL

3030058, at * 12 (N .D. Cal . 2004) (Plaintiffs must "state, with particularity, facts indicating that the

1 2 individual defendant was directly involved in the preparation of the allegedly misleading statements.").

V :Q 13 Here, Plaintiffs have failed to provide any particulars regarding Mashruwala's involvement in preparing

14 A Q any of the challenged statements . Instead, the Consolidated Amended Complaint makes only conclusory 15 allegations that "defendants were involved in drafting, producing, reviewing and/or disseminating the .r zo 16 false and misleading statements," and that they "participated in drafting, preparation and/or approval

. O 17 of the various public and shareholder and investor reports ." See CAC IT 20, 22 . Further, the group

18 pleading does not apply to oral remarks made by others . Thus, even if Plaintiffs had alleged particular

19 facts demonstrating that Mashruwala was involved in the preparation of the challenged written

20 statements, their claims still fail to the extent that they are seeking to recover for the challenged oral

21 statements made by Ranadive and O'Meara. Accordingly, in addition to the reasons set forth above, the 22 Section 10(b) claim against Mashruwala is DISMISSED .

23 E . Liability Under § 20(a) of the Exchange Act

24 Finally, Plaintiffs have failed to adequately plead their second cause of action, which is brough t 25 I under Section 20(a) of the Exchange Act. To establish "control person" liability under Section 20(a) 26 of the Exchange Act, Plaintiff must show that a primary violation of Section 10(b) or Rule I Ob-5 was 27

28 41 Case 4 :05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 42 of 4 3

1 committed and that each individual defendant "directly or indirectly" controlled the violator . See

2 Paracor Finance, Inc . v. General Electric Capital, 96 F .3d 1151, 1161 (9th Cir.1996). Since Plaintiffs

3 have not stated a viable Section 10(b) claim, Plaintiffs' claim under Section 20(a) of the Exchange Act

4 necessarily fails . Additionally, with respect to Mashruwala and Carey, Plaintiffs have failed to allege

5 any facts showing that either defendant had the requisite power to control TIBCO, either directly or

6 indirectly . Accordingly, the entire Consolidated Amended Complaint is DISMISSED .

8 F. Leave to Amen d 9 As a final matter, the Court notes that Defendants ask the Court to dismiss the Consolidated

10 Amended Complaint without leave to amend, noting that : (1) the stock drop which led to this suit was

11 over fourteen months ago ; (2) Plaintiffs have already been given an opportunity to amend the initial o A 12 complaints by filing the Consolidated Amended Complaint ; (3) the Opposition offers no new facts ; and

•~ v 13 (4) Plaintiffs have not requested leave to amend, much less explained how amendment would cure the w C 14 A N defects in their case . Defendants' arguments are well taken . However, notwithstanding the fact tha t

15 Plaintiffs have been given a prior opportunity to amend and have neither requested nor explained how w' z° 16 further amendments will cure the defects that Defendants have identified, the Court will grant Plaintiffs

17 one final opportunity to amend their complaint if they can do so in good faith . However, given the fact

18 that this case has been pending for over a year, the information necessary to amend the complaint should

19 be readily available to Plaintiffs . As such, Plaintiffs must file the amended complaint within twenty (20)

20 days of the filing date of this Order.

21 CONCLUSION

22 IT IS HEREBY ORDERED THAT Defendants ' Request for Judicial Notice [Docket No . 40] is 23 GRANTED .

24 IT IS FURTHER ORDERED THAT Defendants' Motion to Dismiss [Docket No . 39] is 25 GRANTED WITH LEAVE TO AMEND . Plaintiffs are hereby granted leave to filed an amended

26 complaint no later than twenty (20) days of the filing date of the Court's Order only if they can allege, 27

28 42 Case 4:05-cv-02146-SBA Document 53 Filed 05/25/2006 Page 43 of 4 3

1 in good faith, an adequate factual basis for their allegations and can allege specific facts supporting all

2 of the required elements of their causes of action with respect to each named defendant .

3 IT IS FURTHER ORDERED THAT Defendants shall respond to the amended complaint withi n

4 twenty-five (25) days after it is filed . If Defendants file any motions directed at the consolidated 5 complaint, the motion(s) must be noticed for the first available hearing date following the applicable

6 notice period. Any opposition or reply briefs must be filed by the deadlines set forth in Civil Local Rule 7 7-3. The parties may not alter the deadlines set forth herein without first seeking leave of Court an d 8 demonstrating the existence of good cause .

9 IT IS FURTHER ORDERED THAT the Case Management Conference, initially scheduled for

1 0 May 23, 2006 is CONTINUED to September 20.2006 at 2:30 p.m. The parties shall meet and confer

I-, 11 prior to the conference and shall prepare a joint Case Management Conference Statement which shall

1 2 be filed no later than ten (10) days prior to the Case Management Conference . The Case Management

• u 13 Conference Statement shall specifically set forth the parties' proposed schedule for class certification ~. o 14 discovery and for the briefing and hearing of the motion for class certification . Lead Counsel shall be

E 15 responsible for filing the statement as well as for arranging the conference call . All parties shall be on

z 16 the line and shall call (510) 637-3559 at the above indicated date and time . 0" 17 IT IS SO ORDERED . 1 8 VLI(0-~ ;e 04MdAto- - Dated: 5/24/06 -S UNDRA BROWN ARMSTR G 19 United States District Judge 20

28 43 EXHIBIT 20 1

3 4

6 IN THE UNITED STATES DISTRICT COURT

7 FOR THE NORTHERN DISTRICT OF CALIFORNI A 8

9 IN RE VAXGEN, INC. SECURITIES Master File No. C 03-01129 JSW LITIGATION 10 CLASS ACTION This document relates to: 11 ORDER GRANTING All Actions DEFENDANTS' MOTION TO V 12 DISMISS CONSOLIDATED AMENDED CLASS ACTION v i •~ U 13 COMPLAINT WITH LEAVE TO Sr wo AMEND 1 4 A Q 15 z 16 1. INTRODUCTION

.Q 17 Lead Plaintiff, Theodore Williams (hereinafter "Plaintiff'), brings this action on behalf of himself

18 and on behalf of all other persons who purchased or otherwise acquired the common stock of

19 defendant VaxGen, Inc. ("VaxGen") between August 6, 2002 and February 26, 2003 (the "Class

20 Period")1, pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U .S.C .

21 §§ 78j(b) and 78t(a), and the rules and regulations promulgated thereunder, including SEC Rule lOb-

22 5, 17 C.F .R. 240.1Ob-5 .

23 Now before the Court is the Motion to Dismiss the Consolidated Amended Class Action

24 Complaint for Violations of the Federal Securities Laws filed by VaxGen, Lance K . Gordon

25 ("Gordon"), and Donald P . Francis ("Francis") (collectively "Defendants") . Defendants move to

26 dismiss asserting that Plaintiff fails to meet the heightened pleading requirements of the Private

27 Securities Litigation Reform Act ("PSLRA") and fails to state a claim upon which relief can be grante d

The Court has not yet certified a class and refers to the time period involved as the "Class Period" for ease of reference . 1 under Federal Rule of Civil Procedure 12(b)(6) . Defendants also assert that further amendments to

2 the Complaint would be futile and request that the Court dismiss this action with prejudice .

3 Having carefully reviewed the parties' papers, considered their arguments and relevant legal

4 authority, and having had the benefit of oral argument, the Court hereby GRANTS Defendants ' 5 motion to dismiss, with leave to amend .

6 II. PROCEDURAL HISTORY

7 On March 17, 2003, plaintiff Janice Whitkens filed a federal securities class action in this

8 Court. Whitkens v. VaxGen, Inc., et al., C-03-1129. On that same day, a notice of this first filed

9 complaint was published in Business Wire, advising members of the proposed class of their right to

10 move to serve as lead plaintiff or plaintiffs. Subsequently, twelve similar and related complaints were a. 11 filed in this district. On May 19, 2003, pursuant to the parties' stipulation, this Court ordered the

V 'E 12 related actions consolidated. The Whitkens action serves as the lead case and the master file . v 0 13 On April 14, 2004, this Court appointed Theodore Williams as lead plaintiff, resolving 'ir 0a 14 competing motions for appointment of lead plaintiff and approval as lead counsel. On May 15, 2004 ,

15 Mr. Williams filed the Consolidated Amended Class Action Complaint for Violations of the Federa l 0 Z 16 Securities Laws (the "Complaint"), which is the operative pleading in the consolidated actions .

1 7 On June 28 , 2004, Defendants moved to dismiss the Complaint , and the Court heard oral

18 argument on the motion on February 25, 2005 .

19 III. FACTUAL BACKGROUN D

20 VaxGen is a publicly traded company founded in 1995 to continue the development and 21 commercialization of AIDSVAX, a vaccine designed to prevent infection or disease caused by HIV,

22 the virus that results in AIDS. (Complaint ¶ 2 .) Defendant Gordon is VaxGen's Chief Executive

23 Officer and has served as a member of VaxGen's Board of Directors . Defendant Francis is a co-

24 founder of VaxGen and has served as VaxGen's President and a member of its Board of Directors . 25 (Complaint IT 26-27.)

26 The AIDSVAX vaccine is made from a protein called gp 120 , which is the same protein that

27 protrudes from the surface of HIV and enables the virus to dock with cells of the body's immun e

28 system ("T cells"). (Id., IT 3, 38 n.2.) The vaccine "is designed to provoke the immune system into

2 1 making antibodies that will latch on to the gp 120 protein in the real virus and the virus from infected

2 immune cells." (Id., ¶ 3 .) In 1990, Phillip Berman, then an employee of Genentech, Inc .

3 ("Genentech"), who later became VaxGen's Vice President of Research and Development, conducted

4 an early study on the AIDSVAX vaccine using chimpanzees . (Id., ¶¶ 4, 32 .) Two of five

5 chimpanzees were vaccinated with AIDSVAX, with three animals used as controls . That study

6 showed that the vaccine protected against infection from the same strain of synthetic HIV that was

7 used to make the vaccine . (Id., ¶ 32 .) In small human trials to test its safety, the vaccine was found to

8 do no harm. (Id.) In June 1994, Genentech took the 1990 trial results to NIH to obtain funding to

9 test gp 120 in large human trials . NIH rejected the funding request, and Genentech abandoned

10 AIDSVAX. (Id., ¶ 33 .) 11 sue. Defendant Francis, who also had worked for Genentech, and Berman persuaded Genentec h

U 1 2 to license the technology for AIDSVAX to VaxGen . Genentech agreed and provided VaxGen with CJ 76 13 $1 million in start-up funds and owns approximately 11% of VaxGen common stock. (Id. ¶¶ 5, 34). o A ~ 14 VaxGen was able to demonstrate in Phase I and Phase II clinical trials that 70% of immunize d

E 15 participants in early trials were creating antibodies against HIV and suffered no serious side effects

16 from the vaccine . Accordingly, VaxGen began to seek government funding for Phase III clinical trials

0 17 from the Center for Disease Control ("CDC") . (Id., ¶ 34.)

18 According to Plaintiff, in October 1999, VaxGen was able to obtain CDC funding only

19 through the assistance of William Heyward, then the head of the AIDS vaccine unit at the CDC. Mr.

20 Heyward joined VaxGen in January 2000 as President of International Clinical Studies . (Id., ¶¶ 35-

21 36.) Plaintiff alleges that Mr . Heyward was negotiating for employment with VaxGen, while VaxGen

22 was seeking funding from the CDC . In 2002 Mr. Heyward admitted that he had a financial interest in

23 the vaccine decision. (Id., ¶ 36.) 24 Phase III clinical trials of AIDSVAX were run in North America, Europe, and Thailan d

25 commencing in 1999 . (See id., ¶¶ 37, 55 .) The findings in the Phase III clinical trials were to be used

26 to determine the effectiveness of AIDSVAX in protecting against infection with HIV and, thus, were

27 critical to VaxGen's ability to obtain approval by the U .S . Food and Drug Administration, the next

28 phase of development prior to commercializing AIDSVAX . (Id., ¶¶ 6, 8.) During the Class Period ,

3 no other company conducting HIV vaccine research and development had reached the Phase III clinical trial level. (Id., ¶ 9 .)

In October 2001, the Data and Safety Monitoring Board ("DSMB") conducted a midpoin t

review of the North American/European Phase III clinical trials and recommended that the trials

continue to their conclusion , finding that AIDSVAX was not demonstrating 30% efficacy. If,

however , AIDSVAX had shown a 30% efficacy , the DSMB would have recommended that the trials

terminate early . VaxGen then could have submitted an application for regulatory approval. (Id., ¶¶

8 41, 42 .)

9 Plaintiff contends that although Genentech 's initial study of AIDSVAX on chimpanzees had

10 been promising, most human data on gp 120 was discouraging and, therefore, most AIDS vaccine

11 researchers abandoned the idea of protecting against HIV infection by simulating the production of

0 12 antibodies and instead focused their efforts on designing a second generation of AIDS vaccines that +~ w 13 would encourage the body to produce T cells. (Id., ¶¶ 4, 38 n.4.) Plaintiff alleges Defendants were ~. wo 14 A Q aware of these facts . (See, e.g., id., ¶¶ 54, 60, 64, 69 .) 15 On August 14, 2002, Defendant Gordon signed and VaxGen filed its Form 10-Q with the 0 c 16 Securities and Exchange Commission ("SEC") . In that document, VaxGen made a number of -S

0 17 representations regarding the Company's plans to build certain facilities in connection with the

18 development and production of AIDSVAX . (Id., ¶ 52 .) The market reacted favorably to the

19 information contained in the Form 10-Q, and the price of VaxGen stock increased from $6 .10 per

20 share on August 6, 2002, to $8.68 per share on August 30, 2002 . (Id., ¶ 53 .)

21 On October 21, 2002, VaxGen issued a press release and announced that the Phase III trial in

22 Thailand had cleared safety reviews and that "[i]n its seventh review of the Thai trial, the DSMB foun d

23 that VaxGen's AIDS vaccine candidate , AIDSVAX B/E, continues to exhibit a very good safety

24 profile." (Id., ¶ 55 .)

