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1 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 2 PATRICK J. COUGHLIN (111070) JEFFREY W. LAWRENCE (166806) 3 DENNIS J. HERMAN (220163) CHRISTOPHER P. SEEFER (201197) 4 SHIRLEY H. HUANG (206854) SHANA E. SCARLETT (217895) 5 JENNIE LEE ANDERSON (203586) 100 Pine Street, Suite 2600 6 San Francisco, CA 94111 Telephone: 415/288-4545 7 415/288-4534 (fax) [email protected] 8 [email protected] [email protected] 9 [email protected] [email protected] 10 [email protected] [email protected] 11 – and – WILLIAM S. LERACH (68581) 12 655 West Broadway, Suite 1900 San Diego, CA 92101 13 Telephone: 619/231-1058 619/231-7423 (fax) 14 [email protected] 15 Lead Counsel for Plaintiffs 16 [Additional counsel appear on signature page.] 17

18 UNITED STATES DISTRICT COURT 19 NORTHERN DISTRICT OF CALIFORNIA 20 SAN JOSE DIVISION 21 In re VERISIGN CORPORATION ) Master File No. C-02-2270-JW(PVT) SECURITIES LITIGATION ) 22 ) CLASS ACTION ) 23 This Document Relates To: ) PLAINTIFFS’ THIRD AMENDED CLASS ) ACTION COMPLAINT 24 ALL ACTIONS. ) ) DEMAND FOR JURY TRIAL 25

26 REDACTED VERSION 27 28

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1 TABLE OF CONTENTS 2 Page

3 I. INTRODUCTION ...... 1 4 II. JURISDICTION AND VENUE...... 6 5 III. PARTIES ...... 7 6 IV. DEFENDANTS’ SCIENTER AND INTERNAL REPORTS...... 10 7 V. CONFIDENTIAL WITNESSES ...... 13 8 VI. VERISIGN LEVERAGES ITS STOCK MARKET SUCCESS TO ACQUIRE NETWORK SOLUTIONS ...... 15 9 A. Network Solutions – The 800-Pound Gorilla in Domain Name Services 10 Until 1999 – Then One of 110 Accredited Domain Name Registrars...... 17 11 B. VeriSign Comes Under Fire for Acquiring Network Solutions...... 19 12 VII. DEFENDANTS’ SCHEME TO DEFRAUD...... 22 13 A. Improper Accounting for Domain Name Sales and False and Misleading Reporting of Domain Name Sales Metrics ...... 22 14 1. VeriSign Inflates Accounts Receivable, Revenue and Deferred 15 Revenue by Changing the Domain Name Automatic Renewal Period to Two-years...... 22 16 2. Defendants Falsely Manipulated the Reported Metrics for the 17 Domain Name Market...... 30 18 3. Some of the Truth About VeriSign’s True Financial Condition Leaked in the Market in October 2001 ...... 35 19 B. Improper Accounting for Roundtrip and Other Long-Term Investments ...... 39 20 C. Improper Revenue Recognition on Barter Transactions...... 41 21 D. Failure to Adequately Reserve for Uncollectible Delinquent Receivables...... 42 22 E. VeriSign Artificially Inflated Its Deferred Revenue by Falsely Accounting 23 for Acquired Deferred Revenue in Violation of GAAP ...... 43 24 VIII. CONFIDENTIAL WITNESSES’ ACCOUNTS CONFIRM DEFENDANTS’ SCHEME TO DEFRAUD ...... 46 25 IX. FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD...... 49 26 A. False Statements Regarding 4Q00 and FY00 Results ...... 49 27 1. Facts Showing Statements Alleged in Connection with 4Q00 and 28 FY00 Were Materially False and Misleading...... 52

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3 2. Additional Reasons Why the Statements Regarding 4Q00 and FY00 Were False and Misleading When Made...... 67 4 B. False Statements Regarding 1Q01 Results ...... 69 5 1. Facts Showing Why Statements Regarding 1Q01 Were Materially 6 False and Misleading ...... 72 7 C. False Statements Regarding 2Q01 Results ...... 86 8 1. Facts Showing Why Statements Relating to VeriSign’s 2Q01 Financial Results Were Materially False and Misleading ...... 88 9 2. Additional Reasons Why the Statements Regarding 2Q01 Results 10 and Business Prospects Were False or Misleading When Made ...... 101 11 D. False Statements Regarding 3Q01 Results ...... 103 12 1. Reasons Why Statements Regarding 3Q01 Financial Results Were False When Made ...... 105 13 2. Additional Reasons Why the Statements Regarding VeriSign’s 14 3Q01 Results and Business Prospect Were False or Misleading When Made...... 116 15 3. Facts Supporting a Strong Inference that Defendants Knew or 16 Recklessly Disregarded that the Statements Regarding 3Q01 Results Were False When Made...... 120 17 E. False Statements Regarding 4Q01 Results ...... 121 18 1. Facts Showing Why Statements Relating to 4Q01 Were Materially 19 False and Misleading ...... 124

20 2. Additional Reasons Why Statements Made in 4Q01 Were False When Made...... 132 21 3. Facts Supporting a Strong Inference that Defendants Knew or 22 Recklessly Disregarded that the Statements Regarding 4Q01 Results Were False When Made...... 134 23 F. The Truth About VeriSign’s Business Continues to Leak Into the Market...... 135 24 X. THE END OF THE CLASS PERIOD: VERISIGN’S 1Q02 EARNINGS 25 RELEASE REVEALS ADDITIONAL ADVERSE INFORMATION ABOUT THE COMPANY AND ITS TRUE FINANCIAL CONDITION IS EXPOSED ...... 138 26 XI. PROXIMATE LOSS CAUSATION/ECONOMIC LOSS ...... 144 27 XII. FALSE FINANCIAL STATEMENTS...... 149 28

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3 A. VeriSign Inflated and Prematurely Recorded Domain Name Revenue Deferred Revenue and Accounts Receivable...... 151 4 B. VeriSign Repeatedly Violated SOP 97-2 and SAB 101 Revenue 5 Recognition Requirements for its Software, License and Affiliate revenue ...... 154 6 C. VeriSign’s Improper Accounting for Its Investees ...... 158 7 D. VeriSign’s Failure to Record Impairment...... 160 8 E. VeriSign’s Inflated Acquired Deferred Revenue...... 161 9 F. VeriSign OverStated Goodwill by More than $10 Billion at December 31, 2000 and at March 31, 2001 ...... 162 10 G. VeriSign’s Improper Segment Disclosures...... 163 11 1. VeriSign Did Not Make Required Segment Disclosures...... 163 12 2. VeriSign Covered Up the Fact that Sales and Market Share of Its 13 Domain Names Segment Plummeted During the Class Period by Reporting Segments by Customer Type ...... 163 14 3. VeriSign’s New Segment Reporting Metrics Violated Regulation 15 S-K ...... 164 16 H. VeriSign’s Belated Admission of the Extent of Roundtripping ...... 165 17 I. VeriSign’s Omissions and Deficient Disclosures About Related Parties...... 166 18 XIII. ADDITIONAL ALLEGATIONS SUPPORTING A STRONG INFERENCE OF SCIENTER ...... 168 19 A. VeriSign Used Its Inflated Stock as Currency to Acquire Other Businesses ...... 168 20 B. Defendants’ Insider Trading ...... 169 21 XIV. GROUP PLEADING AND CONTROL PERSON ALLEGATIONS ...... 170 22 XV. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE- 23 MARKET DOCTRINE ...... 171 24 XVI. STATUTORY SAFE HARBOR ...... 172 25 XVII. CLASS ACTION ALLEGATIONS...... 172 26 FIRST CLAIM FOR RELIEF ...... 174

27 SECOND CLAIM FOR RELIEF ...... 176 28 For Violation of Section 20(a) of the Exchange Act (Against All Individual Defendants) ...... 176

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3 FOURTH CLAIM FOR RELIEF ...... 178 4 For Violation of Section 15 of the Securities Act...... 178 5 (Against All Individual Defendants)...... 178 6 XVIII. PRAYER FOR RELIEF ...... 179 7 XIX. JURY DEMAND...... 180 8

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1 I. INTRODUCTION 2 1. Plaintiffs bring this action against VeriSign Corporation (“VeriSign” or the 3 “Company”) and four of its officers and directors for violations of the Securities Act of 1933 4 (“Securities Act”), Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated 5 thereunder (17 C.F.R. §240.10b-5), on behalf of themselves and a proposed class of persons and 6 entities that purchased or otherwise acquired the common stock of VeriSign between January 25, 7 2001 and April 25, 2002, inclusive (the “Class Period”). 8 2. On March 7, 2000, VeriSign announced that it would issue $21 billion in new stock 9 to acquire Network Solutions, Inc. (“Network Solutions” or “NSI”) and turn it into a wholly-owned 10 subsidiary of VeriSign. By 2000, these two companies were flying high as they capitalized on the 11 market’s desire for “pure play” Internet stocks that could ride the rising tide of e-commerce that 12 appeared to be sweeping the country. Network Solutions operated the official “registry” of Internet 13 domain names, such that anyone who wanted to register a website under the .com, .net or .org 14 domains had to go to, or through, Network Solutions, which collected at least $6 per year from every 15 website listed on the registry. VeriSign was the preeminent leader in providing Internet “trust 16 services” which had the ability to verify both the source and authenticity of information transmitted 17 over the Internet, allowing customers to safely send personal financial information, such as credit 18 card numbers, needed to complete commercial transactions over the World Wide Web. 19 3. In numerous communications with media outlets and industry analysts, VeriSign 20 lauded the proposed agreement, claiming it would turn VeriSign into the Internet’s first utility, 21 assisting customers both in creating their websites and managing their commercial transactions over 22 the Internet. The market was not uniformly swayed. While some analysts applauded it, many others 23 questioned whether VeriSign was paying too much for Network Solutions (ultimately approximately 24 $18 billion over book value) suggesting that VeriSign could have obtained the same benefits, at a 25 much lower cost, by simply entering into a joint marketing arrangement with Network Solutions. 26 Nevertheless, the deal was approved by shareholders at both companies, and VeriSign completed the 27 acquisition on June 9, 2000. 28

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1 4. In light of the price paid for Network Solutions, the criticisms that had been leveled at 2 the Company, and out of a desire to show that the combined Company would be profitable, there 3 was enormous pressure on VeriSign to not only demonstrate consistent revenue growth, but to show 4 that it was growing at a rate greater than could have been realized by either VeriSign or Network 5 Solutions as a stand-alone company. In addition, it was critical that this growth was occurring from 6 the Company’s core business operations – so-called “organic growth” – and not from related 7 activities, such as the investment of excess capital in other enterprises. 8 5. Shortly after the deal closed, however, the Internet boom went bust. Both of 9 VeriSign’s main business lines were dramatically and adversely affected: the demand for new 10 domain names declined and the need for, and demand for, “trust services” also declined. The decline 11 was reflected in VeriSign’s stock price which began to tumble, falling from $196 per share on the 12 day the acquisition of Network Solutions was completed to $75 per share by January 24, 2001. As a 13 result, the Company could no longer generate the amount of revenue that defendants had primed the 14 market to expect as a result of the Network Solutions acquisition. Increased competition and 15 lowered demand for new domain names, together with slowing growth in the number of commercial 16 transactions completed over the Internet, further reduced the opportunities for sales growth in 17 VeriSign’s core business lines. 18 6. Unable to deliver the revenue and earnings they had promised the market through 19 VeriSign’s business operations, defendants began to employ an assortment of schemes, artifices and 20 devices to mislead investors about both the amount and source of revenues earned by the Company. 21 Defendants’ fraud cut across virtually all aspects of VeriSign’s business, including misrepresenting 22 VeriSign’s domain name business – both the revenues generated and the metrics of new and renewed 23 names, improperly accounting for roundtrip and barter transactions with investees and affiliates; and 24 violating Generally Accepted Accounting Principles (“GAAP”) and VeriSign’s accounting policies 25 by manipulating quarterly and year-end reported financial results. As a result, plaintiffs purchased 26 or otherwise obtained VeriSign stock at artificially inflated prices and suffered damages when 27 VeriSign’s true financial condition began to be revealed to the market, which caused a decline in the 28 value of their investments. These schemes are summarized below. Additionally, as a result of its

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1 acquisition of Network Solutions, VeriSign increased its cash position from $100 million to $900 2 million. VeriSign began using these funds to falsely portray its record revenues and earnings. 3 7. VeriSign arbitrarily extended the length of its customers domain name renewals to 4 two-years, then booked hundreds of millions of dollars in current and deferred revenues, on the sale 5 of these and other names, based on estimates of how many customers would actually decide to renew 6 their names with no basis to support their estimates. Because VeriSign’s sales continued to lag even 7 with these manipulations, defendants booked millions of dollars of additional revenue at the end of 8 every quarter through improper and undisclosed roundtrip, barter and related party transactions that 9 assured the Company would meet or exceed its forecast estimates for revenues, earnings per share 10 (“EPS”), and sequential growth in its core business. Additionally, VeriSign used its inflated stock to 11 acquire other cash rich companies, further permitting it to perpetuate the illusion that its core 12 business was growing. In 4Q01 alone, the acquisitions of eNIC Corporation (“eNIC”), Illuminet 13 Holdings, Inc. (“Illuminet”) and .tv Corporation (“.tv”) contributed more than $40 million to 14 VeriSign’s deferred revenue growth. 15 8. Defendants used these practices to repeatedly issue false and misleading statements 16 regarding purported growth in customer demand, and trumpeted VeriSign’s sequential deferred 17 revenue growth as a sign of the Company’s health. In fact, defendants knew, and internal documents 18 and emails at VeriSign show, that at the time these statements were made, demand for the 19 Company’s products and services was flagging, that competition in the domain name business was 20 cutting into VeriSign’s market share, and thus the reported growth in sequential revenue and 21 deferred revenue was not a result of demand for VeriSign’s products, but rather a result of 22 accounting manipulations in both domain name business and the digital certificate business. 23 9. VeriSign’s false and misleading financial reports artificially inflated the Company’s 24 stock price and had a direct and proximate impact on the purchases made by Class members during 25 the Class Period. While the effects of the fraud impacted the market, the fraud itself was concealed 26 from the investing public. Defendants’ fraud continued throughout the Class Period, however, some 27 of the artificial inflation was taken out of the stock as the weakening of VeriSign’s businesses could 28 not be covered up indefinitely. For example, when in October 2001, VeriSign reported that

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1 VeriSign’s domain name renewal rates had fallen nearly 8% and its deferred revenue balance (a sign 2 of the long-term growth of the domain name business) had increased 2.6%, the bottom of 3 management’s guidance, VeriSign’s stock price declined nearly 20%. At the same time, rumors 4 began swirling about VeriSign’s transactions with affiliates and related parties and on October 16, 5 2001, Herb Greenberg questioned VeriSign’s revenue from its investees and related parties.1 While 6 these declines partially reflected the true state of VeriSign’s business, defendants continued to 7 improperly book revenues on two-year automatic renewals, and use revenues from acquisitions and 8 investments to make it appear that its business was growing, thereby preventing the full truth about 9 VeriSign’s business from being revealed. 10 10. In March 2002, VeriSign issued its Annual Report for 2001 and admitted that nearly 11 10% of its 2001 revenues had resulted from undisclosed round trip and barter transactions rather than 12 arms-length deals. Although this partial admission of some of VeriSign’s accounting manipulations 13 removed more inflation from VeriSign’s stock price by causing VeriSign’s stock to lose 10% of its 14 value in one day, the full extent of the problems facing the Company remained hidden from investors 15 and VeriSign’s stock continued to trade at artificially inflated prices. 16 11. On April 25, 2002, the Company issued its 1Q02 earnings that revealed the true 17 financial condition of the Company. The report disclosed that VeriSign’s sales were lagging, 18 margins decreasing and, as a result, a major restructuring of operations was required at a cost of $70 19 – $80 million. In fact, as defendants well knew, VeriSign’s sales had been in decline since mid-2000 20 and the results that VeriSign reported were false and misleading due to defendants’ accounting 21 manipulations. Although defendants did not acknowledge that VeriSign had in fact been 22 maintaining its revenue and earnings numbers by falsifying its financial results, the disclosure did 23 24 1 VeriSign’s response was to attempt to cover up its investment. In an October 17, 2001 email 25 from Evan to Korzeniewski and Sclavos, Evan sought to prevent CPA2Biz from mentioning VeriSign in its press release scheduled for the next day. Evan wrote: “After the Herb Greenberg 26 fiasco yesterday, I think it would be much better for them not mention the investment at this time. 27 We certainly had investors in VRSN in the early days that did allow us to mention them either . . . SS- Do you agree? 28

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1 eliminate the artificial stock price inflation caused by the fraud. Even without the defendants’ 2 confession of wrong doing the effects of the fraud were devastating and immediate. 3 12. Analysts were shocked by the nature and magnitude of the adverse information 4 reported on April 25, 2002, and immediately understood that the disclosures revealed that the overall 5 market for VeriSign’s products had been declining and the disclosure revealed the true state of 6 VeriSign’s business. For example, on April 26, 2002, the first full trading day after VeriSign’s 7 disclosure, several analysts explained the impact of the disclosures on VeriSign’s business. US 8 Bancorp Piper Jaffray analyst, C. Eugene Munster, issued a report entitled “Downgrading From 9 Outperforms to Hold Perform on Our Belief that FY02 Will Not See Organic Revenue Growth.” 10 Munster noted, “with the company experiencing weaknesses in each of its primary business units, . . 11 . organic revenue growth will prove elusive in fiscal 2002.” Similarly, Wedbush Morgan Securities 12 analyst, Timothy S. Leehcaley, downgraded VeriSign’s stock from buy to hold, in a report entitled 13 “VeriSign Missed Our Top-Line Estimate and Rescinded Full-Year Guidance; Downgrading our 14 Rating to Hold.” Leehcaley wrote, “we were not encouraged by management rescinding guidance 15 for the full-year 2002, the poor cash flow numbers, the surprisingly low domain name renewal rate, 16 and the large drop in gross margins caused by general pricing pressures and product mix.” With the 17 truth about VeriSign’s business thus disclosed, the Company’s stock collapsed, losing half its value 18 and closing at $9.89 per share by the end of April 26, 2002. 19 13. The following chart illustrates how VeriSign’s stock price traded at artificially 20 inflated prices during the Class Period while the Company’s true financial condition was concealed 21 from investors and how the artificial inflation was removed from the stock price as the Company’s 22 true financial condition was revealed to the market: 23 24 25 26 27 28

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16 17 II. JURISDICTION AND VENUE 18 14. The claims asserted herein arise under and pursuant to §§11 and 15 of the Securities 19 Act [15 U.S.C. §§77k, 77o], and §§10(b) and 20(a) of the Exchange Act [15 U.S.C. §§78j(b) and 20 78t(a)], and Rule 10b-5 [17 C.F.R. §240.10b-5] promulgated thereunder by the United States 21 Securities and Exchange Commission (“SEC”). 22 15. Venue is proper in this district pursuant to §22 of the Securities Act and §27 of the 23 Exchange Act. Many of the acts and transactions giving rise to the violations of law complained of 24 herein, including the preparation and dissemination to the investing public of false and misleading 25 information, occurred in this district. VeriSign has its principal place of business in Mountain View, 26 California. In connection with the acts, conduct and other wrongs complained of herein, the 27 defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, the 28 United States mails, and the facilities of the national securities markets.

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1 III. PARTIES 2 16. (a) Sheet Metal Workers’ Local Union No. 19 Pension Fund, Wilson Telephone 3 Company, Inc. (“Wilson Telephone”), Oregon Telephone Company (“Oregon Telephone”) and 4 Raymond E. Donnelly (“Donnelly”) are the lead plaintiffs, pursuant to §21D(a)(3)(B) of the 5 Exchange Act in accordance with the Court’s July 31, 2002 Order. Lead plaintiffs Wilson 6 Telephone, Oregon Telephone and Donnelly acquired VeriSign shares in exchange for shares of 7 Illuminet pursuant to the acquisition of Illuminet by VeriSign. Each of the lead plaintiffs suffered 8 significant economic losses in connection with their transactions in VeriSign stock during the Class 9 Period, which were proximately caused by defendants’ false and misleading statements to the 10 market. 11 (b) In addition, James H. Harrison, Jr., Harriet Goldstein, Carlton B. Dodge, 12 Michael Atlas and Harvey Burstein have also filed complaints against VeriSign and some or all of 13 the Individual Defendants. Each of these plaintiffs also suffered significant economic losses in 14 connection with their transactions in VeriSign stock during the Class Period that were proximately 15 caused by defendants’ false and misleading statements to the market. 16 17. Defendant VeriSign is a Delaware corporation that was formed in 1995 with its 17 headquarters and principal place of business in Mountain View, California. VeriSign became a 18 public company in January 1998. VeriSign’s stock is traded in an efficient market and is regularly 19 traded on the NASDAQ National Market under the symbol “VRSN.” 20 18. Defendant Stratton D. Sclavos (“Sclavos”) was, at all times relevant hereto, 21 Chairman, President and Chief Executive Officer (“CEO”) of VeriSign. Sclavos knew the adverse 22 non-public information about the business of VeriSign, as well as its finances, markets and present 23 and future business prospects, via access to internal corporate documents, communications with 24 other corporate officers and employees, attendance at management and Board of Directors’ meetings 25 and committees, and via reports and other information provided to him in connection therewith. 26 During the Class Period, Sclavos participated in the preparation and issuance of false and/or 27 misleading statements, including statements in VeriSign’s press releases and during its public 28 conference calls and other communications with analysts. Sclavos also prepared, reviewed and

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1 signed the Company’s Reports on Form 10-K and 10-Q during the Class Period. In 2001, Sclavos’ 2 base salary was $329,712 and he received a bonus of $150,000. Sclavos’ bonus was based on 3 VeriSign’s actual performance in 2001 in achieving financial, product delivery and customer 4 satisfaction targets as compared to planned results for these criteria. In addition, based on 5 VeriSign’s reported performance, Sclavos also received 1.3 million stock options in 2001. Sclavos 6 sold 245,375 shares of VeriSign stock and pocketed proceeds of over $13.2 million during the Class 7 Period. 8 19. Defendant Robert J. Korzeniewski (“Korzeniewski”) was, at all times relevant hereto, 9 Executive Vice President of Business Development and Sales of VeriSign. Prior to the Network 10 Solutions acquisition, Korzeniewski was the Chief Financial Officer (“CFO”) at Network Solutions 11 and was thus knowledgeable of the accounting for domain names services at NSI. Korzeniewski 12 knew the adverse non-public information about the business of VeriSign, as well as its finances, 13 markets and present and future business prospects, via access to internal corporate documents, 14 communications with other corporate officers and employees, attendance at management meetings, 15 and via reports and other information provided to him. According to the Company’s website: 16 As VeriSign’s executive vice president, Corporate and Business Development, Bob Korzeniewski is responsible for the company’s corporate development team and 17 providing a consistent strategy and focus for investments and merger and acquisition activity. He manages the company’s overall business development in order to 18 effectively develop strategic relationships that can leverage and benefit all of the company’s services. He also directs the company’s Policy Group to ensure 19 VeriSign’s public policy interests are pursued. 20 During the Class Period, Korzeniewski participated in the issuance of false and/or misleading 21 statements, including the preparation of the false and/or misleading press releases. In 2001, 22 Korzeniewski received $270,182 in salary, a $61,776 bonus, and 125,000 VeriSign stock options 23 based on the Company’s performance. Korzeniewski sold 163,326 shares of VeriSign stock, 24 obtaining proceeds of over $8.2 million during the Class Period. 25 20. Defendant Dana L. Evan (“Evan”) was, at all times relevant hereto, CFO of VeriSign. 26 Evan knew the adverse non-public information about the business of VeriSign, as well as its 27 finances, markets and present and future business prospects, via access to internal corporate 28 documents, communications with other corporate officers and employees, attendance at management

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1 meetings and via reports and other information provided to her in connection therewith. During the 2 Class Period, Evan participated in the preparation and issuance of false and/or misleading 3 statements, including false and/or misleading statements in press releases and during conference 4 calls and other communications with analysts. According to CW1,2 Evan was a “micromanager” 5 who was intimately involved with the Company’s day-to-day operations, including personally 6 approving every hiring decision in the Mountain View office. Evan also prepared, reviewed, and 7 signed the Company’s Reports on Form 10-K and 10-Q during the Class Period. In 2001, Evan 8 received $260,951 in salary, $86,179 in bonus, and 130,000 VeriSign stock options based on the 9 Company’s performance. Evan sold 96,600 shares of VeriSign stock obtaining proceeds of over 10 $5.3 million during the Class Period. 11 21. Defendant Quentin Gallivan (“Gallivan”) was, at all times relevant hereto, Executive 12 Vice President of Worldwide Sales and Services. Because of Gallivan’s position, he knew the 13 adverse non-public information about the business of VeriSign, as well as its finances, markets and 14 present and future business prospects, via access to internal corporate documents, communications 15 with other corporate officers and employees, attendance at management meetings and via reports and 16 other information provided to him in connection therewith. During the Class Period, Gallivan 17 participated in the issuance of false and/or misleading statements, including the preparation of the 18 false and/or misleading press releases. Gallivan also made a presentation regarding the ESP 19 Division to the analysts during the Company’s Analyst Day in February 2001. In 2001, Gallivan 20 received $294,797 in salary, $61,776 in bonus, and 125,000 VeriSign stock options based on the 21 Company’s performance. Gallivan sold 160,994 shares of VeriSign stock for proceeds of over $8.7 22 million during the Class Period. 23 22. By reason of their positions, and the way in which VeriSign was run, the officers 24 and/or directors identified above (collectively, the “Individual Defendants”), not only had access to 25 material inside information about VeriSign but were able to and did control directly or indirectly the 26

27 2 Confidential witnesses are referred to herein as “CW.” 28

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1 acts of VeriSign and the contents of the representations disseminated during the Class Period by or 2 in the name of VeriSign. Indeed, as CW1 remarked: Gallivan, Sclavos, and Evan were the three 3 main “movers and shakers” of VeriSign, their authority and power were interchangeable; any of their 4 words were the golden rule. Among management circles within VeriSign, it was well known that 5 Gallivan, Sclavos, and Evan had engineered a giant pyramid scheme to manipulate the stock price 6 and cashed out an obscene amount of stock options.

7 IV. DEFENDANTS’ SCIENTER AND INTERNAL REPORTS 8 23. Discovery has revealed that defendants received numerous reports that provided them 9 with contemporaneous information about the Company’s performance, including the source and 10 amount of its revenues, its unit sales of specific products and services, and other information 11 pertaining to the financial health and performance of its business. The reports received by 12 defendants included the following: 13 (a) Bag Analysis. On at least a monthly and quarterly basis, Sclavos, Evan and 14 Korzeniewski received detailed spreadsheets containing forecasts of volume, life, price and 15 bookings, revenue analyses, forecast comparisons to actual performance, deferred revenue balance 16 forecasts, and other information designed to show Sclavos, Evan and other senior executives how 17 much revenue was “in the bag” versus how much was expected. The reports identified the source of 18 VeriSign’s actual and anticipated revenues, identified revenue shortfalls by business unit, and 19 described business development deals and other actions being taken to close the gap between actual

20 and forecast sales. As the end of the quarter drew closer, the reports were updated and circulated 21 weekly, daily and intraday. These reports, as well as other spreadsheets and attachments, 22 demonstrate, for each quarter during the Class Period, that each of the defendants received 23 contemporaneous information that showed: (i) VeriSign was not on track to meet forecasted sales or 24 revenue; (ii) VeriSign had instituted numerous undisclosed and/or improper end of quarter roundtrip, 25 barter, related party and other transactions in an attempt to close the gap (i.e., make up the revenue in 26 order to meet Wall Street expectations); and (iii) VeriSign unit sales of domain names and other

27 products were well behind forecast estimates. 28

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1 (b) Monthly Financial Presentation. Every month, Sclavos, Evan, Korzeniewski 2 and Gallivan prepared and received copies of detailed financial packages provided to VeriSign’s 3 board. Each package contained spreadsheets comparing VeriSign’s performance to internal 4 forecasts and business plans, detailed revenue analyses by operating unit (Web ID, Authentication 5 Services, Registry, etc.), channel (partners, storefront, etc.) and product (domain names, PKI 6 certificates, etc.), detailed registration and renewal metrics, trend analyses, expense breakdowns, and 7 other information. These packages evidence defendants’ contemporaneous knowledge of 8 information demonstrating that VeriSign’s domain name business did not meet internal forecasts 9 throughout the Class Period, and that revenue shortfalls were being made up by improperly and 10 arbitrarily increasing renewal rate estimates over plan, and through increasing reliance on end of 11 quarter “lumpy revenue” deals. 12 (c) Knowledge Services Standard Reports. VeriSign had a dedicated unit, called 13 Knowledge Services, whose job was to prepare and circulate numerous periodic reports used by 14 management to track the performance of its business. The reports circulated to Sclavos, Evan and 15 other senior executives (including Korzeniewski and Gallivan) included weekly Market Share 16 reports tracking the number of domain names registered by the VeriSign registrar and each of its 17 competitors and weekly Multi-year Registration and Renewal reports tracking the average length of 18 term and each week’s registrations and renewals. This provided an additional source of defendants’ 19 (contemporaneous) information about VeriSign’s domain name business.

20 24. Additional documents and emails produced in discovery also show that on a weekly 21 basis throughout the Class Period the defendants received reports prepared by the corporate 22 development department that listed potential roundtrip and barter deals being worked on including 23 the name of the investee company, the amount of the potential investment, the percentage of the 24 investee company VeriSign would acquire with its investment, whether VeriSign would receive a 25 seat on the investee company’s board of directors, the amount of revenue to be generated on the 26 required business deal, the member of the corporate development department that was working on

27 the deal and the status of the investment and business deal. 28

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1 25. Defendants also received numerous reports concerning VeriSign’s receivables 2 including: 3 (a) A monthly accounts receivable aging report that listed the dollar amount of 4 each type of receivable (e.g., affiliate, consulting, onsite server, class 3, onsite MSA and Enterprise 5 3rd party) and the dollar amount that was current, 1-30 days delinquent, 31-60 days delinquent, 61- 6 90 days delinquent, 91-180 days delinquent, 181-360 days delinquent and greater than 361 days 7 delinquent. 8 (b) An Aging - 4 Bucket Report and an Aging – By Collector report that was 9 prepared at least on a quarterly basis that listed for every customer (1) the total amount owed by the 10 customer, (2) the amount owed and invoice number for each unpaid invoice, (3) the due date of each 11 unpaid invoice, and (4) the number of days payment was past due. 12 (c) A quarterly accounts receivable (“A/R”) Allowance Analysis report that listed 13 (1) the total dollar amount of west coast receivables, (2) the dollar amount west coast receivables 14 that were current, 1-30 days delinquent, 31-60 days delinquent, 61-90 days delinquent, 91-180 days 15 delinquent, 181-360 days delinquent and greater than 361 days delinquent, (3) the dollar amount of 16 receivables net of the specific reserves, (4) each customer for which VeriSign had established a 17 specific reserve, (5) the dollar amount of the general bad debt reserve, and (6) the dollar amount of 18 receivables net of the general bad debt reserve. 19 (d) A monthly general ledger account reconciliation of the bad debt reserve that

20 listed by month the beginning balance of the bad debt reserve, increases due to additional provisions, 21 increases due to recoveries, reductions due to write-offs, the ending balance of the reserve, the 22 balance of receivables and the bad debt reserve as a percentage of receivables. 23 (e) A weekly affiliate A/R report that listed every affiliate that was delinquent in 24 paying VeriSign. For each delinquent affiliate, the report listed (1) the balance of each unpaid 25 delinquent invoice, (2) the date payment was due, (3) the number of days the invoice was 26 outstanding, (4) the responsible sales representative, and (5) an update on the status of collecting the

27 past due receivables. 28

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1 26. In addition, according to a September 5, 2001 email prepared by Sonny Sano that was 2 sent to Evan, Gallivan and others, in July-August 2001, VeriSign established a group called the 3 “Accounts Receivable Management Team” that met on the first Monday of each month after the 4 initial meeting on August 28, 2001 to deal with VeriSign’s delinquent customers and affiliates. 5 Permanent members of the team included Evan, Gallivan, Pereira, Ulam, Clement and Sano. 6 According to a October 26, 2001 email from Yazmin Yazdi, the individual responsible for preparing

7 and distributing the weekly affiliate A/R report, any activity with any affiliate had to first be cleared 8 with defendants Sclavos and/or Evan.

9 V. CONFIDENTIAL WITNESSES 10 27. In addition to the documents and emails that evidence defendants’ knowledge of and 11 participation in the scheme to defraud, the allegations are confirmed and corroborated by numerous 12 former employees of VeriSign. 13 28. Confidential Witness 1 (“CW1”) is a former VeriSign Global Vice President of Sales 14 for the Consulting Division in Herndon, Virginia during the Class Period. In that capacity, CW1 has 15 personal knowledge of VeriSign’s accounting and revenue reporting specifically with respect to the 16 Consulting Division. CW1 reported to VeriSign’s Consulting Division Senior Vice President Tim 17 Ranney (“Ranney”) and defendant Gallivan. 18 29. Confidential Witness 2 (“CW2”) is a former Network Solutions/VeriSign Chief 19 Systems Architect in Herndon, Virginia. Based on his own observations and communications with 20 VeriSign management-level employees, CW2 has obtained knowledge of fictitious revenue reported 21 by VeriSign in 2001. CW2 also has personal knowledge of the forecasting and reporting process in 22 the Consulting Division. 23 30. Confidential Witness 3 (“CW3”) is a former Illuminet/VeriSign database manager 24 who was employed by VeriSign in Dallas, Texas during the Class Period. CW3 started working for 25 National TeleManagement Corporation (“NTC”) until NTC’s acquisition by Illuminet in July 2001. 26 CW3 has personal knowledge of the due diligence conducted by VeriSign, or the lack thereof, when 27 it acquired Illuminet in December 2001. 28

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1 31. Confidential Witness 4 (“CW4”) is a former VeriSign account executive for the ESP 2 Division unit at the Mountain View office during the Class Period. In that capacity, CW4 has 3 personal knowledge regarding VeriSign’s digital certificate business in FY01 as he was responsible 4 for selling VeriSign’s digital certificates and training classes to enterprise customers. CW4 reported 5 to Account Executive Manager Christine Harris (“Harris”), Territory Public Key Infrastructure 6 (“PKI”) Manager, Amy Dolittle (“Dolittle”), and Territory Training Manager Amy Burrow 7 (“Burrow”), who in turn reported directly to defendant Gallivan regarding VeriSign’s digital 8 certificate business. 9 32. Confidential Witness 5 (“CW5”) is a former finance manager for Air2Web in Atlanta, 10 Georgia. CW5 has personal knowledge of VeriSign’s investment in Air2Web, Air2Web’s purchase 11 of VeriSign’s Universal Service Security Center, and the collaboration software project that was sold 12 to only one customer, PTTrust, VeriSign’s worldwide affiliate in Cairo, Egypt. 13 33. Confidential Witness 6 (“CW6”) is a former Illuminet/VeriSign network applications 14 project manager in Olympia, Washington and also has personal knowledge regarding the 15 circumstances surrounding VeriSign’s acquisition of Illuminet. 16 34. Confidential Witness 7 (“CW7”) is a former VeriSign manager of credit and 17 collections/accounts receivable in its Mountain View office. CW7 has personal knowledge of the 18 accounts receivable management meetings in which VeriSign’s accounts receivable status was 19 discussed on a bi-monthly basis. In that capacity, CW7 reported to accounting manager Danny Dow 20 (“Dow”), who reported to Financial Controller Bert Clement (“Clement”) who reported to defendant 21 Evan. 22 35. Confidential Witness 8 (“CW8”) is a former VeriSign operations manager in the 23 Mountain View office. In that capacity, CW8 was responsible for managing all technical aspects of 24 VeriSign’s application product service, including the site network and website infrastructure for 25 VeriSign’s worldwide affiliate partners. 26 36. Confidential Witness 9 (“CW9”) is a former VeriSign senior Internet account 27 executive in the Mountain View office. In that capacity, CW9 sold VeriSign’s digital certificates for 28 the Mass Markets Division and has personal knowledge of the sales operations in that Division.

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1 37. Confidential Witness 10 (“CW10”) is a former WebNum Services (“WebNum”) 2 manager who worked out of VeriSign’s Dulles, Virginia office during the Class Period. In that 3 capacity, CW10 reported briefly to Executive Vice President and General Manager of VeriSign’s 4 Global Registry Services, Herb Hribar (“Hribar”), and later to Rusty Lewis (“Lewis”) (who held the 5 same title as Hribar). From time to time, CW10 also reported to Vice President of Sales for Asia and 6 Latin America, Mike Kardos (“Kardos”), and VeriSign Vice President of EMEA (Europe/Middle 7 East/Africa), Hisham El-Manawy (“El-Manawy”). Both Kardos and El-Manawy reported directly to 8 defendant Gallivan. According to CW10, Kardos was the key player responsible for negotiating the 9 WebNum contract with VeriSign customers. CW10 has personal knowledge of VeriSign’s swap and 10 barter dealings with affiliates and technology partners as CW10 was familiar with the approximate 11 dollar amounts and payment schedules regarding contract terms. 12 38. Confidential Witness 11 (“CW11”) is a former VeriSign Vice President of Customer 13 Service in Herndon, Virginia during the Class Period. In that capacity, CW11 has personal 14 knowledge of the operations of Network Solutions in Virginia.

15 VI. VERISIGN LEVERAGES ITS STOCK MARKET SUCCESS TO ACQUIRE NETWORK SOLUTIONS 16 39. As it entered 2000, VeriSign’s primary product was a line of “digital certificates” that 17 permitted the use of advanced encryption technologies designed to safeguard information transmitted 18 over the Internet. These certificates are managed through a network of secure data centers that 19 provide VeriSign with the ability to identify the source of information transmitted over the Internet 20 and determine whether that information has been intercepted or altered by third parties while in 21 transit. Apart from their use in commercial transactions, digital certificates also have a variety of 22 other applications, including controlling access to sensitive data and account information, enabling 23 digitally-signed emails, and creating on-line electronic trading communities. 24 40. According to VeriSign’s 1999 Annual Report, filed with the SEC on March 22, 2000, 25 the Company had issued over four million digital certificates by the end of 1999, more than any 26 other company in the world. VeriSign’s certificates were already being used by every company 27 listed on the Fortune 500 and many federal government agencies, including the Internal Revenue 28

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1 Service and the Federal Bureau of Investigation. VeriSign sold its digital certificates, sometimes 2 packaged with consulting arrangements or other services, on an annual subscription basis, with 3 annual fees ranging from $250 to $500,000 or more, depending upon the volume of traffic over the 4 website and the number and nature of services provided. In addition, VeriSign also sold its services 5 through “affiliate” arrangements with banks, credit card companies, brokerage firms, Internet service 6 providers, telecommunications companies and other businesses handling large numbers of 7 transactions over the Internet, permitting these companies to issue and manage their own digital 8 certificates, either under VeriSign’s name or through a co-branding relationship. 9 41. Driven by increased sales of its digital certificates and other trust services, the 10 Company reported annual revenues of $84 million in 1999, more than double the $39 million it had 11 reported in 1998. The Company’s stock had entered 1999 trading as low as $15 per share during the 12 first quarter, but exploded during the fourth quarter when the Company turned its first ever pro 13 forma profit and its share price topped $190. By January 30, 2000, there were more than 67,000 14 beneficial owners of the Company’s shares, and more than 100 million shares of stock in the 15 Company had been issued. 16 42. Buoyed by its newfound wealth, VeriSign began to use its stock to acquire other 17 companies. In February 2000, VeriSign acquired Thawte Consulting (Pti) Ltd. (“Thawte 18 Consulting”), a privately held South African company that provided digital certificates to websites 19 and software developers, for $652 million in stock (4.4 million shares), and Signio, Inc. (“Signio”), a 20 privately held company that provides payment services that connect on-line merchants, business-to- 21 business exchanges, payment processors and financial institutions on the Internet, for $876 million in 22 VeriSign stock (5.6 million shares). These acquisitions had a material effect on VeriSign’s financial 23 statements increasing total assets from $341.2 million on December 31, 1999 to $1.9 billion on 24 March 31, 2000. Both acquisitions were completed in February 2000. 25 43. On March 7, 2000, VeriSign set its sights on a bigger target, and announced plans to 26 acquire Network Solutions by exchanging two shares of newly-issued VeriSign stock for each 27 outstanding share of Network Solutions. Network Solutions was a leading provider of web identity 28 services, with two principal areas of business: maintaining the exclusive registry for top level

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1 domains (.com, .net .org and .edu) and serving as a registrar for second level domain names within 2 those domains. Internet domain names are unique identities which enable businesses, other 3 organizations and individuals to communicate and conduct commerce on the Internet. 4 44. It was as if David planned to acquire Goliath. In a press release issued on April 27, 5 2000, for example, Network Solutions announced net revenues for the 1Q00 of $98.2 million – an 6 amount that was $14 million more than VeriSign’s total revenues for all of 1999. Network Solutions 7 had collected these enormous revenues primarily from the small fees it collected from millions of 8 customers registering new domain names for the Internet. Network Solutions had nearly $900 9 million in cash,3 whereas VeriSign had only $100 million in the bank at the time of the acquisition. 10 To complete the acquisition, VeriSign had to issue 78 million shares of new stock in the Company, 11 with a (then) estimated market value of $21 billion based on VeriSign’s closing stock price the day 12 before the acquisition was announced.

13 A. Network Solutions – The 800-Pound Gorilla in Domain Name Services Until 1999 – Then One of 110 Accredited Domain Name Registrars 14 45. From 1992 through 1999, Network Solutions was both the exclusive registry and the 15 sole registrar for Internet domain names. Network Solutions was regulated by the government 16 through the Internet Corporation for Assigned Names and Numbers (“ICANN”), which among other 17 things, set the price Network Solutions could charge for domain name registration services. During 18 that period Network Solutions registered domain names for an initial term of two-years, charging by 19 1999, $70 for the initial two-year registration, and $35 per year for renewals. Network Solutions’ 20 principal lines of business were the registry and registrar business: 21 (a) Registry Services. All domain names are listed and maintained in a master 22 registry list – essentially a telephone book of Internet addresses. As the exclusive registry, Network 23 Solutions maintained (and VeriSign continues to maintain) the definitive directory for the .com, .net 24 .org and .edu web address and was responsible for the infrastructure to enable this information 25

26 3 27 In February 2000, Network Solutions conducted a secondary offering that raised $511 million for the company. 28

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1 throughout the Internet. The annual registry fee for a domain name was $6 and every registrar was 2 required to pay this fee to Network Solutions for its maintaining the registry.

3 (b) Registrar Services. As disclosed in its 2000 Report on Form 10-K, 4 VeriSign/Network Solutions registered second level domain names in the .com, .net and .org top 5 level domains, enabling individuals, companies and organizations to establish a unique identity on 6 the Internet. According to Network Solutions’ 1999 Report on Form 10-K filed on March 31, 2000, 7 domain name registration services were the company’s core business. Not only did the registrar 8 provide the vast majority of the company’s revenue, but, as stated in the 1999 Report on Form 10-K, 9 that business was “expected to continue to account for a very significant portion of [Network 10 Solutions’] revenue in at least the near term.” 11 46. Network Solutions booked revenues from the sale of domain names ratably over the 12 life of the registration, such that the vast majority of its revenues were deferred – providing a strong, 13 and highly visible, pipeline of future revenues that was attractive to investors. Prior to January 2000, 14 Network Solutions charged a fee of $70 for initial two-year registrations and $35 per year for 15 renewals. 16 47. On November 10, 1999, Network Solutions, the Department of Commerce and 17 ICANN entered into a series of wide-ranging agreements relating to the domain name system that, 18 among other things, opened up the domain name system to competitive registrations in the .com, .net 19 and .org top level domains. According to Network Solutions’ 1999 Report on Form 10-K, by March 20 13, 2000, there were 34 active ICANN accredited registrars (including Network Solutions) operating 21 in 12 countries; additionally, 36 other entities had received accreditation status and 40 other 22 accredited registrars, were in the process of testing Network Solutions systems. 23 48. The effects of competition in the registrar business were immediate. For the quarter 24 ended December 31, 1999, Network Solutions registered 64% of the net new second level domain 25 names. In 1Q00 the results were more stark. In 1Q00, Network Solutions registered only 39% of 26 the total net new registrations as non-Network Solutions registrars accounted for 3,075,000 of 27 5,037,000 total net new registrations. Each registrar was permitted to offer variable registration 28 terms, up to 10 years, and had discretion on pricing of registration services.

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1 49. In January 2000, Network Solutions permitted customers to sign up for an initial term 2 of just one year (at $35), and they overwhelmingly chose to do so. The effect of this was to 3 significantly reduce VeriSign’s long-term deferred revenues (i.e., revenues to be earned in 12 4 months or more). 5 50. As KPMG LLP (“KPMG”), VeriSign’s auditor, noted in its 3Q00 review, this 6 reduction was a function of customers choosing the shorter periods. KPMG wrote, “From January 7 2000 the company changed its policies to any number of years from one to ten years. Most of the 8 clients choose to use the one-year registration which has no impact on long-term deferred revenue 9 and that’s why it is decreased so sharply.” VeriSign’s long-term deferred revenue to decline by 10 nearly 44% from 2Q00 to 3Q00. 11 51. By the middle of 2000, many of the 100+ accredited registrars were large companies, 12 including, among others, AT&T, America Online, CORE or Internet Council of Registrars, Deutsche 13 Telekom, France Telecom Oleane, as well as smaller, more focused entities like, iDirections, interQ, 14 Internet Domain Registrars, Melbourne IT, NameSecure.com, NetBenefit, PSINet, Register.com, 15 Talk.com and Verio. Many of these companies offered basic registration for 1-year terms at between 16 $9.00 and $15.00 per year, a fraction of the prices that Networks Solutions/VeriSign was charging.