25 On November 5, 2002, VaxGen issued a press release announcing its third quarter 2002 fisca l

26 results, and held a conference call in connection with that press release . During that conference call ,

27 Defendant Francis stated that the DSMB had "reviewed [the Phase III trials] every six months fro m

28 the beginning of the -trial, and each time we get remarkable information, and that information is - ha s

4 1 been good news at each meeting and those reviews really deal with two issues [safety and efficacy] ." 2 (Id.,¶57 . )

3 On November 15, 2002, Defendant Gordon signed and VaxGen filed its Form 10-Q for th e

4 period ended September 30, 2002 . Plaintiff alleges that the market again responded favorably to th e

5 information presented in the press release, conference call and Form 10-Q, and the price of VaxGen

6 stock rose to $19.05 per share . (Id., ¶¶ 58-59. )

7 On December 13, 2002, however, the stock price of VaxGen dropped to $13 .01 on news

8 reported in The Street .com that Paul Allen, through his investment firm Vulcan Ventures one of

9 VaxGen's largest shareholders, was selling his holdings in VaxGen. This announcement came just

1 0 prior to the time at which VaxGen planned to announce the results of the AIDSVAX Phase III clinical t 11 trials. (Id., ¶ 61 .) In addition, the article reported that VaxGen had permitted other preferred

V 12 shareholders to sell their shares in VaxGen. (Id.) VaxGen's spokesman stated that Allen's disposal

.- w 1 3 of his VaxGen shares were part of a planned selling plan and was not indicative of anything to do with 14 A Q AID S VAX. (M ) 15 Plaintiff also alleges that in December 2002, an article appeared in Nature magazine, which Ct a 16 raised questions about whether the type of AIDS vaccine that VaxGen was developing in AIDSVA X 0 17 would be effective against HIV . (Id. )2

1 8 On December 16, 2002, VaxGen announced in a press release that the FDA had "designated

19 [VaxGen's] HIV/AIDS vaccine candidates .. . as Fast Track Products", which would enable rapid

20 regulatory review of AIDSVAX . The price of VaxGen stock rose on this news . (Id., ¶ 62 .) On

21 December 17, 2002, VaxGen held a conference call in which Defendants addressed the Nature

22 article and the Fast Track designation of AIDSVAX . (Id., ¶ 63 .) The market again responded

23 favorably to this information, and the price of VaxGen stock rose to $17 .60. (Id.) Plaintiff alleges that

24 despite additional criticism, Defendants "continued their unfounded predictions of success" and at the

25 close of trading on December 30, 2002, VaxGen stock closed at $19 .31 per share . 26

28 2 Plaintiff has not alleged the specific date on which the article was published, and Defendants have not included it in their Request for Judicial Notice .

5 1 On January 22, 2003, VaxGen stated in a press release that it planned to announce the result s

2 of the Phase III trials before the end of March 2003, and stated that "no data are available yet to

3 conclude if or how effective the vaccine is ." (Id., ¶ 68 .) 4 On or about February 24, 2003, Vaxgen announced the results of the Phase III trials ,

5 disclosing that "there were no meaningful differences in infection rates for the AIDSVAX treated

6 patients." (Id., ¶ 70.) In response to this partial disclosure, the price of VaxGen stock lost over 47% 7 of its value from a closing price of $13 .02 on Friday, February 21, 2003, to a closing price of $6.86

8 on Monday, February 24, 2003 . (Id., ¶ 71 .)

9 Plaintiff alleges that Defendants tried to stem the drop in the stock price by claiming that the

10 trials revealed that there were 67% fewer HIV infections among ethnic minorities (other than

11 Hispanics) who had received AIDSVAX compared to placebo recipients, and a 78% reduction in 0 12 U HIV infection in African-American recipients of AIDSVAX, compared to placebo recipients . y,~ w 13 VaxGen claimed that these results were statistically significant and that it would seek FDA approval of 'fir w 0 1 4 A the vaccine for limited use. (Id., ¶ 72 .) An article appearing in the Wall Street Journal on February E 15 26, 2003, however, reported that the reliability of the February 24, 2003 reports was in question 0 16 because VaxGen had not taken into account requisite "penalties" designed to reduce the statistical

0 17 significance of results obtained from slicing a body of data into smaller pieces. In response, the price

18 of VaxGen stock dropped to close at $4 .82 per share. (Id., ¶ 73,)

19 . IV. ANALYSIS

20 Plaintiff alleges that throughout the Class Period Defendants "engaged in a scheme to artificiall y

21 inflate the market price of VaxGen's common stock to defraud Class members by making

22 misrepresentations and non-disclosures of material fact concerning VaxGen's ability to demonstrate a

23 satisfactory level of effectiveness in the AIDSVAX vaccine's Phase III clinical trials ." (Id., ¶ 7; see 24 also id., ¶ 11 . )

25 Section 10(b) of the Securities Exchange Act provides, in part, that it is unlawful "to use o r

26 employ in connection with the purchase or sale of any security registered on a national securities

27 exchange or any security not so registered, any manipulative or deceptive device or contrivance i n

28 contravention of such rules and regulations as the [SEC] may prescribe ." 15 U.S.C . § 78j(b).

6 1 Rule I Ob-5 makes it unlawful for any person to use interstate commerce :

2 (a) To employ any device, scheme, or artifice to defraud ; (b) To make any untrue statement of material fact or to omit to state a material fact 3 necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or ; 4 (c) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any 5 security.

6 17 C .F.R. § 240.10b-5.

7 To plead a claim under section 10(b) and Rule 1 Ob-5, a plaintiff must allege (1) a

8 misrepresentation or omission , (2) of material fact, (3) made with scienter, (4) on which the plaintiff

9 justifiably relied, (5) that proximately caused the alleged loss. Binder v. Gillespie, 184 F .3d 1059,

10 1063 (9th Cir. 1999). Additionally, as in all actions alleging fraud, Plaintiffmust state with particularity

11 ' the circumstances constituting fraud . Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (9th Cir .

V .E 12 1999) ; Fed. R. Civ . P . 9(b). +r w . U 13 Tr Plaintiff also claims that defendants Gordon and Francis are liable pursuant to Section 20(a) o f 14 AQ the Securities Exchange Act, which provides for derivative liability for those who control others found 15 to be primarily liable under the provisions of that act . In re Ramp Networks, Inc. Sec. Lit., 201 F. 0 16 Supp. 2d 1051, 1063 (N.D . Cal. 2002). Where a plaintiff asserts a section 20(a) claim based on an

•: w 17 underlying violation of section 10(b), the pleading requirements for both violations are the same . Id.

18 19

20 21

7 1 A. Applicable Pleading Standards.

2 1. Rule 12(b)(6) .

3 A motion to dismiss is proper under Rule 12(b)(6) where the pleadings fail to state a claim

4 upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). A motion to dismiss should not be 5 granted unless it appears beyond a doubt that a plaintiff can show no set of facts supporting his or her

6 claim. Conley v. Gibson, 355 U.S . 41, 45-46 (1957) ; see also De La Cruz v. Tormey, 582 F .2d 7 45, 48 (9th Cir. 1978).

8 2. Private Securities Litigation Reform Act.

9 In order to limit the number of frivolous private securities lawsuits, Congress enacted th e

1 0 PSLRA in December of 1995, and created heightened pleading standards for such lawsuits . 15 i 1 1 U.S .C. § 78u-4(b). The PSLRA requires that "the complaint shall specify each statement alleged to 0 U 1 2 have been misleading, the reason or reasons why the statement is misleading, and, if an allegation 13 regarding the statement is made on information and belief, the complaint shall state with particularity all 14 A Q facts on which that belief is formed " 15 U.S.C. § 78u-4(b)(1)(B) . Furthermore, the PSLRA requires E 15 that the plaintiff "state with particularity facts giving rise to a strong inference that the defendant acted ~ L0 V5 Z 16 with the required state of mind ." 15 U.S.C . § 78u-4(b)(2) . Q o .Q 17 The heightened standard set by the PSLRA was intended to put an end to securities fraud

18 lawsuits that plead "fraud by hindsight." In re Silicon Graphics, Inc. Sec. Lit., 183 F .3d 970, 988

1 9 (9th Cir. 1999). "The PSLRA significantly altered pleading requirements in private securities fraud

20 litigation by requiring that a complaint plead with particularity both falsity and scienter." In re Vantive

21 Corp. Sec. Lit., 283 F.3d 1079, 1084 (9th Cir . 2002) (citing Ronconi v. Larkin, 253 F .3d 423, 429

22 (9th Cir. 2001)) (emphasis added). "Thus the complaint must allege that the defendant made false or

23 misleading statements either intentionally or with deliberate recklessness or, if the challenged

24 representation is a forward looking statement , with ` actual knowledge . . . that the statement was false

25 or misleading."' Id. at 1085 (citing 15 U.S.C. § 78u-5(c)(1)(B)(I)) . This is often accomplished "by

26 II' pointing to inconsistent contemporaneous statements or information (such as internal reports) made by

27 or available to the defendants ." Yourish v. California Amplifier, 191 F.3d 983, 993 (9th Cir . 1999)

28 (quoting In re GlenFed Sec. Lit., 42 F.3d 1541, 1549 (9th Cir. 1991) (en banc)); see also id. at

8 1 994 (discussing insufficiency of plaintiffs' allegations with regard to the non-disclosure of confidentia l

2 non-public information) .

3 Under the PSLRA, a complaint still is construed in the light most favorable to the non-movin g

4 party and all material allegations in the complaint are taken to be true . Silicon Graphics, 183 F .3d at

5 983 . To determine whether Plaintiff has pled a strong inference of scienter, however, "the court must

6 consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to

7 the plaintiffs." Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir . 2002). The Court "should

8 consider all the allegations in their entirety, together with any reasonable inferences therefrom, in

9 concluding whether, on balance, the plaintiffs' complaint gives rise to the requisite inference of

10 scienter." Id. "Conclusory allegations of law and unwarranted inferences, however, are insufficient to

1. 11 defeat a motion to dismiss ." In re Northpoint Communications Group, Inc. Sec. Lit. (Northpoint 12 U II), 221 F . Supp. 2d 1090, 1094 (N.D . Cal . 2002). .~ w 13 w Finally, the Court may consider the facts alleged in the complaint, documents attached to th e O 14 AA complaint, documents relied upon but not attached to the complaint when the authenticity of thos e 15 documents is not questioned, and other matters for which the Court can take judicial notice . z 16 Northpoint II, 221 F. Supp. 2d at 1094 ; see also Silicon Graphics, 183 F.3d at 986 .

O 17 3. Request for Judicial Notice .

18 Defendants request that the Court take judicial notice of VaxGen press releases, SEC filings ,

19 and conference call transcripts, all of which are referenced in the Complaint .' Plaintiff does not dispute

20 the accuracy of the documents attached to the request, and the requested documents are the types of

21 documents of which this Court properly make take judicial notice . See, e.g., In re Calpine Corp.

22 Sec. Lit., 288 F. Supp . 2d 1054, 1076 (N.D. Cal. 2003) (court "may properly take judicial notice of

23 SEC filings and documents expressly referenced" in a complaint") . Accordingly, the Court GRANTS

24 Defendants' request .

25 B. Plaintiff Fails to Plead With Requisite Specificity The Alleged Materially False or Misleading Statements. 26

27 3 These documents are attached as exhibits to the Declaration of William S . Freeman in support 28 of Defendants' motion to dismiss . Citations to documents attached to the Freeman Declaration are abbreviated as "RJN Ex . .11

9 The PSLRA requires that Plaintiff allege with the requisite particularity each statement allege d

2 to be false or misleading, the reason or reasons why the statement was false or misleading, and if thos e

3 allegations are made on information and belief all facts on which that belief is formed . 15 U.S .C. §

4 78u-4(b)(1)(B) .4

5 1. Plaintiff does not clearly identify which statements are false. 6 Throughout the Complaint, Plaintiff engages in a pattern of quoting excerpts from document s

7 or conference calls that are comprised of multiple statements . Many of these excerpts, on their face,

8 appear to contain indisputably true facts . (See Complaint, ¶¶ 55-58, 62-63, 68 .)5 Plaintiff then claims

9 "each of the statements" in a particular paragraph or paragraphs are "each" materially false and

10 misleading because Defendants omitted information regarding the "antiquated" nature of the science

11 underlying the AIDSVAX vaccine, the fact that the studies of AIDSVAX performed on chimpanzees

12 U was not significant, the alleged use of an insider to secure funding for the Phase III trials, and the

U 13 DSMB's decision not to terminate the Phase III trials at midpoint . (Id., ¶¶ 54, 60, 64, 69.) However, I-C V 14 there simply is no clear link or explanation as to why what appear to be facially true statements are Q E 15 false or misleading because of the alleged omissions regarding the research and initial studies z 16 performed on the AIDSVAX vaccine or the decision not to terminate the Phase III trials . The same is V Q 1 7 true with respect to the omission regarding Mr . Heyward's alleged assistance in obtaining funding for

18 the Phase III clinical trials . 19 As the party bringing this action, Plaintiff is responsible for identifying with particularity what

20 statements are false and misleading . 15 U.S.C. § 78u-4(b)(1). He has not fulfilled his responsibility in 21 It appears to the Court that most of the allegations in Plaintiff's Complaint are based upon 22 information and belief. Plaintiff states at the outset of his Complaint that the facts alleged on information and belief are "based upon inter alia, the investigation conducted by and through his attorneys, which included, 23 among other things, a review of the public documents and announcements concerning [VaxGen], [SEC] filings, wire and press releases published by and regarding VaxGen, and information readily available on the Internet." 24 (Complaint at 1 :20-26 .) Plaintiff also asserts that he "believes substantial evidentiary support will exist for the allegations herein after a reasonable opportunity for discovery ." (Id. at 1 :27-28 .) This boilerplate language 25 alone does not satisfy the PSLRA's pleading requirements . Silicon Graphics, 183 F.3d at 985 . In the event that Plaintiff chooses to amend his Complaint, he must clearly state the basis and sources for his belief in those 26 facts . For example, the information in Paragraphs 4 through 6 does not appear to be based on Plaintiff's personal knowledge . Plaintiff must allege the facts supporting his belief in those allegations . 27 For example, in paragraph 55, Plaintiff quotes a press release dated October 21, 2002, in which 28 VaxGen stated it "is conducting two Phase III trials, one in Thailand and another in North America and Europe ." It is not disputed that VaxGen was indeed conducting such trials .

10 1 this regard, and the Court is "unwilling . .. to search through" the Complaint in an effort to link th e

2 allegedly false statements to the reasons those statements purportedly are false . In re Autodesk Sec.

3 Lit., 132 F. Supp . 2d 833, 841-842 (N.D. Cal. 2000).

4 2. Plaintiff has not sufficiently plead facts to show that statements clearly identified in his opposition brief are materially false or misleading . 5 In his opposition brief, Plaintiff did clearly identify four statements that he claims are materially 6 false and misleading . However, Plaintiff fails to allege sufficient facts to demonstrate that those 7 statements are actionable . For example, Plaintiff contends that a statement made by Defendant 8 Francis in a November 5, 2002 conference call, that "each time we get remarkable information, and 9 that information is - has been good news at each meeting and those reviews really deal with two issues 10 [safety and efficacy]" was false and misleading because Defendants omitted the information described 11 in paragraphs 54, 60, 64, and 69 of the Complaint . 12 U Francis made this statement while discussing the Phase III trials and the DSMB's review o f cd .) 13 - wC, those trials . (Opp. at 7, quoting Complaint, ¶ 57.) It is apparent from the transcript of this conference 1 4 A Q call, however, that the focus of the Defendants ' statement was on the information VaxGen had E 15 z received regarding the safety of the AIDSVAX vaccine. When questioned about the efficacy - 16 particularly in conjunction with the prior trials on chimpanzee - the Defendants expressly noted that ~ w 17 there were obvious differences between human subjects and the chimpanzees and that VaxGen would 18 have to wait for the results of the Phase III trials to determine the efficacy of AIDSVAX. (See RJN 19 Ex. K at 74. ) 20 To be actionable under the PSLRA, a statement or omission must be a statement or omission 2 1 that "would significantly alter the total mix of information available to investors." Wenger v. Lumisys, 22 Inc., 2 F. Supp. 2d 1231, 1235 (N .D. Cal. 1998). Viewing the allegations in their entirety, Plaintiff 23 does not allege facts demonstrating that Defendants made contemporaneous inconsistent statements or 24 that the information allegedly omitted by Defendants was necessarily inconsistent with the actual 25 progress of the Phase III trials . Nor has Plaintiff alleged facts showing that Defendants were privy to 26 non-public information that the Phase III trials were not, in fact, proceeding well or that would 27

28 seriously undermine Defendants ' basis for believing that those trials would be successful .6 See

2 Yourish, 191 F.3d at 993 . Indeed, Plaintiff's Complaint discloses that all of the information allegedly

3 omitted was in the public domain prior to the Class Period . (See, e.g., Complaint, ¶¶ 47-48.) Cf. In

4 re Gupta Corp . Sec. Lit., 900 F . Supp. 1217, 1232 (N.D . Cal. 1994) (noting that " [u]nder

5 established precedent , [defendant ] had no duty to alert the market to information that was already 6 available to the market").

7 In this respect, Plaintiffs reliance on In re Amylin Pharmaceuticals, Inc. Sec. Lit., 2003

8 U.S. Dist. LEXIS 7667 (N .D. Cal. 2003) in support of his motion is misplaced . In Amylin, the Court

9 found the plaintiffs' allegations of material falsity to be sufficient because the plaintiffs cited to internal

10 minutes of a meeting between the company and the FDA that disclosed the FDA had concerns about 1 1 i the efficacy of the company's potential new drug following an initial twelve month Phase III clinical trial 12 U and the company's efforts to modify its test protcols . There were also actual discrepancies between

U 13 the company's statements about the safety of the drug, and what the actual results demonstrated in that r.+ 0 U 1 4 respect. The court concluded that this information would have been information that significantly

E 15 altered the mix of information available to the public. There are no similar facts alleged here . z00 CA 16 The Court also finds that Plaintiff has not alleged sufficient facts to show that the remainin g

w 17 statements identified in his opposition brief actually were false and misleading . Even if Plaintiff could

18 rectify that defect, for the same reasons discussed above, the facts currently alleged are insufficient to

1 9 demonstrate that, with respect to the remaining statements discussed in the opposition brief, th e 20 21

23 24 ° Plaintiff alleges that the Defendants "were privy to non-public information concerning 25 [VaxGen's] business, finances, products, markets and present and future business products via access to internal corporate documents, conversations with other corporate officers and employees, attendance at 26 management and Board of Directors meetings and committees thereof and via reports and other information provided to them in connection therewith . Because of their possession of such information, the Individual 27 Defendants knew or recklessly disregarded the fact that the adverse facts specified herein had not been disclosed to, and were being concealed from, the investing public ." (Complaint, ¶ 28 .) Plaintiff does not 28 substantiate these conclusory allegations by reference to any specific non-public reports, documents, or conversations . Moreover, as noted, the "adverse facts" discussed actually were in the public domain .

12 omissions described herein would have "significantly alter[ed] the total mix of information available t o investors." Wenger, 2 F. Supp. 2d at 1235 . '

In sum, the Court finds that Plaintiff has neither adequately specified which statements in th e

Complaint are alleged to be false and misleading nor alleged sufficient facts demonstrating that th e

specific statements identified in his opposition are materially false or misleading . C. Plaintiff Fails to Plead Sufficient Facts to Establish the Requisite Scienter .

The PSLRA also requires a plaintiff to allege particular facts giving rise to a strong inference

that "the defendant made false or misleading statements either intentionally or with deliberate

recklessness." Vantive, 283 F.3d at 1085; 15 U.S.C . § 78u-4(b)(2). Where the pleadings are not

1 0 sufficiently particularized or where, even taken as a whole, they do not raise a strong inference of

1 1 scienter, dismissal pursuant to Rule 12(b)(6) is proper. Lipton v. Pathogenesis Corp., 284 F .3d 12 U 1027, 1038 (9th Cir. 2002). Plaintiffs deficient allegations of falsity undermine his allegations of

U 13 scienter, because Plaintiffs theory is that Defendants had no reasonable basis to believe that 0 14 A AIDSVAX would prove to be a success in the Phase III trials . Thus, the same facts are used to A M 15 establish falsity and scienter.8 e~ 0 z 16 a~ 0 w 17

18 ' The additional statements identified in Plaintiff's opposition brief are : (1) "[t]his means the vaccine will hopefully be available in early 2005 instead of the middle of 2005" ; (2) "Our senior vice presidents of 19 research and development, inventor of the vaccine, reviewed that article [in Nature] extensively last week. An d in short, it's nothing new. And the conclusions it draws simply would not be possible for us to then have 20 prevented HIV infection in chimpanzees and monkeys . .. . So while it's an interesting experiment, it doesn't change our opinion" ; and (3) "those [the chimpanzee] studies where animals were immunized with our vaccine 21 candidate and then challenged with a fresh vial of HIV, we saw complete protection of the chimpanzees, while all control animals became infected." 22 The Court does note a further problem with respect to the first of these three statements, namely that it 23 is apparently a quote attributed to Francis and published in the San Francisco Chronicle . Plaintiff, however, does not allege facts sufficient to demonstrate that Francis had sufficient control over the publication of the 24 statement to make it actionable . See, e .g., In re Gupta, 900 F. Supp . at 1237 (discussing requirements under "entanglement theory" to plead liability for statements published by analysts) . As to the last statement, Plaintiff 25 does not clearly explain why the "fresh vial of HIV" language was misleading . 26 Defendants correctly state that Plaintiff alleges in conclusory fashion that "Defendants acted with scienter in that Defendants knew that the public documents and statements . .. were materially false and 27 misleading ... ," and that "Defendants knew or recklessly disregarded that ... their statements as to a high expectation of success at the trials' conclusions were unfounded, and lacked any reasonable basis for belief ." 28 (Complaint, ¶ 75 .) If these were the only allegations in the Complaint regarding scienter, there is no doubt that they would be insufficient . Northpoint II, 221 F. Supp . 2d at 1094 .

13 1 As discussed in Section B, Plaintiff attempts to support his claims that the Defendants '

2 statements were "unfounded" and "lacked any reasonable basis for belief' by alleging that Defendants

3 knew that the AIDSVAX vaccine was based on what they claim was "failed and antiquated

4 technology," that the research had been criticized in the scientific community, and that at the midpoint 5 of the Phase III trials, the independent monitoring board did not recommend that the trials be

6 terminated . (Complaint, IT 54, 60, 64, 69 .) Plaintiff follows these assertions by referring the reader

7 back to earlier paragraphs of the Complaint . (Id., citing to IT 4-6, 32-39, 41-42, 46-48.) The

8 allegations in those paragraphs are insufficient to establish a strong inference of deliberate recklessness. 9 First, although as noted Plaintiff contends that Defendants were "privy to non-public

10 information" (Complaint, ¶ 28), Plaintiff does not allege facts as to what that non-public information

1 1 was, e.g., board minutes, reports from the DSMB, reports from the FDA, or conversations with

U E 12 persons who had knowledge about the progress of the trials . See, e.g., In re Peerless Systems Corp. w U 13 Sec. Lit., 182 F. Supp. 2d 982, 993 (N .D. Cal 0 . 2002) (finding scienter allegations deficient where

U 14 plaintiffs alleged no facts as to how Defendants learned of true and adverse information). To the

E; 15 extent Plaintiff relies on the fact that the DSMB did not terminate the Phase III trials at their midpoint 00 rn z 1 6 and the allegations of using an insider to obtain funding from the CDC for those trial to establish

0 17 scienter, the Court concludes that those facts, without more, do not suggest that the Defendants were

18 deliberately reckless in making statements to the public about the ultimate success of AIDSVAX and

19 the progress of the Phase III trials . Indeed, the allegations in Plaintiff's Complaint demonstrate that 20 VaxGen previously stated that if the trials were not successful at the midpoint, VaxGen would have the

2 1 opportunity to establish the efficacy of the vaccine at the trials' conclusion . VaxGen also represented

22 that they would have to await the outcome of those trials to determine the ultimate efficacy of the

23 vaccine. These allegations negate an inference that Defendants were deliberately reckless in either

24 ignoring or not discussing more fully the DSMB's decision not to terminate the trials .'

25 Finally, as this Court has previously mentioned in connection with Plaintiffs allegations o f

26 falsity, the majority of the facts upon which Plaintiff relies to allege that Defendants had no reasonabl e 27

28 9 Plaintiffs also do not allege that Defendants made suspicious stock sales, further negating a strong inference of deliberate recklessness . See, e .g., Silicon Graphics., 183 F.3d at 985-988 .

14 belief in the ultimate success of the AIDSVAX vaccine were in the public domain prior to the Class

2 Period and do not appear related to how the ongoing Phase III trials were proceeding . Nor are the

3 facts alleged by Plaintiff necessarily inconsistent with statements made by the Defendants with regard

4 to the vaccine. As such, for the same reasons the Cou rt found these allegations to be insufficient to

5 establish falsity, the Court finds them insufficient to establish scienter . See, e.g., Yourish, 191 F .3d at

6 993 ; In re: Amylin, 2003 U.S. Dist. LEXIS 7667 at *28 (finding allegations of scienter sufficient

7 where the complaint, when examined in its entirety , contained sufficient allegations of non-public

8 information undermining defendants ' belief in ultimate success of clinical trials and defendants'

9 knowledge regarding the manipulation of a safety database) ."

10 D. Forward Looking Statements and "Bespeaks Caution" Doctrine .

11 The PSLRA's safe harbor provision provides that a person may not be held liable for a

U 1 2 securities fraud claim based on an untrue statement or omission of material fact with respect to any

U 13 forward-looking statement to the extent that the statement is "identified as a forward-looking 0 U 14 statement, and is accompanied by meaningful cautionary statements identifying important factors that A Q E 15 could cause actual results to differ materially from those in the forward-looking statement ." 15 U.S .C. 0 z 16 § 78u-5(c)(1)(A)(i). A person may be held liable, however, if the forward-looking statement is made

w° 17 with "actual knowledge . . . that the statement was false or misleading ." Id. at § 78u-5(c)(1)(B) ; No.

18 84 Employer-Teamster Joint Council Pension Trust Fund v . America West Holding Corp., 320

19 F .3d 920, 936 (9th Cir . 2003) (hereinafter "America West") .

20 Defendants contend that many of the statements alleged to be false or misleading are forward-

21 looking statements and, therefore, they are protected from liability on that basis as well . Again, Plaintiff

22 has not adequately identified the particular statements which he claims are false and misleading . It is

23 Plaintiff's responsibility to do so to meet the pleading standards of the PSLRA . The Court is not 24 willing to parse through the multitude of statements quoted in Plaintiff's Complaint to determine whic h 25

26 10 The Court is cognizant of the Ninth Circuit's decision in Warshaw v. XOMA Corp ., 74 F .3d 955 (9th Cir. 1996) . Although Xoma would appear to suppo rt Plaintiff s case, on further analysis it does not because 27 the plaintiffs in that case were permitted to plead scienter in a conclusory fashion . Xoma, 74 F.3d at 960 (citing GlenFed, 42 F .3d at 1548) . The XOMA case was also decided before the Ninth Circuit issued its opinion in 28 Silicon Graphics, in which it made clear that a plaintiff seeking relief under the PSLRA must plead specific facts supporting a strong inference of deliberate recklessness . Silicon Graphics, 183 F.3d at 985 .

15 1 of those statements might be forward looking and then determine whether Defendants accompanied

2 such statements with sufficient cautionary language . Furthermore, because the Court has already

3 decided that Plaintiff fails to satisfy the heightened pleading standards in establishing falsity and

4 scienter, and has concluded that the Complaint should be dismissed for those reasons, it is not

5 necessary for the Court to address whether any statements are forwarding looking at this time . 6 E. Control Person Liability

7 Section 20(a) of the Securities and Exchange Act provides derivative liability for those wh o

8 control others found to be primarily liable under the Act. In re Ramp Networks, 201 F . Supp . 2d at

9 1063 . Here, Plaintiff asserts that Gordon and Francis are liable under this section because of an

10 underlying violation of section 10b . Because Plaintiff has not adequately alleged facts to support the

1 1 underlying lOb-5 violation, the section 20(a) claim must be dismissed as well . Id. ; America West

12 Holding Corp., 320 F.3d at 945 . y,~ w 13 V . LEAVE TO AMEND o 14 A Motions to dismiss are viewed with disfavor and rarely should be granted, and Federal Rule o f 15 Civil Procedure 15(a) provides that leave to amend is to be freely given when justice requires. See

16 Eminence Capital, LLC v. Aspeon, Inc ., 316 F.3d 1048, 1051 (9th Cir . 2003). "Dismissal with

.Q 17 prejudice and without leave to amend is not appropriate unless it is clear on de novo review that the

18 complaint could not be saved by amendment." Id. (citing Chang v. Chen, 80 F .3d 1293, 1296 (9th 1 9 Cir. 1996)). The Ninth Circuit has admonished that because the standards in the PSLRA are

20 high,"[a]dherence to these principles is especially important in the context of the PSLRA." Id. 21 Ultimately, however, it is within the Court's discretion to determine whether to grant a plaintiff leave to

22 amend. Vantive, 283 F.3d at 1097-1098.