17 B. VeriSign Comes Under Fire for Acquiring Network Solutions 18 52. Industry analysts were far from unanimous in their support of VeriSign’s acquisition 19 of Network Solutions. While some analysts and media pundits supported it, others questioned 20 whether VeriSign was paying too much for the company, noting the advent of competition from 21 other registrars and claiming VeriSign could have obtained access to Network Solutions’ customers 22 at a lower cost simply by entering into a joint marketing arrangement. See, e.g., E. Hansen & P. 23 Jacobus, “Analysts Divided Over VeriSign’s Purchase of Network Solutions” (Mar. 7, 2000), at 24 CNET News.com; D. Egbert, “Strategic Union, or $21 Billion Blunder?” (Mar. 27, 2000), at 25 TechNews.com. 26 53. In response, defendants sought to convince the media and the financial community 27 that the Network Solutions acquisition was a good deal, claiming it would turn VeriSign into the 28 Internet’s first utility, assisting customers both in creating their websites and managing their

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1 commercial transactions over the Internet. During VeriSign’s April 19, 2000 earnings conference 2 call, for example, Evan emphasized that “[both VeriSign and Network Solutions] derive revenue 3 from multiple sources and provide tremendous annuity-like recurring revenue streams which build 4 significant deferred revenue balances. Both company’s growth, operating and net margins continue 5 to expand driving significant profitability and strong earnings momentum. The combined companies 6 today have well over a billion dollars in cash and investments and are generating hundreds of 7 millions of dollars in operating cash flow on an annual basis.” Sclavos, too, talked up the growth 8 and financial strength of both companies: “With over 10 million customers, we believe Network 9 Solutions currently has the largest and fastest growing base of business customers on the Internet.” 10 Sclavos added, “Given the recurring nature of both companies’ revenue stream, and the opportunity 11 to increase both the reach and depth of our services we feel the combined companies will have an 12 unmatched business model. We look to be one of the top three Internet companies in terms of 13 revenues, profits and operating cash flow. We think this is especially important in the market where 14 fundamentals will matter again.” 15 54. It worked. Sclavos and Evan convinced investors that the acquisition was an 16 excellent opportunity that would turn VeriSign into the leading Internet domain name and security 17 company, providing a “one stop shopping” Internet utility that would continue to grow the company 18 both in the short term and in years to come. On June 9, 2000, VeriSign completed the acquisition of 19 Network Solutions, issuing 78 million new shares of stock in the company which, at the time the 20 deal closed, had a market value of approximately $19 billion. 21 55. Even among analysts who thought the acquisition would be beneficial, the financial 22 health of Network Solutions was a key component of these views. For example, in a July 28, 2000 23 research note entitled “VeriSign-Network Solutions: An End-to-End Win,” Morgan Stanley Dean 24 Witter described the advantages of Network Solutions as follows: “the company has a solid balance 25 sheet, positive net profits, a predictable revenue stream, and a healthy revenue backlog of cash 26 received, but not yet booked, for its services. Because of this, the company has growth opportunities 27 that are similar to or greater than those of its other Internet peers.” Additionally, while recognizing 28 that competitors, like Register.com, had taken “some” market share from Network Solutions

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1 (VeriSign’s 2Q00 share was 38% down from 71% in 4Q99), Dean Witter noted that not only was 2 VeriSign targeting the retail services, as opposed to bulk sales market for domain names, but the 3 combined company had “valued added services” not currently offered by Register.com,” that it 4 believed would drive revenue growth. In short, the financial fortunes of the combined company 5 rested on VeriSign-Network Solutions being able to garner a large share of the domain name market 6 through its registrar business and sell additional services to those customers. 7 56. Shortly after VeriSign’s acquisition of Network Solutions was completed the dot-com 8 bubble began its collapse, ultimately sending many Internet companies spiraling into bankruptcy. 9 This, in turn, decreased the demand for domain name registration services, as existing owners failed 10 to renew their domain name registrations and fewer people were seeking to join the Internet gold 11 rush by creating new websites. With fewer companies conducting business over the Internet, the 12 rapid growth in demand for VeriSign digital certificates and other e-commerce services also began to 13 wane. Further, the existence of over 100 competitors for the registrar business (and the 14 correspondingly cheaper rates they charged), and the shift in demand to one year registrations, also 15 damaged the Companies’ short and long-term deferred revenue streams. Thus, both lines of 16 VeriSign’s business were in substantial decline. As a result of these market conditions, VeriSign’s 17 business began to suffer. Decreasing numbers of domain name registrations cut into the revenues 18 the Company could earn from registry and registrar services, while declining growth in e-commerce 19 was reducing the demand for digital certificates and VeriSign’s other Internet trust and security 20 products and services. The decline was reflected in VeriSign’s stock price as well, which fell from 21 $196 per share on the day the acquisition of Network Solutions was completed to $75 per share on 22 January 23, 2001 – the day before the Company announced its FY00 results. 23 57. According to CW2, by the beginning of 2001 VeriSign’s only stable source of

24 revenue was that derived from Network Solutions’ registry business. Demand for digital certificates 25 was decreasing, and increased competition from other website registrars was cutting into domain 26 name registrations and renewals. In fact, as CW2 was told by VeriSign’s Internet Technology 27 Services General Manager and Director of Consulting, Ranney, during the first half of 2001 28 VeriSign’s revenue from the sale of digital certificates was decreasing, and the Company had shifted

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1 revenues earned by various Network Solutions business divisions to VeriSign in order to give the 2 appearance of growth in the digital certificate market. Indeed, as CW2 summed up, all VeriSign 3 cared about was the revenues the Company could pillage from Network Solutions. In fact, 4 defendants had begun looking for revenue and finding it by scheming to falsify VeriSign’s financial 5 results.

6 VII. DEFENDANTS’ SCHEME TO DEFRAUD 7 58. Unable to deliver the revenue and earnings they had promised the market 8 legitimately, defendants were desperate to find revenue any way possible. Following the completion 9 of the acquisition, in the latter part of 2000 defendants began to employ an assortment of schemes, 10 artifices and devices to mislead investors about both the amount and source of revenues earned by 11 the Company, and the strength and reliability of its deferred revenue pipeline. Defendants’ fraud cut 12 across virtually all lines of VeriSign’s business and, as the discovery to date has shown, was 13 essential to defendants’ desperate attempt to meet Wall Street’s expectations on a quarterly and 14 yearly basis and convince investors that VeriSign, with the Network Solutions acquisition, was “one 15 of the top three Internet companies in terms of revenue, profits and cash flow.” The scheme was 16 carried out in the following general ways.

17 A. Improper Accounting for Domain Name Sales and False and Misleading Reporting of Domain Name Sales Metrics 18 1. VeriSign Inflates Accounts Receivable, Revenue and Deferred 19 Revenue by Changing the Domain Name Automatic Renewal Period to Two-Years 20 59. In its 2000 Report on Form 10-K, VeriSign reported that domain name registration 21 revenues consisted primarily of registration fees charged to customers and registrars for domain 22 name registration services and that domain name registration revenues were deferred and recognized 23 ratably over the registration term, generally one to two-years. For example, if a customer registered 24 a domain name for one year at $35, VeriSign would recognize $8.75 of that fee per quarter and 25 report the balance as deferred revenue. VeriSign maintained “waterfall” schedules to track the 26 revenue to be recognized each month. 27 28

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1 60. Because the domain names had purportedly been sold and the registration fees 2 purportedly collected, there appeared to be little risk that these fees would not eventually be earned 3 and waterfalled (i.e., recognized) as revenues, providing VeriSign with a very reliable source of 4 future periodic revenues. For example, following the February 1, 2001 Analyst Day where 5 defendants rolled out VeriSign’s new post-merger business model and reporting segments, an 6 FAC/Equities analyst described Evan’s presentation as follows:

7 Comments from CFO -Over 89% of all the revenue VeriSign takes in is deferred, but expenses are recognized as they are incurred, providing tremendous 8 predictability and visibility to the business. This conservative accounting practice provides management tremendous flexibility, as it allows them to plan and focus on 9 the quarters ahead instead of the current quarter. 10 (Emphasis added.) Internal VeriSign documents, including a powerpoint presentation used by Evan 11 for the Analyst Day, produced in discovery, also reflect these comments, as do similar reports from 12 many other analysts. 13 61. Because it was a leading indicator of domain name revenue and demand trends, and a 14 strong predictor of quarterly operating results, VeriSign’s deferred revenue balance was closely 15 watched by analysts and investors, as was the information VeriSign reported about its share of the 16 market for domain name registration services, including the rates at which its existing customers 17 were renewing their domain names rather than switching to lower-priced competitors. Indeed, 18 VeriSign reported new and renewed domain name registrations and deferred revenue in every 19 quarterly earnings release issued during the Class Period and analysts reported that deferred revenue 20 visibility was what investors valued most about VeriSign. 21 62. At the beginning of the Class Period, VeriSign reported more than $500 million in 22 deferred revenues on its December 31, 2000 balance sheet, most of it due to domain name 23 registration fees. By way of comparison, at the end of Q100, before VeriSign got into the domain 24 name business, it had just $43 million in deferred revenues on its balance sheet from the sale of 25 digital certificates and other PKI products. 26 63. During the Class Period, defendants manipulated both the revenues VeriSign reported 27 from the sale of domain names and the metrics it reported about the market, thereby misleading 28 investors about the source, timing and amount of revenue it derived from the sale of domain names,

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1 and its prospects for continued success. Defendants did this by, inter alia: (i) wrongfully booking

2 revenue before it was earned based on estimated sales, instead of actual sales, without any reliable 3 basis for making such estimates; (ii) making improper forward-looking adjustments of VeriSign’s 4 “estimated” revenue to correct undisclosed errors in its prior reported revenue and failing to restate 5 (i.e., reduce) prior reported revenue; and (iii) improperly booking revenue on two-year default 6 renewal terms for its customers, despite the absence of any demonstrable basis that customers would 7 accept such products. In addition, VeriSign misled investors about the demand for domain names 8 and related products by deliberately inflating the reported size of both the overall market for domain 9 name registrations and VeriSign’s share of that market, as well as the rate at which VeriSign was 10 retaining its customers through domain name renewals, and the average life of the names it was 11 selling. All of these manipulations misled investors about the financial performance and prospects 12 of VeriSign’s domain name business. 13 64. VeriSign reported increasing amounts of receivables, revenues and deferred revenues 14 by using an accounting sleight of hand: although the entire domain name industry was using a 15 default (“automatic”) renewal rate of one year, VeriSign decided to increase the automatic renewal 16 period to two-years.4 Not only was there no basis for VeriSign to adopt this change, but to the extent 17 that there was any reason to estimate an automatic renewal period at all, it should have been for one

18 year – which had been the default period Network Solutions had always used and continued to use 19 even after competitors entered the market. 20 65. After Network Solutions began offering one-year initial registrations in January 2000, 21 customers were increasingly shifting from two-year registrations to one-year registrations. In 22

23 4 “Automatic” or “default renewals” refers to those situations where the customer’s initial 24 registration contract expires and the customer has not contacted the registrar (or responded to requests) regarding a renewal period. Rather than simply let the contract lapse (and risk reselling a 25 domain name that the customer still wants) VeriSign billed the customer for a specified renewal period. During the entire time that Network Solutions was the sole registrar it always used a one- 26 year automatic renewal period (even when the initial contract was for two-years). In 1999, when the initial period was reduced to one year, Network Solutions still maintained an automatic renewal 27 period of one year. It was only in October 2000, after VeriSign acquired Network Solutions, that defendants changed the default period to two-years. 28

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1 addition, more than 99% of Network Solutions’ customers had always chosen one-year renewal 2 terms. Thus, there was a sharp decline in long-term deferred revenue – revenue to be earned from 3 services provided over a year. According to KPMG’s deferred revenue memo from its 2000 audit 4 workpapers, long-term deferred revenue declined $73.5 million – from $130.6 million as of March 5 31, 2000 to $57.1 million as of October 31, 2000 – a 56% decline in seven months. Thus, it was 6 clear that domain name subscribers were choosing shorter periods for their domain name contracts. 7 Moreover, the increasing number of competing registrars further eroded VeriSign’s market share and 8 put pricing and other pressures on the amounts it could charge. 9 66. Nevertheless, despite these facts and clear trends, in October 2000, and in violation of 10 GAAP, VeriSign began recognizing revenue and deferred revenue on invoices to customers that 11 charged $70 for a two-year renewal term when those customers had only agreed to one-year renewal 12 terms. As a result of this improper accounting change, defendants were able to boost net registrar 13 receivables from approximately $9 million as of June 30, 2000 (the month of VeriSign’s acquisition) 14 to $28.3 million as of December 31, 2000 – which results were reported on January 24, 2001. As the 15 two-year invoicing continued throughout the Class Period, registrar receivables grew to $96.4 16 million as of December 31, 2001, before returning to $9.1 million as of December 31, 2002 – where 17 they should have been all along. The impact on deferred revenue – a key measure of the Company’s 18 performance – was even greater.

19 67. Because Network Solutions contracts all had a one-year default renewal, no customer 20 prior to October 2000 agreed to this change and defendants had no basis to believe that any would 21 accept the two-year period, let alone any basis to “estimate” how many customers might accept it. 22 Yet, VeriSign recorded a receivable and deferred revenue for the two-year renewal term (short term 23 for the first renewal year and long-term for the second renewal year) and did so one month prior to 24 the expiration date of each contract. Thus, with the stroke of a pen, revenue and deferred revenues 25 were automatically increased – by November 2000, projected 2001 renewal revenues were adjusted 26 upward by $20 million by this new policy. VeriSign’s waterfall schedules for the two-year renewals

27 confirm that deferred revenues and revenues increased substantially during the Class Period as a 28 result of the two-year automatic renewals. Monthly revenues more than doubled from

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1 approximately $3.6 million prior to the Class Period to more than $7.6 million during the Class

2 Period. Deferred revenues quadrupled from approximately $30 million prior to the Class Period to 3 more than $120 million during the Class Period. This was all the more astonishing since Network 4 Solutions was no longer a monopoly and faced extensive competition from over 70 registrars. 5 68. During the Class Period, VeriSign reported that renewal registrations exceeded new 6 registrations and a substantial increase in long-term deferred revenue and receivables (registrations 7 in 000s; deferred revenue and receivables in millions). 8 4Q00 1Q01 2Q01 3Q01 4Q01 9 New Registrations 1,900 1,000 1,000 750 600 10 Net New Name Revenue $39.9 $29.0 $30.6 $23.8 11 Renewals5 650 1,200 1,400 1,200 1,200 12 Net Renewal 13 Revenue $78.3 $74.2 $61.8 $69.8

14 Ratio of Renewals/ 15 New Registrations 34% 120% 140% 160% 200% 16 A/R $128.0 $161.2 $189.6 $228.4 $314.9 17 Short Term Def. Rev. $452.7 $435.3 $435.3 $442.6 $471.3 18 LT Def. Rev. $55.6 $106.3 $134.8 $142.2 $150.7 19 69. The recording of any amount of any revenue (and receivables) prior to receiving 20 payment from the arbitrary two-year default renewal was improper under GAAP (FASCON 5) 21 because (1) collectibility was not reasonably assured, (2) VeriSign had no historical basis to estimate 22 collectibility (since it just started the two-year automatic renewals in October 2000), (3) many 23 customers were unaware of the automatic renewal, denied they had agreed to the renewal and 24

25 5 The two-year renewal waterfall schedule indicates that the volume of automatic renewals 26 reported by VeriSign was misleading and that they totaled 836,180 in 4Q00 (not 650,000), 1.4 27 million in 1Q01 (not 1 million), 1.6 million in 2Q01 (not 1 million) and 1.3 million in 3Q01 (not 750,000). 28

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1 refused to pay, and (4) the customers only agreed to one-year renewal terms and had never 2 authorized two-year renewal terms. 3 70. Defendants knew that the market was moving to shorter, not longer terms. In fact, 4 KPMG, VeriSign’s auditor, noted in its 3Q00 review, that customers were choosing one-year terms 5 when they were offered: 6 As it is appeared in the comparison of the two quarters [2Q00 and 3Q00] together, we can see that long-term deferred revenue decreased by 43.58% which is a 7 significant decrease and by asking the management about their explanation, they told us that the company used to offer its service for clients for only 2 years period 8 duration until January 2000. from January 2000 the company changed its policies to any number of years from 1 to 10 years. Most of the clients choose to use the 1 year 9 registration which has no impact on Long-term deferred revenue and that’s why it is decreased so sharply.6 10 71. Not only did defendants lack any basis to recognize revenue based on estimates for 11 renewals that had never been purchased or sold, but even their month-to-month internal results of 12 these “estimates” confirmed that they had no basis to do so. For example, as shown in the following 13 chart, the automatic renewal waterfall schedule reflects that the bad debt rate applied to automatic 14 renewals (which had historically fluctuated between 22% and 25% when Network Solutions was a 15 monopoly and used a one-year default renewal period) climbed dramatically beginning in October 16 2000, reaching an astonishing 68% by August 2001, principally as the result of the significant errors 17 in VeriSign’s past estimates, and the huge improper forward-looking adjustments (described infra), 18 defendants were making in a desperate and unsuccessful attempt to correct them: 19

20

21

22

23

24

25 6 Long-term deferred revenues represent revenues that would not be earned for 12 months or more. Short-term deferred revenues represent revenues expected to be earned within the next 12 26 months. Hence, one-year registration terms would only boost short term deferred revenues, whereas two-year terms increased long-term revenues, purportedly giving investors a better window into the 27 Company’s future expected performance. 28

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1 CHART REMOVED 2 3 4 5 6 7 8 9 10 11 12 13 14 72. In short, there was no basis to recognize revenue based upon unknown estimates of 15 sales of theretofore unknown and unsold products, and that defendants repeatedly were forced to 16 upward adjust the estimated bad debt rate confirmed that they had no basis to do it. However, 17 defendants continued to report VeriSign’s revenues and deferred revenue based on “estimates” when 18 they knew their “estimates” were without foundation. 19 73. Indeed, the declining demand and increased competition for the sale of domain names 20 showed early in the Class Period that the estimated bad debt rates used by VeriSign on its waterfall 21 schedules were understated, and that actual revenues from the sale of domain names were millions of 22 dollars less than had been publicly reported. Rather than reporting these errors and disclosing the

23 adjustments to the market, defendants simply increased the estimated bad debt rate for future 24 reporting periods to cover up the errors in prior periods. Thus, each month, defendants made 25 “forward looking adjustments” to VeriSign’s estimates to reduce the amount of then current 26 revenues in an effort to balance out the errors it had made in prior periods. Repeated upward 27 adjustments to the estimated bad debt rate were made by defendants each month to cover up the past 28 errors in their renewal estimates. The adjustments were made by or under the direction of Voslow

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1 and reviewed by Sclavos, Evan, Korzeniewski and other members of senior management before 2 being finalized. 3 74. Thus, VeriSign did not correct the errors to eliminate deferred revenues placed on its 4 balance sheet from sales that had never occurred. Hence, VeriSign continued to recognize revenues 5 based on “waterfalled” deferred revenues on its balance sheet even after defendants knew that those 6 deferred revenues had been overstated because the renewals on which they were based had never 7 taken place. In addition, VeriSign greatly overstated domain name receivable balances, which were 8 also based on estimated collections from estimated renewals, requiring it to take massive writedowns 9 during and after the Class Period totaling more than $60 million to eliminate A/R booked on non- 10 existent domain name renewals. 11 75. Defendants were, at a minimum, deliberately reckless, if not actually aware of and 12 involved in the fraudulent accounting. As Voslow wrote in a June 11, 2001 email to Sclavos, Evan 13 and others describing how they needed to conceal VeriSign’s accounting for the automatic renewals: 14 “this is all done behind the scenes where it should remain! . . . I don’t like the idea of talking about 15 ‘renewal accounting’ in detail in public.” Defendants switch to the two-year automatic renewal was 16 motivated, in large part, to make it appear that VeriSign had stemmed the decline in VeriSign’s long- 17 term deferred revenues, thereby falsely assuring investors that the Company continued to have a very 18 strong pipeline of domain name revenues well into the future. 19 76. In addition, VeriSign internal documents reveal that even if there had been a basis to 20 recognize domain name revenue on an estimated basis (which there was not) defendants knew that

21 VeriSign was not properly accounting for the actual revenue. For example, in a July 20, 2002 email 22 to Evan and others, Voslow acknowledged how VeriSign had accounted for renewals during the 23 Class Period and contrasted that to the current method: “In the past, we had to estimate the majority, 24 now we only have to estimate a small slice. In the past, we took into account the variance between 25 the estimate and the actual by adjusting the future renewal rates (if I was low 2 units, we would take 26 2 units from the current renewal pool) whereas now, we have such a small piece to true up, we will

27 just do it on a 3 month lag basis with a hard true-up that should almost always net to an immaterial 28

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1 amount.” In fact, Voslow admitted that VeriSign could not “true up” the number for six to nine 2 months – thereby further acknowledging that the “estimates” were improper. 3 77. Following implementation of the new policy, VeriSign’s long-term deferred revenues 4 from the sale of domain names grew dramatically, from $55.6 million at the end of FY00 to $143 5 million by the end of FY01. After VeriSign revealed on April 25, 2002 that its domain name 6 business was not as strong as previously represented, its long-term deferred revenues again 7 plummeted back to $117 million by the end of 2Q02:

8 9 Long Term Deferred Revenue ($millions) 10 160

11 140 12 120 13 100 14 15 80

16 60 17 40 18 20 19 20 0 Q300 Q400 Q101 Q201 Q301 Q401 Q102 Q202 Q302 21 Reporting Period 22 2. Defendants Falsely Manipulated the Reported Metrics for the Domain Name Market. 23 78. As the operator of the worldwide registry for domain names ending in .com, .net and 24 .org, (collectively, “c/n/o”) VeriSign was the principle repository of information about the overall 25 market for domain name registration services. Because each registrar had to go through the registry 26 to register a new or renewed c/n/o name, VeriSign had access to detailed information about each of 27 its competitors, including the number of new names they had sold, the number of names renewed, 28

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1 and the number of names each had lost to, or poached from, other registrars. VeriSign’s registry also 2 provided information about the market as a whole, including the total number of active domain 3 names, and the number of names registered by each registrar. 4 79. During the Class Period, defendants took advantage of the public trust placed in 5 VeriSign as the operator of the registry and manipulated data reflecting the health of both its 6 registrar business, and the overall domain name market. In particular, defendants misled investors 7 by: (1) inflating the reported number of domain name transactions it handled and the number of 8 names under management by the VeriSign registrar by giving away names for free or selling them at 9 a deep discount; (2) overstating VeriSign’s renewal rate, both by including renewals that customers 10 had not agreed to accept in the numerator and by failing to include unrenewed free and promotional 11 names in the denominator; (3) using two-year renewals to inflate the average life of the names it 12 sold, creating the appearance of long-term visibility in VeriSign’s revenues (as described above); 13 and (4) failing to timely delete or deactivate expired, non-renewed names, thereby concealing an 14 overall decline in the market for domain names. 15 80. At the outset of the Class Period, Sclavos expressed frustration with the amount of 16 attention investors and analysts were paying to the number of names sold as an indicator of the 17 strength of VeriSign’s business. In several emails Sclavos sent to senior executives from January 18 23-25, 2001 in preparation for analyst day presentations, he repeatedly emphasized that they should 19 try to move analysts away from domain names as a sign of VeriSign’s financial condition. In one

20 such email, Sclavos wrote: “Our goal should be to have the analysts walk away saying ‘Wow, I 21 didn’t realize how much more there is beyond simple domain names and certificates!’ I have every 22 confidence that we can and will pull this off.” In another email, Sclavos forwards copies of an 23 analyst report, with the message: “The Dain Rauscher analyst is one of our biggest fans. Even his 24 report is begging us to explain how we meet our business targets if name volumes drop off 25 dramatically. We will really need to have very strong strategy and roadmap presentation and LOTS 26 of metrics that show how we monetize our customer bases.” 27 81. Following the analyst day presentation, the Dain Rauscher analyst, Stephen Sigmond, 28 published a positive research note supporting the new operating metrics unveiled by management,

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1 prompting Sclavos to send him a congratulatory email recognizing his “Good note.” In response, 2 Sigmond told Sclavos: “We’re still getting some pushback from accounts that are concerned over 3 domain name renewal rates, so it appears that the message is still sinking in. But it’s a good first 4 step. I whipped the [Dain Rauscher] sales force into a frenzy and we’ve been pretty involved on the 5 trading side this morning.” Analysts continued to focus on domain name metrics as a strong 6 indicator of VeriSign’s businesses. 7 82. During the Class Period, defendants reported the following metrics to investors and 8 analysts regarding the number of new and renewed domain names sold by its Network Solutions 9 registrar, the rate at which expiring names were renewed by the registrar, the average life of the 10 names sold during the quarter, the total number of names under management by the VeriSign 11 registrar, and the total number of names in the registry, reflecting registrations by both the VeriSign 12 registrar and its competitors (numbers in 000s except for average life in years):

13 4Q00 1Q01 2Q01 3Q01 4Q01 New registrations 1,900 1,000 1,000 750 600 14 Renewal registrations 650 1,200 1,400 1,200 1,200 15 Renewal rate 50% 65% 60% 53% Names Under Management 15,100 15,500 16,000 14,500 13,600 16 Total Names in the Registry 28,200 30,613 32,400 32,000 28,800

17 83. In order to show registrar growth during and prior to the Class Period, VeriSign 18 inflated the number of domain name transactions by the VeriSign registrar by giving away hundreds 19 of thousands of names for free, or at promotional rates of less than $10: 20 4Q00 1Q01 2Q01 3Q01 4Q01 21 Free/Promotional Names 485,727 166,359 210,188 108,147 47,531 22 Percentage of New Names 26% 17% 12% 14%` 8%

23 84. In fact, the numbers were themselves artificially inflated. Internal emails make clear 24 that VeriSign was giving away or selling names at a deep discount to meet Wall Street expectations 25 for domain name unit sales, which remained a highly important metric to investors. In one telling 26 instance, Douglas Wolford, the general manager of the domain name business, interrupted a 27 customer’s chemotherapy treatments by calling him on his cell phone at the end of a quarter and 28

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1 convincing him to take hundreds of thousands of free names he didn’t need before the quarter ended 2 so that VeriSign could meet Wall Street expectations for name growth.

3 85. Defendants further misled investors by excluding free and promotional names from 4 VeriSign’s publicly-reported renewal rate calculations. In determining the renewal rate to report to 5 investors, VeriSign first calculated its “renewable base,” which was the total number of names

6 coming up for renewal in the period, but excluded the number of free and promotional names up for 7 renewal. To calculate the renewal rate, VeriSign then divided this “renewable base” by the number 8 of names it estimated would be renewed. By using this calculation method, defendants were able to 9 artificially inflate the renewal rate reported to investors, because the numerator (estimated renewals) 10 included thousands more names than were actually renewed (as described above), while the 11 denominator (the “renewable base”) excluded thousands of names that were actually up for renewal:

12 2Q01 3Q01 4Q01 Overstated Estimated Renewals 1,381,602 1,205,619 1,137,228 13 Understated Renewable Base 2,386,171 2,338,834 2,316,198 14 Actual Renewal Base 2,560,440 3,179,042 2,601,494 Reported Renewal Rate 60% 53% 54% 15 “Actual” Renewal Rate7 54% 38% 44%

16 86. Given that renewals accounted for more than 50% of VeriSign’s quarterly revenues 17 from the sale of domain names, the switch to two-year autorenewals not only had an enormous 18 impact in artificially inflating both VeriSign’s financial results, it also inflated the average life of the 19 domain names managed by VeriSign, which defendants used to convince investors of the strength of 20 the domain name business, as depicted in the following chart derived from monthly financial 21 packages provided to VeriSign’s board and the Individual Defendants (revenues in $000s, average 22 life in years): 23 24 25

26 7 27 Based on estimated renewals by VeriSign. In fact, the actual renewal rate was even lower because the estimated renewals were overstated as previously alleged. 28

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1 1Q01 2Q01 3Q01 4Q01

2 Avg. life – renewals 1.90 1.92 1.95 1.83

3 Avg. life – new names 1.52 1.37 1.58 1.54

4 5 87. Indeed, as Mike Voslow wrote to Evan and other executives in a January 30, 2001 6 email attaching a revised 2001 renewal sensitivity analysis that increased the average life forecast to 7 1.8 years: “A 50% renewal rate with an average life of 1.8 [years] can have better results than 70% at 8 a 1.3 ave term. The term has more of an impact than the renewal rate itself.” 9 88. In addition to inflating its own performance metrics, VeriSign also inflated 10 performance metrics relating to the market as a whole, as reflected in the “zone files” VeriSign

11 maintained for each top level domain (“TLD”).8 Because the zone files contain information about 12 all the active names registered under each TLD (i.e., .com, .net and .org), investors and analysts 13 closely monitored the zone files for early indications of trends affecting the industry. VeriSign 14 represented to its investors, customers and competitors that all non-renewed, expiring domain names 15 were immediately deleted from the zone files after a 45-day grace period for late renewals following 16 the expiration date. As a result, analysts were led to believe that the files provided a relatively 17 accurate snapshot of the size of the overall domain market on any given day. 18 89. In fact, defendants knew that VeriSign was not deleting expired names in a timely 19 fashion, and millions of expired names continued to be identified as active in the zone file long after 20 their expiration date. As a result, the zone file overstated the number of active domain names, 21 covering up an overall decline in the market. Between 3Q01 and 2Q02, VeriSign belatedly deleted 22 more than six million expired names that were still listed as active in the zone file. 23 90. During 4Q01, some analysts began raising questions about the zone file, suggesting 24 that its overall size was beginning to contract. In response, Korzeniewski, Sclavos and Evan began a 25 concerted effort to discredit these analysts by encouraging SnapNames.com, an industry trade 26

27 8 Each extension (.com, .net, .org, etc.) is referred to as a separate TLD. 28

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1 publication, and other investment analysts to write conflicting reports falsely claiming that the zone 2 file was continuing to expand. Investors did not learn of the extent to which VeriSign’s domain 3 name business and the overall domain name industry was struggling until the end of the Class 4 Period, when VeriSign announced a massive restructuring of its business, more than $60 million in 5 write-offs related to the domain name business, and reduced guidance going forward due to the 6 diminished prospects for that business, as described infra. 7 91. In fact, unbeknownst to analysts or investors, because of its accounting fraud 8 VeriSign’s actual deferred revenue had been steadily declining throughout the year. The decline in 9 deferred revenue remained hidden by defendants’ unreported overstatement of domain name 10 revenues, including long-term and short-term deferred revenues booked on the automatic two-year 11 renewal of expiring domain names.

12 3. Some of the Truth About VeriSign’s True Financial Condition Leaked in the Market in October 2001 13 92. By the third quarter of 2001, analysts were increasingly focused on VeriSign’s long- 14 term prospects. Some analysts, such as Bear Stearns, warned (in an October 22, 2001 report) that 15 “the very thing that investors value most about VeriSign (deferred revenue visibility) could be at risk 16 in 2002” due to a declining domain name market. Others, however, including Legg Mason Wood 17 Walker, Inc. and Robinson-Humphrey, indicated that they believed VeriSign would continue to 18 report strong and stable revenues and deferred revenue growth. 19 93. On October 25, 2001, VeriSign released its 3Q01 results, revealing that VeriSign’s 20 domain name renewal rates had fallen from 60% to 52% (which was still artificially inflated) and its 21 deferred revenue balance had increased just 2.6% sequentially, barely reaching the bottom of 22 management’s guidance for deferred revenue growth. Although deferred revenue had grown, the 23 increase was less than the 5% growth analysts expected as a sign of the continued strength and 24 25 26 27 28

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1 visibility of VeriSign’s earnings, and missed the 3% low end of management’s guidance.9 In fact, 2 even these results were artificially inflated as a result of defendants’ accounting manipulations. 3 94. Nevertheless, the 3Q01 announcements partially revealed that VeriSign’s domain 4 name business, and its purportedly strong deferred revenue pipeline was not as strong, or as visible, 5 as defendants had led investors to believe. Although the $585 million in reported deferred revenues 6 was still inflated by defendants’ ongoing deliberate overstatement of domain name sales, investors 7 reacted to the declining sequential growth going forward with alarm, sending VeriSign’s stock 8 plummeting nearly 20% in one day, declining from $53.34 to $42.82 on extraordinary volume of 48 9 million shares. 10 95. Analysts echoed this concern, but the market did not yet know the extent of the 11 problem. As one Bear Stearns analyst noted, “[w]ith the deterioration in the company’s domain 12 name business, we believe management’s revenue and EPS guidance for 2002 are at serious risk.” 13 In addition, in an October 16, 2001 article, columnist Herb Greenberg began questioning VeriSign’s 14 revenue from related party investees. 15 96. Defendants sought to dismiss the partial disclosures, both directly and by having 16 others contact analysts. On November 17, 2001, Piper Jaffray analyst, Scott Nicholas, emailed 17 Sclavos and Evan asking for comment on the fact that the size of the c/n/o zone file had begun to 18 decline after September 30, 2001, and that Network Solutions had lost a percentage of its market 19 share to competitors. On November 19, 2001 Sclavos responded that the analyst’s conclusion that

20 this represented “the first sustained reduction in the size of the.com/.net/.org file in the history of the 21 Internet” was “1) a little dramatic and 2) misleading as you are trying to equate the shrinkage with 22 less Internet presence or usage.” Sclavos sought to dismiss the decline in the zone file as having 23 been due to the “cleaning out” of 800,000 to 1,000,000 “promotional and speculative names in our 24 database,” with another 400,000 free names due to be cleaned out in Q4. “Bottom line is that you’re 25

26 9 In VeriSign’s October 25, 2001 press release and during the October 25, 2001 conference 27 call, defendants claimed VeriSign had met the low end of guidance by claiming a 3% sequential growth rate, achieved by simply rounding up the 2.6% actual growth rate. 28

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1 more likely to have a single step function drop in the zone file this quarter as the names are cleared 2 out. Expect it to begin growing again in Q1 as we have less names deleting (higher quality names up 3 for renewal) and as new names stabilize.” In fact, defendants knew its market had been declining for 4 over a year and VeriSign had at least six million names that should have already been deleted. 5 97. On November 20, 2001, Piper Jaffray issued an analyst report reporting on VeriSign’s 6 apparent loss of market share and raising concerns with the health and visibility of VeriSign’s future 7 revenue stream: “While there clearly is a reasonable explanation for the potential decline in listed 8 names (VeriSign eliminating speculative names), we are aware a decline could be other than a 9 discrete, isolated instance, and perhaps represents a tweak down in momentum in the domain name 10 business. The decline in Zone file listings has the potential to expose VeriSign’s registrar business 11 (46% of September revenue) to risk. Importantly, this data is not a one time event.” Following 12 issuance of this report, VeriSign’s stock declined from $44.46 to $41.23 on November 20, 2001. 13 98. Following issuance of this report, SnapNames president, Ron Wiener, emailed 14 Nicholas, apparently at the behest of Korzeniewski, complaining that his interpretation of the data 15 was incorrect: 16 [T]his is the second time that an analyst has used our data to, in effect, support what we believe is an incorrect (or as you say, “potentially controversial”) interpretation of 17 the data. I’m sure you know that there are a number of people quite upset over the note as, in their view, proffering incomplete information. Often times this kind of 18 error can move markets, and indeed VRSN is getting unfairly hammered this morning as a result. 19 99. The other instance referred to by Wiener occurred in August 2001, when an analyst 20 had expressed concern over a 102,000 net reduction in names in July. In an email to Sclavos and 21 Evan on that occasion, Korzeniewski had advised that “Ron [Wiener] is willing to do almost 22 anything to be helpful” to VeriSign’s business, and was “looking for guidance from us” as to how he 23 can do so. 24 100. Wiener sent a copy of his November 20, 2001 to Korzeniewski, along with a note 25 asking him to forward it to Sclavos because “I hear through the grapevine he’s understandably upset 26 with Piper over their interpretation of the data.” Korzeniewski did as requested, and Sclavos 27 responded within 15 minutes with instructions to thank Wiener and to “ask him to put some 28

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1 reference to this in the upcoming [SnapNames] report[.] All eyes will be on it and I would like to 2 see them explain the situation in this type of detail.” Evan then asks Korzeniewski to ask Wiener to 3 “send a similar email to us” “so we can forward it off to others”. Wiener did as requested. 4 101. Prompted by the efforts of Wiener, Sclavos, Evan and Korzeniewski to counteract the 5 impact of the Piper Jaffray report, other analysts issued positive reports on VeriSign reiterating 6 bullish ratings on the Company. Included among these was a First Analysis report which plainly 7 reflects defendants’ efforts to mislead analysts and investors about the true health of the domain 8 name business, and the risks arising from its manner of accounting for domain name revenues. 9 102. VeriSign continued thereafter to “work behind the scenes” to mask declining market 10 conditions that continued to threaten its deferred revenue stream. In one indicative email, Sclavos 11 wrote to Evan, Voslow, Helbert, Hribar and others that “there is a tremendous amount of noise in the 12 market right now about what we are going to do to the zone file” and asking them to “coordinate 13 building scenarios” so he could choose a course of action. After summarizing the variables affecting

14 the zone file, Sclavos wrote: “Wow, lots of data points. No wonder investors have such a hard time 15 figuring this out.” (Emphasis added.) 16 103. At the end of 4Q01, VeriSign booked an $8.5 million adjustment to increase accounts 17 receivable and deferred revenue based on the purported underestimation of past renewal rates. In 18 fact, there was no basis to support this adjustment, and it had to be reversed in 1Q02. In addition, as 19 reflected in emails on December 19, 2001 from Sclavos to Evan and others, and September 4, 2001

20 between Hribar and Frankel, defendants also deliberately chose not to disclose recent acquisitions of 21 eNic, which cumulatively inflated short-term and long-term deferred revenue. These actions further 22 misled investors about the health of the domain name business and the visibility of VeriSign’s future 23 revenues resulting from previously-booked deferred revenues, and VeriSign’s ability to demonstrate 24 sequential growth in deferred revenues through sales of domain names by the registrar. Thus, even 25 though some of the truth regarding VeriSign’s business had leaked into the market, defendants’ 26 actions successfully protected further decline to VeriSign’s stock price. 27 28

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1 B. Improper Accounting for Roundtrip and Other Long-Term Investments 2 104. The defendants used the cash VeriSign received when it acquired Network Solutions 3 to buy revenues in order to meet its Wall Street quarterly estimates. Specifically, the defendants 4 caused VeriSign to invest over $200 million in companies and to recognize more than $77 million of 5 revenue on a related business deal (a requirement for the investment to be made), and improperly 6 recognized in violation of GAAP. The following chart depicts the amount of the improper roundtrip 7 transactions during the Class Period (in millions): 8

9 2H00 1Q01 2Q01 3Q01 4Q01 FY01

10 Roundtrip $50.3 $7.7 $70.9 $60.1 $29.8 $168.5 Investments 11 Roundtrip $13.3 $10.5 $14.2 $17.9 $16.4 $64.0 Revenues 12 13 105. For example, in 2000, VeriSign made a $25 million investment in NameZero and 14 recognized revenue of $2.5 million and more than $8 million of deferred revenue (that was 15 subsequently recognized as revenue during the Class Period). In 1Q01, VeriSign wrote-off the entire 16 NameZero investment. In 2000, VeriSign also made a $10 million investment in i-DNS and 17 improperly recognized $5 million of revenue. VeriSign wrote-off all but $2.35 million of the 18 investment in 4Q01 and after the Class Period. 19 106. In 1Q01, VeriSign made a $5.2 million investment in Quova and improperly 20 recognized $540,148 of revenue. Additional revenue of $680,666 was improperly recognized in 21 2Q01 – 4Q01. After the Class Period, VeriSign wrote-off the entire $5.2 million investment. 22 107. In 2Q01, VeriSign made a $10.4 million investment in Euro909, purchased Euro909’s 23 domain name business for $24.6 million and improperly recognized $6 million of revenue. In 3Q01 24 and 4Q01, VeriSign improperly recognized an additional $6.2 million of revenue. After the Class 25 Period, VeriSign wrote-off $6.5 million of the investment. VeriSign also made a $20 million 26 investment in SurePay in 2Q01 and improperly recognized $4 million of revenue during the year. 27 After the Class Period, VeriSign wrote-off the entire $20 million investment. 28

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1 108. In 3Q01, VeriSign improperly recognized $6.9 million of revenue on a transaction 2 with Firstream and committed to invest $16.4 million in the company which it did on October 15, 3 2001. VeriSign improperly recognized another $3.3 million of revenue in 4Q01 and invested an 4 additional $4 million. After the Class Period, VeriSign wrote-off the entire $21 million investment. 5 109. Numerous documents, including emails between the defendants and members of 6 VeriSign’s corporate development group, show that VeriSign scrambled to complete the roundtrip 7 transactions to close revenue gaps caused by the volume and price declines in domain name 8 registrations so that VeriSign reported results in line with analyst expectations. VeriSign did not 9 disclose anything about the transactions until March 19, 2002, when, with VeriSign under increasing 10 scrutiny from the media and analysts regarding the extent of its related party activities, disclosed in 11 the Company’s Report on Form 10-K that the roundtrip transactions accounted for more than 6.5% 12 or $64 million of the Company’s 2001 revenues. 13 110. The documents also show that VeriSign improperly accounted for the roundtrip 14 investments and other long-term investments in non-public companies by using the cost method of 15 accounting, rather than the equity method required by GAAP (Accounting Principles Bulletin 16 (“APB”) 18). By using the cost method of accounting, VeriSign did not recognize its share of the 17 losses incurred by the investee company, which would have reduced reported earnings. Under the 18 equity method of accounting required by GAAP, VeriSign would have been required to recognize its 19 share of the losses incurred by the investee in proportion to the extent of its investment. 20 111. APB 18 requires the equity method of accounting for investments where the investor, 21 VeriSign, has the ability to exercise significant influence over the investee companies, which can be 22 demonstrated by, among other things, membership on the board of directors and material 23 intercompany transactions. VeriSign had the ability to – and did – exercise influence over its 24 investees because: 25 (a) VeriSign had board representation on 20 investee companies; 26 (b) VeriSign recognized revenues on roundtrip investments with 18 of the 27 investee companies, and also required many of the investee companies to apply a portion of the 28 roundtrip investment to pay down delinquent receivables; and

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1 (c) VeriSign would not have made the roundtrip investment unless the investee 2 company agreed to a related business deal and the pay down of delinquent receivables. 3 112. The defendants ignored these GAAP requirements and caused VeriSign to improperly 4 account for the investments under the cost method. 5 113. In addition, the defendants caused VeriSign to report inflated earnings by failing to 6 writedown its roundtrip and other long-term investments to fair market value to reflect permanent 7 impairment as required by GAAP (SFAS 115). For example, the defendants caused VeriSign to 8 report inflated earnings in 4Q00 and FY00 by delaying until 1Q01 a $74 million investment 9 impairment charge, including a $23 million impairment charge to write-off 100% of the Company’s 10 investment in NameZero and a $22 million impairment charge on the Company’s investment in 11 Critical Path. VeriSign recorded additional impairment charges after the Class Period: $18.8 million 12 in 1Q02; $94.8 million in 2Q02; and $53.2 million in 3Q02. Many of the charges should have been 13 recorded during the Class Period. 14 114. The defendants also knew that VeriSign was basing its impairment analyses on data 15 known to be outdated and stale; and that the Company did not even have financial statements for 16 many of the companies it had invested in, and therefore lacked the starting point needed to perform a 17 competent impairment analysis. According to KPMG workpapers VeriSign did not prepare any 18 written analyses related to investment impairment until KPMG required such analyses in 2Q02 – 19 after the Class Period.