23 The initial complaint in this case was filed on March 17, 2003 . When Plaintiff filed the 24 amended and consolidated complaint on May 15, 2004, he was aware of the rigorous pleading

25 requirements established by the PSLRA, and had thirteen complaints from which to compile his

26 allegations against the Defendants . On February 22, 2005, three days before the hearing on the

27 motion to dismiss, the Court issued a tentative ruling setting forth the questions it had for the parties .

28 The Court specifically asked Plaintiff what, if any, additional facts he could allege if leave to amen d

16 I was granted. (Docket No. 44.) Despite this advance notice, Plaintiff response at the hearing was not

2 adequate to address the Court' s concerns. Plaintiff merely mentioned the possibility of sho rtening the

3 class period to November 5, 2002, and adding allegations regarding defendant Francis ' knowledge of 4 the early studies underlying the AIDSVAX vaccine, neither of which would cure the defects mentioned

5 herein.

6 This is, however, the first time the sufficiency of the Complaint has been challenged, and a

7 review of various complaints filed in the related actions suggests that amendment might not be entirely

8 futile. See, e.g., Braun, et al. v. VaxGen, Inc., et al., No. 03-1264 (Docket No . 1); Williams v.

9 VaxGen, Inc., et al., No . 03-1266 (Docket No. 1). Based on Plaintiff' s comments at the hearing the

10 Court expects that the Plaintiff will face great obstacles in overcoming the pleading deficiencie s

11 described herein. But, in the interest of ensuring that Plaintiff has had an adequate oppo rtunity to make

U° 12 his case , the Court reluctantly grants Plaintiff one fu rther chance to amend. If Plaintiff chooses to file .~ w .C w 13 an amended complaint, he shall: r..~ o 14 (1) Clearly identify the particular statements that he claims were false and misleading by way of

15 underscoring, italics, or the use of bold text, e~ o 16 (2) Clearly identify the reasons why the statements were false and misleading when made, as

17 well the facts supporting those allegations ;

18 (3) Clearly identify which allegations are made on information and belief and the facts and

19 sources relied upon to support Plaintiffs belief in those allegations ; and

20 (4) Set forth any additional particularized facts that were not known to the investing public,

21 which Plaintiff contends demonstrate a strong inference of deliberate recklessness .

22 Plaintiff will not be able to overcome the deficiencies of the current complaint simply by relying

23 on the facts set forth in the Complaint that is the subject of this motion. Rather, he must come forward 24 with additional facts that would suggest Defendants knew or had no reasonable basis to believe that

25 the Phase III trials would not prove successful and, thus, that AIDSVAX would not be a commercial

26 success, or come forward with additional reasons as to why the facts currently alleged would

27 undermine the Defendants' belief in the success of the Phase III trials.

28 VI. CONCLUSION

17 1 For the reasons set forth in this Order, Defendants' motion to dismiss is GRANTED . This

2 ruling is without prejudice to Plaintiff filing an amended complaint .

3 Plaintiff SHALL file any amended complaint, within thirty (30) days of the date of this Order.

4 If Plaintiff does not file an amended complaint within thirty days, this case shall be dismissed .

5 If an amended complaint is filed, Defendants shall either file an answer or move to dismiss

6 within twenty (20) days of service of the amended complaint . If Defendants move to dismiss, they 7 shall notice the motion for July 15, 2005, at 9 :00 a.m., followed by a case management conference on

8 the same date . Plaintiff's opposition to any motion to dismiss shall be due on June 3, 2005 .

9 Defendants' reply brief shall be due on June 17, 2005 . The Court will consider modifying this

10 schedule upon good cause shown . Finally, if Defendants do not move to dismiss an amended

11 complaint, the case management conference shall be held on July 15, 2005, at 1 :30 p.m.

12 IT IS SO ORDERED.

13 Dated: March 30, 2005 /s/ Jeffrey S . White JEFFREY S. WHITE 14 UNITED STATES DISTRICT JUDG E 15

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23 24

25 2 6

27 1

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18 EXHIBIT 21 1

3 4

7 IN THE UNITED STATES DISTRICT COUR T 8 9 FOR THE NORTHERN DISTRICT OF CALIFORNI A

1 0

1 1 In re VERITAS SOFTWARE CORPORATION Master File No. C-03-0283 MMC SECURITIES LITIGATION V 1 2 ORDER GRANTING MOTIONS TO DISMISS, WITH LEAVE TO AMEND ; . 1 3 DENYING MOTION TO STRIKE ; VACATING HEARIN G 1 4 This Document Relates to ALL ACTIONS ( 1 5 Docket Nos . 77, 83) o 1 6 a~ a 1 7 Before the Court is the. motion to dismiss, filed September 12, 2003 by defendants 1 8 Veritas Software Corporation ("Veritas "), Gary L. Bloom ("Bloom"), Mark Leslie ("Leslie") and 1 9 Paul A. Sallaberry ("Sallaberry") (collectively "Veritas defendants") . Also before the Court is 20 the separate motion to dismiss and motion to strike , filed September 17, 2003 by defendant 2 1 Kenneth Lonchar ("Lonchar"). Having considered the papers filed in support of, and in 22 opposition to, the motions , the Court finds the ma tters appropriate for decision without oral 23 argument (see Civ . L.R. 7-1(b)) and hereby VACATES the December 12, 2003 hearing . For 24 the reasons set forth below, defendants' motions to dismiss are GRANTED, and Lonchar's 25 motion to strike is DENIED . 26 BACKGROUND 27 This is a purported securities fraud class action, brought on behalf of persons wh o 28 bought Veritas stock between January 24, 2001 and January 16, 2003 . The action is 1 brought against Veritas ; its former Chief Executive Officer ("CEO"), Leslie ; its current CEO,

2 Bloom; its former Chief Financial Officer ("CFO"), Lonchar ; and its Executive Vice President,

3 Sallaberry. (See Corrected Consolidated Class Action Complaint ("Compl ."), filed July 21, 4 2003.) Plaintiffs allege that defendants violated §§ 10(b) and 20(a) of the Securitie s 5 Exchange Act of 1934 ("Exchange Act") and Rule 1 Ob-5 promulgated thereunder,' by causing 6 Veritas to issue false and misleading statements about its financial performance for the fourth 7 quarter of its fiscal year 2000 ("4Q00") and fiscal year 2001 . (See id . ¶ 1 .) Veritas is a 8 supplier of "data availability software products[ .]" (See id . ¶ 2 .) 9 Plaintiffs allege that, in 2000 and 2001, Veritas improperly recorded revenue an d 10 expenses with respect to a transaction with America Online , Inc. ("AOL") in September 2000, 1 1 in which AOL purchased $50 million in Veritas software , and Veritas agreed to purchase $20 12 million in online advertising from AOL. (See id . 15.) Plaintiffs allege that Veritas improperly 13 recognized at least $20 million of the $50 million in software and service sales as revenue for 14 its 4000 and full fiscal year 2000. (See id .) Plaintiffs also allege that Veritas improperly 15 recorded $20 million in overvalued adve rtising expenses during its 4Q00 and throughout its 16 fiscal year 2001 . (See id .) As a result of the allegedly improper recognition of revenues on 1 7 the AOL transaction, Veritas posted, .on January 24, 2001, "record 4Q00 revenue growth and 18 earnings growth over the prior year and was able to beat First Call analysts consensus 19 revenue estimates,by $25 million and beat earnings per share ("EPS") estimates by $0 .02 per 20 share." (See id . ¶ 6.) Throughout fiscal year 2001 , Veritas repeated the allegedly false 4Q00

21 and fiscal year 2000 revenue and earnings results in press releases , conference calls and in 22 public filings with the Securities Exchange Commission ("SEC"), and allegedly falsely assured 23 investors that its revenue recognition principles were in compliance with Generally Accepted 24 Accounting Principles ("GAAP") . (See id . ¶ 7 .) 25 In 2002, the United States Department of Justice ("DOJ") and the SEC commenced an 26 investigation into AOL's revenue recognition practices "related to barter and roundtrip typ e 27

28 1 See 15 U.S.C . §§ 78j(b), 78t(a); 17 C.F.R. § 240 . 10b-5.

2 1 transactions2 on sales of its online advertising space - including its September 2002

2 adve rtising deal with Veritas." (See id . ¶ 9 .) In August 2002, the SEC subpoenaed Veritas

3 for documents relating to its $50 million transaction with AOL . (See id . IT 10.) Defendants did 4 not disclose to investors the SEC's investigation into the accounting of Veritas ' transaction 5 with AOL until November 14, 2002. (See id. 110 .) 6' On October 3, 2002, Veritas announced to investors that Lonchar , its CFO, had 7 misrepresented his educational background . (See id . ¶ 11 .) In that announcement, Bloom 8 assured investors that Lonchar's misrepresentation had no effect on the accuracy of Veritas' 9 financial statements or on the quality of its financial procedures and controls . (See id . 1 12.) 10 According to the complaint, Bloom further assured investors that "it was unlikely that there 11 would be any additional scrutiny of the Company's financials because the Company had 12 recently completed an internal review as part of its certification to the SEC ." (See id .) Veritas

13 did not disclose the SEC's investigation into the AOL transaction at that time . (See id .) After 1 4 Veritas' announcement, the company's stock price lost 19% of its value, dropping from 15 $15.15 on October 2, 2002 to $11 .53 on October 3, 2002. (See id . ¶ 14.) 16 On October 21, 2002, Veritas announced its 3Q02 financial results in a press releas e 17 and a conference call with analysts . (See id . ¶ 15.) Veritas did not disclose the SEC' s 18 investigation into the AOL transaction at that time . (See id .) 19 On October 23, 2002, Veritas announced that it would restate its financial results for th e 20 two years between September 30, 2000 and June 30, 2002, reducing revenues, primaril y

2 1 from online advertising transactions, by $190 million . (See id . ¶ 16.) Veritas did not disclos e 22 the SEC's investigation into the AOL transaction at that time . (See id .) 23 On November 14, 2002, Veritas filed with the SEC its form 10-Q for the period endin g 24 September 30, 2002 . (See id . 117 .) In that document, Veritas disclosed that it wa s 25 cooperating with the SEC in its investigation of AOL and of AOL' s September 2000 26

27 2 According to the complaint, the SEC "has described roundtrip transactions as transactions that involve simultaneous pre-arranged sales transactions in order to create a 28 false impression of business activity and revenue ." (See Compl. at 2 n.3 .)

3 1 transaction with Veritas. (See id .) Veritas also stated that it was reviewing its accounting

2 treatment of the transaction, focusing on $20 million in advertising services expense and $20

3 million of the revenue . (See id .) After that announcement, Veritas' stock price dropped from 4 $18.31 to a low of $15 .83. (See id .) 5 On January 17, 2003, Veritas, according to plaintiffs, announced that it would restate it s 6 fiscal year 2000 and 2001 financial statements as a result of "improper accounting" with 7 respect to its transactions with AOL in 2000 . (See id . ¶ 18.) The company announced that it

8 would "restate its financial results to reflect that $20 million of license and support fees paid by 9 AOL will not be recognized as revenue and $20 million of advertising services paid by AOL 10 will not be recorded as expense." (See id .) After the announcement, Veritas' stock price 1 1 dropped from $19 .28 on January 16, 2003 to a low of $16 .95 on January 17, 2003. (See id . ¶ 12 19.)

13 On March 17, 2003, Veritas filed with the SEC its Form 10-K/A for the fiscal yea r 14 ending December 31, 2001, officially announcing the restatement of revenue for the fourth 15 quarter and fiscal years 2000 and 2001 . (See id . ¶ 20.) Veritas allegedly admitted that "at 1 6 the time of the transaction , the fair value of the goods and services purchased and sold in the 17 September 2000 AOL transactions could not be reasonably determined as required by 18 GAAP ." (See id .) Veritas also revealed that it would restate additional transactions . (See 19 id .) According to the complaint, "[t]he effect of the restatement reduced revenue for fiscal year 20 2000 by $20 million (all from 4000) and increased losses by $8 .6 and $0.02 per share, 2 1 respectively (also from 4Q00), thereby erasing all of the earnings that represented the margin 22 of earnings that beat Wall Street estimates for 4Q00 ." (See id .)

23 LEGAL STANDAR D 24 A motion to dismiss under Rule 12(b)(6) .cannot be granted unless "it appears beyond 2 5 doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him 2 6 to relief." See Conley v. Gibson, 355 U .S . 41, 45-46 (1957) . Dismissal can be based on the 27 lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable

28 legal theory. See Balistreri v. Pacifica Police Dept. , 901 F .2d 696, 699 (9th Cir . 1990).

4 1 Generally, a district court, in ruling on a Rule 12(b)(6) motion, may not consider an y 2 material beyond the pleadings . See Hal Roach Studios. Inc. v. Richard Feiner And Co. . Inc. , 3 896 F.2d 1542, 1555 n . 19 (9th Cir. 1990). Material that is properly submitted as part of the 4 complaint, however, may be considered. See id . Documents whose contents are alleged in

5 the complaint, and whose authenticity no party questions, but which are not physically attached 6 to the pleading, also may be considered . See Branch v . Tunnell , 14 F.3d 449, 454 (9th Cir . 7 1994). Finally, the Court may take judicial notice of matters of public record . See Mack v. 8 South Bay Beer Distributors, Inc ., 798 F .2d 1279, 1282 (9th Cir. 1986) .3 9 In analyzing a motion to dismiss , the Court may disregard factual allegations if such 10 allegations are contradicted by the facts established by reference to exhibits attached to the 1 1 complaint. See Durning v. First Boston Corp ., 815 F.2d 1265, 1267 (9th Cir. 1987) . 12 Conclusory allegations, unsupported by the facts alleged, need not be accepted as true . See

13 Holden v. Hagopian, 978 F .2d 1115, 1121 (9th Cir. 1992). 14 DISCUSSION 15 A. Motions to Dismiss 16 As both motions to dismiss raise essentially the same issues, the Court will conside r 17 I them together.

18 1 . Section 10(b) and Rule 1Ob-5 19 Defendants' motions to dismiss the § 10(b) and Rule 1 Ob-5 claims are based primaril y 20 on the argument that plaintiffs have not alleged scienter with the requisite specificity . In 21 particular, defendants argue that plaintiffs have not pleaded facts showing that any of the 22 defendants knew about or participated in the initial accounting decisions relating to the 23 September 2000 AOL transaction, or that any defendant was aware, at any relevant time prio r 24 to Veritas' January 17, 2003 announcement that it would restate its fiscal year 2000 and 200 1

26 3 In connection with each of the instant motions, defendants have requested that the Court take judicial notice of numerous documents, including SEC filings . Plaintiffs have 27 opposed those requests in part . In ruling on the instant motions, the Court has not found it necessary to review any documents outside the pleadings . Accordingly, the requests for 28 judicial notice are, in each instance, DENIED as moot .

5 1 I financial statements, that there were any accounting errors in Veritas' treatment of tha t 2 1 transaction . 3 Section 10(b) of the Securities Exchange Act of 1934 provides that "[i]t shall be 4 unlawful for any person . . . [t]o use or employ, in connection with the purchase or sale of any 5 security . . . any manipulative or deceptive device or contrivance in contravention of such rules 6 and regulations as the Commission may prescribe [.]" See 15 U .S .C. § 78j(b). Rule 1 Ob-5 7 provides:

8 It shall be unlawful for any person . . . 9 (a) To employ any device, scheme, or artifice to defraud , 10 (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the 11 circumstances under which they were made, not misleading, o r 12 (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the 13 purchase or sale of any security . 14 17 C.F.R . § 240.10b-5. "The elements of a Rule 10b-5 claims are : (1) a misrepresentation o r 15 omission of a material fact ; (2) reliance, (3) scienter, and (4) resulting damages ." See 1 6 Paracor Finance. Inc. v. General Electric Capital Corp., 96 F. 3d 1151, 1157 (9t" Cir. 1996) . 1 7 Any class action complaint alleging securities fraud in violation of the Exchange Act is

18 1 subject to the heightened pleading standards set fo rth in the Private Securities Litigation 1 9 Reform Act of 1995 ("PSLRA") . See In re Silicon Graphics Inc . Sec. Litig„ 183 F. 3d 970, 20 973-74 (9th Cir . 1999). Under the PSLRA, for all claims based on misrepresentations or 21 omissions, plaintiffs must "specify each statement alleged to have been misleading, the 22 reason or reasons why the statement is misleading, and, if an allegation regarding the

23 statement or omission is made on information and belief, the complaint shall state with 24 particularity all facts on which that belief is formed ." See 15 U .S.C. § 78u-4(b)(1) . Plaintiffs 25 "must provide all the facts forming the basis for [their] belief in great detail ." See Silico n 26

6 1 Graphics, 183 F . 3d at 983 4 The PSLRA also requires that "the complaint shall, with respect 2 to each such act or omission alleged to violate this chapter [the Securities Exchange Act of 3 1934], state with particularity facts giving rise to a strong inference that the defendant acted 4 with the required state of mind ." See 15 U.S.C . § 78u-4(b)(2) . The required state of mind is

5 "deliberate recklessness , at a minimum." See Silicon Graphics , 183 F. 3d at 974. Plaintiffs 6 "must plead , in great detail, facts that constitute strong circumstantial evidence of deliberately 7 reckless or conscious misconduct." See id . They "must state specific facts indicating no less

8 than a degree of recklessness that strongly suggests actual intent ." See id . at 979 . 9 In determining whether scienter has been adequately alleged, the Court must examine

10 1 the totality of plaintiffs ' allegations . See No . 84 Employer-Teamster Joint Council Pension 11 Trust Fund v. America West Holding Corp , 320 F. 3d 920, 938 (9th Cir. 2003) . The Court 12 must consider "`all reasonable inferences to be drawn from the allegations, includin g

13 inferences unfavorable to the plaintiffs ."' See id. (quoting Gompper v. VISX. Inc. , 298 F .3d 14 893, 897 (9th Cir. 2002)). "District courts should consider all the allegations in their entirety, 15 together with any reasonable inferences that can be drawn therefrom , in concluding whether, 16 on balance, the plaintiffs' complaint gives rise to the requisite inference of scienter." Gompper 17 v. VISX. Inc. , 298 F.3d at 897. To establish a strong inference of scienter, the allegations

18 must show that an inference of fraud is "`the most plausible of competing inferences ."' See id. 19 (quoting Helwig v. Vencor. Inc. , 251 F.3d 540, 553 (6th Cir. 2001 ) (en banc)) . 20 In the instant case, the complaint acknowledges that "the type of restatemen t 21 announced by Veritas was for `a correction of an error in previously issued financial 22 statements."' (See Compl. ¶ 92 (quoting Accounting Principles Bulletin ("APB") No . 20 .) The

23 mere fact that Veritas has restated its accounting for the AOL transactions does not give rise 24 to a strong inference of fraudulent intent. See DSAM Global Value Fund v. Altris Software. 25 Inc., 288 F.3d 385, 390 (9th Cir. 2002) (citation omitted) ("[T]he mere publication o f 26

27 4 "Allegations are deemed to have been made on information and belief until the plaintiffs demonstrate that they have personal knowledge of the facts." In re The Vantive Corp. 28 Sec . Litig ., 283 F.3d 1079, 1085 n.3 (9th Cir. 2002) .

7 inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish 2 scienter.") The Ninth Circuit has held that even allegations that an "auditor egregiously failed

3 to see the obvious - that according to [GAAP], millions of dollars in revenue from software 4 sales reflected in a financial statement should not have been recognized" - fail to establish a 5 strong inference of scienter, but rather allege only "a compelling case of negligence - perhaps 6 even gross negligence." See id . at 387.

7 Here, plaintiffs have failed to plead facts sufficient to give rise to a strong inference tha t 8 anyone at Veritas knew, or was deliberately reckless in not knowing, of the accounting error 9 with respect to the AOL transaction . Plaintiffs allege that when Veritas announced the 10 restatement, it acknowledged that "at the time of the transaction, the fair value of the goods 11 and services purchased and sold in the September 2000 AOL transactions could not be 1 2 reasonably determined as required by GAAP ." (See Compl . % 20 .) Plaintiffs also allege that 13 Veritas' "accounting for the September 2000 AOL transaction violated GAAP and SEC rules 14 that require that multiple element software and services transactions be recorded at an 15 established fair value ." (See id . IT 53.) As defendants correctly point out, however, plaintiffs 16 have not alleged any facts to show how Veritas originally determined the value of the 1 7 components of the September 2000 AOL transaction at the time of the transaction . The 18 complaint also fails to allege who was involved in making those decisions . Consequently, 19 there are no facts from which the Court can determine whether those valuations were so 20 outside the bounds of reasonableness as to constitute deliberate recklessness on the part of 21 any defendant. See , g.g ., In re The Vantive Corp . Sec. Litig., 283 F.3d 1079, 1091 (9th Cir . 22 2002) (citation omitted) (holding complaint must "allege specific contemporaneous conditions 23 known to the defendants that would strongly suggest that the defendants understood that their 24 recognition of revenues . . . was `excessive"') . 25 Although plaintiffs attempt to support their fraud allegations as set forth below, thes e 26 allegations fail, both individually and collectively, to give rise to a strong inference of scienter . 27 First, plaintiffs attempt to support their fraud allegations by summarizing, in th e 28 complaint, information provided by eleven confidential witnesses, all of whom are former 1 Veritas employees. (See Compl. ¶ 29.) Although, in theory, former employees might have 2 information that would give rise to a strong inference of fraud, these particular confidential

3 witnesses, at least as shown by the pleadings, had little to no experience with the accounting

4 of the AOL transaction, or other information from which a strong inference of scienter can be

5 drawn . 6 Of those witnesses, ten are alleged to have worked in marketing and advertising, not

7 accounting . (See id .) According to the complaint, those individuals state that the AOL 8 transaction was well known at Veritas, and that the negotiations were conducted by high level 9 Veritas executives, including Sallaberry. (See id . ¶ 54(a)-(d).) Plaintiffs argue that because 10 the value of the AOL transaction was so high, it is "reasonable to infer" that defendants knew 11 of the specifics of the transaction . While it may be reasonable to infer that Veritas' executives 12 were aware of the transaction, it is not reasonable to assume, without some factual allegations 13 as to the extent of their involvement in the accounting aspects of that transaction, that they 14 were aware that the accounting of that transaction was erroneous. See , e.g ., DSAM Global 15 Value Fund , 288 F.3d at 390 (holding, where complaint alleged auditor had access to 16 documents revealing clients' improper revenue recognition at time auditor conducted audit, 1 7 allegations raised only inference of negligence, not scienter) . Moreover, even if the facts 18 alleged can be considered to give rise to a "reasonable inference" that defendants knew that 19 accounting errors had been made, which they do not, the pleading requirements of the 20. PSLRA would not be met, as the PSLRA requires the allegation of facts that give rise to a 21 "strong inference" of scienter. See In re Read-Rite Corp. Sec. Litig., 335 F .3d 843, 848-49 22 (9th Cir. 2003) (holding that although defendants' job duties might give rise to "reasonable 23 inference" that defendants knew of false statements about product, such allegations were 24 insufficient to state claim under PSLRA, which requires "strong inference" of scienter .) 25 According to plaintiffs , two of the confidential witnesses are of the opinion that AOL 26 I was not "representative of the typical advertising market for Veritas" because AOL was 27 typically used by individuals, while Veritas' customers were typically businesses. (See id . 28 ¶ 54(h).) According to plaintiffs , it was later determined that the advertisements Veritas

9 1 placed with AOL received little response . (See id .) From these allegations , the Cou rt cannot

2 infer, without more, that any particular defendant knew that Veritas ' ultimately unsuccessful

3 advertising venture with AOL had no value at the outset. Cf., In re Glen Fed Sec. Litig., 42 F.3d 4 1541, 1548 (9th Cir. 1994) (observing , in pre-PSLRA case, "often there is no reason to

5 assume that what is true at the moment plaintiff discovers it was also true at the moment of the 6 alleged misrepresentation"). 7 Plaintiffs also allege that it was "apparent" to some of the confidential witnesses tha t

8 the transaction was a "swap/barter" transaction . (See id . ¶ 54(a).) The complaint 9 acknowledges, however, that there is nothing intrinsically fraudulent about a "barter" 10 transaction. (See id. 1101 .) Plaintiffs allege that, under GAAP, the accounting for barter 11 transactions "should be based on the fair value of the assets or services involved ." (See id .) 12 The only evidence even touching on how Veritas valued the AOL transaction at the time they

13 entered into it comes from Confidential Witness 2 ("CW2"), the only confidential witness who 1 4 is alleged to have had responsibilities in finance or accounting . (See id .) According to the 1 5 complaint, CW2 was a Veritas finance manager who "was responsible for compiling revenues 1 6 and costs for the profit and loss statements for the professional services division, and had 1 7 personal knowledge regarding the professional services aspect of the AOL deal ." (See id. ¶

18 29(2) .) CW2 allegedly received an inquiry from Veritas' revenue accounting department, 19 inquiring about "the price ranges of the professional training courses and consulting services 20 for the AOL deal," and specifically seeking information about the most expensive courses. 21 (See id . ¶ 54(f) .) According to the complaint, CW2 was told the information was being 22 gathered to assign a value to a contract in negotiation with AOL . (See id .) This allegation

23 fails to raise any inference of scienter, and in fact suggests the contrary, as it tends to show 24 that Veritas was attempting to base the value of its services to AOL on the actual cost of those 25 services, as plaintiffs admit GAAP requires. (See id . ¶ 101). 26 Plaintiffs next allege that defendants "were motivated" to commit accounting fraud

27 I because Veritas allegedly needed the revenue from the AOL transaction to beat market

28 expectations for 4Q00. (See id . ¶ 54(m)-(n) .) . Although this allegation suggests that Veritas

10 1 may have had a motive to inflate its revenues from the AOL transaction, it does not raise,

2 without more, a strong inference that Veritas' recognition of that revenue was deliberately

3 reckless . See Silicon Graphics , 183 F .3d at 974 (holding that, in order to raise strong 4 inference of deliberate recklessness, "plaintiffs must state facts that come closer to 5 demonstrating intent, as opposed to mere motive and opportunity") . 6 Plaintiffs also find it suspicious that Veritas did not disclose the September 200 0

7 11 transaction with AOL at the time the transaction was entered into . (See Compl. % 54(l).) 811 Plaintiffs acknowledge, however, that Veritas disclosed the AOL transaction on November 14, 9 2000 . (See id . % 107.) Plaintiffs do not allege, moreover, why the transaction was required to 10 be disclosed prior to that date, or that any defendant was deliberately reckless in failing to 11 disclose the transaction before that date . 12 Plaintiffs further allege that Veritas' failure to immediately disclose the SEC' s 1 3 investigation raises a strong inference of fraudulent intent . (See , etc ., I . ¶¶ 9-17.) Plaintiffs 14 acknowledge, however, that the SEC was investigating "AOL's revenue recognition 15 improprieties." (See id . ¶¶ 9, 76 .) There is no allegation that the SEC suspected Veritas of 16 accounting improprieties. Accordingly, Veritas' failure to disclose the SEC's investigation 1 7 earlier than it did does not raise a strong inference of scienter . 18 Finally, plaintiffs contend that defendants' stock sales raise a strong inference of 19 scienter. Although unusual or suspicious stock sales by corporate insiders may constitute 20 circumstantial evidence of scienter, stock sales are suspicious only when they are 2 1 "`dramatically out of line with prior trading practices at times calculated to maximize the 22 personal benefit from undisclosed inside information ."' See In re Silicon Graphics , 183 F .3d at 23 986 (citation omitted). "Among the relevant factors to consider are : (1) the amount and 24 percentage of shares sold by insiders ; (2) the timing of the sales ; and (3) whether the sales 25 are consistent with the insider's prior trading history ." See id . Plaintiffs allege that defendant 2 6 Leslie sold 53 .1 % of his stock between May 2001 and March 2002, that defendant Sallaberry 27 sold 16.54% of his stock between February 2001 and February 2002, and that defendant 28 Lonchar sold 19 .42% of his stock between May 2001 and March 2002 . (See Compl. 128 .)