20 C. Improper Revenue Recognition on Barter Transactions 21 115. In addition to improperly recognizing revenue on roundtrip transactions, VeriSign 22 also improperly recognized millions of dollars in revenues on barter transactions during the Class

23 Period. For example, in 2Q01 VeriSign improperly recognized $2.5 million of revenue on a barter 24 transaction with Infospace and in 4Q01 VeriSign improperly recognized $6 million of revenue on a 25 barter transaction with Phoenix Technologies, Inc. 26 116. As shown in the following chart, the defendants also knew the amount of revenues 27 recognized on the barter transactions increased in each quarter of 2001 and that VeriSign did not 28 disclose anything about them until March 19, 2002, when VeriSign disclosed in its Report on Form

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1 10-K that $37.5 million – not $39.5 million – of 2001 revenues were attributable to the barter 2 transactions. KPMG told VeriSign to disclose the revenues in 2Q01 when VeriSign improperly 3 recognized $2.5 million on a barter transaction with Infospace but the Company refused. 4 1Q01 2Q01 3Q01 4Q01 FY01 5 Barter $1.7 $7.8 $11.1 $18.9 $39.5 6 Revenues

7 D. Failure to Adequately Reserve for Uncollectible Delinquent Receivables. 8 117. The defendants knew VeriSign reported inflated earnings during the Class Period by 9 failing to write-off or establish reserves on delinquent receivables. From the Company’s account 10 receivable reports, the defendants knew VeriSign reported the following amounts of receivables and 11 reserves from its west coast operations (in millions): 12

13 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q0210 4Q02

14

15 Gross A/R $54.3 $55.5 $55.0 $71.9 $72.9 $85.9 $92.3 $96.1 $55.8

16 Specific reserve $1.3 $4.4 $2.9 $4.9 $7.3 $14.3 $16.8 $22.3 $13.9

17 General reserve $2.2 $1.9 $2.4 $5.1 $11.7 $3.3 $6.8 $7.7 $0.9

18 Net A/R $50.8 $49.2 $49.7 $61.9 $43.9 $68.3 $68.7 $66.1 $41.0

19 Delinq. Net A/R $36.0 $25.2 $27.2 $32.2 $27.4 $32.0 $40.8 $44.1 $22.8

20 21 118. From internal reports, including aging receivable reports, the defendants knew that 22 many of the delinquent accounts were attributable to VeriSign’s affiliate customers which comprised 23 a larger and larger portion of receivables. In fact, because of the financial condition of these 24 affiliates, collectibility on most of these receivables was doubtful from the outset and should not 25

26 10 27 This represents the consolidated financials for VeriSign West including Name Engine, Global Place, VPS, Secure IT, Telenisus, and Signio. 28

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1 have been recorded as revenue until the funds were actually collected. Most of these customers were 2 in financial trouble and many of the receivables had been past due for one to two-years. 3 119. The defendants also knew that VeriSign continued to recognize revenues from these 4 delinquent customers despite their nonpayment and that VeriSign made roundtrip investments in 5 many of the companies to provide them with the funds to pay down their delinquent receivables and 6 to generate additional revenues for VeriSign. Indeed, the problems were so bad that, by August 7 2001, VeriSign created an “accounts receivable management team” and required any activity with 8 any affiliate to be cleared by Sclavos or Evan. After the Class Period, VeriSign established reserves 9 on many of the delinquent receivables or wrote them off.

10 E. VeriSign Artificially Inflated Its Deferred Revenue by Falsely Accounting for Acquired Deferred Revenue in Violation of GAAP 11 120. When one company buys another, the acquiring company is responsible for recording 12 the “fair value” (defined by GAAP), of all assets and liabilities acquired, as of the acquisition date. 13 As set out below, VeriSign grossly overvalued the deferred revenue it acquired when it bought 14 Network Solutions, nearly all of which was reported as revenue during the Class Period. In addition, 15 during the Class Period, VeriSign had a strategy of using acquisitions, often undisclosed, to mask 16 declines in its deferred revenue. 17 121. Deferred revenue is reported as a liability and was extremely important to VeriSign’s 18 investors and analysts as an indicator of its revenue pipeline, since deferred revenue becomes 19 revenue in future periods. VeriSign consistently failed to comply with the GAAP requirements for 20 valuing acquired deferred revenue by (1) overstating its actual costs, and (2) inflating a “normal” 21 profit margin. It was thereby able to artificially inflate its reported deferred revenue. 22 122. According to APB No. 16, Business Combinations (“APB 16”), the amount of 23 deferred revenue to be recorded by the acquiring company (“fair value”) is equal to the “present 24 value of amounts to be paid.” In other words, the future cost of providing services determines “fair 25 value” of acquired deferred revenue. According to the SEC, a reasonable or “normal” profit margin, 26 based on industry-wide conditions, not specific to the acquiring company, may be added to this 27 figure. 28

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1 123. When VeriSign recorded deferred revenue associated with its acquisition of NSI, it 2 prepared a “White Paper” entitled Deferred Revenue in a Purchase Combination. The White Paper 3 was prepared by NSI’s Vice President of Finance Mike Voslow, and set forth the methodology used 4 by VeriSign to compute the recorded amount of acquired deferred reevenue and shows that VeriSign 5 was “gaming” the numbers to increase its deferred revenue. 6 124. First, the White Paper falsely claimed that NSI had no “built-in excess profit.” In 7 fact, the vast majority of NSI’s preacquisition deferred revenue was based on $50 and $35 per year

8 sales prices set by ICANN when NSI was a regulated monopoly until 1999. Once competition 9 began, “normal,” i.e., market, prices became immediately apparent. For example, in June 2000, Go 10 Daddy Software offered registrations for $8.95 per year, Bulkregister.com offered registrations for 11 $10 per year and dotster offered registrations for $15 per year. In addition, discounts were available 12 for bulk purchases. 13 125. Second, the White Paper falsely claimed that costs were incurred evenly over the 14 registration term. In fact, the biggest single registrar cost is the $6 registry fee, which is fully paid in 15 the first month after registration. Also, once a new domain name registration is complete, usually on 16 the first day, it does not have to be reregistered, so the initial domain name registration costs are only 17 incurred once. Further, NSI’s customer support personnel are used most frequently in the first 18 month of a registration, as that is the time when the customer must resolve any set up problems and 19 get basic information. Subsequently, the frequency and duration of customer support calls are 20 reduced. For nearly all of the deferred revenue, these initial costs, more than half of total costs, had 21 already been incurred. VeriSign had no basis to assert that the costs are uniform throughout the 22 registration term in determining its cost.

23 126. Third, the White Paper relied primarily on the profit margin of a single competitor, 24 one of the only registrars that charged as much as NSI, to determine the industry “average” profit 25 margin. In fact, as defendants knew, this single competitor had a profit margin much higher than 26 average. At the time, there were dozens of other registrars charging significantly less than these two 27 companies, yet VeriSign improperly ignored these profit margins. 28

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1 127. Not only were many other registrars charging less than half what NSI charged, but in 2 addition, other registrars had a $6 expense that NSI did not have – the $6 registry fee. Unlike every 3 other registrar, this fee was not an expense to NSI, because it was an inter-company transaction – 4 like moving money from one pocket to another. Because NSI had higher prices and lower costs than 5 the registrar industry as a whole, a large amount of its preacquisition deferred revenue represented 6 “excess profit,” that, under APB 16, VeriSign was not permitted to record. 7 128. Based on NSI’s gross margins, its actual costs to provide registration services were 8 less than $12 per year per domain name. Based on a review of prices charged by numerous 9 competitors and their costs, the average registrar mark-up is about 50% (yielding a 33% profit 10 margin, substantially less than the 57% used by VeriSign). As a result of VeriSign’s improper 11 conclusions that (1) there was no built-in profit, (2) costs were incurred evenly over the registration 12 term, and (3) the highest sales price has an average profit margin, it was able to overstate NSI’s 13 acquired deferred revenue by at least $90 million, nearly all of which was improperly reported as 14 revenue during the Class Period. 15 129. In addition, for Class Period acquisitions, VeriSign followed the same arbitrary and 16 improper methodology from the NSI acquisition, rather than determining what the future costs and a 17 normal profit margin would be for each acquisition, as required by GAAP. As a result, for its Class 18 Period acquisitions of NSI, .TV, registrars.com, enic, Euro909, Exault, Namesecure and 19 DomainNames, VeriSign overstated its acquired deferred revenue. For some, much of the 20 preacquisition deferred revenue was fictitious, because the deferred revenue was not paid for, so

21 there were no legitimate future costs. For example, according to a KPMG Q201 review workpaper, 22 VeriSign paid just $4,325,000 million for Registrars.com, but recorded $10,816,454 in deferred 23 revenue – $9,273,301 of which would be recognized as revenue within the first year. As VeriSign 24 knew, this was a sham because the company would have been worth far more than $4.3 million if the 25 deferred revenue was legitimate. 26 27 28

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1 VIII. CONFIDENTIAL WITNESSES’ ACCOUNTS CONFIRM DEFENDANTS’ SCHEME TO DEFRAUD 2 130. The foregoing allegations detail the means and methods defendants used to mislead 3 the market as to VeriSign’s financial results and its business on prospects. In addition, as VeriSign’s 4 opportunities for new revenue growth declined, defendants began to exert tremendous pressure on 5 VeriSign’s sales staff by adopting sales quotas they knew to be unrealistic and then threatening 6 employees at all levels with termination if those goals were not met. Even with this pressure, 7 however, legitimate revenue was simply not there. VeriSign almost magically managed to make its 8 numbers every quarter by increasing the numbers from its sales force by an additional 25%-40%. 9 131. According to CW1, in 2001 VeriSign’s Vice President of Worldwide Sales and 10 Services, defendant Gallivan, established a $30 million revenue target for the Network Solutions 11 Consulting Division, an amount that was more than double the year 2000’s $14 million target (which 12 target the Division had missed by $2 million). Given the reduced demand for Internet services in 13 2001, CW1 said that even a 50% revenue increase (to $21 million) would have been difficult for the 14 Division to meet, let alone the 114% target set by Gallivan. Ranney concurred, telling CW2 that he 15 knew the sales quotas were unrealistic because many Internet companies had gone out of business 16 and many others were scaling back on consulting services due to budget cuts. As a result, CW1 said 17 the Division was at least 25% short of targets in every quarter of 2001. Though Ranney attempted to 18 take these factors into account in forecasting revenue projections for the Division, Ranney told CW2 19 that Gallivan was “never satisfied” with his numbers and kept pushing for 30% organic growth per 20 quarter despite the fact that everyone knew the “consulting market industry-wide was growing soft” 21 in 2001. 22 132. CW1 and CW2 stated that Gallivan would repeatedly call them on the telephone, 23 verbally berating them and threatening them with the loss of their jobs if they did not meet their sales 24 targets. For example, CW2 reported that in the spring of 2001 he heard Gallivan in a phone call 25 telling Ranney to “do whatever they had to do to increase revenues or risk being fired.” According 26 to the witnesses, Gallivan’s calls became more frequent at the end of each quarter of the fiscal year, 27 28

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1 and they received multiple calls from Gallivan every day during the last two weeks of each quarter in 2 2001. 3 133. These practices were not limited to the consulting business. CW4 said that he and 4 other account executives responsible for selling digital certificates were also given “unrealistic” sales 5 quotas, pressured by management to hit their targets, but reported lower numbers. In the three weeks 6 before the end of a quarter, CW4 said that his supervisors would send 15-20 emails a day to every 7 account executive, threatening that they had to meet their sales quotas or be fired. When CW4 8 complained about the amount of pressure exerted on the account executives, his supervisor, Territory 9 PKI Manager Dolittle, responded that he was lucky he “never had to attend weekly revenue 10 teleconferences, where all the management would be shaking like hell after Gallivan spoke.” CW4 11 said that ESP Vice President Joe Jose (“Jose”), who supervised Dolittle and reported directly to 12 Gallivan, also “was a legend” for screaming at territory managers and account executives. 13 134. CW9, a senior Internet account executive in VeriSign’s Mass Markets Division in 14 Mountain View, said he also regularly received verbal threats and emails from his supervisor, Mass 15 Markets manager Roger Sheehan (“Sheehan”), regarding his sales quota, especially at the end of the 16 quarter. Like Gallivan, Sheehan set targets for CW9’s sales of digital certificates that he knew were 17 not reasonably achievable because demand for digital certificates was declining, and VeriSign’s 18 competitors were selling them for less than one-third of what VeriSign was charging. Nevertheless, 19 according to CW9, from 3Q01 to 1Q02, Sheehan prepared an Excel spreadsheet showing that CW9 20 had met his digital certificates sales quota for every quarter, even though it “was not possible” that 21 CW9 had sold as many certificates as Sheehan claimed he had. 22 135. Gallivan and other Company executives monitored sales by each of VeriSign’s 23 business units on at least a weekly, monthly and quarterly basis. According to CW1 and CW2, the 24 manager of each business unit was required to participate in a weekly conference call with Gallivan, 25 held every Monday morning, at which they reported the amount of sales their departments had made 26 during the previous week. 27 28

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1 136. CW1 and CW2 also stated that each business division within VeriSign was required 2 to submit a written monthly revenue report to Company headquarters, which was reviewed by 3 Company executives, including Gallivan. 4 137. At the end of each quarter, each division of the Company would forward its 5 accountants’ quarterly revenue calculations to Mountain View for consolidation into VeriSign’s 6 financial statements. For example, CW2 stated that the Accounting Department in Herndon, 7 Virginia, where the Network Solutions subsidiary was located, would send a quarterly report to the 8 accountants at VeriSign’s headquarters, which showed all revenues that had been obtained during 9 the quarter from Network Solutions’ Internet domain registration, global registry services, and 10 consulting services business lines. 11 138. Before the inflated results reported by these business in their monthly and quarterly 12 revenue reports were consolidated into VeriSign’s balance sheet, the numbers were frequently 13 “revised upward” again, further inflating the revenues reported by the Company. For example, CW2 14 stated that Ranney had confided to him that the revenue reports from the Network Solutions 15 subsidiary were regularly “revised upward” after being sent to VeriSign’s headquarters, as reflected 16 by the monthly revenue reports that Ranney received back from Company headquarters. According 17 to Ranney, CW2 said, these reports showed revenue amounts for the Consulting Division that were 18 significantly higher than what had originally been reported to headquarters. CW2 said that Ranney 19 told him he had heated arguments with VeriSign’s head accounting personnel over these disparities. 20 139. CW4 stated that, during the last week of each quarter, VeriSign’s managers, Harris, 21 Dolittle, and Burrow held meetings with the ESP inside sales account executives and inquired about 22 any sales deals that were supposed to close in the week after the quarter’s end. If there was a high 23 probability that the sale would close, and it wasn’t too large to attract attention from outsiders, 24 Harris, Dolittle and Burrow instructed the account executives to record the sale amount in the current 25 quarter on their respective Excel spreadsheets, even though there was no objective evidence of any 26 contract. 27 140. CW1 stated that the revenue figures reflected in these monthly and quarterly reports 28 were typically 25% to 45% higher than the figures he, and Gallivan, had heard reported during the

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1 Monday revenue teleconferences. CW1 said that this was not limited to the Consulting Division, as 2 Network Security Services Divisional Sales Manager Jay Johnson (“Johnson”) had told him that the 3 numbers he had reported to headquarters had also been inflated in the monthly reports he received 4 back from VeriSign headquarters. In addition, CW1 said that in 2Q01 he was told by Jeff Baeth 5 (“Baeth”), an accounting finance manager who reported directly to Evan and worked closely with 6 Gallivan, that both he (Baeth) and Gallivan were then aware that there was “a large discrepancy in 7 the revenue numbers ... somewhere between $3 and $5 million, and as much as $8 million.” 8 141. Despite this knowledge, the false revenue results were repeated by Sclavos and Evan 9 during investor and analyst conference calls that CW1 listened to with Ranney, which often left them 10 shaking their heads: “Ranney and I wondered how they managed to show real revenues to support 11 the house of cards they were making,” he said.

12 IX. FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD 13 A. False Statements Regarding 4Q00 and FY00 Results 14 142. On January 24, 2001, after the market closed, VeriSign issued a press release that 15 reported its 4Q00 and FY00 results. The press release stated in part: 16 Strong Results and Momentum Position Company as the Internet’s Most Trusted 17 Utility 18 ... VeriSign, Inc. today announced revenues of $197.4 million for the fourth quarter ended December 31, 2000, a 613% increase over revenues of $27.7 million reported 19 in the quarter ended December 31, 1999. Pro forma net income for the quarter ended December 31, 2000, excluding the amortization of goodwill and intangible assets and 20 other acquisition-related charges, was $45.5 million, or $0.21 diluted earnings per share compared to net income in the quarter ended December 31, 1999 of $4.5 21 million, or $0.04 diluted earnings per share. 22 Revenues for fiscal 2000 were $474.8 million, representing a 460% increase over revenues of $84.8 million in fiscal 1999. In addition, deferred revenue increased to 23 $508 million at year-end. Pro forma net income for fiscal 2000 was $129.1 million or $0.72 diluted earnings per share compared to pro forma income of $4.0 million or 24 $0.03 diluted earnings per share for fiscal 1999. Including the amortization of goodwill and intangible assets and other acquisition-related charges, the fiscal 2000 25 net loss was $3.1 billion. 26 * * * 27 Authentication Services 28

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1 VeriSign’s core authentication services business, which includes digital certificate and managed public key infrastructure (PKI) services, saw another quarter 2 of strong results. 3 * * * 4 In the enterprise arena, VeriSign exited fiscal 2000 with strong momentum, as the demand for the company’s PKI services continues to accelerate. 5 * * * 6 NSI Registrar 7 The NSI Registrar continued to demonstrate its market leadership in the fourth 8 quarter by registering approximately 1.9 million new and transferred domain names in .com, .org and .net. The NSI Registrar also renewed and extended over 650,000 9 domain names bringing its combined number of domain name transactions to approximately 2.6 million for the quarter. The NSI Registrar now supports 10 customers with some 15.1 million active domain names, representing 87% growth in the registration base over the fourth quarter of 1999 and 10% growth over the third 11 quarter ended September 30, 2000. 12 143. The Company’s 4Q00 and F00 financial results were repeated to the market during 13 the Company’s January 24, 2001 conference call, in reports issued by several analysts that followed 14 VeriSign and in VeriSign’s Report on Form 10-K filed with the SEC on March 28, 2001. During the 15 Company’s conference call, Evan stated that (1) VeriSign’s pro forma tax adjusted EPS of $0.13 in 16 4Q00 beat first call consensus of $0.11, (2) VeriSign expected to see continued sequential growth in 17 top line revenues, (3) VeriSign was raising 2001 revenue guidance to $975 million - $1 billion up 18 from $960-980 million provided during the Company’s October 25, 2000 conference call, (4) 19 VeriSign remained comfortable with current street consensus expectations of approximately $210 20 million for 1Q01 revenues, and (5) VeriSign was raising 1Q01 pro forma EPS estimate to $0.13- 21 $0.14 and F01 pro forma EPS guidance to $0.56-$0.60. During the same conference call, Sclavos 22 stated: 23 We ended the year with 15.1 million active domain names acros our subscriber base, up 87% year-over-year and 10% quarter-over-quarter. We registered in support of 24 the transfer of 1.9 million net new domain names in the quarter and renewed or extended another 650,000. This gave us approximately 2.6 million domain name 25 transactions in Q4. . . . 26 Some other very important metrics in our domain name business, include the average life of both new names and renewals and the upsell rate of additional services. 27 Average new name life increased from 1.1 years in Q3 to 1.3 years in Q4 and actually exited the year at 1.5 years per subscription. Renewals improved even more 28

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1 dramatically quarter-over-quarter with average turn moving from 1.2 to 1.5 years and existing the year at 1.8. 2 144. During the 4Q00 conference call, Sclavos claimed that the average life of new names 3 registered by VeriSign had increased from 1.1 years in Q3000 to exit the year at 1.5 years per 4 subscription, while the average life of renewals had climbed from 1.2 years to 1.8 years over the 5 same period. This was materially false and misleading because the average lives were inflated by 6 defendants’ arbitrary and deliberate use of a two-year default renewal period to increae long-term 7 deferred revenues and average renewal terms, as previously alleged. 8 145. VeriSign reported the following financial results in the January 24, 2001 press release 9 and in the Report on Form 10-K filed with the SEC on March 28, 2001 (in 000s, except registrations 10 and EPS). 11 Statement of Operations 4Q00 FY00 12 New domain name registrations: 1.9 million 4.1 million (3Q00 & 4Q00) 13 Renewed registrations: 650,000 1.27 million (3Q00 & 4Q00)

14 Revenues $197,355 $474,766 15 Other income (expense): $115 <$1,478> 16 Pro forma Net Income: $45,537 $129,094 17 Pro forma EPS: $0.21 $0.72 GAAP Net Income <$1,312,195> <$3,115,473> 18 GAAP EPS <$6.64> <$19.57>

19 Balance Sheet 20 Net accounts receivable: $128,011 21 Allowance for doubtful accounts: $5,261

22 Long-term investments: $209,145 Goodwill: $17,656,641 23 Deferred revenue: $452,713 24 Long-term deferred revenue: $55,575

25 146. In the 2000 Report on Form 10-K, the defendants falsely represented that VeriSign 26 followed certain significant accounting policies and procedures that conformed with GAAP:

27 • VeriSign represented that it accounted for investments in non-public companies under the cost method and that VeriSign regularly reviewed each investment and recorded impairment 28 losses when circumstances indicated that a decline in the fair value of the investment was

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1 other than temporary. In addition, VeriSign represented that VeriSign recorded impairment charges on its investment in public companies when circumstances indicated that a decline in 2 the fair value of the investment was other than temporary.

3 • VeriSign represented that revenues from the sale or renewal of domain name registration services were deferred and recognized ratably over the registration term, generally one to 4 two-years.

5 • VeriSign represented that it performed ongoing credit evaluations of its customers and maintained allowances for potential credit losses on its accounts receivable. 6 • VeriSign represented that it recognized revenue from the licensing of its digital certificate 7 technology and business process technology in accordance with SOP 97-2, “Software Revenue Recognition,” as modified by SOP 98-9 which required revenues to be allocated to 8 each element of the sale (such as the actual software product, upgrades, enhancements, post contract customer support (“PCS”), installation, training etc.) based on the relative fair value 9 of the elements.

10 • VeriSign represented that it reviewed long-lived assets (including goodwill) for impairment whenever events or changes in circumstances indicated that the carrying amount of the asset 11 might not be recoverable. In addition, it was represented that no adjustments to goodwill were required as of December 31, 2000. 12 • VeriSign represented that its organization of its business into two reportable operating 13 segments – the mass markets division and the enterprise and service provider division – was based on how the chief operating decision maker (“CODM”) viewed and evaluated 14 VeriSign’s operations.

15 1. Facts Showing Statements Alleged in Connection with 4Q00 and FY00 Were Materially False and Misleading 16 147. Based upon the internal documents at VeriSign, as well as the statements from 17 confidential witness, it is clear that VeriSign’s 4Q00 and F00 financial results were materially false 18 and misleading and not reported in accordance with GAAP or VeriSign’s publicly reported 19 accounting policies and that defendants knew, or were deliberately reckless in not knowing, of these 20 improprieties. The improprieties included the (1) improper recording of revenue on domain name 21 registrations including the improper recognition of revenue on the automatic two-year renewals of 22 expired domain name contracts, (2) improper recognition of revenue on fraudulent roundtrip, 23 investment and barter transactions, (3) failure to record VeriSign’s share of losses incurred by the 24 investee companies as required by APB 18, (4) failure to record impairment charges on long-term 25 investments as required by SFAS 115 and VeriSign’s publicly reported accounting policy, (5) 26 improper recording of revenue in violation of SOP 97-2 and SAB 101; (6) failure to write-off or 27 establish adequate reserves on uncollectible delinquent receivables, (7) improper overstatement of 28

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1 acquired deferred revenue; and (8) failure to record a goodwill impairment charge for the Network 2 Solutions acquisition. Had VeriSign reported its financial results accurately and in accordance with 3 GAAP, it would not have exceeded first call consensus estimates. In fact, VeriSign would have

4 reported a pro forma tax adjusted loss if absent the defendants accounting improprieties. 5 148. Misleading Domain Name Registrations: The reported level of new registrations was 6 misleading because VeriSign failed to disclose that 25% or 1.025 million of the 4.1 million in new 7 registrations reported for 3Q00 and 4Q00 were free or promotional registrations that ranged in price 8 from $0 to $10 compared to the non-promotional price of $35. Waterfall schedules and a VeriSign 9 report on renewals disclosed that more than 800,000 of the free and promotional registrations were 10 purchased by NameZero a startup company that VeriSign gave $23 million to in August 2000 so that 11 it would help VeriSign report higher registrations. The entire $23 million investment was written off 12 in 1Q01. 13 149. Automatic Renewals of Expiring Domain Name Registrations: Accounts receivable, 14 short term deferred revenue, long-term deferred revenue, revenue and net income were all overstated 15 as a result of defendants’ decision in October 2000 to automatically and arbitrarily book revenue, 16 renew expiring domain name registrations and charge customers $70.00 for a two-year registration 17 term when customers had not agreed to the automatic two-year renewal. As reported in KPMG’s 18 3Q00 deferred revenue memo, one and two-year domain name registrations had declined 19 substantially during 2000, from 2.6 million in 1Q00, to 1.5 million in 2Q00 and 724,424 in 3Q00.

20 Further, as KPMG reported in its December 31, 2000 deferred revenue memo, long-term deferred 21 revenue had also declined sharply because customers were overwhelmingly purchasing one year 22 registrations after Network Solutions began offering them in January 2000 (prior to January 2000, a 23 customer had to purchase at least a two-year registration). But KPMG also noted that long-term 24 deferred revenue increased in 4Q00 because VeriSign changed the billing default period from one 25 year to two-years in October 2000. VeriSign instituted the automatic two-year renewals to conceal 26 and reverse the decline in deferred revenue and revenue caused by the decline in overall registration 27 volume as the market changed from two-year to one-year registrations. 28

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1 150. VeriSign recorded domain name registrations net of an estimate for uncollectible 2 registrations which was purportedly based on historical collections of the particular type of 3 registration. But the defendants knew there was no historical collection data on the two-year 4 renewals because they did not exist before VeriSign instituted them in October, 2000. Waterfall 5 schedules show that 216,190 of the 316,803 renewal registrations in 4Q00 were improperly renewed 6 for two-years including 167,376 that were booked in December 2000. The waterfall schedule also 7 shows that the two-year automatic renewals in 4Q00 caused VeriSign to record (1) gross receivables 8 of $22.2 million, (2) a bad debt reserve of $7.0 million, (3) net receivables of $15.1 million, (4) 9 revenue of $1.1 million, (5) short-term deferred revenue of $7.6 million, and (6) long-term deferred 10 revenue of $6.5 million. 11 151. GAAP (SFAS 5, APB 10, and FASCON 5) and SEC SAB 101 did not permit 12 VeriSign to record any receivables, revenues or deferred revenues on the two-year automatic 13 renewals before the Company was paid because (1) customers had not agreed to the two-year 14 renewals, (2) it was impossible for VeriSign to estimate how many of the renewals would actually be 15 accepted as there was no historical data (because they began in October 2000), and (3) the market 16 had undergone dramatic change, including continual losses of market share by VeriSign. The 17 waterfall schedules disclosed that throughout the Class Period, VeriSign consistently overestimated 18 the number of customers that would accept the two-year automatic renewals. Moreover, VeriSign 19 did not restate (and reduce) the overstated receivables, revenues and deferred revenues when actual 20 collections were lower than VeriSign’s reported estimates. Rather, VeriSign improperly adjusted the 21 estimated default rate applied to renewals recorded in a subsequent accounting period, thereby 22 maintaining the (false) numbers in the market.

23 152. Failure to Report Domain Name Bad Debt Reserve: VeriSign did not report domain 24 name accounts receivable and the bad debt reserve in accordance with GAAP and SEC regulations. 25 Although VeriSign reported $128 million of receivables net of a $5.3 million bad debt reserve as of 26 December 31, 2000, VeriSign’s accounting records disclosed that VeriSign had actually established

27 a $43.1 million reserve on $166 million of receivables. Thus, in violation of APB 12 and SFAS 5, 28 VeriSign failed to report $37.8 million (87%) of its recorded allowance for doubtful accounts (also,

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1 this reserve, though not reported, was woefully inadequate). Further, in violation of SEC Rule 12- 2 09, VeriSign failed to report $93.9 million (100%) of its recorded charges for uncollectible 3 receivables. VeriSign claimed these disclosures were not required because most was not charged to 4 bad debt expense. However, both GAAP and the SEC require disclosure of all material reserves, not 5 just reserves charged to bad debt expense. 6 153. Roundtrip Transactions: In 3Q00 and 4Q00, VeriSign made more than $50 million of 7 roundtrip investments to generate revenue to close projected revenue gaps and report results in line 8 with the guidance provided during the Company’s October 25, 2000 conference call. 9 Company Investment 2000 Revenue 2001 Revenue

10 NameZero $25 million $2.5 million $4.5 million i-DNS $10 million $5 million -0- 11 eSign $4.55 million $2.5 million $5.31 million HiTrust $2 million $2,344,375 $1,929,875 12 Cybersign $2 million -0- $392,805 Access360 $6 million -0- $1,193,125 13 Certplus $775,000 $1,077,500 $1,250,000 14 Several of the more egregious examples of defendants’ fraudulent accounting are detailed below. 15 154. The Roundtrip Transaction with NameZero: On May 25, 2000, VeriSign and 16 NameZero entered into a domain name registration services agreement under which NameZero 17 agreed to purchase domain names from VeriSign. On August 28, 2000, VeriSign entered into a 18 stock purchase agreement and invested $25 million in NameZero by acquiring 4,992,243 shares of 19 NameZero series C preferred stock (or 18% of NameZero’s total outstanding stock) for $15 million,

20 and loaned NameZero an additional $10 million that did not require any payments until the loan’s 21 maturity date 18 months from the expiration of VeriSign’s option to purchase NameZero (at the 22 earliest December 31, 2002). At the same time VeriSign also entered into a wholesale program 23 agreement under which NameZero acquired domain name registrations for $10 per domain name. 24 The defendants caused VeriSign to account for the $15 million equity investment under the cost 25 method of accounting. 26 155. Under the series C preferred stock purchase agreement, VeriSign received

27 NameZero’s financial statements and knew that NameZero did not have the ability to pay VeriSign 28 absent the $25 million investment. The closing documents for the August 28, 2000 stock transaction

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1 show that $3.7 million of the $25 million investment was used to pay-off $1.7 million of receivables 2 and a $2 million advance from VeriSign related to domain names purchased under the May 25, 2000 3 domain name registration services agreement. Thus, at the outset, defendants knew the investment 4 was being “roundtripped” to pay-off past due receivables. At December 31, 2000, even with 5 VeriSign’s $25 million investment, NameZero reported just $1.8 million of capital and $6.4 million 6 of cash, after reporting a $9 million net loss. Thus, by December 31, 2000, most of VeriSign’s $25 7 million cash investment was gone. Without VeriSign’s $25 million investment, NameZero would 8 have been insolvent with negative cash. 9 156. According to VeriSign’s waterfall schedules, NameZero bought 806,288 domain 10 names from VeriSign throughout 2000. VeriSign recorded $2,478,102 of revenue and $6,809,541 of 11 deferred revenue in 2000 for those names. NameZero’s December 31, 2000 financial statements 12 showed the defendants knew revenue recognition was improper because NameZero did not have the 13 ability to pay VeriSign absent the $25 million investment. 14 157. In addition, in a December 13, 2000 email, Wolford told Korzeniewski that (1) the 15 NameZero board had voted to “throttle back” monthly registrations from 120,000 to 35,000, (2) 16 NameZero was running out of cash and was not close to meeting the criteria for a $5 million loan 17 from VeriSign to acquire another 500,000 domain names, and (3) VeriSign would have to change the 18 criteria for the loan or find other sources to make up a projected 270,000 domain name shortfall in 19 1Q01. 20 158. The defendants also schemed to avoid having VeriSign properly record its share of

21 NameZero’s losses as required by GAAP (APB 18). As was clear both from the amount and use of 22 VeriSign’s investment, VeriSign had the ability to – and did – exercise significant influence over 23 NameZero. The defendants knew VeriSign had the ability to significantly influence NameZero 24 because Wolford was a member of NameZero’s five member board of directors. The defendants 25 knew VeriSign did significantly influence NameZero by requiring NameZero to execute the August 26 28, 2000 wholesale program agreement as a condition to receiving the $25 million and by obtaining

27 an option to purchase the entire company. As a result, APB 18 required VeriSign to recognize its 28 share of NameZero’s $9 million net loss in 2000. Although VeriSign purportedly limited its equity

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1 stake to 18% of NameZero from its $15 million equity investment, it actually controlled 30% of the 2 company because the $10 million “loan” that did not require any payments until maturity was, in 3 substance, an investment. Thus, VeriSign in fact had at least a 30% interest in NameZero on August 4 28, 2000, and was required to record at least $2.7 million of NameZero’s $9 million net loss in 2000. 5 159. Because the defendants knew about NameZero’s deteriorating financial condition and 6 the company’s decision to reduce the volume of domain name registrations, they also knew VeriSign 7 needed to record an impairment charge on its $25 million investment. In fact, in a string of emails 8 dated January 23, 2001 between Sclavos, Evan, Korzeniewski, Wolford and others, Wolford wrote 9 that NameZero sales over the past three months were only 15% of their plan and Evan wrote that the 10 NameZero investment was one “that the auditors really were pushing us to write down at year end.”

11 Defendants did write down the entire investment, but not until 1Q01, and did so based on 12 NameZero’s financial condition in 2000 – clear evidence that the investment should have been 13 written down in 4Q00. 14 160. The defendants did the transaction with NameZero to mask the decline in VeriSign’s 15 domain name registration business and to enable the Company to report misleading domain name 16 sales to the market. In a December 3, 2001 email to Champ Mitchell, Bruce Keiser, NameZero’s 17 president, made clear that NameZero had been acquiring domain names from VeriSign in order to 18 enable VeriSign to meet Wall Street financial expectations. In the email, Keiser wrote “[s]ince our 19 relationship with VeriSign began over 18 months ago, we have always done what is in the best

20 interest of VeriSign and responded promptly to VeriSign management’s regular quarterly requests 21 to help VeriSign meet Wall Street’s expectations. . .” (emphasis added). As shown in the following 22 chart, absent the NameZero transaction, VeriSign would have reported substantially lower levels of 23 new domain name registrations in 2Q00, 3Q00 and 4Q00: 24 2Q00 3Q00 4Q00 25 New Domain Name Registrations 2.1 million 2.2 million 1.9 million NameZero Registrations 223,664 317,171 265,453 26 Percentage 10.7% 14.4% 14.0%

27 28

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1 In short, the NameZero investment was illustrative of defendants’ fraud: Defendants had VeriSign 2 enter into a roundtrip investment with NameZero so VeriSign could give money to NameZero in 3 order for NameZero to buy domain names from VeriSign, thereby masking the decline in the 4 Company’s domain name registration business and allowing VeriSign to recognize the returned 5 funds as revenue to make it appear that VeriSign was selling the names. Had VeriSign properly 6 accounted for the NameZero roundtrip transaction, the Company’s FY00 earnings would have 7 declined by nearly $30 million. 8 161. The i-DNS Roundtrip Transaction: On July 27, 2000 VeriSign invested $10 million in 9 i-DNS by executing a promissory note that was convertible into series B preferred stock and 10 concurrently executed a license and marketing agreement that required the two companies to jointly 11 develop modifications of multilingual technologies (previously developed by i-DNS) so accredited 12 registrars could register multilingual domain names. It also provided that both companies would 13 jointly market registry services using the modified multilingual technologies. I-DNS returned $5 14 million of the $10 million loan to VeriSign purportedly to develop the joint technology and defray 15 the costs of integrating the i-DNS technology and the joint technology into VeriSign’s systems. 16 VeriSign recognized the $5 million as revenue in 2000. 17 162. The defendants knew the revenue could not be recognized for several reasons. To 18 begin with, under the terms of the license and marketing agreement, the $5 million could only be 19 recognized as revenue if VeriSign achieved certain milestones – including completion and

20 deployment of the product – but VeriSign never developed the technology or achieved the 21 milestones. Thus, no revenue could be recognized in 2000 because VeriSign had not earned the 22 revenue by completing its obligations. According to the deposition testimony of Herb Hribar, even 23 in 2001, multilingual domain names never worked because of technical issues with browsers 24 interpreting foreign character strings. Further, under the Securities Purchase Agreement, VeriSign 25 received i-DNS financial statements, which showed i-DNS only had $2.3 million in cash before 26 VeriSign made the $10 million loan. Thus, i-DNS did not have the ability to pay VeriSign the $5

27 million absent the $10 million loan. 28

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1 163. The Certplus Roundtrip Transactions: VeriSign improperly recognized $1,077,500 in 2 2000 revenue from Certplus. On July 2, 1998 VeriSign entered into a software license agreement 3 with Certplus that was amended on November 19, 1999. The amended agreement allowed Certplus 4 to sell VeriSign certificates in France and required Certplus to pay VeriSign quarterly royalties of 5 $200,000 ($800,000 for the year) and $250,000 for marketing services provided by VeriSign. 6 VeriSign made a number of investments in Certplus and by 2000 it was clear that Certplus could and 7 would only pay VeriSign with the proceeds of VeriSign’s investments. Revenue recognition was 8 improper because Certplus was only able to pay VeriSign when VeriSign made investments in 9 Certplus. Thus, Certplus was giving VeriSign its own money – a straight return of VeriSign’s 10 capital. Further it is clear that defendants knew VeriSign’s investments were the only way Certplus 11 could pay them. 12 164. According to VeriSign’s September 29, 2000 affiliate receivables report (that was 13 sent to Evan and Gallivan), Certplus owed VeriSign $200,000 that was 183 days past due, $200,000 14 that was 122 days past due and $200,000 that was 61 days past due. In addition, according to 15 Certplus’ business plan and financial statements that were sent to Sclavos by Certplus on September 16 19, 2000 and forwarded by Sclavos to Evan on September 22, 2000, Certplus was projecting 17 revenues of 16 million French Francs and a 23.7 million net loss for 2000. 18 165. On October 20, 2000, VeriSign made an additional $242,000 investment in Certplus 19 that was used to pay the $200,000 receivable that was 183 days past due as of September 29, 2000.

20 Moreover, it was reported in VeriSign’s November 10, 2000 affiliate receivable report received by 21 Evan and Gallivan that the two other $200,000 receivables were now 164 and 103 days past due and

22 that Certplus would not pay those past due invoices until VeriSign made additional investments. 23 Nevertheless, three weeks later on November 30, 2000 VeriSign sent Certplus a $200,000 invoice 24 for 4Q00 royalties and recognized the revenue. Certplus’ financial statements that were sent to 25 VeriSign disclosed that Certplus reported a $2.2 million loss in 1999 after commencing operations in 26 March 1999, a $3.2 million net loss in 2000 and was insolvent with negative capital of $902,000.

27 Thus, the defendants also knew that VeriSign’s $775,000 investment was impaired but VeriSign 28 failed to record an impairment charge.

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1 166. VeriSign recognized $1.25 million of revenue in 2001 ($1 million of royalties and 2 $250,0000 for marketing services) and VeriSign made additional investments of approximately $1 3 million that increased the total outstanding balance of the investment to $1.7 million and provided 4 Certplus with cash it needed to pay VeriSign. When VeriSign asked about another $500,000 of 5 severely delinquent 2001 receivables on March 8, 2002, CertPlus wrote back the same day, saying, 6 “you have to wait until our shareholders, including VeriSign have brought in some cash, end of 7 March.” On April 4, 2002, VeriSign wrote again: “End of March has come and gone. Any word on 8 when VeriSign will be receiving payment from you?” CertPlus wrote back the next day: “Where do 9 we stand with regards to the bridge loan? . . . As you see, it will be from right pocket into left pocket 10 (for VeriSign I mean).” After the Class Period, VeriSign wrote-off the entire $1.7 million 11 investment and $525,000 of Certplus receivables. 12 167. Euro909 Roundtrip Transaction: VeriSign entered into a transaction with Euro909 on 13 November 17, 2000 whereby Euro909 became an affiliate for the distribution and delivery of 14 VeriSign certificate services and products in Denmark, Norway, Sweden and Finland. VeriSign 15 recorded a $1,972,000 receivable and recognized revenue of $1,169,333 and deferred revenue of 16 $801,667. Most of the recorded amounts related to the purchase and installation of the VeriSign 17 processing center software platform. 18 168. The defendants knew it was improper to recognize the revenue at all, and it clearly 19 could not be recognized in 2000. First, the November 7, 2000 agreement required VeriSign to

20 install, configure and implement the processing center software platform that a December 5, 2000 21 statement of work disclosed would not be completed until March 2001. Euro909 did not pay 22 VeriSign the $1.9 million and specifically told VeriSign in 1Q01 that payment was contingent on its 23 processing center being up and running and that Euro909 did not have sufficient cash to pay its 24 account in any event. Further, Euro909’s financial statements disclosed that the company reported a 25 $5.4 million net loss in 2000 providing additional evidence that it did not have the ability to pay 26 VeriSign. Because the processing center was not up and running in 4Q00 and because Euro909 did

27 not have the ability to pay VeriSign, defendants knew that GAAP precluded the revenue from being 28 recognized in 4Q00. In fact, Euro909 did not pay the $1,972,000 receivable until 2Q01 and did so

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1 only after VeriSign invested $10.4 million in Euro909 and purchased Euro909’s domain name 2 business for $24.5 million. 3 169. Certisign Brazil Roundtrip Transaction: VeriSign recognized $2.1 million of revenue 4 in 4Q00 and $1.4 million in 2001 pursuant to a December 8, 2000 international affiliate agreement 5 with CertiSign Brazil whereby CertiSign Brazil acquired VeriSign’s payment services software 6 platform. Certisign Brazil was a VeriSign affiliate before executing the December 8, 2000 7 agreement. On September 29, 1999 VeriSign and Certisign Brazil entered into a seven year 8 international affiliate agreement (signed by Sclavos) that permitted Certisign Brazil to distribute and 9 deliver VeriSign’s certificate services in Brazil. In a string of October 2000 emails between the 10 companies that were received by Evan and Korzeniewski, VeriSign told Certisign Brazil it was 11 interested in making a $7.5 million investment in Certisign Brazil if Certisign Brazil agreed to 12 license VeriSign’s Signo payment platform. 13 170. Under the agreement, VeriSign processed all of CertiSign’s sales transactions on 14 VeriSign’s own equipment because CertiSign did not have the necessary equipment and was unable 15 to perform these essential services itself. CertiSign’s technological and financial dependence on 16 VeriSign meant that VeriSign’s subsequent $7.5 million investment in CertiSign had to be accounted 17 for under the equity method rather than the cost method. Under the equity method, VeriSign was 18 required to eliminate all profit from CertiSign transactions and disclose the transactions, which it 19 failed to do.

20 171. VeriSign used CertiSign solely for the revenue it would generate. For example, on 21 October 16, 2000, Michael Kardos wrote to defendant Gallivan about VeriSign’s future CertiSign 22 investment: “As far as I can tell, our [proposed investment] limit on $7.5M is not a matter of 23 available funds, it is a matter of downstream write-off exposure.” On February 21, 2001, CertiSign 24 wrote to defendants Sclavos, Evan and Gallivan to accept VeriSign’s offer to invest in CertiSign, 25 proposing to pay VeriSign with CertiSign stock. 26 172. VeriSign did not make the $7.5 million investment until May 23, 2001 but entered

27 into the payment services agreement on December 8, 2000. The agreement required CertiSign 28 Brazil to pay $1 million on February 15, 2001, $1 million on June 15, 2001 and $510,000 on

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1 November 15, 2001. In addition, from their receipt and review of the November 30, 2000 and 2 February 2, 2001 affiliate receivable reports, the defendants knew VeriSign recognized the $2.1 3 million of revenue when CertiSign Brazil had not paid VeriSign two invoices totaling $365,000 that 4 were over five months past due and a third $438,000 invoice that was also delinquent. CertiSign 5 Brazil needed VeriSign to invest $7.5 million in the company before it could pay VeriSign what it 6 owed. In fact, defendants required Certisign Brazil to use VeriSign’s investments to pay past due 7 receivables. For example, on May 8, 2001 Evan wanted to make sure CertiSign’s receivables were 8 paid out of the investment. She wrote to controller Bert Clement, “Bert – Can we do a journal entry 9 transaction as part of the investment to record a net transaction with the $7.5M going into the 10 investment account, $846K crediting receivables, and approx. $6.6M net cash going out the door?” 11 173. A July 4, 2001 email from CertiSign showed that on June 30, 2001, CertiSign owed 12 VeriSign approximately $1.5 million, but only had $112,071 in cash. On January 16, 2002, 13 CertiSign told VeriSign that it still did not even have a working VeriSign product because the 14 service center that VeriSign shipped back in December 2000 was not suitable for the Brazil market. 15 174. Failure to record investment impairment charge on MyComputer investment: The 16 defendants knew that VeriSign’s $6 million investment in MyComputer needed to be written off 17 completely as of December 31, 2000 because the company was “struggling financially,” was 18 insolvent after reporting a year-to-date net loss of $8.7 million in 2000, and only had cash on hand 19 sufficient to operate for one to two months without raising additional financing. The defendants also

20 knew the owners of MyComputer had tried to sell the company and that a sale had fallen through in 21 October 2000. But the defendants delayed recording any impairment charge until 1Q01 when the 22 entire $6 million was written off based on MyComputer’s 2000 financial condition. 23 175. Failure to Record Investment Impairment Charge on Critical Path Investment: The 24 defendants knew that VeriSign’s investment in Critical Path (a public company) was impaired as of 25 December 31, 2000. VeriSign purchased 474,711 shares of Critical Path on January 1, 1999 for $2 26 million ($4.21 per share) and reported the investment at $14.6 million on December 31, 2000 based 27 on the $30.75 closing price of the stock on that date. But before VeriSign issued its 2000 Report on 28 Form 10-K on March 28, 2001, the price of Critical Path’s stock had declined to just $2 per share.

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1 VeriSign did not record an impairment charge and instead simply disclosed that it would record an 2 impairment charge in 1Q01 if it determined the decline in Critical Path’s stock price was other than 3 temporary. 4 176. The defendants knew that the impairment charge was required in 4Q00 because the 5 decline in the Critical Path’s stock price was not temporary. Critical Path’s stock price declined 6 from $30.75 on December 31, 2000 to just $3.00 on February 15, 2001 in response to public 7 disclosures of fraud by Critical Path. On March 28, 2001, the date VeriSign filed the 10-K, Critical 8 Path’s stock price closed at $1.81. In addition, the disclosures that caused the permanent price 9 declines in Critical Path’s stock constituted a Type I subsequent event – an event that already existed 10 at year end but was not discovered until later as opposed to a Type II subsequent event that did not 11 exist at year end – that required the impairment charge to be recorded as of December 31, 2000. 12 177. Failure to Adequately Reserve for Receivables (Other than Domain Name Sales): 13 Receivables and net income from VeriSign’s west coast operations were overstated because 14 VeriSign failed to reserve for significantly delinquent receivables including amounts due from 15 affiliates. According to KPMG’s performance improvement observations workpaper VeriSign did 16 not have a formal company-wide reserve policy in place for the reserving of uncollectible accounts 17 which KPMG said could cause VeriSign to under accrue for bad debts. VeriSign’s A/R Allowance 18 Analysis report shows that VeriSign’s west coast receivables had quadrupled from $12.7 million on 19 December 31, 1999 to $54.3 million at December 31, 2000, and that $23.8 million or 44% of west

20 coast receivables were more than 60 days past due and that DSOs had increased from 60 days at 21 December 31, 1999 to 89 days at December 31, 2000. 22 178. Most of VeriSign’s affiliates were Internet start up companies that were not 23 creditworthy when VeriSign recorded revenue. Under GAAP and SEC rules (e.g., Concepts 5, SOP 24 97-2 and SAB 101), when collectibility is not reasonably assured, immediate revenue recognition is 25 prohibited. Additionally, VeriSign had no credit policies in place during the Class Period. As 26 defendant Evan pointed out, credit policies (e.g., a review of each customer’s cash resources before 27 making any sales on credit, setting appropriate credit limits and cutting off sales to delinquent 28 customers) are necessary for large companies like VeriSign to minimize uncollectible sales and

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1 costly write-offs. Because most of VeriSign’s affiliates did not have the ability to repay VeriSign 2 when sales were recorded (absent funds from VeriSign), revenue for sales to such customers should

3 not have been recognized until VeriSign was paid, independent of a VeriSign investment (which 4 constituted a return of capital to VeriSign and is not a legitimate sale). However, VeriSign 5 improperly recorded revenue from customers that were not creditworthy and on sales for which 6 collectibility was not reasonably assured. 7 179. VeriSign was also responsible for setting adequate reserves for uncollectible accounts 8 receivable, but it failed to do so, thereby artificially inflating its financial results. VeriSign’s policy 9 for setting A/R reserves was to reserve a fixed percentage of delinquent A/R, based on how many

10 days past due the accounts were and to record reserves for specific accounts after they were 11 definitively known to be uncollectible (which violated GAAP’s requirement for accrual accounting). 12 For all severely delinquent receivables, VeriSign kept the uncollected accounts on its books until 13 after they became more than one year past due – and even the one year write-off policy was often 14 overridden by VeriSign’s management. 15 180. VeriSign’s “fixed reserve percentages” were improper and far too low to account for 16 VeriSign’s uncollectible receivables. Further, by waiting until specific accounts were known to be 17 uncollectible to book the necessary reserves, VeriSign violated GAAP and SEC rules (e.g., SFAS 5), 18 as well as simple accrual accounting. VeriSign’s policy for setting reserves resulted in ongoing 19 GAAP and SEC reporting violations because the reserves were never even close to adequate to 20 account for its uncollectible receivables. In fact, as of December 31, 2000, VeriSign’s reserves were 21 drastically understated because (1) most of VeriSign’s customers were struggling Internet start ups

22 that were not creditworthy; (2) VeriSign drastically reduced the fixed reserve percentages it used at 23 December 31, 1999 – even though VeriSign’s outstanding receivables were significantly more 24 delinquent at the end of 2000 than they were at the end of 1999; and (3) the highest fixed reserve 25 percentage was just 11% – even for A/R that was 6-12 months past due – which was far too low. 26 Indeed, internal documents show that VeriSign knew that it would never collect 89% of balances

27 that were seriously delinquent. 28

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1 181. VeriSign’s reserve policy was not adjusted for the significant deterioration in aging at 2 December 31, 2000, and did not allow for the absence of VeriSign credit policies or the lack of 3 creditworthiness of its customers. VeriSign’s customers’ lack of creditworthiness was obviously 4 based on their need for VeriSign money, habitually delinquent payment histories and defaults and 5 the fact that many of VeriSign’s customers were Internet startups which simply lacked capital 6 resources, particularly at the end of 2000 and continuing throughout 2001. The slow paying trends 7 reflected in the aging categories (see table below) was due to VeriSign having routinely extended 8 credit to and recorded revenue from customers that lacked the ability to pay VeriSign. As KPMG 9 noted, “[a]lso, waiting one year before writing off an account appears to be excessive.” 10 182. The following table reflects VeriSign’s west coast A/R aging (this excludes Network 11 Solutions and domain name receivables). The significant deterioration in 2000 is reflected below:

12 VeriSign A/R aging December 31, 1999 December 31, 2000 composition as of: 13 Total $ Total % Total $ Total % 14 A/R, 61 or more days past due $3.0M 24% $23.8M 44% 15 A/R, 1-60 days past due $2.7M 21% $13.4M 25% A/R, Current $7.0M 55% $17.1M 31% 16 A/R, Total $12.7M 100% $54.3M 100% A/R Reserve, Total $1.0M 7.5% $3.5M 6.5% 17

18 183. This drastic A/R deterioration reflected the weakened economic conditions in the 19 Internet industry at the end of 2000 and meant that fixed reserve percentages needed to be much 20 higher as of December 31, 2000 than in the prior year. For example, since December 31, 1999, the 21 amount of A/R greater than 60 days past due increased nearly eight-fold, from $3 million to $23.8 22 million; and the percentage nearly doubled, from 24% to 44%. 69% of VeriSign’s A/R was past 23 due. Instead, VeriSign drastically reduced its fixed percentages so that the 2000 reserve percentages 24 were actually lower than in 1999, when they should have been much higher. VeriSign arbitrarily 25 reduced 1999’s already inadequate fixed reserve percentages to ridiculously low amounts, including 26 just 11% for accounts that were six months to 360 days past due: 27 28

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1 Fixed reserve % on accounts December 31, 1999 December 31, 2000 greater than 60 days past 2 due: 3 Total $$$ Reserve % Total $$$ Reserve %

11 4 A/R, 181+ days past due $2.9M 25% $3.1M 11% A/R, 91-180 days past due $12.3M 8% 5 A/R, 61-90 days past due $7.1M 6% A/R, 61+ days past due (Total) $2.9M $22.5M 6 A/R Reserve, Total $0.7M 25% $1.8M 7.8% 7 8 184. In 1999, for all accounts receivable that were more than 60 days past due, VeriSign 9 used the same 25% fixed “general” reserve, whether an account was 61 days past due or 360 days 10 past due. Similarly, in 2000, once a receivable was more than six months past due, the minimal 11% 11 reserve was the same until it was suddenly written off when it became more than one year past due. 12 Thus, after an account was six months past due, for the next five months, nothing would change. 13 11% was entirely inadequate, even for receivables six months past due (as was the 25% used in 14 1999), because the likelihood of default increases every month. Even if an 11% reserve was 15 adequate for accounts 6 months past due (which it was not), it could not possibly be adequate five 16 months later, on the eve of being written off as uncollectible. 17 185. Failure to Record Goodwill Impairment Charges: The defendants also knew that 18 VeriSign overstated assets, GAAP earnings and EPS and capital by $9.9 billion because it delayed 19 writing down goodwill until 2Q01. In its 2Q01 Report on Form 10-Q, VeriSign said it recorded the 20 $9.9 billion charge because the NASDAQ had declined 46% from 3,966 on June 30, 2000 to 2,161 21 on June 30, 2001. KPMG’s 2Q01 workpapers also stated that the $9.9 billion impairment charge 22 was taken because of the decline in the NASDAQ and the decline in VeriSign’s stock price (from 23 $176.50 on June 30, 2000 to $60 on June 30, 2001). But KPMG also stated that these market 24 conditions which indicated an impairment test was required had existed for several quarters. 25

26 11 27 This was documented as greater than 60 days past due, with no further detail. As such, it is unclear how much of the total related to the specific aging categories listed for December 31, 2000. 28

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1 186. KPMG’s 2000 audit workpapers confirm this. In its significant issues and decisions 2 workpaper and its impairment of goodwill workpaper from the 2000 audit KPMG wrote that the 3 decline in the stock market since the completion of the Network Solutions acquisition (the NASDAQ 4 declined 36% from 3,966 on June 30, 2000 to 2,552 on December 31, 2000; VeriSign’s stock price 5 declined 58% from $176.80 on June 30, 2000 to $74.59 on December 31, 2000) had caused many to 6 question valuation assumptions underlying acquisitions completed in 2000 but that no impairment 7 test was performed because VeriSign claimed it was too soon. 8 187. By March 31, 2001, the NASDAQ had declined to 1,840 and VeriSign’s stock price 9 declined to $35.44. In its 1Q01 significant issues and decisions workpaper, KPMG again stated that 10 it discussed the possible impairment of goodwill with management and the audit committee but did 11 not require an impairment charge because VeriSign believed it was premature. Joe Hoffman, 12 KPMG’s SEC and concurring review partner, disagreed and wrote that it was never premature to test 13 for impairment. In addition, KPMG auditor, Tom Adkins, wrote that KPMG’s agreement to meet 14 with the audit committee prior to the end of 2Q01 to discuss the magnitude of the impairment charge 15 2Q01 suggested that KPMG allowed VeriSign to defer recognition of the charge from 1Q01 to 16 2Q01.

17 2. Additional Reasons Why the Statements Regarding 4Q00 and FY00 Were False and Misleading When Made 18 188. In addition to VeriSign’s internal reports and emails, the confidential witnesses 19 corroborate not only the decline in VeriSign’s core business, but the accounting fraud perpetrated on 20 the market. The statements regarding demand for VeriSign’s products and services were materially 21 false and misleading because, by late 2000, none of VeriSign’s lines of business were growing 22 legitimately. CW1 said that VeriSign’s global registry services was the Company’s “cash cow,” and 23 that VeriSign was suffering losses in its other business divisions. 24 189. Confidential witnesses corroborated that VeriSign would invest a significant amount 25 of cash in small, private, start-up companies that lacked sufficient capital to pay for VeriSign 26 products on their own. As Internet start-up companies with limited histories or product offerings, 27 many of VeriSign’s affiliates had insufficient capital to purchase VeriSign products or services 28

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1 unless VeriSign provided them with funds via an “investment.” When VeriSign invested in a new 2 affiliate, the investment dollars would often be immediately converted into license revenues that 3 would be paid for with the funds received from VeriSign. 4 190. VeriSign also made investments in start-up Internet “technology partners” that were 5 dependent on VeriSign’s investment to pay for, or even offer, VeriSign products. Shortly after 6 receiving “investment” funds from VeriSign, they would begin to offer new collaborative VeriSign 7 products that could not have been paid for without VeriSign’s investment. These technology 8 partners were motivated to accept funds from VeriSign because it enabled them to publicize the 9 VeriSign investment, which gave them credibility with other investors, and because they, too, could 10 begin to report revenues from sales of VeriSign products. 11 191. According to CW8, a former VeriSign operations manager who was responsible for 12 managing technical aspects of VeriSign’s application product services, after an affiliate relationship 13 had been created, VeriSign would provide “services” to the affiliate to further continue the business 14 relationship, such as hosting the affiliate’s website on VeriSign’s own server or creating a web page 15 link allowing the affiliates to sell VeriSign’s products or services. In some cases, VeriSign would 16 also help the affiliate build a global server. CW8 stated that if an affiliate partner did not have a 17 secure infrastructure by which to sell VeriSign services, VeriSign would completely host the affiliate 18 partner’s website on its own servers, charging the affiliate for the hosting costs, e.g., VeriSign’s Asia 19 affiliate, HiTrust. 20 192. According to CW10, the affiliates were dependent on VeriSign’s equity investments 21 to purchase future VeriSign products/services (as in the case of Firstream, see infra) and to 22 participate in multiple affiliate product programs. CW10 described the relationship between 23 VeriSign and its affiliates as “a welfare state,” i.e., VeriSign was supporting them. Kardos informed 24 CW10 that not a single affiliate was profitable and that every affiliate was a “losing proposition.” 25 193. VeriSign was, in essence, capitalizing and running these “affiliates.” The affiliate 26 partners were simply selling VeriSign products under different corporate names. VeriSign did not 27 disclose the nature or the full extent to which it was using these kinds of business arrangements with 28 its affiliates.

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1 194. By January 2001, defendants knew from the information provided in weekly revenue 2 meetings and monthly revenue reports that sales were declining across almost all of the Company’s 3 product lines. In addition, defendants knew that their reported revenues had been inflated by 4 transactions with VeriSign’s affiliates and technology partners. According to CW10, VeriSign had 5 “executive sales” people who were not part of the regular sales team, but executives on the 6 management team who sold VeriSign products and services to the Company’s affiliates, including 7 the round trip transactions described above. According to CW7, defendants Evan and Gallivan were 8 generally the two corporate executives who originally negotiated the deals between VeriSign and its 9 affiliate customers on a one-on-one basis. CW10 stated that Kardos and El-Manawy worked closely 10 with Anil H.P. Pereira (“Pereira”) and Gallivan to broker deals with its affiliates. 11 195. Most of VeriSign’s affiliates were under an exclusive commitment to sell only 12 VeriSign products and services. CW8 said that VeriSign’s servers, which issued digital certificates, 13 encompass a financial Oracle-based database back-end component that tracked and recorded the 14 amount of digital certificates sold by each affiliate on a monthly basis. At any time, VeriSign 15 executives, as well as affiliate partners, could access data that would reflect the amount of digital 16 certificates sold as well as the profit generated from the sales. CW8 said that VeriSign and the 17 affiliate partners shared profits from such sales according to an agreed-upon percentage. Most of 18 VeriSign’s affiliates had agreed to provide VeriSign minimum royalties over a multi-year term. 19 VeriSign improperly reported these royalties as revenue every quarter, even though it knew that most 20 affiliates were not making sufficient, if any, sales to cover the minimums and had no ability to pay 21 VeriSign in the absence of such sales (e.g., CertiSign, etc.). Hence, defendants knew, throughout the 22 Class Period, that significant portions of VeriSign’s revenue were derived from uncollectible royalty 23 agreements.

24 B. False Statements Regarding 1Q01 Results 25 196. On April 26, 2001, the Company issued a press release entitled, “Demand For 26 ‘Internet Utility’ Services From Both New and Existing Customers Fuels Strong Results and 27 Extends Market Leadership.” The press release stated in part: 28

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1 VeriSign, Inc., today announced revenues of $213.4 million for the first quarter ended March 31, 2001, a 526% increase over revenues of $34.1 million reported in 2 the quarter ended March 31, 2000. Pro forma net income for the quarter ended March 31, 2001, excluding the amortization of goodwill and intangible assets related 3 to acquisitions, stock-based compensation charges related to acquisitions, gains and losses on equity investments, and benefit for income taxes, was $48.6 million, or 4 $0.23 diluted earnings per share compared to pro forma net income in the quarter ended March 31, 2000 of $2.2 million, or $0.02 diluted earnings per share. In 5 addition, deferred revenue balances increased 7% sequentially to $542 million and cash and investments totaled $1.2 billion for the quarter ended March 31, 2001. 6 “Even with the current macro-economic conditions facing the IT sector, we were 7 able to grow our revenue sequentially, expand our operating margins and generate healthy operating cash flow during the quarter,” said Stratton Sclavos . . . . 8 Mass Market Division . . . . In the web presence space, the NSI Registrar continued 9 to demonstrate its market leadership in the first quarter by registering approximately 1.0 million new and transferred domain names. The NSI Registrar also renewed and 10 extended 1.2 million domain names bringing its combined number of domain name transactions to approximately 2.2 million for the quarter. The NSI Registrar now 11 supports 6.5 million customers with some 15.5 million active domain names, representing 57% growth in the registration base over the first quarter of 2000. 12 197. The Company’s 1Q01 financial results were repeated to the market during the 13 Company’s April 26, 2001 conference call, in reports issued by several analysts that followed 14 VeriSign and in VeriSign’s Report on Form 10-Q filed with the SEC on May 11, 2001 in which it 15 was also represented that VeriSign’s financial statements reflected all adjustments that were 16 necessary for a fair presentation of the financial position of the Company and its results of operations 17 and cash flows. During the April 26, 2001 conference call Evan stated that VeriSign’s 1Q01 pro 18 forma tax adjusted EPS of $0.14 beat the First Call consensus estimate of $0.13. In addition, Evan 19 stated that VeriSign expected revenue growth to accelerate in the second half of 2001, was 20 comfortable with consensus expectations of $230 million of revenue for 2Q01 and was maintaining 21 2001 revenue guidance of $975 million to $1 billion. Evan also stated that VeriSign was 22 comfortable with consensus expectations of $0.14 for 2Q01 EPS and that the Company was 23 maintaining 2001 EPS guidance of between $0.56-$0.60. Sclavos stated: 24 We made significant strides here in Q1. We registered approximately 1 million net- 25 new and transferred names in the quarter at an average term of 1.5 years per name, significantly up quarter-over-quarter. 26 We also renewed an additional 1.2 million names, which represents an approximately 27 70% renewal rate. Additionally the renewed names’ average subscription turn was 1.9 years per name versus last quarter’s 1.7. And all told we increased our number of 28 unique customers to 6.5 million, up from 6.2 million.

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1 The renewal rate and subscription term metrics are important leading indicators of our ability to sell these customers additional services. 2 198. During the same conference call, Sclavos and Evan stated: 3 • The Company was seeing strong renewal rates and upward trends in its 4 digital certificate (authentication) and registrar (identity) businesses.

5 • The Company was seeing “strong growth” via customer demand. 6 • The Company was “more insulated” than other companies. 7 • The Company was recognizing revenue “conservatively.” 8 • The Company had two to three quarters of visibility in its deferred revenue. 9 199. During the same conference call, Evan stated: 10 “Q1 demonstrates a very solid start to the year as we saw continued growth across all of our major lines of business. We saw positive trends in the growth of our active 11 customer basis as well as increased revenue generated per customer in the various business units . . . . In addition, we exited the quarter with a very strong balance 12 sheet containing over a billion dollars of cash, no debt, and a substantial deferred revenue balance. In fact, deferred revenue grew significantly quarter over quarter 13 and was also ahead of plan expectation . . . . Total deferred revenue increased to $542 million in Q1 from $508 million last quarter. This represents the 7% sequential 14 increase and was well ahead of our internal expectation of 3% to 4% growth. The accelerated growth we saw this quarter in deferred revenue was related to the greater 15 than forecasted renewal rates and the increase of average life of our new renewing name base. We would conservatively expect deferred revenue to grow at a rate of 16 approximately 5% per quarter.” 17 200. During the 1Q01 conference call, Sclavos claimed that: “We registered approximately 18 one million net new and transferred names in the quarter at an average term of 1.5 years per name, 19 significantly up quarter-over-quarter. We also renewed an additional 1.2 million names, which 20 represents an approximately 70% renewal rate. Additionally, the renewed names’ average 21 subscription turn was 1.9 years per name versus last quarter’s 1.7.” 22 201. As a result of those false statements, VeriSign’s shares jumped 12% the following 23 day on triple the average trading volume. VeriSign reported the following false and misleading 24 financial results in the April 26, 2001 press release and the 1Q01 Report on 10-Q filed on May 11, 25 2001 (in 000s, except registrations and EPS):

26 Statement of Operations 1Q01 27 New domain name registrations: 1 million Renewed registrations: 1.2 million 28

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1 Revenues $213,413

2 Pro forma Net Income/(Loss): $48,627 Pro forma EPS: $0.23 3 GAAP Net Income/(loss): ($1,377,377) 4 GAAP EPS: ($6.90)

5 Balance Sheet

6 Net accounts receivable: $161,150 Allowance for doubtful accounts: not reported 7 Long-term investments: $333,729 8 Goodwill: $16,286,314 Short term deferred revenue: $435,340 9 Long-term deferred revenue: $106,349 10 202. On or about May 23, 2001, VeriSign held meetings with analysts at its “Business 11 Without Interruption Analyst Day.” In addition to repeating the financial results for 1Q01, 12 defendant Evan stated:

13 • The Company could actually “expand” margins to 35%-40% in future quarters. 14 • The Company’s pipeline was “solid” and “strong.” 15 1. Facts Showing Why Statements Regarding 1Q01 Were 16 Materially False and Misleading 17 203. VeriSign’s 1Q01 financial results were materially false and misleading and not 18 reported in accordance with GAAP or VeriSign’s publicly reported accounting policies due to the (1) 19 improper recording of revenue on domain name registrations including the improper recognition of 20 revenue on the automatic two-year renewals of expired domain name contracts, (2) improper 21 recognition of revenue on various roundtrip transactions, (3) failure to record VeriSign’s share of 22 losses incurred by the investee companies as required by APB 18, (4) failure to record impairment 23 charges on long-term investments as required by SFAS 115 and VeriSign’s publicly reported 24 accounting policy, (5) improper recognition of license and affiliate revenue in violation of SOP 97-2 25 and SAB 101, (6) failure to write-off or establish reserves on uncollectible delinquent receivables, 26 (7) overstatement of acquired deferred revenue, and (8) failure to record a goodwill impairment 27 charge. If VeriSign had reported its financial results accurately and in accordance with GAAP, it 28 would not have reported results that exceeded first call consensus estimates.

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1 204. Misleading Domain Name Registrations: The reported level of new registrations for 2 1Q01 was misleading because VeriSign failed to disclose that 407,000 or 41% of the one million 3 new registrations were free or promotional registrations that ranged in price from $0 to $10 (and 4 therefore only at most covered the registry fee) compared to the $35 VeriSign charged. Waterfall 5 schedules and a VeriSign report on renewals disclosed that 78,976 of the free and promotional 6 registrations were purchased by NameZero so that it would help VeriSign report higher registrations. 7 In addition, KPMG’s workpapers disclosed that VeriSign’s registrations in 1Q01 were actually 8 178,000 less than the amounts publicly reported in the Company’s April 26, 2001 press release. 9 205. Sclavos’ statements during the conference call were materially false and misleading 10 because: (1) the average terms of new names was only 1.37 years, as reflected in VeriSign’s internal 11 quarter-end financial package; (2) the average lives were inflated by defendants’ arbitrary and 12 deliberate use of a two-year default renewal period to increase long-term deferred revenues and 13 average renewal terms, as previously alleged; and (3) VeriSign’s internally-reported renewal rate 14 was just 65% (not 70%), which was itself inflated by defendants’ actions in booking renewals before 15 they were sold, and in deflating the renewable base by excluding free and promotional names from 16 the calculation, as previously alleged. 17 206. Automatic Renewals of Expiring Domain Name Registrations: Accounts receivable, 18 deferred revenue, long-term deferred revenue, revenue and net income were all overstated because 19 VeriSign continued to automatically and arbitrarily renew expiring registrations and charged 20 customers $70.00 for a two-year registration term when customers had not agreed to the automatic

21 two-year renewal. Waterfall schedules show that 820,864 of the 1.2 million renewal registrations 22 were automatically renewed for two-years. The waterfall schedule also shows that the two-year auto 23 renewals caused VeriSign to record (1) gross receivables of $93.1 million, (2) a bad debt reserve of 24 $35.7 million, (3) net receivables of $57.5 million, and (4) revenue of $6.9 million. Short-term 25 deferred revenue increased to $37.5 million and long-term deferred revenue increased to $29.1 26 million. 27 207. GAAP and SAB 101 did not permit VeriSign to record any receivables, revenues or 28 deferred revenues on the two-year automatic renewals because (1) customers had not agreed to the

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1 automatic renewals and because it was impossible for VeriSign to reasonably estimate how many of 2 the automatic renewals would actually be accepted, (2) VeriSign consistently overestimated the 3 number of customers that accepted the automatic renewals and (3) VeriSign did not restate its 4 financial results when actual default rates were higher than the Company’s estimates but improperly 5 adjusted the estimated default rate applied to renewals in a subsequent accounting period. 6 208. Failure to Adequately Reserve for Domain Name Registration Receivables: VeriSign 7 continued to understate the bad debt reserve and overstate net receivables related to domain name 8 registrations. KPMG’s 1Q01 accounts receivable memo disclosed that gross domain name 9 receivables were $116.7 million and that the bad debt reserve was $25.9 million. Moreover, the 10 workpapers disclosed that VeriSign reduced the bad debt reserve from 41% of gross domain name 11 receivables on December 31, 2000 ($37.8 million reserve on $93.4 million of receivables) to 22.1% 12 ($25.9 million reserve on $116.7 million of receivables). A growing and more significant portion of 13 the receivables balance was related to the improper automatic two-year renewals. From their review 14 of the Company’s automatic renewal waterfall schedules, the defendants knew that default rates on 15 the two-year automatic renewals were actually much higher. 16 209. Roundtrip Transactions: In 1Q01, VeriSign made $7.7 million of roundtrip 17 investments and committed to make another $25.5 million of roundtrip investments to close 18 projected revenue gaps and pay down delinquent receivables so VeriSign could report results that 19 exceeded the guidance provided during the January 24, 2001 conference call and First Call 20 consensus estimates.

21 Company Investment 1Q01 Revenue 2001 Revenue

22 SurePay $20,000,000 $2,854,515 $3,979,515 Quova $5,223,000 $540,148 $1,220,814 23 Netgenshopper $500,000 $350,000 $535,470 NetSecure $5,500,000 $1,879,115 $6,501,750 24 Indentix $2,000,000 unknown $128,333

25 210. VeriSign emails show that the defendants knew VeriSign used the roundtrip 26 investments to report results in line with the guidance defendants Sclavos and Evan provided during 27 the April 26, 2001 conference call. For example, on January 22, 2001, Voslow emailed two versions 28 of VeriSign’s 1Q01 BAG Analysis to Sclavos, Evan and others and wrote that VeriSign could bring

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1 in some “lumpy revenue” to make up projected shortfalls. According to Wolford, “lumpy revenue” 2 was revenue that could be recognized in the quarter in which a sale was made. Similarly, on 3 February 14, 2001, Jeff Baeth sent an email to several VeriSign employees in which he wrote that 4 Sclavos was pressuring VeriSign executives to prepare a forecast that he hoped would back up his 5 “shooting from the hip” representations to Wall Street analysts. As before, VeriSign used a 6 combination of accounting manipulations to meet the Wall Street estimates. Several of the more 7 egregious examples of these transactions are set out below: 8 211. The Quova Roundtrip Transaction: On February 2;3, 2001, VeriSign acquired 2.2 9 million shares of Quova’s series B preferred stock for $4 million and a warrant to purchase 1.2 10 million additional shares for $1,222,678.92. In addition, the companies executed a three-year data 11 license agreement that allowed Quova to obtain data contained in the VeriSign’s registration 12 database for $1,222,678.92 – the exact amount VeriSign paid Quova for the warrant. The agreement 13 required Quova to pay VeriSign $500,000 within seven days for the delivery of the license and 14 $722,678.92 within seven days for three years of monthly delivery license fees ($60,222 per 15 quarter). VeriSign recognized $540,148 in 1Q01 and $60,222 in 2Q01, 3Q01 and 4Q01. On June 16 29, 2001, VeriSign and Quova entered into another data license agreement that required VeriSign to 17 develop and maintain the data obtained and compiled by Quova for $500,000 which VeriSign 18 recognized as revenue in 2Q01. 19 212. The defendants knew the Quova roundtrip transaction was a sham and that revenue

20 recognition was improper. Numerous documents show that the defendants knew (1) VeriSign would 21 have “tremendous trouble selling” the data sold to Quova, (2) the amount of the roundtrip investment 22 was increased so VeriSign could recognize more revenue, and (3) Quova did not have the ability to 23 pay VeriSign absent the $5.2 million investment. On January 25, 2001, Michael Frankel sent an 24 email to Sclavos, Evan, Korzeniewski, and others in which he wrote that VeriSign was planning on 25 making a $4 million investment in Quova, obtaining a board seat and entering into a business deal 26 that would result in VeriSign recognizing $1.8 million of revenue. The next day, Frankel sent an

27 email to Quova stating that Sclavos would probably approve the roundtrip deal later in the day and 28 that VeriSign wanted to invest an additional 3% as a discrete purchase transaction whereby Quova

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1 purchased data and ad placement and paid VeriSign in Quova shares. In a January 29, 2001 email to 2 Wolford and others, Frankel wrote that VeriSign was trying to finalize the package of “stuff 3 [VeriSign] would otherwise have tremendous trouble selling” to be sold to Quova for their stock and 4 that would result in VeriSign recognizing revenue. 5 213. According to a April 17, 2002 Quova email, the investment was increased from $4 6 million to $5.2 million because VeriSign “wanted to get an extra $1mm of revenue so they gave us a 7 bunch of data and advertising, we paid them $1mm and then they paid that back to us.” According 8 to a February 26, 2001 VeriSign email, VeriSign wired $1,222,679.73 to Quova on March 2, 2001 9 and according to a March 6, 2001 VeriSign email, Quova wired $1,222,678.92 back to VeriSign on 10 March 6, 2001. Quova’s financial statements – which the stock purchase agreement disclosed 11 VeriSign received – show that Quova did not have the ability to pay VeriSign absent VeriSign’s $5.2 12 million investment. In 1Q01, Quova reported a $2.4 million net loss on revenues of just $62,000. 13 214. Because VeriSign obtained a board seat and was able to influence Quova to enter into 14 the simultaneous business deal whereby Quova “purchased” data that VeriSign would otherwise 15 have tremendous trouble selling in exchange for the $5.2 million investment, the defendants knew 16 VeriSign was required to account for the Quova investment under the equity method of accounting. 17 VeriSign acquired 12.54% of Quova and therefore should have recorded at least that percentage of 18 the company’s net losses in 2001 as follows (in 000s): 19 1Q01 2Q01 3Q01 4Q01 F01 20 Quova Net Loss $2,377 $2,823 $2,389 $1,982 $9,572 VeriSign Share $298 $354 $300 $249 $1,200 21 215. VeriSign should have recorded an impairment charge on the $5.2 million investment 22 due to Quova’s deteriorating financial condition. Quova reported a $9.6 million net loss in 2001 and 23 burned through more than $8 million of cash which reduced the company’s capital by more than 24 50% to $7.9 million. In 2Q02, after the Class Period, VeriSign wrote-off its entire investment. 25 216. The SurePay Roundtrip Transaction: In 1Q01 VeriSign improperly recognized 26 $2,854,515 of revenue in a roundtrip transaction with SurePay. On March 30, 2001, the last day of 27 1Q01, VeriSign committed to making a $20 million investment for 15.6% of SurePay that would 28

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1 also result in VeriSign obtaining a seat on SurePay’s board of directors. On the same date, VeriSign 2 and SurePay entered into a license and service provider agreement whereby SurePay was given a 3 Universal Service Center and permitted to sell VeriSign’s certificate products and services bundled 4 with SurePay’s B2B Solution. In addition, VeriSign and SurePay entered into a development and 5 distribution agreement under which the companies would jointly develop and market an end to end 6 online payment solution. The license and service provider agreement required SurePay to pay 7 VeriSign $3.75 million - $3 million for the USC license, $500,000 for annual maintenance and 8 support and $250,000 for the first installment of minimum net quarterly revenues. VeriSign 9 recorded a $3.75 million receivable and recognized $2.9 million of revenue in 1Q01 and $375,000 10 (the $250,000 net quarterly revenues plus ¼ of the $500,000 annual maintenance and support fee) in 11 each of 2Q01, 3Q01 and 4Q01 – for a total of $6.5 million in 2001 revenues. On May 1, 2001, 12 VeriSign made the $20 million investment and acquired 19.8% of SurePay. 13 217. The defendants knew the roundtrip transaction was a sham and that revenue 14 recognition was improper. In a December 15, 2000 email to eOneglobal.com (the other shareholder 15 in SurePay), VeriSign’s Mark McLaughlin wrote that VeriSign would not acquire more than 20% of 16 SurePay for accounting reasons, i.e., so that VeriSign would not have to consolidate SurePay’s 17 financial results with VeriSign’s. From SurePay’s actual and pro forma financial statements, which 18 VeriSign received, the defendants knew SurePay reported a $6.1 million net loss in 2000, a $4.1 19 million net loss in 1Q01 and projected a $25.7 million net loss for 2001.

20 218. In addition to structuring the transaction to avoid recognizing its share of SurePay’s 21 losses as required by APB 18, the defendants also knew that the reason for the “investment” was that 22 VeriSign could get back its $20 million and recognize revenue. In a December 21, 2000 email 23 McLaughlin wrote that VeriSign’s investment rules required the Company to “take out 50%” of any 24 investment within the first year and 100% within three years. McLaughlin wrote that in response to 25 a statement from First Data (the majority shareholder of eOne) that VeriSign was “getting 20% of 26 the company with money that is flowing right back to you.”

27 219. The defendants knew revenue recognition was improper because SurePay did not 28 have the ability to pay VeriSign if VeriSign did not make the $20 million investment. SurePay’s

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1 June 30, 2001 financial statements – which VeriSign received – showed that SurePay reported a net 2 loss of $10.7 million through June 30, 2001, had burned through $18.3 million of cash in the first six

3 months of 2001 and would have reported negative cash if VeriSign did not make the $20 million 4 investment on May 1, 2001. SurePay paid VeriSign the $3.75 million required by the license 5 agreement in 2Q01 within a week of receiving the $20 million from VeriSign on May 1, 2001. Anil 6 Pereira, a VeriSign executive, was appointed to SurePay’s board at the same time. 7 220. Two weeks after VeriSign’s investment, SurePay told VeriSign that the product 8 development schedule would be delayed by six to nine months. By December 2001, SurePay had 9 generated minimal sales from VeriSign and fired nearly half of its employees to preserve cash. 10 SurePay refused to pay VeriSign for the 4Q01 and subsequent minimum revenue “commitments” 11 recorded by VeriSign until a contract termination was negotiated. In June 2002, SurePay’s CEO 12 wrote to defendant Sclavos admitting that “[t]he real issue is that the market for the services we 13 originally envisioned to develop and sell together doesn’t exist.” Ultimately, SurePay only paid 14 VeriSign a fraction of the $6 million in minimums. 15 221. The defendants also knew that VeriSign failed to record its share (19.8%) of 16 Surepay’s losses as required by APB 18 because VeriSign had the ability to and did significantly 17 influence SurePay. VeriSign’s $20 million investment, its membership on the board and its ability 18 to get SurePay to enter into the license agreement and the distribution and development agreement 19 showed that VeriSign had the ability to and did significantly influence SurePay. Had VeriSign

20 properly accounted for its SurePay investment it would have recorded 19.8% or $4.7 million of 21 SurePay’s $23.9 million net loss through November 30, 2001. 22 222. The defendants also knew that its $20 million investment was impaired and needed to 23 be written down during the Class Period. In addition to SurePay’s deteriorating financial condition, 24 numerous email communications between VeriSign and SurePay disclosed that the companies never 25 developed or sold an integrated product. After the Class Period the commercial agreements were 26 terminated and VeriSign wrote-off the entire investment - $18 million in 2Q02 and $2 million in

27 3Q02. 28

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1 223. The Netsecure Roundtrip Transaction: On December 31, 2000, VeriSign and 2 Netsecure executed (1) a five-year international affiliate agreement under which Netsecure would 3 sell VeriSign’s certificates in the People’s Republic of China and (2) a five-year international 4 affiliate agreement under which Netsecure would sell VeriSign’s certificates in Thailand, Singapore, 5 Vietnam, Brunei, Malaysia, the Philippines, Cambodia, Laos, Indonesia and Myanmar. Each 6 agreement was signed by Gallivan and required NetSecure to pay VeriSign $2,079,500 for 7 implementation fees and ongoing affiliate support programs ($392,000 of which were recurring 8 annual fees), 50-60% of any sales revenue and escalating minimum royalty payments beginning in 9 3Q01. 10 224. According to revenue schedules included in KPMG’s workpapers and VeriSign’s 11 interrogatory responses, VeriSign recognized the following amounts of revenue in 2001: 12 1Q01 2Q01 3Q01 4Q01 F01

13 $1,879,125 $2,958,125 $699,000 $965,500 $6,501,750

14 225. NetSecure’s financial statements showed that none of the revenue should have been 15 recognized because Netsecure did not have the ability to pay VeriSign. NetSecure’s financial 16 statements – which VeriSign received – disclosed that when the company commenced operations on 17 April 7, 2000, it did not generate any revenues in 2000 and reported a $317,569 net loss in 2000. 18 From April 7, 2000 through June 30, 2001, Netsecure did not generate any revenue and reported a 19 $2.5 million net loss and $610,009 of cash which caused Ernst & Young, the company’s auditors, to

20 issue a going concern opinion. 21 226. Although Netsecure only had $610,009 of cash on June 30, 2001, VeriSign’s June 30, 22 2001 Aging – 4 Bucket report disclosed that Netsecure owed VeriSign $3.4 million. On August 20, 23 2001, VeriSign acquired 16 million shares of NetSecure’s series C shares for $3 million that 24 provided Netsecure with the funds it needed to pay its delinquent and other receivables. VeriSign’s 25 September 30, 2001 Aging – 4 Bucket report confirms that Netsecure used a portion of the $3 26 million to pay the $682,500 of delinquent receivables included on the June 30, 2001 report because

27 those receivables were not included on the September 30, 2001 report. But the report disclosed that 28 Netsecure still owed VeriSign $2,740,250.

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1 227. NetSecure’s September 30, 2001 financial statements disclosed that the company 2 reported a $1.5 million loss and generated just $2,716 of revenue in the quarter ending September 3 30, 2001. NetSecure’s December 31, 2001 financial statements disclosed that the company reported 4 a $2.2 million net loss and generated just $163,171 of revenue in the quarter ending December 31, 5 2001. Netsecure reported $1.7 million of cash on December 31, 2001 when VeriSign’s December 6 29, 2001 affiliate receivable report and the December 31, 2001 Aging – By Collector report showed 7 that Netsecure owed VeriSign $4.9 million, including $2.2 million that was delinquent. 8 228. On February 2, 2002, VeriSign gave $2.5 million to NetSecure in exchange for 9 convertible note which provided the company with funds it needed to pay VeriSign. VeriSign’s 10 March 31, 2002 Aging – 4 Bucket report confirms that Netsecure paid VeriSign $1,115,125 in 1Q02 11 that paid seven receivables including a $1,037,250 receivable that had been past due since August 12 29, 2001. But the report also shows that VeriSign recorded five additional receivables totaling 13 $1,384,000 that resulted in Netsecure owing VeriSign a total of $5,251,375 including $575,000 that 14 was 197 days past due, $575,000 that was 106 days past due, $100,000 that was 152 days past due, 15 $350,000 that was 90 days past due, $466,500 that was 85 days past due, $497,500 that was 60 days 16 past due, $784,000 that was 29 days past due and $1,046,250 that was due on March 31, 2002. 17 Thus, defendants knew that NetSecure could not pay VeriSign and that the $6.5 million of revenue 18 recognized in 2001 was improper. 19 229. VeriSign wrote-off its entire $5.5 million investment in 2Q02 and 100% ($3.8

20 million) of NetSecure’s receivables for which VeriSign had recognized revenue. 21 230. 1Q01 Investment Impairment Charge: In 1Q01 VeriSign recorded a $74.7 million 22 impairment charge on 12 of its long-term investments as follows 23 Company Impairment Charge 24 Critical Path $22,059,251 Interland $7,821,563 25 Interliant $6,379,333 NameZero $23,000,193 26 MyComputer $6,000,000 27 Access360 $3,000,000 XDrive $2,000,000 28 Obongo $1,999,998

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1 Aventail $1,500,000 Aceva $1,000,000 2 Scratchtrack $350,000 Volation $250,000 3 Reserve ($670,000) 4 Total $74,690,328 5 VeriSign should have recorded the impairment charges on its investments in Critical Path, 6 MyComputer, Access360 and NameZero no later than 4Q00. 7 231. Barter Transactions: Beginning no later than 1Q01, VeriSign began to improperly 8 recognize revenues on barter transactions, failed to disclose the transactions or that the purpose of 9 the barter transactions was the same as the improper roundtrip transactions – to close revenue gaps 10 caused by VeriSign’s declining domain name registration and digital certificate businesses. In 1Q01, 11 VeriSign recognized $1,730,377 of revenue on barter transactions with NetCreations ($980,376), 12 .CC ($500,001) and .WS ($250,000), and two with Global Domain. The $250,000 in 1Q01 barter 13 revenue from the .WS deal was improper because there were no .WS registrations in 1Q01 and 14 VeriSign had no history of prior .WS sales that supported the amount recorded by VeriSign, as 15 required by APB 29. 16 232. Failure to Adequately Reserve for Receivables: The defendants knew receivables and 17 net income were overstated because VeriSign continued to underreserve for significantly delinquent 18 receivables including amounts due from affiliates. From VeriSign’s various receivables reports, the 19 defendants knew west coast receivables totaled $55.5 million and that 53% or $29.4 million of the 20 receivables were delinquent - including $23.2 million that were more than 60 days delinquent and 21 $17.6 million that were more than 90 days delinquent. The reports also show the defendants knew 22 VeriSign had established $4.4 million of specific reserves on seven accounts and reduced the bad 23 debt reserve from $2.2 million as of December 31, 2000 to just $1.9 million or 3.8% of net 24 receivables ($51.0 million) on March 31, 2001. The defendants knew the $1.9 million reserve was 25 inadequate to cover potential losses on the $51 million of net receivables because many of the 26 receivables were severely delinquent: 49% or $25.2 million of net receivables were delinquent 27 28

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1 including $6.7 million that were more than 181 days past due, $13.5 million that were more than 91 2 days past due and $19 million that were more than 60 days past due. 3 233. For example, the defendants knew from the March 31, 2001 A/R Allowances 4 Analysis Report that the $4.4 million of specific reserves were established on the following seven 5 delinquent accounts: 6 Customer Receivable Amount Days Past Due Specific Reserve 7 Bigon $1,891,000 233 $1,891,000 CDC $75,000 180 $75,000 8 Digicerf $250,000 105 $250,000 Interpath $255,000 335 $255,000 9 Interstat $356,000 180 $356,000 10 Docutech $209,000 current $209,000 IBG (Mexico) $1,407,000 90-244 $1,407,000 11 234. But VeriSign’s Aging- 4 Bucket Report and the affiliate receivable reports showed 12 the defendants knew that no specific reserves had been established on many additional delinquent 13 receivables. In addition, VeriSign continued to improperly recognize revenues from the delinquent 14 affiliates and continued to make investments in the Company’s affiliates to provide them with cash 15 to pay down their delinquent receivables. 16 Customer Amount Days Past Due 1Q01 Revenue Total 2001 Revenue 17 Adacom $50,000 154 $385,500 $2,012,000 18 Adacom $250,000 206 Al Bahar $660,000 305 $177,021 $428,482 19 Al Bahar $552,000 212 20 Certisign Portugal $950,015 212 $281,000 $751,000 Certisign Portugal $672,000 91 21 Certisign Portugal $310,500 59 Certisign Brazil $140,000 244 $375,592 $1,481,592 22 Certisign Brazil $75,000 62 23 Certplus $250,000 62 $312,500 $1,250,000 Certplus $200,000 91 24 Certplus $250,000 59 Keca-Crosscert $650,000 62 $1,657,050 $2,348,082 25 D-Trust $337,500 152 $573,000 $1,582,000 ESign $500,000` 62 $693,851 $5,310,733 26 Euro909 $1,972,000 91 $302,500 $12,576,808 27 IT Trust $530,050 305 $188,400 $2,154,216 Roccade $55,766 455 $993,535 $2,390,859 28 Roccade $68,510 305

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1 Roccade $460,000 62 Satayam $125,000 153 $471,750 $1,194,000 2 Satayam $400,000 212 Satayam $397,500 91 3 Satayam $175,000 62 4 Satayam $404,285 59 Telefonica $500,000 62 $728,000 $3,393,000 5 Trust Italia $250,000 62 $449,250 $3,322,817 W3Fusion.com $442,250 62 $448,000 $1,194,495 6 W3Fusion.com $1,439,800 182

7 235. Keca-Crosscert: the defendants knew that VeriSign and Crosscert entered into an 8 international affiliate payment services agreement on January 12, 2001 whereby Crosscert would sell 9 VeriSign’s Internet-related payment services products in Korea. The agreement was signed by Evan 10 and required Crosscert to pay initial fees of $1,710,000 and annual fees of $140,000 as follows: 11 $650,000 due February 15, 2001, $650,000 due June 15, 2001 and $410,000 due November 15, 12 2001. VeriSign recognized the $1.7 million as revenue in 1Q01 and recorded two $650,000 13 receivables for the payments that were due on February 15, 2001 and June 15, 2001. But as the 14 defendants knew from VeriSign’s March 31, 2001 and June 30, 2001 Aging- 4 Bucket Reports, 15 Crosscert did not pay VeriSign the two $650,000 payments until VeriSign made a $4 million 16 investment in October 2001. Crosscert never paid the $410,000 which was written off after the 17 Class Period in 3Q02. In addition, from their review of Crosscert’s financial statements the 18 defendants knew Crosscert reported a net loss of 5.6 million Korean won in 2001 and burned 19 through 14 million Korean won which would have resulted in Crosscert having negative cash absent 20 the VeriSign’s $4 million (approximately 4.9 million won) investment. Thus, the defendants knew 21 the revenue should not have been recognized and that the receivable should have been reserved for 22 after the revenue was improperly recognized. In 3Q02, after the Class Period, VeriSign wrote-off $2 23 million of the investment and the $410,000 receivable. 24 236. Certisign Portugal: The defendants also knew that VeriSign continued to recognize 25 revenue and record additional receivables pursuant to the July 14, 2000 international affiliate 26 agreement with Certisign Portugal signed by Sclavos on behalf of VeriSign. Certisign Portugal 27 never paid and VeriSign did not establish any reserves until 4Q01 when VeriSign wrote-off $2.5 28

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1 million of receivables that were 484 days past due. After the Class Period, VeriSign wrote-off 2 another $1.8 million of receivables, terminated the affiliate agreement and cancelled all amounts 3 invoiced in 2000 and 2001 or $5.5 million. 4 237. Satayam Infoway: VeriSign recognized $471,750 of revenues on sales to Satayam 5 Infoway in 1Q01 even though the company had not paid (1) the three receivables that were 6 delinquent on December 31, 2000 ($400,000 122 days past due on December 31, 2000 and 212 days 7 past due on March 31, 2001, $125,000 63 days past due on December 31, 2000 and 153 days past 8 due on March 31, 2001, and $397,500 1 day past due ib December 31, 2000 and 91 days past due on 9 March 31, 2001) or (2) the three additional delinquent receivables totaling $976,785. VeriSign’s 10 February 2, 2001 aging report and subsequent aging reports disclosed that Satayam had not paid the 11 past due invoices and would not do so until issues were resolved and the contract reworked. 12 VeriSign recognized additional revenues of $187,000 in 2Q01, $143,000 in 3Q01 and $143,000 in 13 4Q01, and recorded another $572,000 of receivables. Satayam did not pay the multiple past due 14 invoices that were past due in 1Q01 or additional past due invoices as late as August 28, 2001 and 15 VeriSign did not establish any reserves until it recorded a $450,000 reserve in 3Q01 when Satayam 16 had failed to pay multiple invoices totaling more than $2.2 million – some of which were more than 17 a year past due. 18 238. W3Fusion.com: VeriSign recognized $448,000 of revenue on sales to W3 19 Fusion.com in 1Q01 in addition to the $1.2 million of revenue recognized in 2000 when

20 W3Fusion.com had failed to pay the $1,439,800 receivable that was now 182 days past due and three 21 additional delinquent receivables: $272,250 and $170,000 that were both 62 days past due and 22 $170,000 that was one day past due. VeriSign’s Aging 4 Bucket Reports and the affiliate receivable 23 reports disclosed that (1) W3Fusion.com did not pay these past due invoices until VeriSign made a 24 $1 million investment in 2Q01, $800,000 of which was used to pay down a portion of the 25 $1,439,800 past due receivable, (2) VeriSign did not establish a specific reserve on any of the 26 delinquent receivables (until 4Q01) despite the nonpayment and (3) VeriSign recognized additional

27 revenue of $348,000 in 2Q01, $380,500 in 3Q01 and $17,995 in 4Q01. In 4Q01 VeriSign 28 established a $1.75 million specific reserve when W3Fusion.com owed VeriSign $2.6 million that

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1 was 454 days past due, was having “funding issues” and VeriSign had suspended support activities 2 due to nonpayment. In 2Q02, VeriSign wrote-off the $1 million investment that was used to pay the 3 $1.4 million delinquent receivable and a $2 million investment made in February 2002. 4 239. Certplus: VeriSign continued to recognize revenue pursuant to the July 2, 1998 5 software license agreement that was amended on November 19, 1999 despite the fact that Certplus 6 had not paid three delinquent receivables totaling $700,000 and when they knew Certplus would not 7 pay until VeriSign made additional investments. The $700,000 of delinquent receivables were not 8 paid until Certplus received additional investments including an additional $1 million investment 9 made by VeriSign. Although the $700,000 of past due receivables were paid, VeriSign wrote-off its 10 entire Certplus investment – which had increased to $1.7 million – after the Class Period in 3Q02 11 when it also wrote-off $525,000 of delinquent receivables. 12 240. Euro909: Euro909 did not pay the $1,972,000 delinquent receivable until VeriSign 13 invested $10.4 million in the company on June 20, 2001 and acquired Euro909’s domain name 14 business for $24.5 million. 15 241. Certisign Brazil: Certisign Brazil did not pay the $215,000 of delinquent receivables 16 as of March 31, 2001 and other delinquent receivables until VeriSign invested $7.5 million in the 17 company on May 23, 2001. 18 242. D-Trust: After recognizing $1.5 million of revenue in 2000, VeriSign recognized 19 another $1.6 million in 2001 even though D-Trust failed to pay its delinquent receivables.