11 1 Although all of these sales took place during the period when Veritas' financial statements 2 allegedly contained errors with respect to the accounting of the AOL transaction, the complaint 3 contains no allegation as to any defendant's prior or subsequent trading history . Notably, the 4 sales did not occur immediately after Veritas entered into the AOL transaction . There is 5 nothing in the allegations to even suggest that defendants sold their stock in order to profit 6 from the alleged accounting error. 7 In conclusion, plaintiffs' allegations, taken as a whole, do not raise a strong inference o f 8 scienter. Consequently, plaintiffs fail to state a claim for violation of § 10(b) of the Exchange 9 Actor Rule 1 Ob-5. 10 2. Section 20(a) 11 Plaintiffs also allege a cause of action against the individual defendants for violation of 12 § 20(a) of the Exchange Act, which provides : " Every person who, directly or indirectly, controls 13 any person liable under any provision of this chapter or of any rule or regulation thereunder 14 shall also be liable jointly and severally with and to the same extent as such controlled person 15 to any person to whom such controlled person is liable , unless the controlling person acted in 16 good faith and did not directly or indirectly induce the act or acts constituting the violation or 17 cause of action ." 15 U .S .C . § 78t(a) . To be liable under § 20(a), defendants also must be 18 liable under another section of the Exchange Act . See Heliotrope General. Inc. v. Ford Motor 19 Co ., 189 F.3d 971, 978 (9th Cir. 1999). As plaintiffs have not stated a claim under § 10(b), 20 their claim for violation of § 20(a) also fails. See id . 2 1 B. Motion to Strike 22 Lonchar moves separately to strike various portions of the complaint that refer to hi s 23 alleged misrepresentations about his educational background , his subsequent departure from 24 his position at Veritas as CFO, and the market's reaction to his alleged misrepresentations . 25 (See Mot. to Strike at 1-2 (citing Compl . 3:18-20, 3:25-28, 4:4-6, 4 :7-11, 6:20-21, 12:22-26, 26 12:27, 32:6-7, and 32:9-10.) Lonchar contends that these allegations have no relation to 27 plaintiffs' allegations of securities fraud, and thus should be stricken from the complaint 28 pursuant to Rule 12(f) of the Federal Rules of Civil Procedure .

12 Rule 12(f) provides that "the court may order stricken from any pleading any insufficient 2 defense or any redundant, immaterial, impertinent, or scandalous matter." "[T]he function of a 3 12(f) motion to strike is to avoid the expenditure of time and money that must arise from 4 litigating spurious issues by dispensing with those issues prior to trial . . . ." Fantasy. Inc. v. 5 Foe , 984 F .2d 1524, 1527 (9th Cir. 1993) (citation omitted), rev. on other grounds, 510 6 U.S. 517 (1994) . "[R]edundant matter consists of allegations that constitute a needless 7 repetition of other averments or which are totally foreign to the issue[s] ." See Gilbert v . Eli Lilly 8 & Co. Inc. , 56 F .R.D . 116,120 n .4 (D. P .R. 1972) (citations omitted) . "`Immaterial' matter is 9 that which has no essential or important relationship to the claim for relief or the defenses 10 being pleaded ." Fa ntasy, 984 F .2d at 1527 (quoting 5 Charles A . Wright & Arthur R . Miller, 11 Federal Practice and Procedure § 1382, at 706-07 (1990)) . "`Impertinent' matter consists of 1 2 statements that do not pertain, and are not necessary, to the issues in question ." Id . (quoting 5 13 Charles A . Wright & Arthur R . Miller, Federal Practice and Procedure § 1382, at 711 (1990)) . 14 "Scandalous" matter consists of any unnecessary allegation that "reflects cruelly upon the 15 moral character of an individual, or states anything in repulsive language which detracts from 16 the dignity of the court." Gilbert, 56 F.R.D. at 120 n .7 (citations omitted). Superfluous 17 historical allegations are a proper subject of a motion to strike . See id . (citing Healing v. 18 Jones, 174 F . Supp. 211, 220 (D . Ariz. 1959)). "Motions to strike are generally not granted 19 unless it is clear that the matter to be stricken could have no possible bearing on the subject 20 matter of the litigation ." LeDuc v. Kentucky Central Life Ins . Co., 814 F . Supp. 820 (N .D . Cal . 2 1 1992) . 22 Lonchar does not seek to strike all of the allegations in the complaint that relate to hi s 23 alleged misrepresentations about his educational background . In particular, he does not seek 24 to strike most of the allegations in paragraphs 11, 12, and 80 of the complaint . Those 25 allegations relate to Bloom's October 2, 2002 announcement to. Veritas' investors that 26 Lonchar had misrepresented his educational background, and plaintiffs' contention that 27 Bloom's statements that Lonchar's misrepresentations did not affect the Company's internal 28 financial statements or its financial procedures and controls were misleading because Bloo m

13 1 failed to disclose that the SEC was investigating the AOL transaction. By not seeking to strike 2 these allegations, Lonchar essentially concedes that plaintiffs ' allegations about hi s 3 misrepresentations have some bearing on the subject matter of the litigation . In addition, 4 although the Court is dismissing the complaint for lack of sufficient allegations of scienter, the 5 1 fact that Lonchar left his employment as CFO of Veritas shortly after the SEC began 6 1 investigating the AOL transaction, and before Veritas announced that it would restate its 7 financial statements with respect to that transaction, provides at least some minimal support 8 for an inference that Lonchar's departure from Veritas and the need for the restatement were 9 related. See, tce . ., In re Adaptive Broadband Sec. Litig ., 2002 U.S. Dist. LEXIS 5887 at *42- 10 43 (N.D . Cal. 2002) (finding allegation that executives ' departure from company coincided 11 with restatement of financials , in connection with other allegations , supported inference of 12 scienter).

13 In conclusion, although plaintiffs' allegations about Lonchar's alleged 14 misrepresentations are undoubtedly unpleasant for Lonchar to read, they are not so divorced 15 from plaintiffs' allegations of securities fraud that they should be stricken from the complaint . 16 CONCLUSION 17 For the reasons stated above:

18 1 . Defendants' motions to dismiss are GRANTED, with leave to amend. Plaintiffs shall 19 I file an amended complaint within 21 days of the date of this order, or the complaint will be 20 deemed dismissed with prejudice . 2 1 I // 22

23 2. Lonchar's motion to strike is DENIED . 24 3. This order terminates Docket Nos . 77 and 83. 25 IT IS SO ORDERED . 26 /s/ Maxine M . Chesney Dated : December 10, 2003 MAXINE M . CHESNEY 27 United States District Judg e 28

14 EXHIBIT 22 UNITED STATES CODE CONGRES SIONAL AND ADMINISTRATIVE NEWS

104th Congress First Sessio n 1995

Convened January 4, 199 5 Adjourned January 3, 199 6

Volume 2

LEGISLATIVE HISTORY : PUBLIC LAWS 104-11 to 104-89 , 104-93, and 104-95 to 104-98 PROCLAMATIONS EXECUTIVE ORDERS TABLES and INDEX

WEST PUBLISHING CO. ST. PAUL, MINN . HOUSE CONFERENCE REPORT NO . 104-369

[page 31] JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENC E The managers on the part of the House and the Senate at the conference on the disagreeing votes of the two Houses on the amendments of the Senate to the bill (H .R. 1058) to reform Federal securities litigation, and for other purposes, submit the following joint statement to the House and the Senate in explanation of the effect of the action agreed upon by the managers and recommended in the accompanying conference report :

STATEMENT OF MANAGERS -THE "PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 " The overriding purpose of our Nation 's securities laws is to protect investors and to maintain confidence in the securities markets, so that our national savings, capital formation and investment may grow for the benefit of all Americans . The private secu rities litigation system is too impo rtant to the integrity of Ame rican capital markets to allow this system to be undermined by those who seek to line their own pockets by bringing abusive and meritless suits . Private securities litigation is an indispensable tool with which defrauded investors can recover their losses without having to rely upon government action . Such private lawsuits promote public and global confidence in our capital markets and help to deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers and others properly perform their jobs. This legislation seeks to return the securities litigation system to that high standard . Congress has been prompted by significant evidence of abuse in private securities lawsuits to enact reforms to protect investors and maintain confidence in our capital markets. The House and Senate Committees heard evidence that abusive practices committed in private securities litigation include : ( 1) the routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price , without regard to any underlying culpability of the issuer , and with only faint hope that the discovery process might lead eventually to some plausible cause of action; (2) the targeting of deep pocket defendants , including accountants, underwriters , and individuals who may be covered by insurance , without regard to their actual culpability ; (3) the abuse of the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle ; and (4) the manipulation by class action lawyers of the clients whom they purportedly represent . These serious injuries to innocent parties are compounded by the reluctance of many judges to impose sanctions under Federal Rule of Civil Procedure 11, except in those cases involving truly outrageous misconduct . At the same time, the investing public and the entire U.S. economy have been injured by the 730 LEGISLATIVE HISTORY HOUSE CONT. REP. N0. 104- 169 [page 43 ] due to the chilling effect of the current system on the robustness and candor of disclosure. . . . Understanding a company 's own assessment of its future potential would be among the most valuable information shareholders and potential investors could have about a firm." 26 Fear that inaccurate projections will t rigger the filing of securities class action lawsuit has muzzled corporate management. One study found that over two-thirds of venture capital firms were re- luctant to discuss their performance with analysts or the public because of the threat of litigation .27 Anecdotal evidence similarly indicates corporate counsel advise clients to say as little as possible, because "legions of lawyers sc rub required filings to ensure that disclosures are as milquetoast as possible , so as to provide no grist for the litigation mill." 28 Technology companies-because of the volatility of their stock prices-are particularly vulnerable to securities fraud lawsuits when projections do not materialize . If a company fails to satisfy its announced earnings projections-perhaps because of changes in the economy or the timing of an order or new product-the company is likely to face a lawsuit . A statutory safe harbor for forward-looking statements The Conference Committee has adopted a statuto ry "safe harbor" to enhance market efficiency by encouraging companies to disclose forward-looking information . This provision adds a new section 27A to the 1933 Act and a new section 21E of the 1934 Act which protects from liability in private lawsuits certain "forward- looking" statements made by persons specified in the legislation .29 The Conference Committee has crafted a safe harbor that differs from the safe harbor provisions in the House and Senate passed bills. The Conference Committee safe harbor , like the Sen- ate safe harbor, is based on aspects of SEC Rule 175 and the judicial created "bespeaks caution " doctrine. It is a bifurcated safe harbor that permits greater flexibility to those who may avail themselves of safe harbor protection . There is also a special safe harbor for issuers who make oral forward-looking statements. The first prong of the safe harbor protects a written or oral forward-looking statement that is: (i) identified as forward-looking, and (ii ) accompanied by meaningful cautiona ry statements identifying important factors that could cause actual results to differ materially from those projected in the statement . Under this first prong of the safe harbor , boilerplate wa rnings will not suffice as meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement . The cautionary statements must convey substantive information about factors that real- istically could cause results to differ materially from those projected in the forward -looking statement , such as, for example, information about the issuer's business. As part of the analysis of what constitutes a meaningful cautionary statement , courts should consider the factors identified in the statements . "Important" factors means the stated factors identified in the cautionary statement must be relevant to the projec- 742 PRIVATE SECURITIES LITIGATION P.L. 104-67 [page 44] tion and must be of a nature that the factor or factors could actually affect whether the forward-looking statement is realized . The Conference Committee expects that the cautionary statements identify important factors that could cause results to differ materially-but not all factors. Failure to include the particular factor that ultimately causes the forward-looking statement not to come true will not mean that the statement is not protected by the safe harbor . The Conference Committee specifies that the cautionary statements identify "important" factors to provide guidance to issuers and not to provide an opportunity for plaintiff counsel to conduct discovery on what factors were known to the issuer at the time the forward-looking statement was made . The use of the words "meaningful" and "important factors" are intended to provide a standard for the types of cautionary statements upon which a court may, where appropriate, decide a motion to dismiss, without examining the state of mind of the defendant . The first prong of the safe harbor requires courts to examine only the cautionary statement accompanying the forward-looking statement. Courts should not examine the state of mind of the person making the statement. Courts may continue to find a forward-looking statement immaterial-and thus not actionable under the 1933 Act and the 1934 Acton other grounds. To clarify this point, the Conference Committee includes language in the safe harbor provision that no liability attaches to forward-looking statements that are "immaterial." The safe harbor seeks to provide certainty that forward-looking statements will not be actionable by private parties under certain circumstances . Forward-looking statements will have safe harbor protection if they are accompanied by a meaningful cautionary statement. A cautionary statement that misstates historical facts is not covered by the Safe harbor, it is not sufficient, however, in a civil action to allege merely that a cautionary statement misstates historical facts. The plaintiff must plead with particularity all facts giving rise to a strong inference of a material misstatement in the cautionary statement to survive a motion to dismiss. The second prong of the safe harbor provides an alternative analysis. This safe harbor also applies to both written and oral forward-looking statements . Instead of examining the forward-looking and cautionary statements, this prong of the safe harbor focuses on the state of mind of the person making the forward-looking statement. A person or business entity will not be liable in a private lawsuit for a forward-looking statement unless a plaintiff proves that person or business entity made a false or misleading forward- looking statement with actual knowledge that it was false or misleading. The Conference Committee intends for this alternative prong of the safe harbor to apply if the plaintiff fails to prove the forward-looking statement (1) if made by a natural person, was made with the actual knowledge by that person that the statement was false or misleading; or (2) if made by a business entity, was made by or with the approval of an executive officer of the entity with actual knowledge by that officer that the statement was false or misleading. 743 LEGISLATIVE HISTORY HOUSE CONF. REP. NO. 103-169 [page 45] The Conference Committee recognizes that, under certain circumstances, it may be unwieldy to make oral forward-looking statements relying on the first prong of the safe harbor . Companies who want to make a brief announcement of earnings or a new product would first have to identify the statement as forward-looking and then provide cautionary statements identifying important factors that could cause results to differ materially from those projected in the statement. As a result, the Conference Committee has provided for an optional, more flexible rule for oral forward-looking statements that will facilitate these types of oral communications by an issuer while still providing to the public information it would have received if the forward-looking statement was written . The Con- ference Committee intends to limit this oral safe harbor to issuers or the officers, directors, or employees of the issuer acting on the issuer's behalf. This legislation permits covered issuers, or persons acting on the issuer's behalf, to make oral forward-looking statements within the safe harbor. The person making the forward-looking statement must identify the statement as a forward-looking statement and state that results may differ materially from those projected in the statement. The person must also identify a "readily available" written document that contains factors that could cause results to differ materially. The written information identified by the person making the forward-looking statement must qualify as a "cautionary statement" under the first prong of the safe harbor (i .e ., it must be a meaningful cautionary statement or statements that identify important factors that could cause actual results to differ materially from those projected in the forward-looking statement.) For purposes of this provision, "readily available" information refers to SEC filed documents, annual reports and other widely dissemi- nated materials, such as press releases . Who and what receives safe harbor protection The safe harbor provision protects written and oral forward- looking statements made by issuers and ce rtain persons retained or acting on behalf of the issuer. The Conference Committee intends the statutory safe harbor protection to make more information about a company's future plans available to investors and the public. The safe harbor covers underwriters , but only insofar as the underwriters provide forward looking information that is based on or "derived from " information provided by the issuer. Because underwriters have what is effectively an adversarial relationship with issuers in performing due diligence , the use of the term "derived from" affords underwriters some latitude so that they may disclose adverse information that the issuer did not necessarily "provide ." The Conference Committee does not intend the safe harbor to cover forward-looking information made in connection with a broker's sales practices. The Conference Committee adopts the SEC's present definition, as set forth in Rule .175, of forward -looking information, with certain additions and cla rifying changes. The definition covers : (i) certain financial items, including projections of revenues , income and earnings, capital expenditures, dividends, and capital structure ; ( ii) management's statement of future business plans and ob- 744 EXHIBIT 23 Historical Prices Page 1 of 7