20 VeriSign’s December 29, 2001 affiliate receivable report disclosed that D-Trust owed VeriSign 21 $996,091 that was 371 days delinquent. 22 243. Failure to record $9.9 billion goodwill impairment charge: The defendants knew that 23 VeriSign overstated earnings by continuing to delay the $9.9 billion goodwill impairment charge 24 claiming it was premature, and despite the fact the NASDAQ had declined further in 1Q01 to 1,840 25 and VeriSign’s stock price had declined further in 1Q01 to $35.44. In KPMG’s significant issues 26 and decisions workpaper, Joe Hoffman, KPMG’s SEC and concurring partner, disagreed with

27 VeriSign’s belief that it was premature to test for impairment and wrote that it was “never 28 premature” to test for impairment. Moreover, KPMG recognized an impairment charge was required

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1 by agreeing to meet with VeriSign’s audit committee prior to the end of 2Q01 to discuss the 2 magnitude of the charge to be recorded in 2Q01. KPMG auditor, Tom Adkins, noted that decision 3 suggested KPMG was permitting VeriSign to defer recognition of the charge from 1Q01 to 2Q01.

4 C. False Statements Regarding 2Q01 Results 5 244. On July 26, 2001, the Company issued a press release entitled, “Strong Demand for 6 Services Leads to Revenue and Operating Margin Expansion.” The press release stated in part: 7 VeriSign, Inc., the leading provider of trusted infrastructure services, today reported its second quarter results for the quarter ending June 30, 2001. 8 Announced revenues for the second quarter for fiscal 2001 were $231.2 million, 9 compared to $70.3 million for the same period last year, a 229.1% increase. The year-ago results reflect the purchase acquisition of Network Solutions, which closed 10 on June 8, 2000, and therefore include only 22 days of Network Solutions’ activity. 11 Pro forma net income for the quarter ended June 30, 2001, excluding the amortization and writedown of goodwill and intangible assets related to acquisitions, 12 stock-based compensation charges related to acquisitions, and benefit for income taxes, was $52.6 million, or $0.25 diluted earnings per share compared to pro forma 13 net income in the quarter ended June 30, 2000 of $10.3 million, or $0.07 diluted earnings per share. 14 Pro forma operating income for the second quarter, excluding stock-based 15 compensation charges and the amortization and writedown of goodwill and intangible assets, was $33.8 million, or a 14.6% operating margin, as compared to 16 $3.5 million, or a 5.0% operating margin, in the quarter ended June 30, 2000. 17 Stratton Sclavos, president and CEO of VeriSign said “While the macro-economic environment remains challenging, we remain confident that the demand for our 18 infrastructure services will continue to grow throughout the remainder of the year.” 19 For the second quarter of fiscal 2001, deferred revenue balances increased 5% sequentially to $570 million and cash and investments totaled $1.3 billion for the 20 quarter ended June 30, 2001. 21 VeriSign reported a one time, non-cash charge in the second quarter of $9.9 billion. This non-cash charge relates to a portion of the goodwill for acquisitions made with 22 stock over the last two-years. “This action recognizes that macro-economic conditions have led to are reduction in market value for these acquisitions,” said 23 Chief Financial Officer and Executive Vice President Dana Evan. “The acquisitions have performed at or above expectations, and on an operating basis we continue to 24 show increased operating income, positive cash flow, and a debt free balance sheet with $1.3 billion in cash and investments.” 25 Mass Market Division . . . . in the web presence space, VeriSign continued to 26 demonstrate its market leadership in the second quarter by adding approximately 1 million net new domain names under management. . . . In addition, VeriSign 27 renewed and extended 1.4 million domain names ending the quarter with some 16.0 million active domain names, which is up 36% over the second quarter of 2000, and 28 represents 6.5 million unique customers.

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1 245. As a result of these false statements, VeriSign’s shares jumped $6.93 the following 2 day, again on triple the average daily trading volume. 3 246. The Company’s 2Q01 financial results were repeated to the market during the 4 Company’s July 26, 2001 conference call, in reports issued by several analysts that followed 5 VeriSign and in VeriSign’s Report on Form 10-Q filed with the SEC on August 13, 2001 in which 6 VeriSign falsely represented that its financial statements reflected all adjustments that were 7 necessary for a fair presentation of the financial position of the Company and its results of operations 8 and cash flows. During the July 26, 2001 conference call, Evan stated that VeriSign’s pro forma tax 9 adjusted EPS of $0.15 beat the First call consensus estimate of $0.14. She also stated that VeriSign 10 expected to see continued growth in top line revenue, remained comfortable with current street 11 estimates of $250-260 million and the consensus estimate of $255 million for 3Q01 revenues, and 12 was maintaining 2001 revenue guidance of $975 million to $1 billion. Evan stated that VeriSign was 13 raising 3Q01 EPS guidance to $0.16 up from current street consensus of $0.15 and also increasing 14 2001 EPS guidance to $0.60-$0.63 up from $0.56-$0.60. On the same conference call, Sclavos 15 stated: 16 We’ve registered approximately 2.8 million new names for the quarter, which was slightly below our goal of 3 million, but still impressive given the overall market 17 conditions. We also renewed over 2.3 million names and managed to transfer over 730,000 names, this brought our total of paid domain transactions to 5.8 million for 18 the quarter. Now, as many of you know, there has been a high degree of investor and industry focused on renewal rates given last years dramatic rise in registrations. 19 We’ve been forecasting a very conservative 50% renewal rate for the year. In Q2, we saw overall renewal rates of 60%. . . . We registered 1 million NET new and 20 transferred names in the quarter at an average of 1.5 years per paid name. We also renewed close to 1.4 million names during the quarter. The average subscription 21 term for the renewed name was slightly over 2 years per name, versus last quarters 1.9. 22 247. During the 2Q01 conference call, Sclavos stated, in response to an analyst’s question 23 regarding the average terms for the names sold during the quarter, that: “I think, we’re going to see it 24 stabilized for a little while on the renewal site, probably posted its two-years per name and on the 25 new side, somewhat between 1.5, 1.8, not to be too specific.” 26 248. VeriSign reported the following false and misleading financial results in the July 26, 27 2001 press release and the 2Q01 Report on Form 10-Q (in 000s, except registrations and EPS): 28

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1 Statement of Operations 2Q01 YTD 2 New domain name registrations: 1 million 2 million 3 Renewed registrations: 1.4 million 2.6 million 4 Revenues $231,197 $444,610 5 Pro forma Net Income: $52,622 $101,249 Pro forma EPS: $0.26 $0.50 6 GAAP Net Income/(loss): ($11,190,730) ($12,568,107) 7 GAAP EPS: ($55.49) ($62.65) 8 Balance Sheet 9 Net accounts receivable: $189,622 Allowance for doubtful accounts: not reported 10 Long-term investments: $458,123 11 Goodwill: $5,067,158 12 Short term deferred revenue: $435,252 Long-term deferred revenue: $134,750 13 1. Facts Showing Why Statements Relating to VeriSign’s 2Q01 14 Financial Results Were Materially False and Misleading 15 249. All of the defendants knew that VeriSign’s 2Q01 financial results were materially 16 false and misleading and not reported in accordance with GAAP or VeriSign’s publicly reported 17 accounting policies due to the (1) improper recording of revenue on domain name registrations 18 including the improper recognition of revenue on the automatic two-year renewals of expired 19 domain name contracts, (2) improper recognition of revenue on various roundtrip transactions, (3) 20 failure to record VeriSign’s share of losses incurred by the investee companies as required by APB 21 18, (4) failure to record impairment charges on long-term investments as required by SFAS 115 and 22 VeriSign’s publicly reported accounting policy, (5) improper recognition of license and affiliate 23 revenue, (6) failure to write-off or establish reserves on uncollectible delinquent receivables, (7) 24 overstatement of acquired deferred revenue, and (8) failure to record a goodwill impairment charge. 25 If VeriSign had reported its financial results accurately and in accordance with GAAP, it would not 26 have reported results that exceeded first call consensus estimates. 27 250. Misleading Domain Name Registrations: The reported level of new registrations was 28 misleading because VeriSign failed to disclose that 864,000 or 86.4% of the one million new

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1 registrations were free or promotional registrations that ranged in price from $0 to $10 compared to 2 the non-promotional price of $35. Waterfall schedules and a VeriSign report on renewals disclosed 3 that 484,452 of the free and promotional registrations were purchased by NameZero, a startup 4 company that VeriSign gave $25 million to in August 2000 so that it would help VeriSign report 5 higher registrations. In addition, KPMG’s workpapers disclosed that VeriSign’s registrations in 6 2Q01 were actually 424,000 less than the amounts publicly reported in the Company’s July 26, 2001 7 press release. 8 251. Sclavos’ statement during the conference call was materially false and misleading 9 because (1) the average renewal life for the quarter, according to internal quarter-end financial 10 packages distributed to Sclavos and the board, was only 1.92 years, not 2 years; (2) according to the 11 same source, the average life for new names was only 1.58 years, not “1.5, 1.8, not to be too 12 specific;” and (3) the average lives were inflated by defendants’ arbitrary and deliberate use of a 13 two-year default renewal period to increase long-term deferred revenues and average renewal terms, 14 as previously alleged. 15 252. Automatic Renewals of Expiring Domain Name Registrations: Receivables, deferred 16 revenue, long-term deferred revenue, revenue and net income were all overstated because VeriSign 17 continued to automatically and arbitrarily renew expiring registrations and charged customers $70 18 for a two-year registration term when customers had not agreed to the automatic two-year renewal. 19 Waterfall schedules show that 732,468 of the 1.4 million renewal registrations were automatically

20 renewed for two-years. The waterfall schedule also shows that the two-year automatic renewals 21 caused VeriSign to record (1) gross receivables of $105.3 million, (2) a bad debt reserve of $54.1 22 million, (3) net receivables of $51.3 million, and (4) revenue of $13.8 million. Short-term deferred 23 revenue increased to $63 million and long-term deferred revenue increased to $41.1 million. 24 253. GAAP and SAB 101 did not permit VeriSign to record any receivables, revenues or 25 deferred revenues on the two-year auto-renewals because (1) customers had not agreed to the 26 automatic renewals and because it was impossible for VeriSign to estimate how many of the 27 automatic renewals would actually be accepted, (2) VeriSign consistently overestimated the number 28 of customers that accepted the automatic renewals, and (3) VeriSign did not restate its financial

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1 results when actual renewal rates were materially lower than the Company’s “estimates” but 2 improperly adjusted the future default rate applied to renewals in a subsequent accounting periods. 3 254. Failure to Adequately Reserve for Domain Name Registration Receivables: Although 4 VeriSign did not report the bad debt reserve in 2Q01, it continued to understate the bad debt reserve 5 and overstate net domain name registration receivables. KPMG’s 2Q01 workpapers show that gross 6 domain name receivables were $167.8 million and that the bad debt reserve was $49.0 million. 7 Moreover, the workpapers show that the bad debt reserve was just 29% of gross domain name 8 receivables when a growing and more significant portion of the receivables balance was related to 9 the improper automatic two-year renewals. Defendants had no basis to estimate the actual default 10 rate. 11 255. Roundtrip Transactions: In 2Q01, VeriSign continued to make roundtrip investments, 12 making over $70 million of investments including the following: 13 Company Investment 2Q01 Revenue Total 2001 Revenue 14 SurePay $20 million $2,854,515 $3,979,515 Euro909 $34.9 million $6,001,500 $12,576,808 15 Certisign Brazil $7.5 million $342,000 $1,481,592 Safe Online $5.0 million unknown unknown 16 Clearcommerce $2.0 million $500,000 $500,000 17 W3Fusion/ITrustChina $1 million $348,000 $1,194,495 Bantu $510,000 -0- $168,750 18 256. Internal VeriSign documents and emails show the defendants knew VeriSign needed 19 the additional roundtrip transactions to generate “lumpy” revenue in order to meet the guidance for 20 2Q01 provided during the April 26, 2001 conference call. For example, in a string of emails 21 between Korzeniewski and members of the corporate development department dated from April 5, 22 2001 to April 9, 2001, Korzeniewski stated that Evan wanted the corporate development department 23 to take a close look at the $25 million in revenue that the department had projected for the balance of 24 2001. Brian Matthews responded that VeriSign would definitely close deals in 2001 that would 25 generate $50 million of revenue over two to three years but that the $25 million expected to be 26 recognized as revenue in 2001 seemed high and would require VeriSign to focus more on deals that 27 would produce immediate revenue “as opposed to strategic deals that would provide a longer term 28

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1 benefit.” On April 19, 2001, Jim Robertson emailed VeriSign’s 2Q01 and 2001 revenue forecast to 2 Sclavos, Evan, Korzeniewski and others and informed them that VeriSign would miss 2Q01 revenue 3 targets by $8 million and 2001 revenue targets by $45 million. 4 257. In a May 16, 2001 slide presentation it was reported that VeriSign could only realize 5 Wall Street’s aggressive growth expectations with “active M&A deal flow” and that “VeriSign was 6 looking for investments that could generate $5 million of revenues within 12 months or $20 million 7 in 24 months.” Moreover, in a May 25, 2001 email Gallivan wrote to Sclavos and others, that 8 Sclavos had offered to “dial for dollars” to help VeriSign close deals. The specific deals Gallivan 9 mentioned in the email included the $7.5 million investment in CertiSign Brazil which closed on 10 May 28, 2001, the $1 million investment in W3Fusion/ITrust China which closed on May 29, 2001, 11 the $34.5 million investment (and acquisition) in Euro909 which closed on June 20, 2001, the $2 12 million investment in Clearcommerce which closed on June 29, 2001 and the $500,000 investment 13 in Bantu which closed on June 29, 2001 – a total of $45.5 million. 14 258. The Certisign Brazil Roundtrip Transaction: In 2Q01 VeriSign made the $7.5 million 15 investment in Certisign Brazil it committed to make in December 2000 when the companies entered 16 into the International Payment Services Affiliate Agreement and used a portion of the proceeds to 17 pay several delinquent receivables. 18 259. On May 15, 2001, Babel informed defendants Evan and Gallivan that VeriSign was 19 ready to wire the $7.5 million investment, but wanted to check the total balance that CertiSign Brazil

20 owed to VeriSign per Evan’s prior e-mail. On May 16, 2001, defendant Evan sent an email to 21 defendant Gallivan and VeriSign’s controller Clement, to use $846,000 of the VeriSign’s $7.5 22 million investment in CertiSign Brazil to pay for the past due A/R owed by CertiSign Brazil. 23 VeriSign’s June 30, 2001 Aging-4 Bucket Report showed that several receivables were paid 24 including the $140,000 receivable that was 244 days past due on March 31, 2001, the $75,000 25 receivable that was 62 days past due on March 31, 2001, the $200,000 receivable that was one day 26 past due on March 31, 2001 and the $112,500 receivable that was due on April 30, 2001. But $1.2

27 million of delinquent receivables were not paid. 28

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1 260. CertiSign Brazil continued to face financial problems and failed to pay VeriSign. 2 VeriSign’s September 30, 2001 Aging-4 Bucket report disclosed that CertiSign Brazil owed 3 VeriSign $3.3 million, including $1million that was 95 days past due, $250,000 that was 62 days 4 past due, $1,283,269 that was 2 days past due, $510,00 that was due in 45 days and $263,000 that 5 was due in 70 days. The December 31, 2001 Aging by collector report showed that CertiSign Brazil 6 owed VeriSign a total of $2.5 million, including $1 million that was due June 27, 2001, $250,000 7 that was due July 30, 2001, $510,000 that was due November 14, 2001, $263,000 that was due 8 December 9, 2001, $7,520 that was due November 7, 2001 and $460,000 that was not due until 9 January 30, 2002 and February 2, 2002. Further, CertiSign Brazil’s financial statements received by 10 VeriSign showed there were problems. In a November 9, 2001 e-mail, VeriSign’s Vice President of 11 EMEA Sales Mike Kardos forwarded CertiSign Brazil’s September 2001 financials that showed a 12 $3.1 million net loss and wrote: 13 Want to see something scary? Check out Certisign’s cash flow statements attached. They are asking for a 9 months deferral of minimum commitments. We are saying 14 no. The big question is Where did the money go? According to their balance sheet they have $3M in the bank at the end of Nov. They appear to have spent $3.4M in 15 Q3 alone. I thought we gave them $7.5M and that there were also other investors. I wasn’t invited to the party where they blew it all – were you? 16 261. In October 2001, CertiSign Brazil restructured due to slow business conditions. As 17 part of the restructuring effort, CertiSign Brazil and VeriSign negotiated CertiSign Brazil’s past due 18 invoices. For the year ending December 31, 2001, CertiSign Brazil lost 11.8 million Brazilian reals 19 (equivalent of $4 million loss). Despite knowing that CertiSign Brazil’s business and financial 20 condition did not improve, VeriSign continued to send invoices to CertiSign Brazil, asking for 21 payments pursuant to the international affiliate agreements, and recognizing revenue that VeriSign 22 knew could not be collected. 23 262. In 3Q02, VeriSign wrote-off $6 million of the $7.5 million investment. On December 24 10, 2002, VeriSign sent CertiSign Brazil a notice of breach of the December 8, 2000 agreement due 25 to nonpayment of the $1mm invoice that was due June 15, 2001 and wrote-off the $1 million 26 receivable. 27 28

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1 263. The Euro909 Roundtrip Transaction: As described above, VeriSign improperly 2 recognized $1.2 million of revenue and recorded a $1,972,000 receivable in 4Q00 and recognized 3 another $302,500 of revenue and recorded a $50,000 receivable in 1Q01 (that was due April 30, 4 2001) after the companies entered into the November 7, 2000 international affiliate agreement. 5 From VeriSign’s March 31, 2001 Aging- 4 Bucket Report, the defendants knew that Euro909 had 6 not paid the $1,972,000 receivable which was 91 days past due. On April 30, 2001, VeriSign 7 recorded receivables of $100,000 and $292,500 that were due May 30, 2001. On May 31, 2001, 8 VeriSign recorded a $223,500 receivable for 1Q01 minimum royalties that was due June 30, 2001. 9 Thus, by May 31, 2001, the defendants knew that Euro909 had not paid VeriSign any of the $2.6 10 million it owed under the November 7, 2000 agreement and that $2.4 million was delinquent. 11 264. Euro909’s 1Q01 Report on Form 6-K disclosed that the company’s cash had declined 12 from $5.8 million to $2.5 million in 1Q01 after Euro909 reported a $2.8 million net loss in 1Q01 and 13 a $5.5 million net loss in 2000. Thus, the defendants knew that Euro909 was rapidly burning 14 through its cash and did not have the ability to pay VeriSign. 15 265. On June 20, 2001, VeriSign (1) amended the November 17, 2000 affiliate agreement 16 and recognized $6 million of revenue in 2Q01, (2) invested $10.4 million in Euro909 and (3) 17 acquired Euro909’s domain name subsidiary for $24.5 million. As part of the deal, VeriSign 18 received a board seat on Euro909. VeriSign’s June 30, 2001 4-Bucket Report disclosed that a 19 portion of the $6.5 million investment was used to pay a $1,972,000 delinquent receivable that had

20 been past due since December 30, 2000. VeriSign’s September 30, 2001 Aging 4 – Bucket Report 21 disclosed that three additional receivables totaling $442,000 were paid in 3Q01 and that Euro909 22 only owed VeriSign $447,000. But the December 31, 2001 Aging – By Collector report disclosed 23 that Euro909 still owed VeriSign $1 million including the $223,500 that was due June 30, 2001 and 24 $356,833 that was due September 30, 2001. 25 266. After the Class Period, VeriSign wrote-off $6.5 million of the investment in 2Q02. In 26 3Q02, VeriSign wrote-off all of Euro909’s receivables that had increased to $1.6 million.

27 267. The Bantu Roundtrip Transaction: On June 29, 2001, VeriSign acquired 107,045 28 shares of Bantu Series A preferred stock for $505,038 pursuant to a stock purchase agreement and

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1 Bantu acquired a license to use VeriSign’s co-branded digital ID center software for $270,000 2 pursuant to a Master Services Agreement. VeriSign recognized $168,750 of revenue in 2001. 3 VeriSign emails prepared in 2002 confirm the deal was done to generate revenue. In a January 7, 4 2002 email to Korzeniewski, Frankel stated that the Bantu deal was done “to get them [VeriSign’s 5 ESP division] some revenue” and in a June 25, 2002 email from Mahi deSilva to Korzeniewski, 6 deSilva wrote that VeriSign “made a $500K investment in Bantu with a $260K reciprocal deal for 7 certs.” 8 268. Bantu never paid VeriSign because it was unable to raise additional financing as both 9 of the companies anticipated when VeriSign made the initial investment in 2Q01. By the end of 10 2001, the investment was written off because Bantu’s $278,625 receivable was delinquent, some of 11 Bantu’s staff had been put on part-time status, and Bantu’s CEO was not responding after VeriSign 12 rejected a payment plan proposed by Bantu. In 3Q02, VeriSign wrote-off the $278,625 receivable. 13 269. The ClearCommerce Roundtrip Transaction: On June 29, 2001, VeriSign (1) acquired 14 882,808 shares of ClearCommerce preferred stock for $2 million per a June 9, 2002 stock purchase 15 agreement signed by Evan, (2) recognized $500,000 of revenue pursuant to a June 29, 2001 Data 16 License Agreement that required VeriSign to develop, deliver and maintain a data compilation (data 17 fields pertaining to business Registrants who have registered domain names with Network Solutions 18 as registrar), and (3) executed a Master License and Joint Marketing Agreement whereby each 19 company granted the other a license to install, test, use, reproduce and distribute bundled products of

20 the two companies. 21 270. Several emails predating the close of the transaction show that the purpose of the deal 22 was to generate revenue to close a projected shortfall. In a May 29, 2001 email to Wolford, Wynne 23 wrote that the Clear Commerce was one of the “Q2 gap closers we are working on” and on June 1, 24 2001 McLaughlin emailed a term sheet for the deal to several members of VeriSign’s corporate 25 development department and wrote that VeriSign needed “to have the business deal cooked quickly” 26 and suggested that VeriSign invest $4 million and “take out $2.5M over 2 years.” In a June 15, 2001

27 email, McLaughlin told Wynne that his proposed roundtrip deal ($3 million investment and revenue 28 of $1 million recognized over the next year) would probably not be approved because it would be

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1 way under the guidelines for the amount of revenue that must be generated for an investment to be 2 made. McLaughlin proposed that VeriSign invest $3 million and that Clear Commerce pay VeriSign 3 $1 million in 2Q01 and guarantee $500,000 of additional revenue so that VeriSign would “get 33% 4 of the investment back today, and 50% over the next 12-15 months.” 5 271. In a June 26, 2001 email to Wynn, Robert Lynch, CEO of Clear Commerce wrote that 6 the company’s auditors had told him that a new accounting rule (EITF 00-25) did not permit 7 companies to trade revenues and that Clear Commerce could not recognize any revenue on the deal 8 if it returned one half of the investment to VeriSign. On June 29, 2001, the transactions were 9 completed and VeriSign recognized the $500,000 of revenue. 10 272. Defendants knew revenue recognition was improper. First, as the defendants knew, 11 GAAP precluded companies from trading revenues. Second, Clear Commerce financial statements 12 (which VeriSign received on June 18, 2001) disclosed that payment was not likely absent the $2 13 million investment. Clear Commerce reported substantial losses in every month in 2001 and through 14 May 31, 2001 the company reported a net loss of $8.7 million. By September 30, 2001, Clear 15 Commerce was insolvent. Indeed, in a June 18, 2001 email, Frankel wrote that Clear Commerce 16 was “still losing a lot of money” but that “they pass[ed] the test for an investment driven by a good 17 biz deal.” 18 273. Additionally, VeriSign could not have properly recognized the $500,000 because the 19 data compilation had not been delivered by June 30, 2001 (the contract required VeriSign to develop

20 the data compilation by cleansing and converting 3 million unique registrant data records to a 21 mutually agreed data format, prior to delivery). 22 274. In a July 16, 2001 e-mail, defendants Evan and Sclavos were informed of the end of 23 quarter deals in 2Q01, accounting for $28.5 million increase in A/R, including a $500,000 deal from 24 ClearCommerce. Defendant Evan then instructed VeriSign’s finance team to follow-up on 25 collecting the quarter-end deals. In 2Q02, less than a year later, VeriSign wrote-off the entire 26 investment in ClearCommerce.

27 275. Barter Transactions: VeriSign continued to improperly recognize revenues on barter 28 transactions, and failed to disclose the barter transactions or that the purpose of the barter

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1 transactions was the same as the improper roundtrip transactions – to close revenue gaps caused by 2 VeriSign’s declining domain name registration business so VeriSign would report results in line with 3 the guidance provided during the April 26, 2001 conference call. The defendants knew that 4 VeriSign continued to improperly recognize revenues on undisclosed barter transactions in 2Q01 5 when the Company recognized $7,792,213 of revenue as follows:

6 Company 2Q01 Revenues

7 .CC $500,000 8 .WS $375,000 InfoSpace $2,667,213 9 .TV $250,000 Snapnames $500,000 10 Yellowpages.com $1,000,000 11 Affinity Housing $500,000 Intercosmos $500,000 12 .CC bonus $500,000 Air2Web $1,000,000 13

14 276. The Barter Transactions with InfoSpace: On June 13, 2001, VeriSign and InfoSpace 15 entered into a barter transaction whereby (1) Infospace received Image Café software licenses to 16 create up to 25,000 websites for $2.5 million ($100 per license) to be paid over 6 months, (2) 17 Infospace received eight months of banner advertising on VeriSign’s “who is” domain name website 18 for $2 million to be paid over 6 months and (3) VeriSign received 9 months of banner advertising on 19 Infospace’s website for $4.5 million to be paid over 9 months. VeriSign did not record an expense 20 for the cost of the banner advertising it purchased, but recorded a $4.5 million receivable, $2.5 21 million of revenue and $2 million of deferred revenue. 22 277. By August 2001, InfoSpace had not made any of the barter payment. In an August 23 10, 2001 e-mail, Mike Voslow reminded VeriSign’s Corporate Development team and defendants 24 Sclavos, Evan, and Korzeniewski that VeriSign and InfoSpace had not made any payments in “like 25 amounts” and that VeriSign was working out the payment terms to ensure that “we don’t pay them 26 and don’t get paid in turn.” 27 28

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1 278. Defendants knew revenue recognition was improper under GAAP (APB 29 and EITF 2 93-11) which required VeriSign to record revenue on the exchange of software for banner 3 advertising at the carrying value of the Image Café software licenses (which was $0) because there 4 was no persuasive evidence of the value of the licenses. VeriSign sold individual licenses for $99 5 (5five-page website) but had not previously sold the licenses in a bulk sale which normally are sold 6 at substantial discounts. In addition, InfoSpace did not even list the licenses for sale on its website 7 as late as July 18, 2001. According to a December 24, 2001 email from Voslow to Korzeniewski 8 and others, InfoSpace did not recognize any revenue on the deal. 9 279. On December 21, 2001, Edwards contacted InfoSpace CEO Jain to ask for 10 $1,006,850 delinquent payment for the deferred revenue. Jain responded that “it was a barter deal” 11 and that VeriSign and InfoSpace should be “cash neutral on the deal.” On December 24, 2001, 12 Voslow admonished Edwards, defendant Korzeniewski, and other finance staff to arrange a swap of 13 checks before December 31, 2001 to get current on the old deals. By the end of 4Q01, InfoSpace 14 had not made the payment. On January 4, 2002, Voslow again admonished specific instructions to 15 Edwards, defendant Korzeniewski, and other finance staff to “work out a check swap so we both can 16 get this cleared off our books.” Following a series of communications between the two companies, 17 VeriSign proposed to wire $2,256,700 to InfoSpace on January 30, 2001, and in return, InfoSpace to 18 wire the exact same amount on January 31, 2002. 19 280. The Barter/Roundtrip Transaction with Air2Web: On April 5, 2001, VeriSign

20 indicated to Air2Web that VeriSign was interested in a roundtrip deal whereby VeriSign would 21 invest in Air2Web and Air2Web would buy products or services from VeriSign. On June 12, 2001, 22 Chris Babel, VeriSign’s Vice President of Corporate Development, reiterated to Air2Web’s CEO 23 Sanjoy Malik that Sclavos was interested in pursuing an investment given the right business deal and 24 investment terms. Babel told Malik that the deal needed to be finalized in two weeks. 25 281. On June 29, 2001, defendant Evan sent a letter to Air2Web committing VeriSign to 26 invest $5 million in Air2Web at a pre-money valuation of $50 million or less on the condition that

27 VeriSign not own more than 19% of Air2Web. On the same day, VeriSign and Air2Web also 28 entered into a (1) collaboration agreement whereby the two companies would integrate Air2Web’s

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1 product with VeriSign’s technology by modifying Air2Web’s mobile Internet platform and then sell 2 VeriSign’s wireless digital certificates and payment services in combination with Air2Web’s 3 platform or service-based wireless content delivery solution, and (2) a platform license agreement 4 under which Air2Web granted VeriSign a license to use its Mobile Internet Platform for use in the 5 VeriSign data center for $500,000. Fees payable by Air2Web totaled $2,044,785 for a USC license 6 ($1.3 million), wireless PKI managed service ($500,000) and other ($230k). VeriSign recorded $1 7 million of revenue in 2Q01 and a $1,844,125 receivable. 8 282. Defendants knew revenue recognition was improper because Air2Web did not have 9 the ability to pay VeriSign absent the $5 million investment that was made on September 18, 2001. 10 Air2Web’s financial statements disclosed that the company was insolvent at June 30, 2001 after 11 reporting an operating loss of $27.3 million in 2000 and $11.5 million in the first six months of 12 2001. Indeed, in an August 31, 2001 email to Evan, Steve Gibson wrote that Air2Web’s CFO told 13 him that the company needed to close another round of financing to pay the outstanding receivable 14 and that VeriSign knew that when it did the deal in June. 15 283. Even with the additional capital, VeriSign knew that Air2Web continued to suffer 16 losses. In 3Q01, Air2Web reported revenues of $1.3 million and negative operating income of $4.5 17 million. In 1Q02, Air2Web reported a net loss of $2.5 million on revenues of $1.4 million. By 18 2002, Air2Web had less than nine months of cash left to sustain its operations. In 2Q02, Air2Web 19 reported a net loss of $2.6 million on revenues of $1.4 million. In 3Q02, VeriSign wrote-off the

20 entire $5 million investment. 21 284. Failure to Adequately Reserve for Receivables: Defendants knew receivables and net 22 income were overstated because VeriSign failed to reserve for significantly delinquent receivables 23 including amounts due from affiliates. From VeriSign’s June 30, 2001 A/R Allowance Analysis 24 report, defendants knew west coast receivables totaled $55.0 million and that 55% or $30.1 million 25 of the receivables were delinquent - including $22.0 million that were more than 60 days delinquent 26 and $14.8 million that were more than 90 days delinquent. In addition, the report disclosed that

27 VeriSign had established $2.9 million of specific reserves on five accounts and a bad debt reserve of 28 $2.4 million which represented just 4.7% of net receivables ($52.1 million) at June 30, 2001.

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1 285. The $2.9 million of specific reserves were established on the following five 2 delinquent accounts: 3 Customer Receivable Amount Days Past Due Specific Reserve 4 Digicerf $250,000 195 $250,000 IBG/iginexo $2,739,760 91-334 $2.0 million 5 Interpath $255,000 425 $255,000 SignOnline $229,000 243 $229,000 6 Wall Street Systems $118,000 152 $118,000 7 286. But VeriSign’s June 29, 2001 affiliate receivables report and the June 30, 2001 Aging 8 – 4 Bucket Report listed millions of dollars of additional delinquent receivables, many that were past 9 due for more than a year, for which no specific reserves had been established. In addition, VeriSign 10 continued to improperly recognize revenues from the delinquent affiliates and, as alleged above, 11 continued to make investments in the Company’s affiliates to provide them with cash to pay down 12 their delinquent receivables. 13 Customer Amount Days 2Q01 F01 14 Outstanding Revenue Revenue

15 Adacom $1,152,000 61 and 245 $375,000 $2,012,000 Al Bahar/Arab Trust $660,000 396 $180,994 $428,482 16 Al Bahar/Arab Trust $552,000 303 CIBC $275,920 527 $618,358 $2,804,816 17 Certisign Portugal $950,015 303 $251,000 $751,000 Certisign Portugal $672,000 182 18 Certisign Portugal $310,000 150 Certisign Brazil $200,000 61 $342,000 $1,481,592 19 Certisign Brazil $1,000,000 3 Certplus $250,000 153 $312,500 $1,250,000 20 Certplus $250,000 61 Keca-Crosscert $650,000 153 $270,915 $2,348,082 21 Keca-Crosscert $650,000 17 D-Trust $337,500 243 $353,000 $1,582,000 22 D-Trust $56,581 150 D-Trust $59,983.43 61 23 ESign $50,000 153 $753,852 $5,310,733 ESign $50,000 80 24 ESign $673,266 61 Euro909 $50,000 61 $6,001,500 $12,576,808 25 Euro909 $392,500 31 HiTrust $225,000 92 457,250 $1,929,875 26 NetSecure $682,250 22 $2,958,125 $6,501,750 Roccade $55,766 546 $327,787 $2,390,859 27 Roccade $68,520 396 Roccade $1,305,000 1 28 Satayam $400,000 303 $187,000 $1,194,000

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1 Satayam $125,000 244 Satayam $397,500 182 2 Satayam $175,000 153 Satayam $404,285 150 3 Satayam $150,000 92 Satayam $572,000 31 4 Telefonica $500,000 153 $909,845 $3,393,000 Telefonica $500,000 92 5 Telefonica $902,500 61 Telefonica $180,000 31 6 Trust Italia $250,000 153 $431,250 $3,322,817 TrustItalia $250,000 62 7 W3Fusion.com $442,250 153 $348,000 $1,194,495 W3Fusion.com $639,820 273 8 W3Fusion.com $170,000 92 W3Fusion.com $90,000 61 9 287. Certisign Brazil, SurePay, Euro909 and W3Fusion.com: As alleged above, in 2Q01 10 VeriSign made investments in Certisign Brazil, SurePay, Euro909 and W3Fusion.com, the proceeds 11 of which were used to pay delinquent receivables. 12 288. Adacom: VeriSign continued to recognize revenue from Adacom, recorded an 13 additional $500,000 receivable and failed to establish any reserves on the company’s delinquent 14 receivables despite the fact that Adacom owed VeriSign $50,000 that was now 245 days past due, 15 $250,000 that was now 150 days past due and $852,000 that was 61 days past due. After the Class 16 Period, in 2Q02, VeriSign wrote-off $1.7 million of Adacom receivables. 17 289. Al Bahar/Arab Trust: VeriSign continued to recognize revenue, recorded an 18 additional $552,000 receivable and failed to establish any reserves despite the fact that Al 19 Bahar/Arab Trust had not paid the $660,000 and $552,000 receivables that were now 396 and 303 20 days past due. 21 290. Certisign Portugal: VeriSign continued to recognize revenue, recorded additional 22 receivables and failed to establish any reserves despite the fact that Certisign Portugal failed to pay 23 receivables that were delinquent at December 31, 2000 and March 31, 2001 including the $950,015 24 receivable that was now 303 days past due, the $672,000 receivable that was now 182 days past due 25 and two receivables totaling $$310,500 that were now 150 days past due. 26 27 28

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1 291. Satayam: VeriSign continued to recognize revenue despite the fact that Satayam had 2 not paid any of the $2.2 million of receivables that were already delinquent on March 31, 2001 and 3 were now between 31 and 303 days past due. 4 292. W3Fusion.com: In 2Q01 VeriSign made a $1 million investment, $800,000 of which 5 was used to pay down the $1,439,800 receivable to $639,420. But that receivable was still 273 days 6 past due and W3Fusion also owed VeriSign another $872,250 that was delinquent. In 4Q01 VeriSign 7 established a $1.7 million specific reserve.

8 2. Additional Reasons Why the Statements Regarding 2Q01 Results and Business Prospects Were False or Misleading 9 When Made 10 293. By June 2001, VeriSign had already suffered three consecutive months of declining 11 market share of .com, .net, and .org domain names registration. In May 2001 alone, VeriSign lost 12 approximately 112,066 in new registrations. 13 294. By 2Q01, VeriSign was scrambling to push its top line revenue. CW1 said that the 14 ESP Division was cutting deals at any cost to show revenues, even where the deal was not profitable. 15 For example, CW1 said that VeriSign’s Atlanta office signed a $3 million deal to install and deploy 16 firewalls for the United Nations in the summer of 2001, even though it cost VeriSign $4 million to 17 complete the project. 18 295. Market data from SnapNames.com, Inc., (“SnapName”) shows that VeriSign 19 experienced a linear decline in its market share for .com, .net, and .org registrations during the Class 20 Period. Even this was incorrect since it included millions of names that should have been deleted: 21 22 23 24 25 26 27 28

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1 2 3 4 5 6 7 8 9 10 11

12 VeriSign’s improper failure to delete expired names resulted in falsely portraying VeriSign market 13 share as being larger than it was. 14 296. VeriSign also continued its expansion of the affiliate and partnership programs in 15 2Q01 such that by the end of the quarter, VeriSign derived at least 9% of the Company’s total 16 revenue from deals with its affiliates. Defendants failed to disclose that these revenues were from 17 affiliates it was supporting, telling the market that the Company continued to enjoy strong customer 18 demand. 19 297. Defendants knew or recklessly disregarded that the revenues reported for 2Q01 were 20 artificially inflated because, as described above, Gallivan and other corporate executives had a 21 pattern and practice of inflating the revenues reported to headquarters by the Network Solutions 22 subsidiary and VeriSign’s other business units. Defendants further knew or recklessly disregarded, 23 also as described above, that the results reported to headquarters by VeriSign’s business units in 24 2Q01 were already inflated as a result of the unrealistic sales goals that had been established and the 25 unreasonable pressure that had been placed on VeriSign’s sales staff, by means of premature revenue 26 recognition, and other practices. Defendants further knew or recklessly disregarded that the market 27 28

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1 conditions in 2Q01 were insufficient to support sales at the levels being reported by the Company, 2 also as described above.

3 D. False Statements Regarding 3Q01 Results 4 298. On October 25, 2001, the Company issued a press release entitled, “Continued 5 Demand for Broad Range of Services Fuels Revenue and Earnings Growth.” The press release 6 stated in part: 7 VeriSign, Inc., the leading provider of digital trust services, today reported its third quarter results for the quarter ending September 30, 2001. 8 Announced revenues for the third quarter of fiscal 2001 were $255.2 million, 9 compared to $173.1 million for the same period last year, a 47% increase. 10 Pro forma net income for the quarter ended September 30, 2001, excluding the amortization of goodwill and intangible assets related to acquisitions, stock-based 11 compensation charges related to acquisitions, and benefit for income taxes, was $59.7 million, or $0.28 diluted earnings per share compared to pro forma net income 12 in the quarter ended September 30, 2000 of $36.0 million, or $0.17 diluted earnings per share. 13 Pro forma operating income for the third quarter, excluding stock-based 14 compensation charges and the amortization of goodwill and tangible assets, was $43.5 million, or a 17.1% operating margin, as compared to $16.8 million, or a 9.7% 15 operating margin, in the quarter ended September 30, 2000. 16 “Continued demand by our customers to utilize our digital trust services as the foundation for on-line commerce and communications drove our strong third 17 quarter results,” said Stratton Sclavos, president and CEO of VeriSign. “As we look ahead into 2002, we remain convinced that our broad portfolio of services, highly 18 scalable global infrastructure and unique distribution model position us for continued growth and execution.” 19 For the third quarter of fiscal 2001, deferred revenue balances increased by 20 $15 million, or 3% sequentially to $585 million, and cash and investments totaled $1.2 billion for the quarter ended September 30, 2001. 21 Mass Market Division . . . . In the Web identity space, VeriSign continued to 22 demonstrate its market leadership in the third quarter by registering approximately 750 thousand new domain names and renewing or extending an additional 1.2 23 million. The Mass Markets group ended the quarter with 6.5 million unique customers with more than 14.5 million active domain names under management. 24 299. The Company’s 3Q01 financial results were repeated to the market during the 25 Company’s October 25, 2001 conference call, in reports issued by several analysts that followed 26 VeriSign and in VeriSign’s Report on Form 10-Q filed with the SEC on November 14, 2001 in 27 which it was also represented that VeriSign’s financial statements reflected all adjustments that were 28

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1 necessary for a fair presentation of the financial position of the Company and its results of operations 2 and cash flows. During the October 25, 2001 conference call Evan stated that VeriSign’s pro forma 3 tax adjusted EPS of $0.17 beat the First call consensus estimate of $0.15 and the increased $0.16 4 EPS guidance given during July 26, 2001 conference call. Evan also stated that VeriSign expected 5 4Q01 revenues to be $270-$285 million which was at the low end of street estimates and that 2002 6 revenues were expected to be $1.35-1.45 billion compared to consensus of $1.4 billion. In addition, 7 Evan stated that VeriSign was raising 4Q01 EPS estimate to $0.19 compared to consensus estimates 8 of $0.18 and that VeriSign was comfortable with consensus 2002 EPS estimate of $1.04. In the 9 same conference call, Sclavos stated: 10 We ended Q3 with 6.5 million unique paying customers for our domain name and Web presence services. Surprisingly, this is consistent with Q2’s customer count 11 even though we took the opportunity to clean out a significant amount of our promotional and speculative names during the quarter. We registered over 750,000 12 net new and transfer names in the quarter at an average term of 1.6 years per paid name. We also renewed close to 1.2 million names during the quarter. The average 13 subscription term for the renewed name was constant at approximately two-years. 14 300. VeriSign reported the following false and misleading financial results in the October 15 25, 2001 press release and 3Q01 Report on Form 10-Q (in 000s, except registrations):

16 Statement of Operations 3Q01 YTD

17 New domain name registrations: 750,000 2.75 million

18 Renewed registrations: 1.2 million 3.8 million

19 Revenues $255,155 $699,765

20 Other income (expense): ($1,753) ($1,730)

21 Pro forma Net Income: $59,697 $160,946 Pro forma EPS: $0.29 $0.80 22 GAAP Net Income: ($386,735) ($12,954,842) 23 GAAP EPS: ($1.91) ($64.34)

24 Balance Sheet

25 Net accounts receivable: $228,376 Allowance for doubtful accounts: not reported 26 Long-term investments: $471,816 27 Deferred revenue: $442,625 28 Long-term deferred revenue: $142,196

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1 1. Reasons Why Statements Regarding 3Q01 Financial Results Were False When Made 2 301. All of the defendants knew VeriSign’s 3Q01 financial results were materially false 3 and misleading and not reported in accordance with GAAP or VeriSign’s publicly reported 4 accounting policies due to the (1) improper recording of revenue on domain name registrations 5 including the improper recognition of revenue on the automatic two-year renewals of expired 6 domain name contracts, (2) improper recognition of revenue on various roundtrip transactions, (3) 7 failure to record VeriSign’s share of losses incurred by the investee companies as required by APB 8 18, (4) failure to record impairment charges on long-term investments as required by SFAS 115 and 9 VeriSign’s publicly reported accounting policy, and (5) failure to write-off or establish reserves on 10 uncollectible delinquent receivables. If VeriSign had reported its financial results accurately and in 11 accordance with GAAP, it would not have reported results that exceeded first call consensus 12 estimates. 13 302. Misleading Domain Name Registrations: The reported level of new registrations was 14 misleading because VeriSign failed to disclose that 381,000 or 51% of the 750,000 new registrations 15 were free or promotional registrations that ranged in price from $0 to $6.00 compared to the non- 16 promotional price of $35.00. Waterfall schedules and a VeriSign report on renewals disclosed that 17 207,826 of the free and promotional registrations were purchased by NameZero, a startup company 18 that VeriSign gave $25 million to in August 2000 so that it would help VeriSign report higher 19 registrations. 20 303. Sclavos’ statement during the conference call was materially false and misleading 21 because (1) it overstated the average terms by rounding up the numbers contained in VeriSign’s 22 internal quarter-end financial packages, which reflected average terms for new and renewed names 23 of 1.58 and 1.95 years, respectively; and (2) the average lives were inflated by defendants’ arbitrary 24 and deliberate use of a two-year default renewal period to increase long-term deferred revenues and 25 average renewal terms, as previously alleged. 26 304. Automatic Renewals of Expiring Domain Name Registrations: Receivables, deferred 27 revenue, long-term deferred revenue, revenue and net income were all overstated because VeriSign 28

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1 continued to automatically and arbitrarily renew expiring registrations and charged customers $70.00

2 for a two-year registration term when customers had not agreed to the automatic two-year renewal. 3 Waterfall schedules show that 490,466 of the 1.2 million renewal registrations were automatically 4 renewed for two-years. The waterfall schedules also show that the two-year automatic renewals 5 caused VeriSign to record (1) gross receivables of $89.1 million, (2) a bad debt reserve of $56.5 6 million, (3) net receivables of $32.5 million, and (4) revenue of $24.3 million. Short-term deferred 7 revenue increased to $82.3 million and long-term deferred revenue increased to $40.7 million. 8 305. GAAP and SAB 101 did not permit VeriSign to record any receivables, revenues or 9 deferred revenues on the two-year automatic renewals because (1) customers had not agreed to the 10 automatic renewals and because it was impossible for VeriSign to estimate how many of the 11 automatic renewals would actually be accepted. VeriSign consistently overestimated the number of 12 customers that accepted the auto-renewals. VeriSign did not restate its financial results when actual 13 default rates were higher than the Company’s estimates but improperly adjusted the estimated 14 default rate applied to renewals in a subsequent accounting period. 15 306. Failure to Adequately Reserve for Domain Name Registration Receivables: Although 16 VeriSign did not report the bad debt reserve in 3Q01, it continued to understate the bad debt reserve 17 and overstate net receivables. KPMG’s 3Q01 workpapers show that gross domain name receivables 18 were $166.8 million and that the bad debt reserve was $56.7 million. The workpapers also show that 19 the bad debt reserve was just 34% of gross domain name receivables when a growing and more

20 significant portion of the receivables was related to the two-year automatic renewals and when the

21 defendants did not know the actual default rate but did know VeriSign estimated the default rate on 22 the two-year automatic renewals to be in excess of 60%. 23 307. VeriSign continued to report inflated domain name revenues due to problems with the 24 Worldnic renewal process. Specifically, as disclosed in KPMG’s 3Q01 Analytical review 25 workpapers, VeriSign recorded receivables and revenues when it sent Worldnic renewal 26 notifications to customers that did not look like invoices and did not include amounts to be paid. As

27 a result, and as noted in the KPMG workpaper, customers did not pay as frequently. Despite 28 knowing of this problem, VeriSign issued financials that it knew were inflated.

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1 308. Roundtrip Transactions: In 3Q01, the defendants knew VeriSign made or committed 2 to make more than $66 million of roundtrip investments to close projected revenue gaps and pay 3 down delinquent receivables so VeriSign would report results that exceeded the guidance provided 4 during the July 26, 2001 conference call and First Call consensus estimates: 5 Company Investment 3Q01 Revenue 2001 Revenue 6 Firstream $16,400,000 $6,935,000 $10,196,750 CPA2BIZ $10,000,000 $450,000 $1,556,250 7 Access360 $9,000,000 $264,375 $3,928,750 Air2Web $5,000,000 $198,581 $1,397,162 8 BigStep $3,000,000 $479,945 $780,270 9 Certplus $1,000,000 $312,500 $1,250,000 Go2 $6,000,000 $800,000 $2,250,000 10 ESign $2,650,000 $1,214,684 $5,310,733 Netsecure $3,000,000 $699,000 $6,501,660 11 Netnumber $5,000,000 $800,000 $1,500,000 Nominum $3,000,000 $200,000 $400,000 12 Roving $2,000,000 $1,000,000 $1,500,040 13 309. As in prior quarters, VeriSign emails and other internal documents show defendants 14 knew VeriSign needed “lumpy” revenue to meet the guidance provided during the July 26, 2001 15 conference call. For example, on July 9, 2001, Neil Edwards, a member of the corporate 16 development department, sent an email to Voslow, Wolford and others in which he asked how much 17 funding was available to close deals that “would fill a projected $25 million gap.” On Setpember 7, 18 2001, Voslow emailed a recent article in which Sclavos stated that VeriSign would meet the 3Q01 19 revenue guidance of $260 million and asked “What happened to $255? Do you guys know 20 something I don’t?” Clement responded that he did not and that “we need Neil Edwards to “crank 21 up the machine” to close both MM (mass market) and Ent (enterprise) gaps. Have we done that 22 yet?” On September 20, 2001, Korzeniewski emailed Evan VeriSign’s latest pipeline report that 23 showed VeriSign was projecting a $7 million revenue gap for 3Q01. In the last three weeks of 24 3Q01, VeriSign closed numerous roundtrip and barter transactions on which the Company 25 improperly recognized revenue helping VeriSign report results in line with the guidance provided 26 during the July 26, 2001 conference call. Roundtrip deals included the September 10, 2001 27 Firstream deal, the September 18, 2001 Air2Web deal, the September 26, 2001 Go2 deal, the 28

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1 September 28, 2001 CPA2BIZ deal, the September 28, 2001 USA.Net deal, the September 28, 2001 2 Nominum deal and the September 28, 2001 Global Names registry deal. Barter deals included .WS 3 (September 21, 2001), Activcard (September 28, 2001), .TV (September 28, 2001), iPIN (September 4 30, 2001), Lightbridge (September 28, 2001), Oracle (September 21, 2001), Snapnames (September 5 21, 2001), and Yodlee (September 28, 2001). 6 310. The Firstream Roundtrip Transaction: On September 10, 2001, VeriSign and 7 Firstream executed (1) a subscription agreement under which VeriSign committed to invest between 8 11.18 million and 18 million euros in Firstream and (2) a 10 year international affiliate agreement 9 (signed by Sclavos) that granted Firstream the right license VeriSign’s software and to sell 10 VeriSign’s certificates in France, Italy, Spain, the United Kingdom and Germany. The affiliate 11 agreement required Firstream to pay VeriSign an initial fee of $5,038,000, annual fees of $837,000 12 and minimum royalties that were to be determined. VeriSign recognized $6.9 million of revenue in 13 3Q01 and another $3.3 million in 4Q01. On October 12, 2001, Korzeniewski sent an email to 14 Sclavos, Evan, Gallivan and others enclosing a summary of acquisitions and investments being 15 worked on that showed VeriSign was going to acquire 16% of Firstream for $16 million and 16 recognize $9.1 million of revenue. On October 15, 2001, VeriSign wired 18 million euros ($16.4 17 million) to Firstream per the subscription agreement. 18 311. The defendants knew revenue recognition was improper because Firstream did not 19 have the ability to pay VeriSign absent the $16.4 million investment. Firstream’s 2001 financial

20 statements disclosed that Firstream commenced operations in February 2000, reported a 40.9 million 21 euro loss in 2000 and a 31.1 million euro loss in 2001. Moreover, the financial statements showed

22 that Firstream reported 11.1 million euros of cash after VeriSign made the 18 million euro 23 investment. Thus, the defendants knew Firstream would have reported negative cash and been 24 unable to pay VeriSign the $10.2 million VeriSign recognized as revenue in 2001 absent VeriSign’s 25 investment. 26 312. In addition, the defendants knew that VeriSign failed to recognize its share of

27 Firstream’s net losses (4.98 million euros – 16% of 31.1 million) in 2001 as required by APB 18 28 because VeriSign had the ability to and did significantly influence Firstream. VeriSign’s

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1 significantly influenced Firstream by requiring Firstream to enter into the affiliate agreement and by 2 obtaining a board seat as a condition to the $16.4 million investment. 3 313. The defendants also knew that VeriSign failed to record an impairment charge on the 4 $16.4 million investment during the Class Period. The $16.4 million investment (and the additional 5 $4 million investment made on December 29, 2001) were impaired the day the investments were 6 made given Firstream’s financial condition. In 3Q02, after the Class Period, VeriSign wrote-off the 7 entire $21 million investment. 8 314. The Netsecure Roundtrip Transaction: VeriSign made a $3 million investment in 9 Netsecure on August 20, 2001 to pay down delinquent receivables after recognizing revenues of 10 $1,879,125 in 1Q01, $2,958,125 in 2Q01 and $699,000 in 3Q01 pursuant to the December 31, 2000 11 international affiliate agreement. From VeriSign’s Aging 4-Bucket report, the defendants knew 12 Netsecure owed VeriSign $3,374,500 as of June 30, 2001, including $682,250 that was past due. 13 315. The defendants knew revenue recognition was improper and that the receivables due 14 from Netsecure were uncollectible given the company’s financial condition. Before VeriSign made 15 the $3 million investment, the defendants knew Netsecure’s June 30, 2001 financial statements (that 16 were received by VeriSign on August 16, 2001) disclosed the company had not generated any 17 revenue during the fiscal year ending June 30, 2001 (or since the company commenced operations 18 on April 7, 2000), reported a $2.1 million net loss for the year and cash of $610,009. Netsecure’s 19 poor and deteriorating financial condition resulted in Ernst & Young stating in its audit report that

20 Netsecure’s “ability to continue as a going concern and to repay its liabilities as they fall due is 21 dependent on the success of its future operations and the ability to obtain additional investments to 22 finance its future expansion.” Instead of establishing reserves for the uncollectible receivables, 23 VeriSign made the $3 million investment, a portion of which was used to pay off the $682,250 of 24 delinquent receivables. But the defendants also knew that Netsecure still owed VeriSign $2,740,250 25 as of September 30, 2001 including $255,000 that was 62 days past due, $1,235,250 that was 32 26 days past due, and $575,000 that was 15 days past due.

27 316. When VeriSign recognized another $965,500 of revenue in 4Q01, the defendants 28 knew from the receivable reports that the amount Netsecure owed VeriSign had grown to $4,982,500

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1 and that $2,329,750 was delinquent. In addition, Netsecure’s financial statements disclosed that the 2 company reported a $1,531,258 net loss for the quarter ending September 30, 2001 and a $2,176,064 3 net loss for the quarter ending December 31, 2001. VeriSign made an additional $2 million 4 investment in February 2002 which was used to pay down some of the Company’s delinquent 5 receivables. In 2Q02, after the Class Period, VeriSign wrote-off the entire $5.5 million investment 6 and $3.8 million of receivables. 7 317. The CPA2BIZ Roundtrip Transaction: On September 28, 2001 VeriSign and 8 CPA2BIZ executed two agreements including (1) a securities purchase agreement whereby VeriSign 9 acquired 4,889.98 shares of the company’s series A preferred stock and a warrant to acquire 977.64 10 shares of the series A preferred stock for $10 million, and (2) a collaboration agreement that required 11 CPA2BIZ to pay VeriSign $5 million for VeriSign products and services to be resold by CPA2BIZ 12 over the next two-years and $550,000 for a universal service center license fee ($450,000), an annual 13 software maintenance fee ($50,000) and a one time set up fee ($50,000). VeriSign recognized the 14 $450,000 universal service center license fee in 3Q01 and recognized $1,106,250 of revenue in 15 4Q01. 16 318. Section 3.7 of the securities purchase agreement stated that VeriSign had been 17 afforded access to CPA2BIZ’s financial statements which showed CPA2BIZ did not have the ability 18 to pay VeriSign absent the $10 million investment. CPA2BIZ was insolvent on June 30, 2001 19 reporting negative equity of $34.1 million. For the six months ending December 31, 2001,

20 CPA2BIZ reported a net loss of $21.2 million and negative capital of $57 million. Further, the 21 December 31, 2001 financial statements show that CPA2BIZ reported $8.4 million of cash after 22 receiving VeriSign’s $10 million investment. Thus, CPA2BIZ would have reported negative cash 23 and been unable to pay VeriSign absent the $10 million investment. In addition, KPMG’s 3Q01 24 review workpapers state that the $450,000 recognized as revenue in 3Q01 should not have been 25 recognized until 4Q01 because agreement was not executed until the last business day of 3Q01. 26 319. The Go2 Systems Roundtrip Transaction: On September 26, 2001 VeriSign (1)

27 acquired 6.5 million shares or 50% of Go2 series C preferred stock for $6 million, (2) entered into a 28 Registry Services Agreement that required with Go2 to pay VeriSign $2 million for VeriSign to

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1 develop, maintain and operate a registry ($800,000 due September 28, 2001, $200,000 due in 45 2 days and $1 million due upon completion of the registry, (3) entered into a data license agreement 3 that Go2 to pay $650,000 to VeriSign for the delivery of 3 million unique registrant data records, and 4 (4) entered into a Promotions Agreement that required Go2 to pay VeriSign $520,000 for delivery of 5 three stand alone direct email promotions. VeriSign recognized $2.25 million of revenue in 2001 on 6 the transaction. 7 320. Internal documents show that defendants knew the investment was made so that the 8 investee could return capital and appear to generate revenue. Indeed, it was clear from the initial 9 June 21, 2001 draft term sheet that VeriSign’s investment “was contingent upon Go2 contracting 10 with the VeriSign registry.” According to a July 16, 2001 email from Robert West to Go2, that 11 language was removed from the term sheet because of concern that the reference “might make an 12 auditor think we were round tripping revenue.” But the Go2 investment remained contingent on the 13 business deals. On August 7, 2001, Sclavos and Evan received an email from Rusty Lewis 14 informing them that VeriSign was contemplating a $6 million investment with “$3 million coming 15 back under a business arrangement.” On September 25, 2001 Korzeniewski received an email from 16 Tom Bell that stated VeriSign would get back $3 million of the investment. In a July 19, 2001 email 17 from Lori Whitted to Lewis and West, it was stated that “the whole point of requiring them to pay 18 the Registrar for promotion is to enable us to justify a $6M investment.” 19 321. Defendants also knew revenue recognition was improper because Go2 did not have

20 the ability to pay VeriSign absent the $6 million investment. Go2’s financials were attached to the 21 September 25, 2001 email received by Korzeniewski and disclosed that Go2 reported a $19.1 million 22 net loss in 2000, a $10.9 million operating loss through July 2001 and was projecting a $19.2 million 23 loss in 2001. In addition, the financial statements disclosed that Go2’s cash had declined from $17.3 24 million at December 31, 2000 to $5.3 million at July 31, 2001 and that Go2 was burning through 25 $1.25 million of cash per month. Thus, defendants knew Go2 would run out of cash by the end of 26 the year and would be unable to pay VeriSign absent the investment.

27 322. In 2001, Go2 reported a $21 million net loss and the company’s auditors issued a 28 qualified opinion that stated Go2 would be unable to continue as a going concern unless it obtained

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1 additional financing and attain successful operations. After improperly recognizing $2.25 million of 2 revenue during the Class Period, VeriSign wrote-off the entire $6 million investment in 3Q02. 3 323. Barter Transactions: The defendants knew that VeriSign continued to improperly 4 recognize revenues on undisclosed barter transactions in 3Q01 when the Company recognized $11.1 5 million of revenue as follows: 6 Company 3Q01 Revenues 7 WS $1,575,000 InfoSpace $334,425 8 Air2Web $204,581 Oracle $1,000,000 9 Snapnames $400,000 10 AOL $650,000 .TV $650,000 11 Qwest $750,000 Activcard $3,000,000 12 Yodlee $1,000,000 Lightbridge $500,000 13 IPIN $1,000,000 14 324. It was improper to recognize the 2001 revenue on the exchange of software platform 15 licenses with ActivCard for several reasons. First, VeriSign did not have a basis under GAAP for 16 the $3 million value it ascribed to its Universal Service Center, because VeriSign did not have a 17 history of arms-length cash sales of Universal Service Centers. Second, VeriSign did not have a 18 bona-fide business purpose for the ActivCard Platform license that it received from ActivCard in the 19 barter exchange, as it did nothing with the Software Platform until at least seven months after it 20 recorded the barter revenue, if ever. In May 2002, Michael Etheridge wrote, “the particular product 21 we bought from them if of little to no direct correlation with our activcard reselling and rev share.” 22 Third, because the exchange was of similar products (Software Platform Licenses) held for sales in 23 the same line of business (data security and authentication), according to APB 29, the exchange did 24 not constitute a culmination of the earnings process and VeriSign could not recognize any revenue 25 until VeriSign made sales to its customers under the ActivCard license. This did not occur prior to 26 April 2002, if ever, and VeriSign sales under the ActivCard license never even approached $3 27 million. Fourth, even if VeriSign could recognize any revenue for the Universal Service Center, 28

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1 under SOP 97-2 and SAB 101, it would have been for an amount much lower than $3 million, 2 ratably recognized over time, beginning in 3Q02, when set up, training and implementation were 3 scheduled – assuming it actually occurred – rather than entirely up front. 4 325. Failure to Adequately Reserve for Receivables: The defendants knew VeriSign’s 5 receivables and net income continued to be overstated because VeriSign failed to reserve for 6 significantly delinquent receivables including amounts due from affiliates. From the Company’s 7 A/R Aging Report, the Aging-4 Bucket Report and the affiliate receivable reports, the defendants 8 knew west coast receivables increased substantially from $55 million as of June 30, 2001 to $71.9 9 million as of September 30, 2001 and that $37 million or 52% of the receivables were delinquent - 10 including $29.7 million that were more than 60 days delinquent and $21.2 million that were more 11 than 90 days delinquent. In fact, KPMG senior auditor Sarah Lemstrom wrote in a receivable 12 workpaper that VeriSign’s Finance Manager Danny Tow told her that “collections are becoming 13 more difficult, especially related to the affiliate customers,” and that bankruptcies were increasing. 14 326. In addition, KPMG’s receivable workpapers disclosed that the marketing receivable 15 balance increased during 3Q01 to $18.1 million ($14.9 million, net), and included $3.2 million of 16 recent uncollectible receivables, an indication of improper revenue recognition. According to 17 various emails and workpapers, KPMG repeatedly asked for supporting details of the increase in 18 marketing receivable balances, which VeriSign refused to provide. VeriSign’s controller, Bert 19 Clement, told de la Rosa and Berry to drop the inquiries because such inquiries were “not efficient”

20 prior to the filing of the Report on Form 10-Q. 21 327. According to VeriSign’s A/R Allowance Analysis report, VeriSign had established 22 $4.9 million of specific reserves on eight accounts and maintained a general reserve of $5.1 million 23 which represented just 7.7% of net receivables ($67.0 million) on September 30, 2001. The 24 defendants knew the $5.1 million reserve was inadequate to cover potential losses on the $67 million 25 of net receivables because many of the receivables were severely delinquent. The A/R Allowance 26 Analysis report disclosed that 48% or $32.2 million of net receivables were delinquent including

27 $2.4 million that were more than 360 days past due, $7.9 million that were more than 181 days past 28

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1 due, $16.7 million that were more than 91 days past due and $24.8 million that were more than 60 2 days past due. 3 328. The A/R Analysis Report disclosed that the $4.9 million of specific reserves were 4 established on the following eight delinquent accounts: 5 Customer Receivable Amount Days Past Due Specific Reserve 6 Ameritrade $340,000 120 $340,000 ArabTrust/Al Bahar $1,212,000 488 and 395 $684,00012 7 IBG/iginexo $2,739,760 181-424 $2.1 million Interpath $255,000 515 $255,000 8 SignOnline $229,000 333 $229,000 9 Wall Street Systems $118,000 243 $118,000 Satayam $2,223,785 123-395 $450,000 10 Worldpreferred $699,000 80-110 $699,000

11 329. But VeriSign’s Aging - 4 Bucket Report and the affiliate receivable reports listed 12 millions of dollars of additional delinquent receivables, many that were past due for more than a 13 year, for which no specific reserves had been established. In addition, VeriSign continued to 14 improperly recognize revenues from the delinquent affiliates and, as alleged above, continued to 15 make investments in the Company’s affiliates to provide them with cash to pay down their 16 delinquent receivables. 17 Customer Amount Days Past Due 3Q01 Revenue 2001 Revenue 18 Adacom $250,000 242 $625,000 $2,012,000 Adacom $852,000 153 19 Adacom $500,000 62 20 Adacom $500,000 31 Al Bahar $660,000 488 $43,256 $428,482 21 Al Bahar $552,000 395 Al Bahar $552,000 62 22 CertiSign Portugal $750,015 395 $138,000 $751,000 23 CertiSign Portugal $672,000 274 CertiSign Portugal $257,500 242 24 CertiSign Portugal $239,500 92 CertiSign Portugal $332,000 62 25 CertiSign Portugal $1,200,000 10 Certisign Brazil $1,000,000 95 $382,000 $1,481,592 26

27 12 This reserve was reversed in 4Q01. 28

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1 Certisign Brazil $250,000 62 Comsign $200,000 123 $145,500 $1,388,667 2 Comsign $200,000 92 Consign $200,995 62 3 Keca-Crosscert $650,000 109 $260,656 $2,348,082 4 D-Trust $337,500 335 $335,500 $1,582,000 D-Trust $175,000 62 5 D-Trust $582,000 31 ESign $1,096,000 62 $1,214,684 $5,310,733 6 Euro909 $223,500 92 $2,796,893 $12,576,808 HiTrust $200,000 92 7 HiTrust $157,500 62 $457,250 $1,929,875 8 HiTrust $429,000 153 Kuwaiti Finance $180,000 62 unknown unknown 9 Netsecure $255,000 62 $699,000 $6,501,750 Netsecure $1,235,250 32 10 Netsecure $575,000 15 11 Roccade $605,010 93 $384,818 $2,390,859 Satayam $400,000 395 $143,000 $1,194,000 12 Satayam $125,000 336 Satayam $397,500 274 13 Satayam $572,000 123 Satayam $175,000 245 14 Satayam $150,000 184 15 Satayam $404,285 242 Telefonica $500,000 245 $1,426,750 $3,393,000 16 Telefonica $100,035 153 Telefonica $682,000 62 17 TrustItalia $250,000 245 $1,150,000 $3,322,817 TrustItalia $250,000 154 18 TrustItalia $250,000 62 19 W3Fusion.com $539,840 365 $380,500 $1,194,495 W3Fusion.com $272,250 245 20 W3Fusion.com $170,000 245 W3Fusion.com $170,000 184 21 W3Fusion.com $170,000 92 MySecureSign $100,000 245 $286,900 $1,350,700 22 MySecureSign $100,000 184 23 MySecureSign $437,500 153 MySecureSign $100,000 123 24 MySecureSign $200,000 63 iTrust $1,872,000 178 unknown unknown 25 iTrust $333,333 92

26 27 28

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1 330. Keca-Crosscert: VeriSign continued to improperly recognize revenue from Keca- 2 Crosscert and failed to establish any reserves when Keca-Crosscert did not have the ability to pay – 3 and did not pay - VeriSign until VeriSign made a $4 million investment in October 2001. 4 331. Certisign Portugal: VeriSign continued to improperly recognize revenue from 5 Certisign Portugal and failed to establish any reserves on their $3.4 million of delinquent receivables 6 that were as many as 395 days past due on September 30, 2001. 7 332. Satayam Infoway: VeriSign continued to improperly recognize revenue from Satayam 8 Infoway and that the $450,000 reserve established in 3Q01 was insufficient because the company 9 owed VeriSign $2.2 million that was severely delinquent. 10 333. W3Fusion.com: VeriSign continued to improperly recognize revenue from 11 W3Fusion.com and failed to establish any reserves when it owed VeriSign $1,874,090, including 12 $1,322,090 that was 92 to 365 days past due. 13 334. Arab Trust/Al Bahar: VeriSign continued to improperly recognize revenue from Arab 14 Trust/Al Bahar or establish any reserves when the company owed VeriSign $1,764,000, all of which 15 was delinquent including $660,000 that was 488 days past due and $552,00 that was 395 days past 16 due. Moreover, according to KPMG’s workpapers the $684,000 reserve that was established in 17 3Q01 was an error and was reversed in 4Q01. 18 335. Adacom: VeriSign improperly recognized revenue from Adacom and did not 19 establish any reserves for Adacom’s delinquent receivables until after the Class Period when in

20 2Q02 VeriSign established a $1.7 million specific reserve.

21 2. Additional Reasons Why the Statements Regarding VeriSign’s 3Q01 Results and Business Prospect Were False or Misleading 22 When Made 23 336. The revenues reported by the Company for 3Q01 were inflated from the amounts 24 reported by its business units in the weekly, monthly and quarterly reports provided to VeriSign 25 headquarters, as described above. In addition, due to the unreasonable amount of pressure exerted 26 by Gallivan and others, the revenues reported by VeriSign’s business units in their monthly and 27 quarterly reports were inflated before being inflated again by corporate executives. In 3Q01, these 28 practices lead to revenues reported based upon sales by VeriSign’s Consulting Division being

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1 inflated by at least $4.25 million. On information and belief, revenues reported by the Company’s 2 other operating units were similarly inflated, based upon the pattern and practice the Company had 3 of inflating field results, as described above. 4 337. Also, in order to further increase the “appearance” of growth, defendants caused 5 VeriSign to orchestrate deals that allowed the Company to pump up its top line revenue during 3Q01 6 via product swaps, side deals, and “quid pro quo” equity investments to compensate for the lack of 7 real demand for the Company’s products and services. VeriSign utilized various business 8 relationships with its affiliates and technology partners to manufacture revenues, which were 9 negotiated at the highest levels of the organization. One of the tactics that VeriSign used was to 10 invest in small, private companies that would buy VeriSign products or services in exchanges. 11 338. CWs confirm the inability of VeriSign’s investees to pay the Company absent the 12 investments. For example, according to CW10, Air2Web was “ready to close doors on its 13 operations” when VeriSign agreed to invest in the company on the condition that Air2Web 14 immediately buy $2.5 - $3 million of VeriSign’s products. According to CW5, in 15 September/October 2001, Air2Web bought roughly $2 million of VeriSign’s Universal Service 16 Security Center, which was a package of software, digital certificates, maintenance services and 17 technical support. CW5 states that Air2Web “did not really need” the Universal Service Security 18 Center but bought it anyway. 19 339. According to CW6 and CW10, VeriSign and Air2Web developed a software platform 20 product that integrated Air2Web’s wireless applications with VeriSign’s secure transaction 21 application. The integrated software platform was sold to only one customer: PTTrust, one of 22 VeriSign’s worldwide affiliates based in Cairo, Egypt. According to CW6, VeriSign acted as the 23 middleman in the sale of the software platform to PTTrust, and no one from Air2Web had any 24 contact with PTTrust. VeriSign brokered the deal, including carrying the papers regarding the close 25 of the transaction. When KPMG (Air2Web’s auditors) reviewed Air2Web’s financials for the FY01 26 audit in early 2002, KPMG asked Air2Web to obtain documentation from VeriSign regarding the 27 agreement between PTTrust and Air2Web. VeriSign provided a letter to Air2Web on VeriSign’s 28 corporate letterhead stating that VeriSign had brokered the deal; however, VeriSign never provided

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1 the actual contract. CW6 said that neither VeriSign nor PTTrust paid Air2Web $500,000 for its 2 share of the deal. VeriSign falsely reported at least $2 million in revenue for 3Q01 from these 3 Air2Web-related transactions. 4 340. In addition, the revenues reported by the Company were further inflated as the result 5 of undisclosed transactions that had been negotiated by Gallivan, Evan and other key management 6 executives with VeriSign’s affiliates, technology partners, and related entities. Moreover, by 3Q01, 7 collection problems had surfaced in some of the deals VeriSign had signed with its affiliates in 2000 8 and early 2001. According to CW7, by 3Q01, many affiliates owed VeriSign $1 million or more, 9 and on average their bills were at least 90 days late in being paid. The delinquent affiliates included 10 ComSign (Israel), CrossCert (Korea), HiTrust (Hong Kong), NetSecure, TrustAsia (Singapore), 11 EuroTrust A/S (Denmark), CertPlus (France), Firstream (France), TrustItalia (Italy), D-Turst 12 (Germany), ArabTrust.com (Kuwait), PTTrust (Egypt), NetSecureHoldings (China), and Diginexo 13 (Latin America). However, the reported revenues and financial results failed to account for the 14 probability that these accounts receivable would not be collected. 15 341. By 3Q01, sales to VeriSign affiliates had surpassed more than 10% of the Company’s 16 total revenue, as follows:

17 1Q01 2Q01 3Q01 18 Affiliate Count 37 38 46 19 Average Annual Revenue Per Affiliate $1.9 million $2.2 million $2.7 million 20 Estimated Quarterly Revenue $17.6 million $20.9 million $31.1 million 21 % of Total Revenue 8% 9% 12% 22 Affiliates Operating Above Minimum N/A 1-3 7-8 23 24 342. Further, according to CW2, between August and December 2001, VeriSign reported 25 $12 million in fictional revenues from barter transactions. In August or September 2001, Ranney 26 told CW1 that Gallivan had “made up” these revenues in connection with deals where VeriSign 27 traded VeriSign packages of digital certificates, products and consulting services for products and/or 28 services from other companies. Between October and December 2001, VeriSign’s Consulting

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1 Director Fran Rosch (“Rosch”) and Human Resources Manager Ivan Yopp (“Yopp”) independently 2 told CW2 that Gallivan still had not revised numbers to account for the fictitious $12 million. 3 Accordingly, VeriSign’s reported revenue for 3Q01 was false and misleading because the reported 4 financials included the fictitious revenue that defendant Gallivan manufactured. 5 343. The 3Q01 statements were also false because VeriSign was continuing to lose market 6 share during this period. According to the “State of the Domain Report” published on November 1, 7 2001 by SnapName, VeriSign suffered three consecutive months of net losses in new registrations in 8 July (net loss of 102,532), August (net loss of 156,760) and September 2001 (net loss of 112,602). 9 344. The Company’s reported deferred revenues were also materially false and misleading 10 because VeriSign had acquired several companies that had significant deferred revenues at the time 11 of the acquisitions, thereby increasing the deferred revenues on VeriSign’s balance sheet. For 12 example, during the October 25, 2001 conference call, Sclavos concealed the fact that the Company 13 had purchased eNIC, which had total deferred revenues of approximately $5 million at the time the 14 deal had closed. Defendants knew that by completing this acquisition, the Company would be able 15 to increase the “appearance” of deferred revenue growth by nearly 80% (2.6% vs. 1.6%). 16 345. Deferred revenues were highly material to VeriSign’s investors, because, unlike other 17 Internet companies, VeriSign had huge amounts of deferred revenue that made its future earnings 18 highly visible to the market. These deferred revenues represented amounts that had been collected 19 from VeriSign’s customers for services that had yet to be provided: e-commerce transactions that 20 had yet to occur or be validated by the Company, or website registrations that were to be renewed in 21 the coming years, among other examples. Defendants knew that investors and analysts valued the 22 Company in part because of the high visibility that these deferred revenues gave to the Company’s 23 future earnings and organic growth. By inflating deferred revenues with amounts obtained through 24 undisclosed acquisitions of other companies, defendants were able to mislead investors into 25 believing that the Company’s highly visible future earnings were the result of organic growth. 26 27 28

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1 3. Facts Supporting a Strong Inference that Defendants Knew or Recklessly Disregarded that the Statements Regarding 3Q01 2 Results Were False When Made 3 346. Defendants knew or recklessly disregarded that the revenues reported for 3Q01 were 4 artificially inflated because, as described above, Gallivan and other corporate executives had a 5 pattern and practice of inflating the revenues reported to headquarters by the Network Solutions 6 subsidiary and VeriSign’s other business units. Defendants further knew or recklessly disregarded, 7 also as described above, that the results reported to headquarters by VeriSign’s business units in 8 3Q01 were already inflated as a result of the unrealistic sales goals that had been established and the 9 unreasonable pressure that had been placed on VeriSign’s sales staff, by means of “scrubbing,” 10 premature revenue recognition, doubtful collectibility, and other practices. Defendants further knew 11 or recklessly disregarded that the market conditions in 3Q01 were insufficient to support sales at the 12 levels being reported by the Company, also as described above. 13 347. Defendants also were aware of the terms of the transactions with VeriSign’s affiliates 14 and technology partners, because those agreements were negotiated or approved at the highest levels 15 of the Company, including by Gallivan or Evan, as previously alleged. Defendants therefore knew 16 or recklessly disregarded that VeriSign was investing money in affiliates like Air2Web that did not 17 need VeriSign’s products or services, and also knew or recklessly disregarded that the percentage of 18 revenues derived from affiliate transactions was growing dramatically during 3Q01. CW7 learned 19 from Dow and Clement in an accounts receivable meeting in 3Q01 that the affiliate customers 20 amounted for 80% of VeriSign’s digital certificate revenues. As a result of their familiarity with 21 these transactions, defendants also knew or recklessly disregarded that a significant percentage of 22 VeriSign’s deferred revenue growth was the result of deferred revenues booked by other companies 23 acquired by VeriSign, and did not reflect organic growth in the Company. 24 348. According to CW7, the problems with collecting from VeriSign’s affiliate customers 25 were also well-known to defendants, as they were the primary topic of VeriSign’s bi-monthly 26 accounts receivable meetings, which took place every other Monday at 7:30 a.m. in a boardroom on 27 the second floor of the main building in VeriSign’s Mountain View headquarters. These meetings 28 were regularly attended by CW7, Dow, Clement, and accounts receivable analyst Yasmin Yazdi

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1 (“Yazdi”). According to CW7, Evan attended about 40% of the meetings, while Gallivan attended 2 the very first meeting and then sent various representatives from the Business Development office in 3 his place for all subsequent meetings. During the course of these meetings, CW7 recommended that 4 VeriSign stop waiting for its affiliate customer to pay if the account had been overdue for more than 5 a year and just take a write-off, but Clement and defendant Evan refused to take any action. In a 6 subsequent meeting, Evan told CW10 that VeriSign had not initiated collection proceedings on these 7 accounts because it was not wise to sue a company in which VeriSign had investments. 8 349. Since defendants Evan and Gallivan had negotiated or approved the original deals 9 with VeriSign’s affiliates, they either attended or sent representatives to the accounts receivable 10 meetings to deal with collection issues with the affiliates. During the accounts receivable meetings, 11 defendant Evan frequently volunteered to call the affiliate customers to deal with collections. CW7 12 said that the accounts receivable department had no copy or record of the original sales contracts 13 defendants Evan and Gallivan negotiated with the affiliates. CW7 stated that Clement, Evan, and 14 Gallivan never exerted any pressure on him to collect monies from VeriSign’s affiliate customers. 15 350. Prior to February 2001, VeriSign kept no record of collections efforts and contacts 16 with affiliate customers. Beyond the invoices that were sent to the affiliates, VeriSign had no 17 written documents and no system to record or track past-due amounts, notification dates, discussion 18 or other efforts made to collect from its affiliate customers. CW7 instructed accounts receivable 19 analyst Yazdi to begin keeping a record of all day-to-day contacts with VeriSign’s affiliate 20 customers, including date of contacts, actions taken, results and amount affiliates owed on an Excel 21 spreadsheet. This Excel spreadsheet was stored on Yazdi’s computer. According to CW7, Evan 22 specifically instructed Yazdi that the Excel spreadsheet should be kept confidential. Evan further 23 directed the information contained in Yazdi’s Excel spreadsheet not to be integrated into VeriSign’s 24 Oracle 11i financial record-keeping system.

25 E. False Statements Regarding 4Q01 Results 26 351. On January 24, 2002, the Company issued a press release entitled, “Fourth Quarter 27 Results Cap a Successful Year and Position VeriSign’s Digital Trust Services for Continued 28 Growth.” The press release stated in part:

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1 VeriSign, Inc., the leading provider of digital trust services, today reported its fourth quarter results for the quarter ending December 31, 2001. 2 Announced revenues for the fourth quarter of fiscal 2001 were $284 million. 3 Pro forma net income for the quarter ended December 31, 2001, excluding the amortization of goodwill and intangible assets related to acquisitions, stock-based 4 compensation charges related to acquisitions, writedown of investments and benefit for income taxes (all of which are included under GAAP results), was $72 million, or 5 $0.33 diluted earnings per share compared to pro forma net income in the quarter ended December 31, 2000 of $46 million, or $0.21 diluted earnings per share. 6 Including the amortization of goodwill and intangible assets related to acquisitions, stock-based compensation charges, writedown of investments and benefit for income 7 taxes not reflected in the pro forma results, the net loss for the quarter ended December 31, 2001 was $401 million. 8 Revenues for fiscal 2001 were $984 million as compared to revenues of $475 9 million in fiscal 2000. Pro forma net income for fiscal 2001, excluding the amortization and writedown of goodwill and intangible assets related to acquisitions, 10 stock-based compensation charges related to acquisitions, writedown of investments and benefit for income taxes, was $233 million, or $1.09 diluted earnings per share 11 compared to pro forma net income for fiscal 2000 of $129 million, or $0.72 diluted earnings per share. 12 Pro forma operating income for the fourth quarter ended December 31, 2001, 13 excluding stock-based compensation charges and the amortization of goodwill and intangible assets, was $62 million, or a 21.8% operating margin, as compared to $24 14 million, or a 12.2% operating margin, in the quarter ended December 31, 2000. 15 * * * 16 The results for the current quarter and fiscal 2001 reflect the acquisition of Illuminet Holdings, Inc., which closed on December 12, 2001, and therefore include 17 19 days of Illuminet’s fourth quarter activity. On a standalone basis, VeriSign revenues for the fourth quarter of 2001 were $272 million, as compared to $197 18 million in the quarter ended December 31, 2000. Standalone pro forma net income for the fourth quarter, excluding the amortization of goodwill and intangible assets 19 related to acquisitions, stock-based compensation charges related to acquisitions, writedown of investments and benefit for income taxes, was $67 million, or $0.32 20 diluted earnings per share. 21 For the fourth quarter of fiscal 2001, deferred revenue balances increased over 6% sequentially to $622 million. On an organic basis, excluding deferred 22 revenue from acquisitions during the quarter, deferred revenue grew approximately 3.5%. The VeriSign standalone net days sales outstanding (DSO) decreased to 74 23 days from 76 days in the third quarter. This takes into account the change in deferred revenue and the exclusion of $60 million of accounts receivable from acquisitions 24 that were booked in conjunction with the closing of those acquisitions. 25 * * *

26 Mass Market Division . . . . In the Web identity space, VeriSign continued to demonstrate its market leadership in the fourth quarter by registering approximately 27 600,000 new domain names and renewing or extending an additional 1.2 million. The Mass Markets group ended the quarter with 6.2 million unique customers with 28

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1 more than 13.6 million active domain names under management, including 13.1 million in .com, .net, and .org. 2 352. On the January 24, 2002 conference call, Sclavos stated: 3 We ended Q4 with 6.2 million unique paying customers for our domain name and 4 Web presence services. This is down from Q3 of 6.5 million customer count, mostly due to the massive clean-up of the domain base we had promised in Q3. 5 We registered approx 600,000 net new and transferred names in the quarter at an 6 average term of 1.7 years per paid name. We also renewed close to 1.2 million names during the quarter, with an average subscription term of approximately 1.9 7 years. Our renewal rate, excluding the promotional names that were purged, was approximately 54%, up from last quarter’s 52%. 8 We ended the quarter with 13.6 million active names under management, including 9 13.1 million in the com, net and org database. This number is higher than the 12 million names reported by several third parties over the last few weeks, due to the 10 names we manage through three small registrars we own and the inclusion of country-code domain. 11 353. The Company’s 4Q01 and F01 financial results were repeated to the market during 12 the Company’s January 24, 2002 conference call, in reports issued by several analysts that followed 13 VeriSign and in VeriSign’s Report on Form 10-K filed with the SEC on March 29, 2002. During the 14 conference call, Evan stated that VeriSign’s 4Q01 EPS of $0.19 met the increased guidance provided 15 during October 25, 2001 conference call. She also stated that VeriSign expected (1) to see continued 16 growth in top line revenue with periodic fluctuations in the growth rate, (2) 1Q02 revenue to be 17 $340-345 million, (3) 2002 revenue to grow 25% to $1.5 billion and (4) 1Q02 EPS to be $0.20. 18 Specifically, VeriSign reported the following false and misleading financial results (in 000s, except 19 registrations and EPS): 20 Statement of Operations 4Q01 FY01 21 New domain name registrations: 600,000 3.35 million 22 Renewed registrations: 1.2 million 5 million

23 Revenues $283,799 $983,564

24 Other income (expense): ($57) <$1,788>

25 Pro forma Net Income $72 $233 Pro forma EPS $0.33 $1.09 26 GAAP Net Income: ($401,110) ($13,355,952) 27 GAAP EPS: ($1.91) ($65.64)

28 Balance Sheet

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1 Net accounts receivable: $314,923 2 Allowance for doubtful accounts: $24,290

3 Long-term investments: $201,781

4 Deferred revenue: $471,329 Long-term deferred revenue: $150,727 5 1. Facts Showing Why Statements Relating to 4Q01 Were 6 Materially False and Misleading 7 354. All of the defendants knew VeriSign’s 4Q01 financial results were materially false 8 and misleading and not reported in accordance with GAAP or VeriSign’s publicly reported 9 accounting policies due to the (1) improper recording of revenue on domain name registrations 10 including the improper recognition of revenue on the automatic two-year renewals of expired 11 domain name contracts, (2) improper recognition of revenue on various roundtrip transactions, (3) 12 failure to record VeriSign’s share of losses incurred by the investee companies as required by APB 13 18, (4) failure to record impairment charges on long-term investments as required by SFAS 115 and 14 VeriSign’s publicly reported accounting policy, and (5) failure to write-off or establish reserves on 15 uncollectible delinquent receivables. If VeriSign had reported its financial results accurately and in 16 accordance with GAAP, it would not have reported results that exceeded first call consensus

17 estimates. In fact, VeriSign would have reported a pro forma tax adjusted loss absent the defendants 18 accounting improprieties. 19 355. Misleading Domain Name Registrations: The reported level of new registrations was 20 misleading because VeriSign failed to disclose that 154,000 or 26% of the 600,000 new registrations 21 were free or promotional registrations that ranged in price from $0 to $10.00 compared to the non- 22 promotional price of $35.00. For the year, VeriSign failed to disclose that 1.8 million or 54% of the 23 3.35 million new registrations were free or promotional registrations, including 804,902 registrations 24 purchased by NameZero. 25 356. Sclavos’ statements during the conference call were materially false and misleading 26 because: (i) the average renewal life for the quarter, according to internal quarter-end financial

27 packages distributed to Sclavos and the board, was only 1.83 years, not 2 years; (ii) according to the 28 same source, the average life for new names was only 1.54 years, not 1.7; and (iii) the average lives

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1 were inflated by defendants’ arbitrary and deliberate use of a two-year default renewal period to 2 increase long-term deferred revenues and average renewal terms, as previously alleged. 3 357. Automatic Renewals of Expiring Domain Name Registrations: Receivables, deferred 4 revenue, long-term deferred revenue, revenue and net income were all overstated because VeriSign 5 continued to automatically and arbitrarily renew expiring registrations and charged customers $70 6 for a new two-year registration term when customers had not agreed to the automatic two-year 7 renewal. Waterfall schedules show that at least 507,102 of the 1.2 million renewal registrations were 8 automatically renewed for two-years. The waterfall schedules also show that the two-year automatic 9 renewals caused VeriSign to record (1) gross receivables of $93.6 million, (2) a bad debt reserve of 10 $51.9 million, (3) net receivables of $41.7 million, and (4) revenue of $24.7 million. Short-term 11 deferred revenue increased to $100.3 million and long-term deferred revenue increased to $39.7 12 million. 13 358. Failure to Report Domain Name Reserves: KPMG workpapers also show that 14 VeriSign misreported receivables and the bad debt reserve. Although VeriSign reported $314.9 15 million of receivables net of a $24.3 million bad debt reserve, KPMG’s workpapers show that 16 VeriSign had established a $90.9 million reserve on $216.8 million of receivables related to domain 17 name registrations. VeriSign only reported the net amount of domain name related receivables 18 ($125.9 million) in the overall net receivables balance without disclosing the gross amount of 19 domain name receivables or the reserve in violation of GAAP and SEC regulation S-X.