"50.114040IFFINANCEW Search -Finance Home -Yahoo! - Help

Historical Prices - pixr As of May-05-06

s Daily Start: Feb - , 11 10 2005 `;- Weekly End: May - 5 2006 Monthly Dividends Ticker Symbol : F- Get Data

Adj.* Date Open High Low Close Volume Close May-05-06 65.50 67.69 65 .50 67.69 4,228,500 67.69 May-04-06 64.55 65 .32 64.55 65.28 581 ,800 65 .28 May-03-06 63 .70 64 .68 63 .68 64.63 439,700 64.63 May-02-06 64.03 64.45 63 .85 64.08 500,600 64 .08 May-01-06 64.15 64.73 63.45 63 .58 704,300 63 .58 Apr-28-06 63 .83 64.63 63.47 64.29 673,800 64.29 Apr-27-06 62.10 63 .96 62.10 63.74 695,000 63 .74 Apr-26-06 61 .93 63 .04 61 .93 62.53 470,800 62 .53 Apr-25-06 62.46 63 .21 61 .74 61 .98 465,300 _ 61 .9 8 Apr-24-06 62.31 62.77 61 .41 62.56 399,800 62.56 Apr-21-06 63.21 63.21 61 .81 61 .97 560,100 61 .97 Apr-20-06 63.04 63.21 62 .64 62.77 747,700 62.77 Apr-19-06 64.17 64.52 63 .03 63.19 621,900 63 .1 9 Apr-18-06 63 .48 64.75 63 .48 64.54 492,800 64.54 Apr-17-06 63 .77 64.06 63 .28 63.50 248,000 63 .5 0 Apr-13-06 63 .90 64.31 63 .75 64.02 349,500 64.02 Apr-12-06 63 .56 64.31 63 .56 63 .99 325,300 63.99 Apr-11-06 64.11 64.42 63 .44 63 .71 420,200 63.7 1 Apr-10-06 63 .31 64.32 63.29 63 .81 349,300 63 .8 1 Apr-07-06 63 .49 64.30 62.85 63.22 586,300 63.22 Apr-06-06 63 .61 63 .81 62.90 63.58 564,600 63.58 Apr-05-06 63 .90 64.14 63 .40 63.76 728,900 63 .76 Apr-04-06 63 .98 64.82 63 .78 64.10 829,500 64 .10 Historical Prices Page 2 of 7

Apr-03-06 64.15 64.36 63.83 64.08 295,000 64.08 Mar-31-06 63 .96 64.33 63.62 64.14 302,000 64.1 4 Mar-30-06 63 .75 64.41 63.43 63.95 496,100 63.95 Mar-29-06 62.44 64.45 62.19 63.95 1,091,500 63.95 Mar-28-06 62.54 62 .89 62.01 62.19 773,500 62 .1 9 Mar-27-06 62.66 63 .11 62 .54 62.69 357,800 62 .69 Mar-24-06 63 .49 63 .50 62.64 62.90 817,400 62 .90 Mar-23-06 64.13 64.13 62.82 63.07 1,000,600 63 .07 Mar-22-06 64.20 64.56 63 .57 63.65 830,000 63 .65 Mar-21-06 65.52 65 .61 64.25 64.36 878,900 64.3 6 Mar-20-06 65.52 66.00 65 .34 65.57 598,300 65 .5 7 Mar-17-06 65 .43 66.00 65.40 65.66 600,000 65 .66 Mar-16-06 66 .17 66.17 65.29 65.69 727,300 65 .69 Mar-15-06 65 .75 66.09 65.50 65.92 766,700 65.92 Mar-14-06 65 .17 65.66 65.10 65.60 343,700 65.60 Mar-13-06 64.39 65 .51 64.33 65.37 1,332,900 65 .37 Mar-10-06 63 .87 64.73 63.85 64.45 1,234,700 64 .4 5 Mar-09-06 64.27 64.57 63 .60 64.19 1,300,900 64.1 9 Mar-08-06 64.00 64.32 63 .79 64.05 946,400 64.05 Mar-07-06 63 .62 64.14 63 .41 64.03 1,827,500 64.03 Mar-06-06 64.53 64.77 63 .67 63.81 1,183,800 63 .8 1 Mar-03-06 63.67 65 .08 63 .67 64.59 1,703,500 64.5 9 Mar-02-06 64.16 64.20 63 .60 64.10 1,034,400 64.1 0 Mar-O1-06 64.09 64.42 63 .81 64.27 1,000,700 64.27 Feb-28-06 64.64 65.05 63 .57 63 .80 1,612,200 63 .80 Feb-27-06 63 .96 65.16 63 .86 65.06 1,563,800 65 .06 Feb-24-06 63 .16 63.88 63 .06 63.81 1,043,900 63.8 1 Feb-23-06 62 .73 63 .54 62 .43 63.31 1,460,900 63.3 1 Feb-22-06 61 .96 62 .87 61 .96 62.69 2,041,000 62.69 Feb-21-06 61 .25 62 .21 61 .15 61 .97 1,499,300 61 .97 Feb-17-06 61 .93 61 .93 61 .16 61 .29 1,552,100 61 .29 Feb-16-06 61 .46 61 .79 61 .20 61.65 1,693,500 61 .65 Feb-15-06 60.68. 61 .34 60.65 61.30 2,211,800 61 .30 Historical Prices Page 3 of 7

Feb-14-06 60.20 60.92 60. 20 60.92 2,481,300 60.92 Feb-13-06 60.71 60.97 59.75 60.25 1,486,600 60.25 Feb-10-06 60.44 60.96 60.27 60.91 1,547,500 60.9 1 Feb-09-06 60.98 61 .21 60.54 60.80 1,701,100 60.80 Feb-08-06 60.58 61 .56 60.56 61.17 2,840,300 61 .1 7 Feb-07-06 58.10 61 .23 57.98 60.85 7,525,700 60 .85 Feb-06-06 56.76 57.70 56 .65 56.88 1,713,600 56 .88 Feb-03-06 56.83 57.23 56 .72 57.06 1,577,800 57 .06 Feb-02-06 57.03 57.32 56.99 57.22 1,963,000 57.22 Feb-01-06 57 .38 57.75 57.28 57.54 1,753,300 57.54 Jan-31-06 57.95 58 .03 57.51 57.78 2,855,800 57.78 Jan-30-06 57.05 58 .19 57.05 58.01 3,416,100 58.0 1 Jan-27-06 57.01 57 .73 56.88 57.03 2,724,400 57.03 Jan-26-06 58.39 58 .42 56.59 57.06 8,078,500 57.06 Jan-25-06 59.30 59.42 57.77 58.02 10,821,100 58.02 Jan-24-06 59.19 59.24 57 .35 57.57 4,348,800 57 .57 Jan-23-06 59.16 59.50 57 .54 58.27 1,664,400 58 .27 Jan-20-06 58 .31 59.05 57 .99 58.46 1,742,400 58 .46 Jan-19-06 59 .37 60.00 58 .46 58.87 4,860,000 58 .8 7 Jan-18-06 56 .44 57.40 56.07 57.26 804,400 57.26 Jan-17-06 56 .11 57.05 55 .77 56.63 599,000 56.63 Jan-13-06 56 .88 57.10 55 .95 56.15 509,400 56.1 5 Jan-12-06 57.23 57 .42 56.35 56.74 605,900 56.74 Jan-11-06 56.50 57 .78 56.34 57.30 949,600 57.3 0 Jan-10-06 56.15 56.87 55.80 56.23 538,500 56.23 Jan-09-06 56.96 57.00 55 .61 56.41 867,500 56.4 1 Jan-06-06 55 .85 57.85 55 .61 57.14 1,416,900 57.1 4 Jan-05-06 56.96 57.71 55 .59 56.00 2,441,400 56 .00 Jan-04-06 54.06 58.84 53 .73 58.16 3,017,200 58 .1 6 Jan-03-06 53 .11 53.99 52.44 53.96 907,300 53 .96 Dec-30-05 52 .86 53.03 52.56 52.72 315,400 52.72 Dec-29-05 52 .53 53.28 52.40 52.77 400,800 52.77 Dec-28-05 52.70 52 .99 52.14 52.45 299,600 52.45 Historical Prices Page 4 of 7

Dec-27-05 52.90 53.47 52 .65 52.78 499,900 52.78 Dec-23-05 53 .00 53.19 52 .63 52.73 316,700 52.73 Dec-22-05 51 .91 53.15 51 .59 52.76 745,700 52.76 Dec-21-05 51 .90 52.73 51 .73 52.08 370,700 52.08 Dec-20-05 52 .48 52.57 51 .76 52.05 724,200 52.05 Dec-19-05 53 .50 53.74 52.39 52.54 545,300 52.54 Dec-16-05 55 .09 55.10 53 .31 53.39 1,205,800 53.39 Dec-15-05 55 .26 56.00 54. 87 54.95 773,800 54.95 Dec-14-05 55 .48 55 .78 54. 52 54.72 615,800 54 .72 Dec-13-05 53 .80 55 .70 53.51 55.34 1,239,100 55 .34 Dec-12-05 54.26 54.51 52.70 53.61 869,500 53 .6 1 Dec-09-05 54.63 54.98 53.42 53.89 1 ,018,500 53 .89 Dec-08-05 56.52 56.52 54 .53 54.70 803,100 54.70 Dec-07-05 56.30 56.40 55 .97 56.25 677,200 56.25 Dec-06-05 56 .06 56.45 55 . 52 56.23 654,400 56.23 Dec-05-05 55 .96 56.45 55 .62 55.91 567,700 55 .9 1 Dec-02-05 56.14 56.60 56. 00 56.54 401,500 56.5 4 Dec-01-05 56.00 56 .71 55 .72 56.27 781,300 56.27 Nov-30-05 56.32 56 .32 55 .34 55.44 499,000 55.44 Nov-29-05 56.75 57 .55 55.99 56.16 739,200 56.1 6 Nov-28-05 56.10 56 .43 55. 48 56.24 620,200 56 .24 Nov-25-05 56.93 56.93 55.90 56.38 144,400 56 .38 Nov-23-05 55.71 56.84 55.53 56.70 892,800 56 .70 Nov-22-05 55.27 55 .79 55.09 55.72 596,000 55 .72 Nov-21-05 57.07 57.07 54. 82 55.60 1,216,700 55 .60 Nov-18-05 57 .36 58.23 56.74 56.99 1,494,200 56.99 Nov-17-05 56 .16 57.00 56. 16 56.74 1,184,000 56.74 Nov-16-05 56 .28 56.44 55 . 52 55.87 724,200 55 .87 Nov-15-05 57 .00 57.12 56.21 56.44 780,000 56.44 Nov-14-05 57 .15 57 .15 55 .92 56.87 917,000 56.87 Nov-11-05 57.03 57 .65 56.57 57.03 648,000 57.03 Nov-10-05 56.26 57 .55 55 .41 57.29 1,698,900 57.29 Nov-09-05 54.32 57 .66 53.80 56.59 6,466,000 56.59 Historical Prices Page S of 7

Nov-08-05 52.50 52.70 50.78 50.88 3,094,300 50.8 8 Nov-07-05 53 .15 53.30 52.23 52.75 1,167,300 52.75 Nov-04-05 52.84 54 .45 52.50 54.11 1,754,700 54.1 1 Nov-03-05 53 .00 53 .18 51 .49 52.50 808,800 52.5 0 Nov-02-05 50.88 52 .98 50.76 52.81 1,231,900 52.81 Nov-01-05 50.83 51 .46 50.34 50.74 589,300 50.74 Oct-31-05 49.51 50.98 49.51 50.73 923,100 50.73 Oct-28-05 49.03 49.85 48.77 49.66 415,800 49.66 Oct-27-05 50.01 50.11 48 .52 48.52 426,900 48.52 Oct-26-05 50.02 50.33 49 .41 49.91 649,000 49.9 1 Oct-25-05 50.10 50.31 49 .50 50.27 597,700 50 .27 Oct-24-05 48.93 50.30 48 .82 50.18 824,700 50 .1 8 Oct-21-05 48.51 49.10 47.90 49.05 1,492,400 49 .05 Oct-20-05 48.22 48.91 47.47 48.09 691,200 48 .09 Oct-19-05 47 .72 48.15 46.61 48.15 1,439,300 48 .1 5 Oct-18-05 48 .82 48.96 47.74 47.84 1,361,800 47.84 Oct-17-05 49 .25 49.47 48.40 49.15 987,100 49.1 5 Oct-14-05 49 .60 50.50 48.75 49.82 1,037,900 49.82 Oct-13-05 48 .30 51 .00 48.00 49.88 2,655,400 49.88 Oct-12-05 47.35 48 .88 46.75 48.31 1,965,500 48.3 1 Oct-11-05 47.81 48 .25 46 .79 47.12 907,200 47.1 2 Oct-10-05 48.20 48 .20 46 .40 47.93 1,487,000 47.93 Oct-07-05 46.00 48.37 45 .81 48.26 2,543,200 48 .26 Oct-06-05 44.98 45 .05 44.35 44.52 745,000 44 .52 Oct-05-05 44.73 45.13 44.50 44.80 1,027,600 44.80 Oct-04-05 45.27 45.27 44.62 44.73 842,600 44.73 Oct-03-05 44 .64 45.37 44.28 45.01 1,170,000 45 .01 Sep-30-05 43 .46 44.65 43 .28 44.51 924,000 44.5 1 Sep-29-05 42 .23 43.50 41 .80 43.46 678,200 43 .46 Sep-28-05 42 .79 42.85 41 .87 42 .31 645,300 42.3 1 Sep-27-05 42.94 43 .11 42.33 42 .79 564,600 42.79 Sep-26-05 42.00 43 .05 41 .76 42.75 887,000 42.75 Sep-23-05 41 .11 42 .26 41 .00 41 .93 537,000 41 .93