20 359. Roundtrip Transactions: In 4Q01, the defendants knew VeriSign made or committed 21 to make more than $52 million of roundtrip investments to close projected revenue gaps and pay 22 down delinquent receivables so VeriSign would report results that exceeded the guidance provided 23 during the October 25, 2001 conference call and First Call consensus estimates: 24 Company Investment 4Q01 Revenue 2001 Revenue

25 Firstream $4,000,000 $3,261,750 $10,196,750 CPA2BIZ $10,000,000 $1,106,250 $1,556,250 26 Keca-Crosscert $4,000,000 $231,747 $2,348,082 Trust Co./Soltrus $5,968,461 $629,666 $4,147,174 27 TrustItalia $3,000,000 $1,292,167 $3,322,817 USA.Net $4,600,000 $105,500 $1,605,500 28 Wand $2,700,000 $900,000 $900,000

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1 Yodlee $1,500,000 $27,500 $1,027,500 Global Name Registry $5,000,000 $200,000 $200,000 2 360. Numerous VeriSign emails show the defendants knew VeriSign continued to use the 3 roundtrip transactions to close projected revenue gaps in order to report results in line with guidance. 4 In an October 19, 2001 email, Korzeniewski informed Sclavos and Evan that $20 million of deals 5 were being worked on and that he was trying to increase the amount to $30 million. He wrote that 6 VeriSign could increase revenues from investments from $8-10 million to $12-15 million” but the 7 cost is cash.” On November 16, 2001 Korzeniewski emailed to Sclavos, a list of “quick quarter end 8 deals” that could generate $2-$3 million of revenues if the corporate development group worked 9 nonstop until the end of the year. In December 2001, the corporate development group continued its 10 efforts to close deals to meet revenue targets. At the same time, the defendants knew VeriSign was 11 projecting a $92 million revenue gap for the mass markets business in 2002 and was looking for 12 investment opportunities (including investments outside VeriSign’s core business) to close the gap. 13 361. By January 2002, VeriSign was running out of cash to make investments to create the 14 appearance of revenue growth. In a January 6, 2002 email, Jeff Baeth wrote that “the REAL 15 problem is Stratton will not admit/understand that we cannot meet wall street est. for FY2002. Herb 16 has lost $50m to his bottom line alone. You guys are missing by $50m and they keep on telling wall 17 street that EPS will go up Q/Q.” Moreover, a February 21, 2002 email shows that VeriSign’s cash 18 had declined from $1 billion to $325 million since the Network Solutions acquisition due to, inter 19 alia, spending substantial amounts on “investments in entities that offered immediate revenue.” 20 362. Firstream: After improperly recognizing $6.9 million of revenue in 3Q01 on the 21 roundtrip transaction with Firstream, on December 29, 2001, VeriSign (1) amended the September 22 10, 2001 affiliate agreement, recorded a $3,225,000 receivable and recognized another $3,261,750 of 23 revenue, (2) made an additional 4.25 million euro investment, and (3) committed to loaning 24 Firstream another 3.25 million euros that it funded on January 3, 2002. In addition, on October 15, 25 2001, VeriSign funded the $16.4 million investment it committed to make on September 10, 2001. 26 Firstream would have reported negative cash and been unable to pay VeriSign the $10.2 million it 27 improperly recognized as revenue in 2001 if the investments were not made. In fact, the $1,277,000 28

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1 receivable included on the September 30, 2001 Aging - 4 Bucket Report and the $3,225,000 2 receivable included on the December 31, 2001 Aging - By Collector report were paid off by March 3 31, 2002 and not included in the March 31, 2002 Aging - 4 Bucket Report. According to a February 4 1, 2002 email from Firstream’s Etienne Mouthon to VeriSign, the proceeds of the loan were used to 5 pay the $3,225,000 receivable. After, the Class Period, however, VeriSign wrote-off the entire $21 6 million investment in Firstream. 7 363. In addition, according to email communications between the companies, the 3.25 8 million euro loan was part of another contrived transaction to generate revenues involving Euro909. 9 On March 27, 2002, Bertel Jensen, Euro909’s CFO, emailed VeriSign an executed VeriSign 10 Webnum International Gateway Affiliate Agreement and wrote that one of the conditions of 11 Euro909 executing the agreement was that Euro909 would receive 2 million euros from Firstream. 12 According to VeriSign’s 1Q02 revenue forecast, the Company recognized $1.5 million of revenue on 13 the March 27, 2002 agreement. Further, in response to a May 15, 2002 email from VeriSign 14 informing Firstream that it would have to pay back the 3.25 million euro loan because “Firstream 15 and EuroTrust are not proceeding with their joint investment,” Firstream’s Mouthon confirmed the 16 contrived nature of the transaction and its relevance to this lawsuit: 17 Second, it is a loan granted to Firstream within the course of a global deal which I am not going to describe here because I think it would not be appropriate for everybody. 18 Given the current Class action that were filed by four different law firms against VeriSign which brief basically investigate investment made by VeriSign to Affiliates 19 in order to obtain revenues which would not have been received by VeriSign if the investment had not been made, I have asked our U.S. attorneys to investigate what 20 are the consequences of such potential repayment. 21 364. In July 2002, VeriSign converted 1 million euros of the note to an investment in 22 Firstream and Firstream paid VeriSign the remaining 2 million euro loan balance. In 3Q02 VeriSign 23 also wrote-off its entire $21 million investment in Firstream. 24 365. CPA2BIZ: After improperly recognizing $450,000 of revenue in 3Q01, VeriSign 25 improperly recognized another $1.1 million of revenue in 4Q01 when CPA2BIZ was insolvent and 26 unable to pay VeriSign absent the $10 million investment.

27 366. Keca-Crosscert: On October 1, 2001 VeriSign made a $4 million investment in Keca- 28 Crosscert that was used to pay down the company’s delinquent receivables related to the $1.7

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1 million of revenue recognized in 2001 related to the Janua;ry 12, 2001 International Affiliate 2 Payment Services Agreement. Keca-Crosscert’s December 31, 2001 financial statements disclosed 3 that it reported cash in the amount of 4 million Korean won after receiving VeriSign’s $4 million 4 (4.9 million Korean won according to Keca-Crosscert’s cash flow statement). Thus, Keca-Crosscert 5 would have reported negative cash and been unable to pay VeriSign absent the $4 million 6 investment. The October 1, 2001 subscription agreement stated that the $4 million investment was 7 conditional on payment of $664,445 and VeriSign’s Aging - 4 Bucket Reports show that the 8 $650,000 receivable that was 153 days past due on June 30, 2001 was paid off by September 30, 9 2001 and that a second $650,000 receivable that was 109 days past due on September 30, 2001 was 10 paid off in 4Q01. 11 367. Keca-Crosscert never paid the $410,000 receivable (the third payment required under 12 the January 12, 2001 agreement) which was written-off after the Class Period in 3Q02 when 13 VeriSign also wrote-off $2 million of the $4 million investment. 14 368. Failure to Write-off RealNames Investment: After recognizing $1.75 million of 15 revenue in 2001, in 1Q02, after the Class Period, VeriSign wrote-off 100% of its $18.9 million 16 investment in RealNames. The financial statements of the company showed that the investment 17 should have been written-off during the Class Period. Indeed, RealNames was insolvent and 18 reported negative capital of $229 million as of December 31, 2001. 19 369. Barter Transactions: VeriSign continued to improperly recognize revenues on barter 20 transactions, and failed to disclose the barter transactions or that the purpose of the barter 21 transactions was the same as the improper roundtrip transactions – to close revenue gaps caused by 22 VeriSign’s declining domain name registration business. The defendants knew that VeriSign 23 continued to improperly recognize revenues on undisclosed barter transactions in 4Q01 when the

24 Company recognized $17,200,000 of revenue as follows:

25 CitySearch $650,000 PitneyBowes $650,000 26 Bionetrix $1,500,000 27 Neoteris $1,500,000 TradeHarbor $500,000 28 IBM $4,500,000

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1 Phoenix $6,000,000 Worldpay $1,900,000 2 3 370. The Phoenix Technology Barter Transaction: On December 31, 2001, VeriSign and 4 Phoenix Technologies entered into a barter transaction whereby (1) Phoenix received four licenses, 5 purportedly to act as an authorized VeriSign Universal Service Center provider for $6.0 million (plus 6 a one-year maintenance agreement for $600,000) and (2) VeriSign received a license to market and 7 distribute Phoenix’s authentication services at an initial cost of $8.0 million (plus a one-year 8 maintenance agreement for $800,000).

9 371. The terms of the transaction show that VeriSign would incur a $2.2 million loss on 10 the deal. Nevertheless, VeriSign recognized the $6 million license fee as revenue in 2001 but failed 11 to recognize any expenses in 2001. A March 21, 2002 report prepared by the business development 12 group not only confirms the $2.2 million loss but shows that the loss was actually $3.8 million 13 because the total costs of the contract were $10.4 million. The same report also shows that while 14 VeriSign recognized $6 million of revenue on the last day of the quarter, none of the costs were 15 recognized because they were capitalized. 16 372. In short, defendants knew that the barter transaction with Phoenix made no economic 17 sense and was a purely accounting driven deal to manufacture revenue. In an e-mail dated January 18 2, 2002, Kendall Larsen from Phoenix Technologies told Phoenix’s staff the barter deal was closed 19 at 11:30 p.m. on New Years Eve. Other internal VeriSign documents further reveal that VeriSign 20 could not have properly recognized $6 million as revenue because some of the contracts had not 21 been signed. In an e-mailed dated January 15, 2002, Tom Galvin from VeriSign’s Investor Relations 22 advised defendants Sclavos and Evan regarding the timing of the press release concerning the 23 VeriSign/Phoenix deal, informing them that it was premature to announce the deal since the deal was 24 not entirely signed. In fact, the engineering, product development and marketing staff at VeriSign 25 and Phoenix Technologies did not have their kick-off meeting until January 18, 2002 to discuss the 26 implementation and delivery of various elements under the barter deal, indicating that VeriSign 27 could not have earned $6 million in 30 minutes on the last day of 4Q01. Indeed, the revenue from 28

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1 Phoenix could not be recorded under GAAP because, inter alia, the transaction had no economic 2 substance. It violated a number of accounting pronouncements, including at a minimum Concepts 5 3 (revenue was not earned), APB 29 (no basis for assigning a value, so it should have been recorded at 4 book value, at or near zero), SAB 101 (signed contract was required for revenue recognition, up 5 front revenue should be recorded over the term of the agreement - if anything was recordable, which 6 it was not), SOP 97-2 (customer acceptance, installation and post-contract support not provided) and 7 Concepts 6 (expenses and related revenue should be matched and recorded in the same period). 8 373. Failure to Adequately Reserve for Receivables: From their receipt and review of 9 VeriSign’s receivable reports the defendants knew receivables and net income continued to be 10 overstated because VeriSign failed to reserve for significantly delinquent receivables including 11 amounts due from affiliates. VeriSign’s December 31, 2001 Accounts Receivable Aging report 12 disclosed that receivables increased from $71.9 million in 3Q01 to $72.9 million in 4Q01 and that 13 $34.5 million or 47% of the receivables were delinquent – including $25.6 million that were more 14 than 90 days past due and $30.4 million that were more than 60 days past due. The Company’s A/R 15 Allowance Analysis report disclosed that VeriSign had established specific reserves of $7.3 million 16 on 11 accounts and a general reserve of $3.5 million which represented just 5.3% of receivables net 17 of specific reserves ($65.6 million). The general reserve was inadequate to cover potential losses on 18 the $65.6 million of net receivables because many of the receivables were severely delinquent. For 19 example, as disclosed in KPMG’s workpapers, VeriSign applied just $864,000 of the general reserve

20 to cover potential losses on $7.9 million of receivables that were 181-360 days past due and just 21 $775,000 of the general reserve to cover potential losses on $9.7 million of receivables that were 91- 22 180 days past due. 23 374. From its review of VeriSign’s aging reports, the defendants also knew that the 24 majority of west coast receivables were due from the Company’s affiliates. Affiliate receivables 25 totaled $57 million and $29.66 million or 52% were delinquent including $23.7 million that were 91- 26 361+ days past due. Further, after establishing the A/R Management team in August 2001 to resolve

27 festering problems with VeriSign’s larger customers, in October 2001, VeriSign required any 28 activity with any affiliate to first be cleared with Sclavos and/or Evan.

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1 375. As of December 31, 2001, VeriSign had established $7.3 million of specific reserves 2 on the following eleven delinquent accounts: 3 Customer Receivable Amount Days Past Due Specific Reserve

4 Ameritrade $341,000 256 $341,000 ComSign $1,026,000 226 $1,026,000 5 Digicerf $250,000 391 $250,000 Grant Thornton $250,000 186 $188,000 6 IBG/iginexo $2,739,760 181-424 $2,341,000 Interpath $255,000 621 $255,000 7 SignOnline $229,000 333 $229,000 SKYRR $400,000 151 $100,000 8 Wall Street Systems $118,000 243 $118,000 W3Fusion.com $2,627,057 454 $1,754,000 9 WorldPrefered $699,000 216 $699,000

10 376. But VeriSign’s December 29, 2001 affiliate receivables report and the December 31, 11 2001 Aging-By Collector report listed millions of dollars of additional delinquent receivables, many 12 that were past due for more than a year, for which no specific reserves had been established. In 13 addition, VeriSign continued to improperly recognize revenues from the delinquent affiliates and, as 14 alleged above, continued to make investments in the Company’s affiliates to provide them with cash 15 to pay down their delinquent receivables. 16 Customer Amount Days 4Q01 F01 Outstanding Revenue Revenue 17 Al Bahar/Arab Trust $1,288,893 720 $24,414 $428,482 18 Adacom $1,911,360 440 $625,000 $2,012,000 CIBC $275,920 527 $618,358 $2,804,816 19 Certisign Portugal $3,618,181 484 $83,000 $751,000 Certisign Brazil $2,490,560 195 $382,000 $1,312,000 20 Keca-Crosscert $845,467 307 $231,747 $2,348,082 D-Trust $996,091 371 $320,000 $1,582,000 21 ESign $3,937,815 346 $1,011,162 $1,361,996 Euro909 $1,007,191 181 $784,625 $7,964,083 22 HiTrust (HK) $300,463 392 507,250 $1,929,875 ITrust $2,872,000 281 $219,815 $2,154,216 23 NetSecure $4,982,500 132 $965,500 $6,501,750 PT Trust $2,637,713 591 $2,125,834 $2,125,834 24 Roccade $434,650 591 $684,819 $2,390,859 Satayam $200,000 226 $393,000 $1,194,000 25 Telefonica $3,849,142 345 $1,195,500 $3,393,000 Trust Italia $1,308,954 334 $1,292,000 $3,322,817 26 W3Fusion.com $2,627,057 454 $17,995 $1,194,495

27 377. NetSecure: VeriSign recognized another $965,500 of revenue in 4Q01 after making a 28 $3 million investment in 3Q01 – the proceeds of which were used to pay down delinquent

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1 receivables – when the company owed VeriSign $4.9 million that was 132 days delinquent. In 2 February 2002, VeriSign made an additional $2.5 million investment but in 2Q02 VeriSign wrote- 3 off the entire $5.5 million investment and $3.8 million of Netsecure’s receivables. 4 378. Firstream: As alleged above, a portion of the proceeds from VeriSign’s $16.4 million 5 investment, 4.25 million euro investment and the 3.25 million euro loan were used to pay $4.5 6 million of receivables that Firstream did not otherwise have the ability to pay. After the Class 7 Period, VeriSign wrote-off its entire $21 million investment in Firstream. 8 379. Keca-Crosscert: VeriSign recognized another $231,747 of revenue in 4Q01 and a 9 total of $2.3 million in 2001 when Keca-Crosscert owed VeriSign $845,467 that was 307 days past 10 due. As alleged above, VeriSign made a $4 million investment on October 1, 2001 that was used to 11 pay the $650,000 that was 153 days past due on June 30, 2001 and the $650,000 receivables that was 12 109 days past due on September 30, 2001. After the Class Period, VeriSign wrote-off the $410,000 13 receivable (the third installment due under the January 12, 2001 affiliate agreement) and $2 million 14 of the investment. 15 380. Adacom: VeriSign recognized another $625,000 of revenue in 4Q01 and total 16 revenue of $2 million in 2001 when Adacom owed VeriSign $1.9 million that was 444 days past 17 due. In 2Q02, after the Class Period, VeriSign wrote-off $1.7 million of Adacom’s receivables. 18 381. PT Trust: VeriSign recognized $2.1 million of revenue in 4Q01 when PT Trust owed 19 VeriSign $2.6 million that was 591 days past due. In 1Q02, VeriSign wrote-off $3.6 million of PT

20 Trust receivables which had increased to $4.7 million as of March 31, 2002.

21 2. Additional Reasons Why Statements Made in 4Q01 Were False When Made 22 382. The revenues reported by the Company for 4Q01 were inflated from the amounts 23 reported by its business units in the weekly, monthly and quarterly reports provided to VeriSign 24 headquarters, as described above. In addition, due to the unreasonable amount of pressure exerted 25 by Gallivan and others, the revenues reported by VeriSign’s business units in their monthly and 26 quarterly reports were inflated before being inflated again by corporate executives. In 4Q01, these 27 practices led to revenues reported based upon sales by VeriSign’s Consulting Division being inflated 28

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1 by at least $4.5 million. On information and belief, revenues reported by the Company’s other 2 operating units were similarly inflated, based upon the pattern and practice the Company had of 3 inflating field results, as described above. 4 383. In addition, in 4Q01, VeriSign’s major business lines were continuing to suffer 5 tremendous sales declines. To reach its previously-reported forecasts of sequential growth, VeriSign 6 entered into more deals with its affiliates whereby it: (1) promised to make further investments in 7 affiliates, including J-Data and SkyGo, if the affiliates would immediately buy VeriSign products; 8 (2) sold products to its affiliates, including eSign, even though the affiliate had no need for the 9 product; and (3) sold products to its affiliates, including TrustAsia, even though collectibility was 10 already in doubt because of significant past due receivables from prior sales. Each of these deals 11 was either negotiated or approved by Gallivan, Evan or other key members of VeriSign’s 12 management. 13 384. For example, in 4Q01, VeriSign and a Japanese company, J-Data, signed a contract 14 for WebNum software licensing, and training/marketing/educational support services. Under the 15 contract, J-Data was to pay approximately $1 million in software license fees and an additional 16 $200,000 in training/marketing/educational support services to VeriSign (for a total of $1.2 million). 17 CW10 learned from Vice President of Sales for Asia and Latin America Kardos that Evan either 18 gave J-Data a letter or verbally told J-Data that VeriSign planned to examine J-Data’s finances and 19 make an investment in the company around the same time J-Data signed the WebNum services 20 contract. According to CW10, J-Data paid $625,000 within 90 days of the original contract date, but 21 J-Data could not pay the remainder of the fees due as of the end of June 2002. According to CW10, 22 J-Data was upset because it expected VeriSign to make an investment in J-Data which never 23 materialized. 24 385. Kardos also told CW10 that eSign, VeriSign’s Australian affiliate, had signed a 25 WebNum services software-licensing contract with VeriSign for $500,000 in 4Q01. eSign, however, 26 did not agree to any additional training/marketing/educational services support. According to 27 CW10, training, marketing, and services support are indispensable components of the WebNum 28 technology. The fact that eSign purchased only the software license but not the vital support

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1 services that accompany the license suggests that eSign did not have the need for WebNum services 2 and may have bought the license in order to boost VeriSign’s top line revenue. According to CW10, 3 by the end of 2Q02, eSign had not even paid for the $500,000 licensing fee. 4 386. On December 31, 2001, VeriSign signed a WebNum services contract with 5 TrustAsia, VeriSign’s affiliate in Singapore, for $800,000 in software licensing and an additional 6 $200,000 in training/marketing/educational services support. Prior to finalizing this deal, CW10 7 learned from Kardos that TrustAsia already owed VeriSign $3 to $4 million in payment for other 8 products and services, lending significant doubt to the collectibility of this agreement. The CEO of 9 TrustAsia, Seth Jutan (“Jutan”), was also the co-founder of Diginexo, VeriSign’s affiliate in Mexico, 10 Venezuela, Columbia, and the Caribbean. According to CW7, Diginexo is among the affiliates that 11 owed VeriSign millions of dollars. 12 387. Also on December 31, 2001, CW10 was told by Executive Vice President/General 13 Manager of Global Registry Services Division Lewis that VeriSign had just made a deal with 14 SkyGo, a mobile telephone marketing start-up company located near VeriSign’s Mountain View 15 headquarters. Under that deal, VeriSign was to invest $2 million in SkyGo and, in return, SkyGo 16 would pay VeriSign $1 million for a WebNum services software license, dated December 31, 2001. 17 According to the information CW10 learned from Lewis, the deal was a “round trip, slight of hand 18 deal” that allowed VeriSign to buy its own products and record revenue for FY01.

19 3. Facts Supporting a Strong Inference that Defendants Knew or Recklessly Disregarded that the Statements Regarding 4Q01 20 Results Were False When Made 21 388. Defendants knew or recklessly disregarded that the revenues reported for 4Q01 were 22 artificially inflated because, as described above, Gallivan and other corporate executives had a 23 pattern and practice of inflating the revenues reported to headquarters by the Network Solutions 24 subsidiary and VeriSign’s other business units. Defendants further knew or recklessly disregarded, 25 also as described above, that the results reported to headquarters by VeriSign’s business units in 26 4Q01 were already inflated as a result of the unrealistic sales goals that had been established and the 27 unreasonable pressure that had been placed on VeriSign’s sales staff, by means of “scrubbing,” 28 premature revenue recognition, doubtful collectibility, and other practices.

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1 389. Defendants further knew or recklessly disregarded that the market conditions in 4Q01 2 were insufficient to support sales at the levels being reported by the Company, also as described 3 above. In addition, Gallivan and other Company executives knew that the 4Q01 revenues included 4 the $12 million in revenues Gallivan had “made up” as the result of barter transactions VeriSign had 5 entered into with other companies, as previously alleged. 6 390. Defendants also were aware of the terms of the transactions with VeriSign’s affiliates 7 and technology partners, because those agreements were negotiated or approved at the highest levels 8 of the Company, including by Gallivan or Evan, as previously alleged. Defendants therefore knew 9 or recklessly disregarded that VeriSign was investing money in affiliates like Air2Web that did not 10 need VeriSign’s products or services, and also knew or recklessly disregarded that the percentage of 11 revenues derived from affiliate transactions was growing dramatically during 4Q01. As a result of 12 their familiarity with these transactions, defendants also knew or recklessly disregarded that a 13 significant percentage of VeriSign’s deferred revenue growth was the result of deferred revenues 14 booked by other companies acquired by VeriSign, and did not reflect organic growth in the 15 Company.

16 F. The Truth About VeriSign’s Business Continues to Leak Into the Market 17 391. On February 6, 2002, in the midst of market speculation regarding the legitimacy of 18 VeriSign’s dealings with its affiliates and partners, Bloomberg issued a report which stated in part: 19 VeriSign, Inc. shares fell 9.5 percent on concern that revenue at the manager 20 of the database of dot-com Web addresses may be inflated by sales to affiliated companies, an analyst said. 21 * * * 22 [VeriSign then had] about 48 international affiliates that host data centers for 23 the company’s business of providing Internet-security services . . . [and] [i]nvestors became concerned that the partner companies, some of which VeriSign has invested 24 in, may buy more software and services than they need, helping VeriSign artificially boost revenue . . . . 25 392. On or about February 7, 2002, VeriSign spokesman, Tom Galvin, in response to these 26 concerns, stated that the Company would not comment on stock activity. He also stated VeriSign 27 28

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1 made investments in six affiliates in 2001, and that these companies accounted for 3.2% of 2 VeriSign’s annual revenues of $983.6 million. 3 393. VeriSign’s stock price declined from $31 per share to a two-year low of $21.47 per 4 share between February 1, 2002 to February 6, 2002 with trading volume over 38 million shares on 5 February 6, 2002 alone – four times average trading volume. KPMG wrote that the price decline 6 was caused by rumors on Internet chat boards like RagingBull.com concerning (1) VeriSign’s 7 accounting for affiliate transactions, (2) the Company’s receivables balances and (3) KPMG 8 reopening the audit. Sclavos asked KPMG to agree to VeriSign issuing a press release stating 9 KPMG had signed off on the Company’s 4Q01 and FY01 financial results before they were issued – 10 which KPMG had done by issuing its January 22, 2002 audit report – but KPMG refused stating 11 there was “no professional work product covering what is meant by ‘signed off’” and that it was 12 “uncomfortable with the idea.” 13 394. On February 8, 2002 The Wall Street Journal’s Heard on the Street column published 14 an article entitled “VeriSign Stock Hurt by Queries About Its Books” that reported that VeriSign was 15 ‘“round-tripping” – in effect, making investments in companies that would immediately come back 16 to VeriSign in the form of affiliate fees, which boost revenue and earnings.” According to the 17 article, Sclavos said “[t]he company’s investments in affiliates average between $3 million and $5 18 million for a non-controlling minority stake in the start-ups of between 15% and 18%.” Sclavos 19 knew that statement was false because VeriSign’s had the ability to – and did – exercise significant 20 influence over the investee companies and because many of the investments were much greater than

21 $5 million. Indeed, VeriSign had just made $24 million of roundtrip investments in Firstream and 22 improperly recognized more than $10 million in revenue in 2001 that Firstream could not have paid 23 VeriSign absent the investment. In addition, The Wall Street Journal article also reported that 24 investors were also worried about the growth prospects for VeriSign’s domain name registration 25 business which had been misrepresented and concealed during the Class Period due to (1) the two- 26 year automatic renewals, (2) the overstatement of acquired deferred revenue and (3) VeriSign’s 27 improper segment reporting. Sclavos false statements reported in the Wall Street Journal article and 28

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1 the continuing concealment of VeriSign’s true financial condition caused VeriSign’s price to 2 continue to trade at artificially inflated prices. 3 395. Recognizing that their fraudulent accounting was beginning to reach the market, the

4 defendants disclosed for the first time in their 2001 Report on Form 10-K that was filed on March 5 19, 2002 that more than 10% of 2001 revenue was attributable to reciprocal arrangements, or “barter 6 transactions,” and roundtrip transaction. Specifically, the Company disclosed the following: 7 In 2001, we derived 3.8% of our total revenues from reciprocal arrangements. We derived no revenues from customers from reciprocal arrangements in 2000 and 8 1999. Typically in these relationships, under separate agreements, we sell our products and services to a company and that company sells to us their products and 9 services. We enter into these arrangements for strategic business purposes and the goods and services we receive in exchange are those we would have purchases in 10 non-reciprocal arrangements. These arrangements are independent relationships and are not terminable unless the terms of the agreements are violated. 11 We derived 6.5% in 2001, 2.8% in 2000 and 1.1% in 1999 of our total 12 revenues from customers with whom we have participated in a private equity round of financing, including several of the VeriSign Affiliates as well as various 13 technology companies in a variety of related market areas. Typically in these relationships, under separate agreements, we sell our products and services to a 14 company and, under a separate agreement, participate with other investors in a private equity round financing of the company. We typically make our investments 15 with others where our investment is less than 50% of the total financing round. Our policy is not to recognize revenue in excess of other investors’ financing of the 16 company. These arrangements are independent relationships and are not terminable unless the terms of the agreements are violated. 17 396. In the Report on Form 10-K, VeriSign also disclosed that it engaged in barter 18 transactions with IBM, Oracle, Phoenix Technologies and InfoSpace and falsely represented that the 19 transactions were recorded at terms VeriSign considered to be fair value. VeriSign also disclosed 20 the dollar amount of the barter transactions: 21 In 2001, we recognized revenues under reciprocal arrangements of 22 approximately $37.5 million, of which $27.0 million involved nonmonetary transactions, as defined above. We did not recognize any revenues under reciprocal 23 arrangements as defined above in 2000 and 1999. 24 397. In response, VeriSign’s stock dropped 10% to close at $26.42 on March 20, 2002. 25 But VeriSign’s stock continued to trade at artificially inflated prices because the true financial 26 condition of the Company continued to be concealed from investors. In addition, investors still did 27 not know that (1) VeriSign had reported overstated revenues, receivables, deferred revenue and 28 earnings by improperly accounting for the two-year auto-renewals and acquired deferred revenue,

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1 (2) VeriSign was misreporting domain name registrations by concealing the number of free and 2 promotional registrations and two-year auto-renewal registrations, (3) the extent to which VeriSign 3 improperly recognized revenues on the roundtrip and barter transactions and the effect on the 4 Company, (4) VeriSign had overstated earnings by failing to properly account for its long-term 5 investments in non-public companies under the equity method and by failing to record impairment 6 charges on many of the investments, and (5) VeriSign had reported overstated earnings by failing to 7 reserve for its delinquent receivables. Moreover, contrary to VeriSign’s March 19, 2002 statements 8 regarding affiliate relationships, VeriSign’s investments in its affiliates were dependent upon the 9 affiliates’ agreement to buy VeriSign products or services, thereby transferring the monies back to 10 VeriSign. In essence, VeriSign was paying itself to boost up revenue from these “round trip” deals. 11 Thus, while some of the artificial inflation was taken out of the stock with these disclosures, the true 12 picture of VeriSign’s business had not yet been revealed.

13 X. THE END OF THE CLASS PERIOD: VERISIGN’S 1Q02 EARNINGS RELEASE REVEALS ADDITIONAL ADVERSE INFORMATION ABOUT 14 THE COMPANY AND ITS TRUE FINANCIAL CONDITION IS EXPOSED 15 398. On April 25, 2002, VeriSign reported its 1Q02 results, which confirmed the falsity of 16 its prior statements. The report stated, in part: 17 Revenues for the first quarter of fiscal 2002 were $328 million. The results 18 for the current quarter reflect the acquisitions of Illuminet Holdings, Inc., which closed on December 12, 2001, and therefore include all of Illuminet’s first quarter 19 activity and H.O. Systems, Inc., which closed on February 8, 2002, and therefore include slightly less than two months of H.O. Systems’ first quarter activity. 20 Pro forma net income for the quarter ended March 31, 2002, which excludes 21 the amortization of intangible assets related to acquisitions and stock-based compensation charges related to acquisitions, (both of which are included under 22 GAAP results), was $68 million, or $0.28 diluted earnings per share compared to pro forma net income in the quarter ended March 31, 2001 of $49 million, or $0.23 23 diluted earnings per share. Including the amortization of intangible assets and stock- based compensation charges related to acquisitions not reflected in the pro forma 24 results, the net loss for the quarter ended March 31, 2002 was $21 million. 25 VeriSign’s first quarter results were not fully taxed, however on a fully taxed basis using a 30% tax rate consistent with financial analyst projections, pro forma net 26 income, excluding the amortization of intangible assets and stock-based compensation charges related to acquisitions, was $47 million or $0.20 diluted 27 earnings per share. 28

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1 Pro forma operating income for the first quarter, which excludes stock-based compensation charges and the amortization of intangible assets, was $61 million, or a 2 19% operating margin, as compared to $27 million, or a 13% operating margin, in the quarter ended March 31, 2001. On a GAAP basis, operating loss was $27 million 3 in the quarter ended March 31, 2002 as compared to a loss of $1,351 million in the quarter ended in March 31, 2001. 4 “Clearly, our first-quarter results were not up to our expectations as we 5 encountered significant spending delays in our IT and telecom customer bases, particularly in the last few weeks of March, as well as more severe challenges in our 6 Mass Markets domain name business,” said Stratton Sclavos, chairman and CEO of VeriSign. “However, even in this difficult environment, we were pleased to be able 7 to generate meaningful pro forma net income, expand our service offerings and advance our overall strategy through a global alliance with IBM and the introduction 8 of our digital trust services framework.” 9 VeriSign also announced plans to restructure its operations to fully rationalize, integrate and align the resources of the company . . . 10 As a result of the restructuring, VeriSign is anticipating charges of 11 approximately $70 to $80 million. . . . 12 “With a solid core business in place, VeriSign is now realigning and integrating all corporate functions to most efficiently execute on our strategy. With 13 the economic outlook still uncertain, it is particularly important for us to take these difficult but necessary steps,” said Dana Evan, Chief Financial Officer of VeriSign. 14 399. On this news VeriSign’s stock price dropped from $18.24 to $9.89 per share. The 15 decline in the price of VeriSign’s stock as information leaked into the market between October 25, 16 2001 and April 25, 2002, including the sharp decline following the April 25, 2002 revelations of 17 deteriorating business conditions, was causally connected to defendants’ representations about the 18 amount, source, timing and reliability of the Company’s reported revenues and the demand for its 19 products during the Class Period. 20 400. Market analysts were shocked by the nature and magnitude of the adverse 21 information reported on April 25, 2002, as the disclosures revealed that the overall market for 22 VeriSign’s products had been declining. As a result, analysts quickly recognized that the disclosures 23 revealed the true state of VeriSign’s financial health. These facts had been concealed throughout the 24 Class Period by the accounting manipulation described above. On April 26, 2002, several analysts 25 wrote as follows: 26 27 28

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1 (a) Credit Suisse First Boston analyst, Todd D. Rakerm issued a report entitled, 2 “Business Degradation Surprising – Reduction to Buy from Strong Buy.” Raker wrote, “The 3 deterioration of VeriSign’s various businesses comes as a shock.” 4 (b) “We believe that credibility concerns and a lack of confidence in estimates are 5 likely to serve as a key overhang on VeriSign shares. ... The big surprise to us in the quarter was a 6 further significant weakening in the company’s domain name business, which we thought was 7 bottoming out.” Legg Mason Wood Walker, Inc., 4-26-02. 8 (c) “Weakness in renewal rates and the decline in domain names under 9 management and in the registry (27.3 million v. 28.8 million in 4Q01) led to a 5% Q/Q decline in 10 deferred revenue to $588 million, which is cause for concern.” SunTrust Robinson Humphrey, 4-26- 11 02. 12 (d) US Bancorp Piper Jaffray analyst, C. Eugene Munster, issued a report entitled 13 “Downgrading From Outperforms to Hold Perform on Our Belief that FY02 will Not See Organic 14 Revenue Growth.” Munster noted, “with the company experiencing weaknesses in each of its 15 primary business units, . . . organic revenue growth will prove elusive in fiscal 2002.” 16 (e) Wedbush Morgan Securities analyst, Timothy S. Leehcaley, downgraded 17 VeriSign’s stock from buy to hold, in a report entitled “VeriSign Missed Our Top-Line Estimate and 18 Rescinded Full-Year Guidance; Downgrading our Rating to Hold.” Leehealey wrote, “we were not 19 encouraged by management rescinding guidance for the full-year 2002, the poor cash flow numbers, 20 the surprisingly low domain name renewal rate, and the large drop in gross margins caused by 21 general pricing pressures and product mix. These negatives, coupled with limited visibility into the 22 registrar business and the market’s generally negative view of security companies, lead us to believe 23 that VeriSign’s stock is likely to trade sideways for the next several months.” 24 (f) “VRSN: Domain Names Sink The Quarter—Downgrading Rating: Reducing 25 Estimates” “The company saw its customer base decline from 13.6 million active registrations to 12 26 million at the end of the quarter, despite having signed up 2.6 million new domain name registrations 27 in the quarter. What this implies is that expiring domain names still significantly outweigh new 28

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1 registrations. And in fact the company’s renewal rate fell against to 40%, according to 2 management.” Wachovia Securities, 4-26-02. 3 (g) “the company’s first quarter results and management’s lowered revenue and 4 EPS guidance hammered home the reality that weakness in the company’s core business (domain 5 names and PKI) will eat through all of the accretion from recent acquisitions.” Bear, Stearns & Co., 6 Inc., 4-26-02. 7 401. As the foregoing analyst reports, and many others like them, indicate, the dramatic 8 decline in the price of VeriSign stock at the end of the Class Period was the direct and proximate 9 result of the disclosure of problems in VeriSign’s business, particularly its domain name business, 10 including its inability to estimate renewal rates, overstatement of domain name revenues, misleading 11 appearance of sequential deferred revenue growth, the undisclosed weakness in its registrar business 12 beyond the purge of free and promotional names, $70-80 million in unexpected charges to expense 13 and the reliability and visibility of VeriSign’s future earnings. These were the relevant truths that 14 were concealed from investors during the Class Period by defendants’ scheme to defraud. Hence, 15 the decline in VeriSign’s stock price following the April 25, 2002 announcement were proximately 16 caused by the false and misleading statements defendants made during the Class Period, as alleged 17 herein, causing damage to investors who purchased shares in reliance on the accuracy of the 18 information defendants reported to the market about the financial condition and performance of 19 VeriSign’s domain name business. 20 402. In addition, VeriSign finally admitted that it had no basis to estimate its renewal rates. 21 Although defendants tried to pitch this as a recent event, in fact they had been unable to estimate 22 renewal rates throughout the Class Period. As a Deutsche Bank Securities analyst wrote: 23 Although renewal rates during the first 2 months of the quarter were on a predictable trend, the company saw a dramatic decline in renewal rates in March. Management 24 has traditionally relied on its ability to assess renewal rates as a key aspect of estimating deferred revenue bookings for anticipate renewals – a practice that the 25 company views as “very conservative.” . . . Now, these renewal rates are falling at a surprising rate, and the company is characterizing renewal rates as unpredictable. As 26 these renewal rates have become “unpredictable,” we would like to see the company adopt practices that reduce reliance on estimation and more tightly link deferred 27 revenue bookings with actual renewal events. 28

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1 In fact, as previously alleged, renewal rates were “unpredictable” and had been “falling at a 2 surprising rate” since before the Class Period, such that revenue recognition was already improper 3 absent actual renewal events. 4 403. The timing and magnitude of VeriSign’s stock price declines negate any inference 5 that the loss suffered by lead plaintiffs and other class members was caused by changed market 6 conditions, macroeconomic or industry factors or Company-specific facts unrelated to the 7 defendants’ fraudulent conduct. During the same period in which VeriSign’s stock price fell 46% as 8 a result of defendants’ fraud being revealed, both the market and industry indexes remained virtually 9 unchanged. 10 404. Indeed, after the Class Period VeriSign recorded substantial investment impairment 11 charges and substantially increased reserves on delinquent receivables (or wrote them off): 12 (a) In 1Q02, VeriSign wrote-off its entire $18.9 million investment in RealNames 13 after recognizing $1.75 million of revenues from the company in 2001. VeriSign also doubled 14 specific reserves on delinquent receivables from $7.3 million as of December 31, 2001 to $14.3 15 million as of March 31, 2002. The Company established a $3.6 million reserve on PT Trust’s $4.7 16 million delinquent receivable after VeriSign recognized $3.6 million of revenue in the prior quarters. 17 VeriSign also established a $2.6 million reserve on ITrust’s delinquent receivable after VeriSign 18 recognized $2.6 million of revenue in the prior quarters. In addition, after recognizing more than $2 19 million of revenue during the Class Period, VeriSign wrote-off $2.5 million of the Certisign Portugal

20 delinquent receivable in 4Q01 and the remaining $1.6 million balance in 1Q02. 21 (b) In 2Q02, VeriSign recorded $94.8 million of impairment charges on the 22 following roundtrip and other long-term investments after recognizing millions of dollars of revenue 23 from the investee companies during the Class Period. 24 Investee Investment Balance Impairment Charge 25 BigStep $3,000,000 $3,000,000 ClearCommerce $2,000,002 $2,000,002 26 Critical Path $964,233 $480,028 EuroTrust $10,438,555 $6,521,555 27 ezlogin/724 $120,000 $116,189 28 Go2 $6,019,999 $6,019,999

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1 Homestead $5,000,000 $5,000,000 Identix $2,000,000 $68,875 2 Interliant $367,030 $339,066 ITrustChina $1,000,000 $1,000,000 3 ITrustChina(2) $2,000,000 $2,000,000 4 MSC Trustgate $2,000,000 $2,000,000 NetSecure $5,500,000 $5,500,000 5 Quova $5,223,000 $5,223,000 Roving $2,000,000 $2,000,000 6 SafeOnline $5,000,000 $5,000,000 Sharemedia $1,580,000 $1,580,000 7 SkyGo $2,000,000 $2,000,000 8 Slam Dunk $16,500,000 $16,500,000 SurePay/E1 Global $20,000,000 $18,000,000 9 USA.net $4,600,000 $4,600,000 WAND $2,700,000 $2,700,000 10 Yodlee $1,500,000 $1,500,000 11 i-DNS $1,545,828 $1,545,828 12 (c) VeriSign also established additional specific reserves on delinquent 13 receivables and recorded additional write-offs. After recording $707,815 of revenue from 14 Ameritrade in 2001, VeriSign wrote-off the entire $350,000 receivable in 2Q02. After recording 15 $2.0 million of revenue from Adacom in 2001, VeriSign established a $1.7 million reserve. After 16 recording more than $3.8 million of revenue from NetSecure in 2001, VeriSign not only wrote-off its 17 entire $5.5 million investment but established a $3.8 million reserve. After recording $4 million of 18 revenues from SurePay/E1 Global in 2001, VeriSign not only wrote-off $18 million of its $20 19 million investment but established a $332,000 reserve. 20 (d) In 3Q02, VeriSign recorded additional impairment charges of $54.2 million, 21 including the following roundtrip and other long-term investments. 22 Investee Investment Balance Impairment Charge 23 Air2Web $5,000,000 $5,000,000 Certisign Brazil $7,500,000 $6,000,000 24 Certplus $1,697,298 $1,697,298 Firstream $20,947,373 $20,947,373 25 Global Names $5,000,000 $5,000,000 Crosscert $4,001,000 $2,001,000 26 Nominum $3,000,000 $3,000,000 27 Qualys $1,518,796 $1,518,796 SurePay/E1 Global $2,000,000 $2,000,000 28 Truenet $3,000,000 $2,500,000

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1 ITTrust $3,000,000 $3,000,000 2 (e) VeriSign also established additional specific reserves on delinquent 3 receivables and recorded additional write-offs. VeriSign wrote-off $3.5 million of delinquent 4 receivables, including $668,000 of Worldcom receivables and $607,000 of Wisekey receivables. 5 After recording $168,750 of revenue from Bantu in 2001, VeriSign established a $279,000 reserve. 6 After recording $1.25 million of revenue in 2001 from Certplus, VeriSign not only wrote-off its 7 entire $1.7 million roundtrip investment but established a $525,000 reserve on the company’s 8 delinquent receivable. After recording more than $2 million of revenue from Crosscert in 2001, 9 VeriSign not only wrote-off $2 million of its $4 million roundtrip investment but established a 10 $410,000 reserve on the company’s delinquent receivable. After recording $8 million of revenue 11 from Euro909/EuroTrust, VeriSign not only wrote-off $6.5 million of its $10.4 million roundtrip 12 investment in 2Q02, but established a $1.6 million reserve on the company’s delinquent receivable. 13 After recording more than $3 million of revenue in 2001 from TrustItalia, VeriSign established a 14 $1.4 million reserve. 15 (f) In 4Q02, write-offs of uncollectible receivables increased significantly to 16 $19.4 million. 17 Customer Write-off 18 NetSecure $3,933,000 PT Trust $3,213,000 19 ITrust $2,619,000 ITrustChina $1,408,000 20 Trust Italia $1,182,000 21 WorldPreferred $699,000 Air2Web $615,000 22 Certisign Brazil $1,000,000 VPS Inactive $1,035,000 23 Other $3,706,000

24 XI. PROXIMATE LOSS CAUSATION/ECONOMIC LOSS 25 405. During the Class Period, the defendants participated in the scheme to deceive 26 investors and the market by causing VeriSign to report materially false and misleading financial 27 results and by making other false and misleading statements. As alleged above, the defendants 28 knew, VeriSign’s financial results were not prepared in accordance with GAAP due to the numerous PLAINTIFFS’ THIRD AMENDED CLASS ACTION COMPLAINT - C-02-2270-JW(PVT) - 144 -