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Sep-22-05 41 .25 41 .41 40.80 41 .30 787,400 41 .30 Sep-21-05 42.32 42.45 41 .25 41 .33 1,265,700 41 .3 3 Sep-20-05 43 .09 43.19 42.51 42.54 713,000 42.54 Sep-19-05 42.76 43.38 42.56 43.26 699,100 43.26 Sep-16-05 42.611 42 .92 41 .89 42.79 774,800 42.79 Sep-15-05 42.96 42 .96 42.60 42.77 453,000 42 .77 Sep-14-05 43.86 43 .86 42.71 42.96 868,000 42 .96 Sep-13-05 44.61 44.65 43.75 43.87 864,200 43 .87 Sep-12-05 45.15 45 .40 44.53 44.73 684,300 44.73 Sep-09-05 45 .50 45 .50 44.66 45.02 730,400 45 .02 Sep-08-05 45 .75 45.98 45 .26 45.40 743,900 45 .40 Sep-07-05 44.02 45.88 43 .76 45.84 1,681,600 45 .84 Sep-06-05 43 .43 44.25 43 .28 44.13 920,000 44.1 3 Sep-02-05 43 .91 44.10 43.01 43.25 649,100 43.25 Sep-01-05 43.75 44.62 43.65 43 .86 1,596,600 43 .86 Aug-31-05 42.50 44.05 42.50 43.90 1,332,600 43 .90 Aug-30-05 41 .94 42.73 41 .62 42.67 814,200 42.67 Aug-29-05 42 .12 42.36 41 .61 42.22 990,100 42.22 Aug-26-05 42.20 42.45 41 .90 41 .99 1,444,000 41 .99 Aug-25-05 43 .12 43.31 42.92 43.00 620,400 43 .00 Aug-24-05 43 .15 43 .55 42.90 43.19 717,100 43.1 9 Aug-23-05 43 .56 43 .63 43.02 43 .10 549,200 43.1 0 Aug-22-05 43.38 43 .84 43 .18 43.53 629,600 43 .53 Aug-19-05 43.15 43 .65 43 .02 43.49 596,700 43 .49 Aug-18-05 43 .10 43 .77 42 .77 43.35 345,400 43 .35 Aug-17-05 43 .26 43.64 42 .85 43.28 472,500 43 .28 Aug-16-05 44.42 44 .45 43 .20 43.30 651,800 43 .30 Aug-15-05 43 .75 44 .60 43 .26 44.47 1,029,800 44.47 Aug-12-05 43 .28 43 .28 42.72 43.15 910,000 43 .1 5 Aug-11-05 42.96 43 .41 42.80 43 .28 595,900 43.28 Aug-10-05 43.80 44.09 42.71 43.01 89.7,300 43.0 1 Aug-09-05 44.11 44.11 43 .06 43.58 950,200 43 .58 Aug-08-05 44 .55 44.79 43 .48 43.70 1,805,800 43 .70 Historical Prices Page 7 of 7

Aug-05-05 41 .36 45 .10 41 .27 44.58 4,076,100 - 44.58 Aug-04-05 41 .69 41 .69 40.88 41.25 1,452,900 41 .25 Aug-03-05 41 .86 41 .97 41 .26 41 .56 1,279,200 41 .56 Aug-02-05 42.69 42.75 41 .80 41 .83 1,518,000 41 .83 Aug-01-05 43.00 43 .44 42.23 42.80 969,000 42 .80 Jul-29-05 43.12 43 .57 42 .95 43.01 985,700 43 .0 1 Jul-28-05 43.65 44.02 43 .03 43.23 1,625,300 43 .23 Jul-27-05 44.01 44.01 43 .07 43.64 790,500 43 .64 Jul-26-05 43.27 43.84 43 .11 43.72 597,200 43 .72 Jul-25-05 43.93 43.93 42.95 43.11 778,500 43 .1 1 Jul-22-05 43 .95 44 .09 43 .50 43.72 451,700 43 .72 Jul-21-05 44.23 44.32 43 .48 43.73 793,000 43 .73

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Historical Prices - pixr As of May-05-06

CO) Daily Start: Feb - 10 2005 C Weekl y End: May 5 2006 r Monthly Dividends

Ticker Symbol: pixy Get Data

Adj . Date Open High Low Close Volume Close Jul-20-05 44.37 44.48 43 .75 44.25 914,400 44.25 Jul-19-05 43.50 44.62 43 .00 44.52 1,396,200 44.52 Jul-18-05 43.65 43 .88 43 .10 43.32 1,007,600 43 .32 Jul-15-05 43.60 43 .60 43 .05 43 .52 1,092,100 43 .52 Jul-14-05 43 .27 43.63 42.60 43 .42 1,781,700 43 .42 Jul-13-05 42 .55 42.63 42.00 42.29 847,600 42.29 Jul-12-05 43 .33 43.39 42.25 42.50 934,800 42.50 Jul-11-05 41 .95 42.75 41 .37 42.75 2,630,900 42.75 Jul-08-05 42.78 43.50 41 .87 43.00 1,181,100 43.00 Jul-07-05 42.75 42 .85 42.48 42.61 1,310,700 42.6 1 Jul-06-05 43 .75 43 .90 42 .95 43.23 1,400,500 43.23 Jul-05-05 43 .30 44.01 42.98 43.80 2,733,000 43.80 Jul-01-05 44.02 44.34 42.68 43.06 9,634,100 43 .06 Jun-30-05 51 .69 51 .84 49.92 50.05 1,975,700 50.05 Jun-29-05 51 .28 51 .74 50.75 51 .67 614,000 51 .67 Jun-28-05 50.62 51 .36 50.56 51 .26 632,300 51 .26 Jun-27-05 50.35 50.54 49.58 50.46 716,200 50.46 Jun-24-05 49 .91 51 .02 49.80 50.06 709,800 50.06 Jun-23-05 51 .35 51 .84 50.00 50.08 955,400 50.08 Jun-22-05 52.65 52.97 50.78 51 .46 1,361,100 51 .46 Jun-21-05 52.45 52 .90 51 .96 52.16 446,800 52.1 6 Jun-20-05 52.68 53 .09 52 .25 52 .68 488,500 52.68 Jun-17-05 53 .75 54.40 52 .80 52.91 1,122,000 52.91 Historical Prices Page 2 of 4

Jun-16-05 53.26 53 .79 52.84 53.36 351,500 53.3 6 Jun-15-05 53.85 54.46 52.66 53.14 599,600 53.1 4 Jun-14-05 53 .42 53 .98 52 .85 53.97 582,000 53.97 Jun-13-05 51 .98 53 .42 51 .96 53.00 463,000 53.00 Jun-10-05 53 .16 53 .16 52 .05 52.33 443,400 52.33 Jun-09-05 53 .37 53 .63 52 .55 53.02 621,200 53 .02 Jun-08-05 53 .72 53 .85 52.80 53.50 713,900 53 .50 Jun-07-05 53 .60 54.57 52.68 52.71 735,900 52 .71 Jun-06-05 52.53 53.58 52.42 53.38 622,000 53 .3 8 Jun-03-05 53 .02 53 .17 52.12 52.33 335,200 52.3 3 Jun-02-05 53 .35 53 .67 52.45 52.78 527,100 52.78 Jun-01-05 53.07 53 .48 52.65 53.29 640,900 53 .29 May-31-05 52.82 53 .09 52 .02 52.67 847,600 52.67 May-27-05 51 .89 52.84 51 .69 52.54 392,200 52.54 May-26-05 52 .00 52.29 51 .74 52.01 645,200 52 .0 1 May-25-05 52 .51 52.71 51 .33 51.68 511,900 51 .68 May-24-05 53 .14 53 .25 52.11 52.45 912,000 52 .45 May-23-05 52.54 53.27 52.30 52.99 2,183,800 52 .99 May-20-05 51 .13 51 .33 50.52 50.68 616,000 50.68 May-19-05 50.40 51 .37 49.90 51 .29 958,500 51 .29 May-18-05 49.96 50.57 49.61 50.17 1,565,500 50.1 7 May-17-05 48.28 49.53 48.14 49.52 894,800 49.5 2 May-16-05 47.45 48 .28 47 .00 48.21 507,700 48.2 1 May-13-05 47 .61 47.86 46 .64 47.29 616,400 47.29 May-12-05 47 .85 48.17 46 .84 47.19 835,800 47.1 9

May-11-05 47,81 1 48.72 47.11 47.87 1,927,800 47 .87 May-10-05 48 .88 49.00 47.92 48.40 1,098,700 48 .40 May-09-05 48 .72 49.23 48 .46 49.02 935,500 49 .02 May-06-05 49.33 50.75 48.21 48.70 7,364,300 48 .70 May-05-05 46.89 46.93 46.07 46.27 768,900 46.27 May-04-05 46.20 46.91 46.01 46.69 520,500 46.69 May-03-05 45.50 46 .17 45.31 46.17 590,700 46.1 7 May-02-05 46.03 46 .34 44.99 45.60 627,600 45 .60 Historical Prices Page 3 of 4

Apr-29-05 45.89 46.19 45.11 45.74 667,000 45.74 Apr-28-05 45.60 46.48 45.20 45.59 471,600 45.59 Apr-27-05 45 .79 46.54 45.16 45.87 888,700 45.87 Apr-26-05 47 .08 47.20 45.55 45.59 528,700 45.59 Apr-25-05 46 .70 48 .15 46.55 47.44 592,200 47 .44 Apr-22-05 47 .58 47 .78 46 .04 46.54 1,012,400 46 .54 Apr-21-05 45 .61 47 .69 45 .61 47.44 1,027,900 47 .44 Apr-20-05 46.23 46 .43 45 .38 45.50 789,400 45 .50 Apr-19-05 2 :1 Stock Split Apr-19-05 47.00 47.00 46 .05 46.31 1,275,600 46 .3 1 Apr-18-05 93 .81 94.50 92 .72 92.93 1,786,400 46.47 Apr-15-05 95 .98 97.32 93 .92 94.39 1,855,600 47.1 9 Apr-14-05 97.02 97.81 95 .49 95.71 1,112,000 47.8 5 Apr-13-05 98.32 99.98 96.91 97.10 780,800 48 .5 5 Apr-12-05 98.50 99.22 97.39 98.71 957,000 49.3 5 Apr-11-05 99.20 99.20 98 .21 98.51 1,427,000 49.26 Apr-08-05 98.21 99.68 98.21 98.95 890,800 49.47 Apr-07-05 100 .30 100.77 98.17 98.73 1,782,200 49.3 7 Apr-06-05 100.34 101 .70 100.16 100.31 1,350,400 50.1 5 Apr-05-05 99 .22 100.67 99 .05 100.42 1,606,800 50.2 1 Apr-04-05 98 .43 99 .42 98 .16 99.22 1,249,800 49.6 1 Apr-01-05 97 .88 99 .50 97 .56 98.73 2,157,000 49 .37 Mar-31-05 95 .07 98 .00 94.88 97.55 2,207,200 48 .7 8 Mar-30-05 93 .22 95 .22 92 .93 95.02 1,172,200 47 .5 1 Mar-29-05 93 .72 94.47 92.52 92.92 1,075,600 46 .46 Mar-28-05 93 .27 94.44 92.54 93.76 849,400 46 .8 8 Mar-24-05 94.47 94.90 92.78 92.84 1,609,800 46.42 Mar-23-05 92.23 93 .05 91 .38 92.25 744,800 46.1 2 Mar-22-05 93.43 93 .77 92.05 92.20 1,007,200 46.1 0 Mar-21-05 91 .40 93.64 90.69 93.32 1,644,800 46.66 Mar-18-05 91 .40 91 .59 90.55 91 .29 758,800 45 .65 Mar-17-05 91 .20 92.10 91 .07 91 .32 666,000 45 .66 Mar-16-05 91 .45 92 .30 90 .58 91 .23 867,600 45 .62 http ://table. finance. yahoo.com/d?a=1 &b=10&c=2005&d=4&e=5&f=2006&s=aixr&v=200&=d 6/27/2006 Historical Prices Page 4 of

Mar-15-05 92 .13 92.71 91 .91 92 .14 838,800 46.07 Mar-14-05 . 89 .67 91 .70 89.60 90.96 1,103,800 45 .48 Mar-11-05 90.24 91 .19 88.51 88.98 920,400 44.49 Mar-10-05 90.36 90.76 89.25 90.24 1,174,800 45.1 2 Mar-09-05 93 .07 93 .07 90.96 91 .16 587,800 45.58 Mar-08-05 92.87 93 .75 92.62 92.71 598,800 46 .35 Mar-07-05 92.12 93 .93 92 .12 93.23 774,400 46 .62 Mar-04-05 91 .62 93 .84 91 .54 91.99 1,060,200 45 .99 Mar-03-05 92 .00 92.62 90.77 91.49 969,800 45 .74 Mar-02-05 89 .34 93 .09 89.10 91 .87 1,469,600 45 .94. Mar-O1-05 89 .50 90.69 88.57 90.06 1,074,000 45 .03 Feb-28-05 89.77 90.10 87.68 89.43 1,120,600 44.72 Feb-25-05 88 .75 90.00 88.27 89.55 1,307,400 44.78 Feb-24-05 88.06 88 .72 87.21 88.50 776,400 44.25 Feb-23-05 88.37 89.51 87 .46 87.96 537,000 43.98 Feb-22-05 89.95 89.98 87 .61 87.85 1,815,400 43 .92 Feb-18-05 89 .75 90.61 89.31 90.17 1,099,000 45 .08 Feb-17-05 88 .60 89.80 88.45 89.53 1,320,800 44.76 Feb-16-05 87 .80 89.25 87.44 89.07 1,678,800 44.5 3 Feb-15-05 88 .83 90.47 88.47 90.22 1,071,400 45 .1 1 Feb-14-05 86.55 89.18 86.55 88.96 1,374,600 44.48 Feb-11-05 90.39 90 .40 85.83 87.06 3,292,200 43.53 Feb-10-05 88.85 '91 .17 88.85 89.88 2,872,000 44.94

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