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1 accounting improprieties alleged herein. Specifically, the defendants knew that VeriSign improperly 2 accounted for (1) revenue and deferred revenue derived from the purported sale of domain names, 3 and the rates at which those names were being sold and renewed; (2) long-term investments 4 (including the failure to account for investments in non-public companies under the equity method, 5 the failure to record impairment charges and the improper recognition of revenue on roundtrip 6 investments); (3) barter transactions; (4) receivables with doubtful collectibility; (5) transactions 7 with affiliates; and (6) goodwill. 8 406. Defendant’s misrepresentations concealed VeriSign’s true financial condition from 9 investors, including: (1) the extent of revenues it claimed to have earned from roundtrip, barter and 10 related party transactions; (2) the amount of revenues VeriSign earned from the sales of domain 11 names, both new and renewed; (3) the rate at which domain names were being renewed by 12 VeriSign’s customers; (4) the visibility and reliability of its future revenue stream derived from 13 deferred revenues booked on the purported sale of those names; and (5) the overall demand for its 14 products and services, and the financial strength of its business. 15 407. Defendants knew that the accounting improprieties caused VeriSign to report inflated 16 revenue, accounts receivable, investments, deferred revenue and earnings. Combined, these 17 practices impacted VeriSign’s reported revenue and earnings throughout the Class Period, allowing 18 VeriSign to boast to Wall Street that VeriSign had “strong results,” “strong momentum,” 19 “accelerated demand,” “sequential revenue growth,” “continued growth across all major lines of 20 [VeriSign’s] business,” “expanded margins”, “solid” and “strong” pipelines. Indeed, these 21 fraudulent schemes caused and maintained the artificial inflation in VeriSign’s stock price 22 throughout the Class Period and until VeriSign’s true financial condition began to be revealed to the 23 market on October 15, 2001, January 25, 2002, Feb;ruary 6, 2002, March 19, 2002 and April 25, 24 2002. 25 408. The fraud and misrepresentations by the defendants inflated the price of VeriSign’s 26 publicly-traded securities throughout the Class Period, causing its price increases to be higher, and 27 its price declines to be lower, than they would have been had the truth about VeriSign’s financial 28 condition been revealed to investors. When the relevant truth concealed from investors by

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1 defendant’s fraud was revealed, including through information finding its way into the market on 2 October 25, 2001, January 25, 2002, February 26, 2002, March 19, 2002 and April 25, 2002, the 3 fraud-induced inflation came out of the stock price, causing damage to investors who purchased 4 shares at the artificially-inflated prices prevailing during the Class Period. 5 409. VeriSign’s stock traded in line with its proxy peer group at the beginning of the Class 6 Period. But for the fraudulent and misleading statements made by defendants regarding the 7 Company’s FY00 results and FY01 prospects, including its substantial deferred revenue stream from 8 domain names that had purportedly already been sold, the price of VeriSign’s securities would have 9 fallen farther and faster than, and traded below, the proxy peer group. Defendant’s fraud kept the 10 price of VeriSign securities artificially inflated during this period, causing harm to investors who 11 purchased during this period and did not sell before the relevant truth began to be revealed. 12 410. After VeriSign reported its 1Q01 results after the close of the market on April 26, 13 2001, the Company’s stock price increased $5.69 or 12.3% and closed at $51.90 on April 27, 2001. 14 The proxy peer group increased 2.8% from April 26, 2001 to April 27, 2001. Had VeriSign 15 accurately reported its 1Q01 financial results and revealed its true financial condition, the 16 Company’s stock price would not have increased 12.3%. Thus, class member who purchased 17 VeriSign stock on or after 4/27 did so at artificially inflated prices. VeriSign’s stock price continued 18 to increase closing at $66 on May 22, 2001 but then gradually declined and closed at $47.17 on July 19 26, 2001. Class members who purchased VeriSign stock during this time did so at artificially 20 inflated prices because VeriSign’s true financial condition continued to be concealed from the 21 market. 22 411. After VeriSign reported its 2Q01 results after the close of the market on July 26, 23 2001, the Company’s stock price increased $6.93 or 14.7% and closed at $54.10 on July 27, 2001. 24 By comparison, the proxy peer group increased just 1%. Had VeriSign accurately reported its 2Q01 25 financial results and revealed the Company’s true financial condition, the stock price would not have 26 increased 14.7%. As a result, class members purchased VeriSign stock at artificially inflated prices. 27 VeriSign’s stock price declined in August 2000 and September 2000 but then rebounded and closed 28 at $53.34 on October 25, 2001. By comparison the proxy peer group declined 19% from July 27,

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1 2001 to October 25, 2001. Class members who purchased VeriSign stock during this time did so at 2 artificially inflated prices because VeriSign’s true financial condition continued to be concealed 3 from the market. 4 412. After VeriSign reported its 3Q01 results after the close of the market on October 25, 5 2001, the Company’s stock price declined $10.52 or 19.7% and closed at $42.82 on October 26, 6 2001. By comparison the proxy peer group remained unchanged. The October 25, 2001 decline 7 caused some, but not all, of the prior fraud-induced inflation to come out of VeriSign’s stock price, 8 as some analysts raised concerns that declines in VeriSign’s renewal rates and deferred revenues 9 were an indication that slackening demand for Internet services and increasing competition were 10 taking a toll on VeriSign’s business. For example:

11 • US Bancorp Piper Jaffray analyst, C. Eugene Munster, observed that VeriSign’s 3Q01 deferred revenue grew only at 3%, “the low end of Company guidance.” 12 Merrill Lynch analyst M. Fernandes echoed, “much to our surprise, deferred revenue 13 only grew 3%.” 14 • Soundview Technology analyst, Paul Saunders, noted that the low deferred revenue grow was “primary due to lower domain name renewal rates,” noting that “renewal 15 rates were not provided on the call, but were below previous quarters as the total base of domain names under management declined by 1.5 million names.” 16 • Robertson Stephens analyst Dane E. Lewis wrote, “current deferred revenue 17 coverage of forward 12-month revenue deteriorated... suggested some deterioration 18 in visibility in VeriSign’s model.” 19 • Legg Mason analyst Todd Weller summarized, “we believe that several issues such as some deterioration in its key metrics in its domain name registration business, 20 lower deferred revenue growth than some had hoped, and DSOs that appear on the surface to have risen sharply again likely will be a source of investor concerns.” 21 22 • Bear Stearns analyst Chris Kwak downgraded the stock from “Attractive” to “Neutral,” noting that “with the deterioration in the company’s domain name 23 business, we believe management’s revenue and EPS guidance for 2002 are at serious risk.” 24 413. Despite these disclosures, VeriSign’s stock price continued to trade at artificially 25 inflated prices because the Company’s true financial condition continued to be concealed from the 26 market by the undisclosed accounting manipulations used to inflate VeriSign’s periodic revenues, 27 including by the continued inflation of VeriSign’s renewal rates, the continued booking of deferred 28

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1 revenues from purported sales of domain names that had never been bought or paid for, the 2 continued failure to take required writedowns of receivables to reflect tens of millions of dollars in 3 uncollectible accounts, and the continued use of end of the quarter roundtrip, barter, related party 4 and other undisclosed “lumpy revenue” transactions. Had the financial impact of these practices 5 been revealed, the price of VeriSign’s stock would have declined even further than it did following 6 the announcement of its 3Q01 financial results. Because the relevant truth was not completely 7 revealed by those results, however, VeriSign’s stock continued to trade at artificially inflated levels. 8 In addition, efforts by VeriSign thereafter to minimize the impact of these disclosures, including by 9 assuring investors of the stability and visibility of its business and concealing declines in overall 10 market demand and VeriSign’s market share, worked both to prevent further dramatic declines in the 11 price of its securities, and to re-inflate the price of its shares. 12 414. Additional inflation was removed from VeriSign’s stock price on February 6, 2002, 13 when the price declined 9.5% to $23.93. Bloomberg and The Wall Street Journal published articles 14 that stated the price declined due to concerns over the extent of the Company’s unreported use of 15 roundtrip, barter, and related party transactions to inflate its periodic revenues. Although these price 16 declines removed some of the artificial inflation from the stock causing class members economic 17 loss, the stock continued to trade at artificially inflated prices because VeriSign’s true financial 18 condition continued to be concealed from investors. 19 415. On March 19, 2002, as the market continued to question the legitimacy of VeriSign’s 20 reported revenue and the conditions of VeriSign’s core businesses, VeriSign filed its 2001 Form 21 10-K and disclosed for the first time that more than 10% of 2001 revenues were attributable to barter 22 and roundtrip transactions. VeriSign’s stock declined $2.71 or 10% and closed at $26.42 on March 23 20, 2002. By comparison, the proxy peer group declined 3.6%. Although the price decline again 24 removed some of the artificial inflation from the stock causing class members economic loss, the 25 stock continued to trade at artificially inflated prices because VeriSign’s true financial condition 26 continued to be concealed from investors. 27 416. On April 25, 2002 VeriSign reported disappointing 1Q02 results including declining 28 domain name registrations, rising receivables, reduced revenues and deferred revenues. In addition

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1 the Company dramatically lowered guidance for the year and announced a major restructuring of 2 operations. As a result, the Company’s stock price declined $8.35 or a stunning 45.8% and closed at 3 $9.89 on April 26, 2002. By comparison, the proxy peer group declined just 1.4%. 4 417. The decline in the price of VeriSign’s stock as information leaked into the market 5 between October 25, 2001 and April 25, 2002, including the sharp decline following the April 25, 6 2002 revelations of deteriorating business conditions, was causally connected to defendants’ 7 representations about the amount, source, timing and reliability of the Company’s reported revenues 8 and the demand for its products during the Class Period. 9 418. But for defendants’ deliberate efforts to manipulate VeriSign’s reported revenues and 10 mislead investors about VeriSign’s revenue, accounts receivable, deferred (future) revenue, and 11 business prospects, VeriSign’s stock would never have traded or maintained at the artificially 12 inflated levels it did during the Class Period, or been poised for a fall when the true condition of 13 VeriSign’s problems was partially and belatedly revealed at the end of the Class Period.

14 XII. FALSE FINANCIAL STATEMENTS 15 419. In order to inflate the price of VeriSign’s stock, defendants caused the Company to 16 falsely report its pro forma and GAAP results for 4Q00, all four quarters and year end of FY01 and 17 1Q02 through improper revenue recognition and other improper accounting practices, as set forth 18 below. 19 420. VeriSign reported the following financial results in press releases, analyst calls and 20 SEC filings during the Class Period:

21 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 Dec 31, March 31, June 30, Sept 30, Dec 31, March 31, 22 2000 2001 2001 2001 2001 2002 Pro Forma13 $45.5 $48.6 $52.6 $59.7 $71.8 $67.7 23 Net Income (in millions) 24 25 13 VeriSign’s pro forma results excluded non-cash expenses and therefore did not present the 26 full financial picture of VeriSign. So, for example, the pro forma net income does not include the non-cash expense of goodwill (and other intangible assets), stock based compensation, and other 27 non-cash expenses. The goodwill alone amounted to $15 billion of expenses not included in pro forma net income and EPS. VeriSign’s stock price and market expectations were based principally 28 PLAINTIFFS’ THIRD AMENDED CLASS ACTION COMPLAINT - C-02-2270-JW(PVT) - 149 -

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1 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 Dec 31, March 31, June 30, Sept 30, Dec 31, March 31, 2 2000 2001 2001 2001 2001 2002 Pro Forma $0.21 $0.23 $0.25 $0.28 $0.33 $0.28 3 Earnings Per Share 4 GAAP ($1,312) ($1,377) ($11,191) ($387) ($401) ($40) Net Loss 5 (in millions) GAAP ($6.64) $6.90) ($55.49) ($1.91) ($1.91) ($0.17) 6 Net Loss Per Share 7 8 421. VeriSign’s reported results, and its representations concerning these results, were 9 materially false and misleading when made, because VeriSign’s financial statements for these 10 periods were not a fair presentation of VeriSign’s results, and were presented in violation of GAAP 11 and SEC rules. Specifically, VeriSign inflated its revenue and earnings during the Class Period by: 12 (1) fraudulently recognizing and improperly reporting inflated revenue, deferred revenue and 13 accounts receivable in connection with the registration business, (2) engaging in sham “round trip” 14 transactions in which the Company invested cash in customers that was funneled back to VeriSign 15 and reported as sales; (3) improperly accounting for certain minority interest investments in Internet 16 start-up companies (investees) under the cost method rather than the equity method; (4) improperly 17 recognizing inflated revenue on barter transactions in which cash never changed hands; (5) failing to 18 accurately report the value of its investments; and (6) false segment reporting. In addition, 19 throughout 2001, VeriSign failed to make the required disclosures under GAAP and SEC rules about 20 significant increases in reported sales to investees, significant revenues from barter transactions and 21 transactions with related parties. These shenanigans caused VeriSign’s reported results and financial 22 statements to be materially false when made, in violation of GAAP. 23 422. GAAP are those principles recognized by the accounting profession as the 24 conventions, rules and guidelines that define acceptable accounting practices. SEC Regulation S-X

25 on its reported pro forma numbers as evidenced by the fact that VeriSign’s press releases, investor 26 conference calls and analyst reports focused mainly on pro forma results. Throughout the Class Period, VeriSign’s pro forma financial statements and GAAP financial statements were both 27 misstated. 28

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1 (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC that are not prepared 2 in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other 3 disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, 4 with the exception that interim financial statements need not include disclosures that would be 5 duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a).

6 A. VeriSign Inflated and Prematurely Recorded Domain Name Revenue Deferred Revenue and Accounts Receivable 7 423. As noted above, Verisign’s revenue for its domain registrations, particularly relating 8 to its revenue concerning the autorenewal of expiring registrations, did not meet the GAAP criteria 9 for revenue recognition. Specifically, 1) collectibility was not probable and 2) VeriSign had no basis 10 with which to estimate collectibility, required by Concepts 5, FAS 5, SAB 101 and APB 10. Under 11 any circumstances, GAAP requires that revenue recognition be deferred until all revenue recognition 12 criteria are met, including that there must be persuasive evidence of an arrangement, collection must 13 be probable, and the entity recording revenue must be able to reasonably estimate the amount that 14 will be collected. For autorenewals, VeriSign did not meet any of the criteria until payment or a 15 timely renewal commitment was actually received from the customer, as set forth below. 16 424. According to FASB Statement of Financial Accounting Concepts No. 5, Recognition 17 and Measurement in Financial Statements of Business Enterprises (“Concepts 5”): 18 Revenues and gains generally are not recognized until realized or realizable . . . If 19 collectibility of assets received for product, services, or other assets is doubtful, revenues and gains may be recognized on the basis of cash received. 20 Concepts 5, ¶83. 21 425. According to FASB Statement of Financial Accounting Standards No. 5, Accounting 22 for Contingencies (“FAS 5”): 23 The conditions under which receivables exist usually involve some degree of 24 uncertainty about their collectibility, in which case a contingency exists as defined in paragraph 1. Losses from uncollectible receivables shall be accrued when both 25 conditions in paragraph 8 are met . . . Whether the amount of loss can be reasonably estimated (the condition in paragraph 8(b)) will normally depend on, among other 26 things, the experience of the enterprise, information about the ability of individual debtors to pay, and appraisal of the receivables in light of the current economic 27 environment. In the case of an enterprise that has no experience of its own, reference to the experience of other enterprises in the same business may be appropriate. 28 Inability to make a reasonable estimate of the amount of loss from uncollectible

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1 receivables (i.e., failure to satisfy the condition in paragraph 8(b)) precludes accrual and may, if there is significant uncertainty as to collection, suggest that the 2 installment method, the cost recovery method, or some other method of revenue recognition be used . . . 3 FAS 5, ¶¶22-23. 4 426. VeriSign’s renewal rates immediately dropped upon introduction of the two-year 5 autorenewal. In addition, there was dramatic turmoil in the industry, with an increasing number of 6 registrar competitors, price competition with uncertain effect, registrars poaching customers from 7 one another, changing business models and VeriSign’s rapid loss in market share. Moreover, 8 according to confidential witnesses, duringg the Class Period, VeriSign never tried to enforce an 9 autorenewal. 10 427. In fact, that VeriSign could simply mail 2-year renewal notices to customers and 11 record revenue violated FAS 5’s prohibition against recording gain contingencies, as well as SAB 12 101 and Concepts 2 requirements that there be persuasive evidence of an arrangement. According to 13 FAS 5, a contingency is an uncertainty that will be resolved when one or more future events occur or 14 fail to occur. Much like a magazine subscription, the act of sending a renewal notice is not a revenue 15 earning event, and even VeriSign’s pervasive Class Period practice of not deleting registrations for 16 non-payment does not result in earned revenue if it is never collected. According to FAS 5, gain 17 contingencies should not be recorded because “to do so might be to recognize revenue prior to its 18 realization.” For example, under revenue recognition policies for newspapers and magazines, 19 renewals are not recorded until received from the customer. By recording registration renewals 20 prior to receipt, VeriSign recognized revenue and deferred revenue prior to its realization, in conflict 21 with FAS 5. 22 428. Until the customer communicated an intent to renew (by actually paying), all 23 VeriSign had was a gain contingency that could not be recorded under GAAP. As a result of 24 VeriSign’s improper accounting for registration renewals, during the Class Period VeriSign 25 overstated its A/R by at least $65 million, its revenue by at least $22 million and its deferred revenue 26 by at least $43 million. 27 28

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1 429. Even assuming that Verisign could, consistent with GAAP recognize revenue by 2 making reasonable estimates and recording the estimates as revenue, deferred revenue and A/R, 3 VeriSign had no basis to make reasonable estimates during the Class period and thus, violated 4 GAAP. As noted above, the market had canged dramatically and the estimates related to a product 5 (the 2-year autorenewal) that had never been sold under any circumstances. Verisgin’s “estiamtes” 6 were therfore unreasonable form the start. Moreover, as detailed above, its estimates during the class 7 period confirmed that there was no reasonable basis to do so. But, Versign’s decision to cover this up 8 y making forward looking adjustments also violated GAAP., According to Accounting Principles 9 Bulletin No. 20, Accounting Changes (“APB 20”), when estimates change, the change must be 10 reflected in the current period, so that the current period financial statements reflect only the latest 11 estimates. 12 430. During the Class Period, VeriSign’s revenue recognition policies violated this GAAP 13 principle. Specifically, VeriSign was required to monitor its renewal estimates and adjust its 14 estimates to actual results. When VeriSign knew its actual renewal rates, according to GAAP, the 15 difference between VeriSign’s estimate and actual collections result in a “change in estimate” which 16 is supposed to be recorded as follows: 17 (a) The balance sheet for the period of change and subsequent periods should be 18 adjusted to reflect only the latest estimates. 19 (b) The statement of income for periods following the period of change should 20 reflect only the latest estimates. 21 (c) The statement of income for the period of change is affected by the entire 22 amount of the change, even if it relates to prior periods. Thus, the income statement of the period in 23 which the change is identified can be severely affected by the change if the change in estimate is 24 significant. 25 431. Instead of following these basic principles, VeriSign would purportedly adjust only

26 its latest renewals by the difference between its prior estimate and its actual experience – leaving its 27 earlier, incorrect revenue estimates intact. This is falsely represented Verisign’s finaincial results, 28

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1 because historical and future financial statements would continue to be misstated. In the case of 2 VeriSign, this policy had several results, all of which violated GAAP: 3 (a) Instead of correcting the cumulative revenue recognition so future periods 4 would be fairly stated, the improper revenue recognition error would not be corrected until the latest 5 renewals were fully amortized, i.e. two-years after the amount of the error was identified. 6 (b) A/R would continue to be overstated for the same period of time. 7 (c) The previously overstated revenue, and current A/R balances that resulted 8 from VeriSign’s incorrect estimates, would not be disclosed or corrected. 9 (d) For as long as VeriSign continued to inflate (or inadequately reduce) its 10 renewal estimates, its financial statements continued to be inaccurate.

11 B. VeriSign Repeatedly Violated SOP 97-2 and SAB 101 Revenue Recognition Requirements for its Software, License and Affiliate 12 revenue 13 432. In every quarter during the Class Period, VeriSign improperly recognized millions in 14 software and license revenue, primarily to international affiliates, but also to domestic and

15 international Internet startups. According to SOP 97-2 and SAB 101, each of the following criteria 16 must be met prior to recognition of any software revenue:

17 • Persuasive evidence of an arrangement exists. 18 • Delivery has occurred. 19 • The vendor’s fee is fixed or determinable. 20 • Collectibility is probable. 21 433. In most instances of sales to international affiliates and Internet startups, collection 22 was not probable. In cases where VeriSign provided funds to its affiliates so they might have the 23 appearance of an ability to pay VeriSign, these were not arms-length sales, and they lacked 24 economic substance. Such arrangements should have been recorded as a return of VeriSign’s 25 investment and not as revenue. (GAAP requires that transactions be accounting for according to 26 their substance. See AU §411, “The Meaning of ‘Present Fairly in Conformity with GAAP’”.) In 27 addition, many of VeriSign’s affiliates defaulted on payments due to VeriSign, even when VeriSign 28

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1 gave them enough money to pay. In these cases, the investments should have been written off and 2 no revenue recognized. 3 434. In addition, by practice, VeriSign’s fees were not fixed and determinable. It was 4 VeriSign’s practice to modify contracts and make concessions in order to encourage payment or 5 make additional sales. Also, many fees were not paid within 12 months. According to SOP 97-2, a 6 practice of modifying contractual terms or allowing more than 12 months for complete payment, by 7 definition, means fees are not fixed and determinable at inception and revenue recognition must be 8 deferred. Also, SOP 97-2 provides that if resellers are new, undercapitalized or in financial 9 difficulty, they may not have a demonstrable ability to pay prior to collecting cash from customers, 10 in which case the fee is not fixed and determinable, and revenue recognition must be deferred. 11 435. SOP 97-2 and SAB 101 also address proper accounting for “multiple-element 12 arrangements,” which describes “bundled” purchases that include separate elements, such as 13 installation, training, maintenance, support and upgrades. Under SOP 97-2 and SAB 101, when the 14 seller does not have “Vendor Specific Objective Evidence” (“VSOE”)14 for the value of each 15 undelivered element, all elements must be recognized as revenue ratably (evenly) over the contract 16 term; up front (immediate) revenue recognition of the software is prohibited. In addition, if an 17 undelivered element is “essential to the functionality” of a delivered element (such as complex 18 installation and training), no revenue may be recognized until the undelivered element is delivered. 19 436. According to SOP 97-2, installation is considered to be essential when software is not 20 “off the shelf” software (easily installable without customization), and separate (up front) revenue 21 recognition for the software is not allowed. Installation of VeriSign’s security and certificate 22 23 24

25 14 VSOE is defined as the price charged when sold separately, or the price established for future separate sales that will not change. VerisSign’s elements for installation of and training for Payment 26 Affiliate Centers, Enterprise Service Centers and Universal Service Centers (by way of example) had no VSOE because they were never sold separately, nor could they be, since these products and 27 services were always bundled together, and never sold separately. 28

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1 products (for example) was time-consuming, complex and required specialized training; VeriSign’s 2 affiliate customers could not install such things on their own.15 3 437. In violation of SOP 97-2, VeriSign’s practice was to recognize the vast majority of its 4 software revenue immediately upon delivery (often the last days of a quarter), even though it was 5 also VeriSign’s practice to delay installation of the software for 6 months to 1 year. Because 6 installation was essential to functionality and was never provided by other vendors, any revenue 7 recognition prior to VeriSign completing its installation and training obligations was improper. 8 438. According to SOP 98-9, there are circumstances in which elements of multiple-

9 element arrangements may be recorded upon delivery. This requires, inter alia, that the undelivered 10 elements are “perfunctory” or “inconsequential,” and requires that the seller have verifiable “Vendor 11 Specific Objective Evidence” (“VSOE”) of the value of each undelivered element. Because 12 VeriSign’s undelivered elements included time-consuming and difficult installations, and because 13 the software was useless without installation, such elements were neither “perfunctory” nor 14 “inconsequential.” Further, VeriSign did not have VSOE for the value of elements such as 15 installation, training and maintenance because it had no history, or an insufficient history, of arms 16 length cash sales; or because the values claimed by VeriSign as VSOE were actually manipulated to 17 maximize up front revenue. In addition, for elements that VeriSign never sold separately, such as 18 installation, by definition, VSOE did not exist. Under SOP 97-2 and 98-9, when VSOE does not 19 exist for an undelivered element, all revenue must be deferred until all elements are delivered. 20 439. In addition, if installation actually occurred, many of VeriSign’s affiliate customers 21 did not have an infrastructure capable of processing its own transactions and actually making sales to 22 third parties. In these cases, VeriSign provided the necessary host security and/or processing 23 services without charge, since VeriSign’s customer could not otherwise use the VeriSign software. 24

25 15 According to a Universal Service Center (“USC”) task list, for a basic installation, it took about 3 days to review and accept a Statement of Work, 6.5 days to set up hardware (which is 26 required before the software can be installed), 15.5 days for installation prep work, 9 days to actually 27 install and configure USC software, and 4.5 days for testing. Thus, the process required nearly two months worth of work, if there are no delays. This is not “off the shelf.” 28

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1 This had the effect of exaggerating the overstatement of up front revenue, because this undelivered 2 element had no VSOE and thus no associated revenue was deferred. Thus, for nearly all such sales 3 where VeriSign recognized software revenue up front, the revenue should have either been 4 recognized ratably, or deferred until after completion of VeriSign’s remaining significant obligations 5 such as installation. 6 440. In most instances, it was clear that the up front revenue recognition was a sham. 7 Regardless of the software delivery date, on its face, VeriSign’s up front revenue was not legitimate 8 when it was obligated to provide essential services such as installation and training 6-12 months after 9 delivery of the software, since VeriSign’s customer could not use the software for any purpose until 10 then. SOP 97-2 was written in order to prevent this kind of abusive revenue recognition. As noted 11 above, throughout the class period Verisign repeatedly improperly recognized revenue under these 12 arrangements. 13 441. In order to manipulate revenues during the Class Period, VeriSign engaged in 14 improper “round trip” and barter transactions, as previously alleged. These transactions had the 15 effect of dramatically overstating revenues and assets, especially the Company’s operating margins. 16 Approximately 10% of VeriSign’s 2001 revenues were derived from transactions with companies in 17 which VeriSign had invested, and from barter transactions where customers provided products to 18 VeriSign rather than cash. 19 442. In July 2000, the Financial Accounting Standards Board weighed in on the subject of 20 barter, saying, “to the extent that revenue include barter transactions for which there is no ultimate 21 realization in cash and no overall effect on net income, the practice may lead to overstated revenues 22 and artificially inflated market capitalization.” 23 443. VeriSign’s round tripping and barter transactions are violations of GAAP “substance 24 over form” reporting requirements for representational faithfulness (sometimes called transparency) 25 in financial statements. “The quality of reliability and, in particular, of representational faithfulness, 26 leaves no room for accounting representations that subordinate substance to form.” FASB Statement 27 of Concepts No. 2 (CON 2), Qualitative Characteristics of Accounting Information. In addition, 28 “the auditor should be aware that the substance of a particular transaction could be significantly

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1 different from its form and that financial statements should recognize the substance of particular 2 transactions rather than their form.” AICPA Statement on Auditing Standards AU §334.02, Related 3 Parties. VeriSign’s practice of using its own funds for “round tripping” with investees violated 4 GAAP because the substance of these transactions was that VeriSign was paying for its own 5 revenues, which is not permitted. 6 444. Pursuant to GAAP, revenues should not be recognized unless and until the revenues 7 are both earned and are collectible. See FASB CON 5, ¶¶83-84. 8 445. According to Accounting Principles Bulletin No. 29, Accounting for Nonmonetary 9 Transactions, revenues should not be recognized on non-monetary transactions unless the fair values 10 of the assets exchanged are determinable within reasonable limits. However, in order to report 11 higher sales and profits, VeriSign inflated the values of the products exchanged. Under GAAP and 12 SEC rules, these exchanges should not have been recorded for $27 million because $27 million was 13 not an objective basis of fair value. 14 446. Throughout all of 2001, VeriSign failed to disclose these product swaps, which are 15 notorious with investors as “low quality” and non-recurring revenue. This was a violation of GAAP 16 and SEC annual and interim reporting requirements, including FASB CON 2, Accounting Principles 17 Bulletin No. 28, SEC Accounting and Auditing Enforcement Release No. 1499 and SAB 99. When 18 VeriSign finally disclosed on March 19, 2002 that $27 million of such revenue was recognized 19 during 2001, the stock price dropped by more than 9% the next day as disappointed investors sold 20 off their VeriSign holdings. 21 447. The Company’s financial results and the statements about them were false and 22 misleading, as such financial information was not prepared in conformity with GAAP, nor was the 23 financial information a fair presentation of the Company’s operations due to the Company’s 24 improper accounting for its revenue in violation of GAAP and SEC rules.

25 C. VeriSign’s Improper Accounting for Its Investees 26 448. According to VeriSign’s 2000 and 2001 Reports on Form 10-K, the Company 27 accounted for investments in non-public companies using the cost method of accounting. However, 28 based on the circumstances, VeriSign was required by GAAP and SEC rules to use the equity

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1 method of accounting for many of these investees. If VeriSign had appropriately used the equity

2 method of accounting for these investments, it would not have been permitted to report any revenues 3 from these investees as revenue on VeriSign’s books. Further, VeriSign would have been required 4 to report its pro rata share of the losses incurred by these investees on its books. VeriSign’s 5 improper use of the cost method permitted it to improperly recognize millions of dollars in revenues 6 from sales to its investees, and to omit the recognition of millions of dollars of losses incurred by its 7 investees, thus overstating its revenues, assets and net income. 8 449. According to GAAP – Accounting Principles Board Opinion No. 18 (APB 18), The 9 Equity Method of Accounting for Investments in Common Stock – when a company has the ability to 10 exercise “significant influence” over its investees, it must account for these investments under the 11 equity method of accounting, rather than the cost method used by VeriSign. APB 18 provides the 12 following specific examples of significant influence: Representation on the Board of Directors, 13 participation in policy-making processes, material intercompany transactions, interchange of 14 managerial personnel, or technological dependence.16 These examples are not all-inclusive – for 15 example, in determining whether an investor can exercise significant influence on an investee, the

16 SEC additionally considers the nature, form and significance to the investee of all of the investor’s 17 financial and operating interests in the investee, and many other factors. 18 450. On numerous occasions, VeriSign met one or more of the specific GAAP criteria that 19 demonstrate significant influence over its investees, making its use of the cost method for those 20 investees a sham and a violation of GAAP and SEC rules. Significantly, as set out in detail above, 21 most of VeriSign’s investments in these companies were made in 2001, during which time VeriSign 22 was concealing from the market the fact that revenues from investees had grown to 6.5% of 2001 23 revenues, or $64 million, a clearly material amount. 24 25

26 16 According to APB 18, there is a presumption that 20% ownership or more results in 27 significant influence. If ownership is less than 20%, significant influence can still be demonstrated by the existence of these or other factors. 28

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1 451. In addition, to these examples, VeriSign’s ability to exercise significant influence 2 over its investees is also demonstrated by timing its investments when the need for capital was 3 critical – such as when investees ran out of money from earlier financing rounds. For instance, 4 according to CW10, Air2Web was ready to close doors on its operations when VeriSign agreed to 5 invest in the company. Thus, VeriSign’s use of the cost method of accounting for these investees, 6 rather than the equity method, was a violation of GAAP and SEC rules. 7 452. As a result of VeriSign’s failure to use the equity method of accounting for 8 investments over which it exercised significant influence, VeriSign improperly reported significantly 9 more than $10.5 million in false 2001 revenues and $1.5 million in false 1Q02 revenues. Further, 10 VeriSign failed to record significantly more than $1 million in equity investment losses during these 11 periods.

12 D. VeriSign’s Failure to Record Impairment 13 453. As noted above, the failure to record the impairment on the value of its investments 14 permitted VeriSign to overstate its income and to conceal a decline in valuation of these investments 15 which had begun at least as early as 3Q00 and continued throughout the Class Period. 16 454. VeriSign included these results in its December 30, 2000 Form 10-K filed on March 17 28, 2001 with the SEC and signed by defendants Sclavos and Evan. The Individual Defendants 18 caused VeriSign to falsify its reported financial results through its failure to record the diminished 19 value of its investments in start-up technology companies. 20 455. GAAP, as described in FASB CON 5, ¶87, states: 21 An expense or loss is recognized if it becomes evident that previously recognized future economic benefits of an asset have been reduced or eliminated, or that a 22 liability has been incurred or increased, without associated economic benefits. 23 456. GAAP, as set forth in FASB Statement of Financial Accounting Standards (“SFAS”) 24 No. 115, Accounting for Certain Investments in Debt and Equity Securities, provides that where an 25 investment is impaired and the impairment is judged to be other than temporary, the cost basis of the 26 investment should be written down to fair value and the amount of the writedown should be recorded 27 as a loss. 28

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1 457. VeriSign’s investments included early stage companies, investment funds, or Internet 2 and e commerce companies where operations were not yet sufficient to establish them as profitable 3 concerns. Thus, there was a significant issue as to whether VeriSign’s investment would be 4 recoverable. As measured by the Hambrecht & Quist Internet Index, the largest decline in the value 5 of Internet companies occurred in April 2000 when the index dropped from above 1000 to below 6 700. The stocks never recovered and the index dropped to just 600 at the end of 3Q00. Investments 7 in companies that were not yet public were similarly affected. As The Dallas Morning News 8 reported on October 11, 2000: 9 [M]any start-ups are failing. Job reductions at Internet companies have been soaring, led by cuts in the Web retail sector, according to the outplacement firm Challenger, 10 Gray & Christmas. Investors in some Websites have simply pulled the plug, impatient with the endless flow of red ink. 11 In spite of these adverse factors, VeriSign failed to record a writedown to reflect the diminution in 12 value of these investments in start-up companies at January 24, 2001, when it reported its 4Q00 13 results. 14 458. In the Company’s 10-Q, filed on May 11, 2001, VeriSign announced that in 1Q01 it 15 would take a one-time charge of approximately $74 million, related primarily to the writedown of 16 the Company’s investments in technology-based companies and other assets in accordance with 17 GAAP. 18 459. VeriSign should have recorded a writedown of these impaired investments as of 19 December 2000, per GAAP. Nevertheless, in order to report favorable results, VeriSign failed to 20 write down the impaired assets to fair value. 21 E. VeriSign’s Inflated Acquired Deferred Revenue 22 460. According to Accounting Principles Bulletin No. 16, Business Combinations (“APB 23 16”), the amount of deferred revenue to be recorded by the acquiring company (“fair value”) is equal 24 to the “present value of amounts to be paid.” In other words, the future cost of providing services 25 determines “fair value” of acquired deferred revenue. Further, according to the SEC, a reasonable or 26 “normal” profit margin, based on industry-wide conditions, not specific to the acquiring company, 27 may be added to this figure. As set out above in detail, Versign overstated NSI’s acquired deferred 28

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1 revenue by at least $90 million, nearly all of which was improperly reported as revenue during the 2 Class Period.

3 F. VeriSign OverStated Goodwill by More than $10 Billion at December 31, 2000 and at March 31, 2001 4 461. When VeriSign purchased NSI, it paid $19.6 billion for just $700 million in 5 stockholder’s equity, resulting in $18.9 billion in goodwill. The $18.9 billion in goodwill was 6 determined based on the average market value of VeriSign’s stock on March 7, 2000, when the 7 acquisition was announced, which was $229.92. As the value of the stock declined, the amount of 8 goodwill was required to be reassessed.. 9 462. According to Statement of Financial Accounting Standards No. 121, Accounting for 10 the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, (“FAS 121”): 11 4. An entity shall review long-lived assets and certain identifiable intangibles to be 12 held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 13 5. The following are examples of events or changes in circumstances that indicate 14 that the recoverability of the carrying amount of an asset should be assessed: 15 a. A significant decrease in the market value of an asset 16 * * * 17 c. A significant adverse change in legal factors or in the business climate that 18 could affect the value of an asset or an adverse action or assessment by a regulator

19 * * * 20 e. A current period operating or cash flow loss combined with a history of 21 operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing 22 revenue.

23 463. With respect to condition 5.a. above, VeriSign’s stock price fell from $247.44 24 immediately after announcing the NSI acquisition to $172.94 the day after closing the NSI

25 acquisition to $74.19 at the end of 2000. This was much more than a significant decrease in 26 VeriSign’s market value, and the goodwill asset recorded in connection with the acquisition of NSI 27 was almost 90% of VeriSign’s 12/31/00 recorded assets. As set out above, VeriSign was required to 28 write down the good will at the end of 2000. PLAINTIFFS’ THIRD AMENDED CLASS ACTION COMPLAINT - C-02-2270-JW(PVT) - 162 -

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1 G. VeriSign’s Improper Segment Disclosures 2 1. VeriSign Did Not Make Required Segment Disclosures 3 464. The specific information about business segments required to be disclosed under 4 Statement of Financial Accounting Standards No. 131 (SFAS 131) includes revenues, expenses and 5 profit for all segments which contribute 10% or greater in revenues or profits to the organization as a 6 whole. These disclosures are required for interim periods as well as annual periods. In order to 7 conceal the declining market share and gross margins in its sale of domain names, VeriSign did not 8 make the required disclosures, causing its financial statements to be incomplete and misleading and 9 in violation of GAAP and SEC reporting requirements. 10 465. According to GAAP and SEC rules, an “operating segment” is a component of 11 business: 1) that earns revenues and incurs expenses; 2) whose operating results are regularly 12 reviewed by the “chief operating decision maker” (identified by VeriSign as CEO Sclavos); and 3) 13 for which discrete financial information is available. SFAS 131, Disclosures About Segments of an 14 Enterprise and Related Information. According to SFAS 131, businesses are required to disclose 15 specific segment information in order to: 16 (a) Better understand the enterprise’s performance; 17 (b) Better assess its prospects for future net cash flows; and 18 (c) Make more informed judgments about the enterprise as a whole. 19 466. VeriSign claimed it had only two operating segments, the ESP Division, and the Mass 20 Markets Division, which were purportedly differentiated based on the customer type. As provided 21 by SFAS 131, ¶15, when a company monitors several sets of components, “the components based on 22 products and services constitute the operating segments.” The ESP and Mass Markets Divisions 23 were not proper operating segments, because they were not segregated by products and services.

24 2. VeriSign Covered Up the Fact that Sales and Market Share of Its Domain Names Segment Plummeted During the Class 25 Period by Reporting Segments by Customer Type 26 467. During the Class Period, VeriSign operated its business under the following operating 27 segments: Network Solutions’ registry services and registrar services, and VeriSign’s Internet trust 28 and security services, such as digital certificates and PKI. These businesses were operating

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1 segments because they were organized as discrete organizations, with separate management and 2 separate internal reports of financial results. 3 468. According to CW11, even after VeriSign’s acquisition of Network Solutions in mid- 4 2000, the two companies remained as separate entities that operated independently on a day-to-day 5 operations basis. For example, Network Solutions’ Herndon, Virginia Customer Service Department 6 was not educated on VeriSign’s products and services, and VeriSign’s Mountain View Customer 7 Service Department was not skilled on Network Solutions’ products and services. VeriSign and 8 Network Solutions maintained separate call-center-operations departments to provide customer 9 services for their products and services. Furthermore, the Herndon, Virginia office had a billing 10 system for global registry services that was separate from the Mountain View headquarters’ billing 11 system for on-line security services. According to CW11, in mid-2001, VeriSign’s Oracle-based 12 financial systems were not compatible with Network Solutions’ financial systems. The two systems 13 were not completely integrated by late 2001. CW11 stated that the Mountain View office held the 14 “purse strings” for the Network Solutions business by dictating all budget forecasting, revenue 15 targets, and corporate accounting. 16 469. Each of these segments comprised more than 10% of VeriSign’s total sales. Under 17 SFAS 131 and SEC Accounting Series Release No. 244, these facts require separate detailed 18 financial reporting. However, VeriSign did not want to disclose separate information about its 19 operating segments because, had it done so, investors would have quickly realized that its Network 20 Solutions segment, which was purportedly its “cash cow,” was rapidly losing market share and was 21 not growing, as represented by the Company. VeriSign’s misrepresentations about the growth of 22 Network Solutions’ business were false and were contradicted by its operating results, which 23 VeriSign improperly withheld from the market.

24 3. VeriSign’s New Segment Reporting Metrics Violated Regulation S-K 25 470. The SEC requires that, as to annual and interim financial statements filed with the 26 SEC, registrants include a management’s discussion and analysis section which provides information 27 with respect to the results of operations and “also shall provide such other information that the 28

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1 registrant believes to be necessary to an understanding of its financial condition, changes in financial 2 condition and results of operations.” See Regulation S-K, 17 C.F.R. §229.303. Regulation S-K 3 states that, as to annual results, the management’s discussion and analysis section shall: 4 (i) Describe any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income 5 from continuing operations and in each case, indicate the extent to which income was so affected. In addition, describe any other significant components of revenues or 6 expenses that, in the registrant’s judgment, should be described in order to understand the registrant’s results of operations. 7 (ii) Describe any known trends or uncertainties that have had or that the 8 registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows 9 of events that will cause material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price 10 increases or inventory adjustments), the change in the relationship shall be disclosed. 11 17 C.F.R. §229.303(a)(3). 12 471. Financial reporting includes not only financial statements, but also other means of 13 communicating information that relates directly or indirectly to the information in the financial 14 statements. See FASB Statement of Concepts No. 1 (CON 1), ¶7. For this reason, in addition to 15 VeriSign’s failure to make the required disclosures in its financial statements and in its SEC filings, 16 VeriSign also shirked its duty to make such disclosures in its conference calls, its press releases and 17 its Annual Reports.

18 H. VeriSign’s Belated Admission of the Extent of Roundtripping 19 472. The magnitude of VeriSign’s revenue derived from roundtripping was deliberately 20 concealed from VeriSign investors until after FY01 ended. For example, in VeriSign’s 2000 Report 21 on Form 10-K, the Company said revenues from investees were “individually” less than 1%, which 22 misled the market into believing that such transactions were immaterial, when in fact they were 23 material, as defined by the SEC. See SEC Staff Accounting Bulletin No. 99 (SAB 99), Materiality. 24 473. VeriSign was obligated to disclose the extent of roundtripping under GAAP and SEC 25 rules. See FASB CON 2, ¶132. When financial information is publicly communicated and material 26 information is omitted such that the information is misleading, it is a violation of §10(b) of the 27 Exchange Act and Rule 10b-5. See SEC Accounting and Auditing Enforcement Release No. 1499 28 (SEC AAER 1499). An omitted fact is material if there is a substantial likelihood that the fact would

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1 have been viewed by the reasonable investor as having significantly altered the “total mix” of 2 information made available. VeriSign was required to make disclosures concerning revenues from 3 investees on at least a quarterly basis, but failed to do so. See Accounting Principles Board Opinion 4 No. 28 (APB 28), Interim Financial Reporting, 32 and SAB 99.

5 I. VeriSign’s Omissions and Deficient Disclosures About Related Parties 6 474. Under GAAP and SEC rules, every VeriSign affiliate and each investee over which 7 VeriSign could exercise significant influence was deemed a “related party.” FASB Statement of 8 Standards No. 57 (FAS 57), Related Party Disclosures, ¶24. “Transactions involving related parties 9 cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of 10 competitive, free market dealings may not exist.” FAS 57, ¶3. As a result, VeriSign was required, at 11 a minimum, to specifically disclose a description of transactions, including transactions that resulted 12 in revenues, and the amount of accounts receivable due from its related parties throughout the Class 13 Period. FAS 57, ¶2; Accounting Research Bulletin No. 43, Chapter 1A, ¶5. VeriSign did not make 14 these required disclosures. 15 475. The failure of VeriSign to make these required disclosures had the misleading effect 16 of preventing investors from analyzing the legitimacy and quality of VeriSign’s reported revenues 17 and receivables. “Because it is possible for related party transactions to be arranged to obtain certain 18 results desired by the related parties, the resulting accounting measures may not represent what they 19 usually would be expected to represent.” FAS 57, ¶15. “The [Financial Accounting Standards] 20 Board also believes that relevant information is omitted if disclosures about significant related party 21 transactions required by this Statement are not made.” FAS 57, ¶17. These omissions were material 22 on both a quantitative and qualitative basis. SAB 99. Because VeriSign failed to make these 23 required disclosures, its financial statements were materially misleading and in violation of GAAP 24 and SEC rules. SEC AAER No. 1499. 25 476. Due to these accounting improprieties, the Company presented its financial results 26 and statements in a manner which violated GAAP, including the following fundamental accounting 27 principles: 28

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1 (a) The principle that interim financial reporting should be based upon the same 2 accounting principles and practices used to prepare annual financial statements was violated (APB 3 28, ¶10); 4 (b) The principle that financial reporting should provide information that is useful 5 to present and potential investors and creditors and other users in making rational investment, credit, 6 and similar decisions was violated (FASB CON 1, ¶34); 7 (c) The principle that financial reporting should provide information about the 8 economic resources of an enterprise, the claims to those resources, and effects of transactions, 9 events, and circumstances that change resources and claims to those resources was violated (FASB 10 CON 1, ¶40); 11 (d) The principle that financial reporting should provide information about how 12 management of an enterprise has discharged its stewardship responsibility to owners (stockholders) 13 for the use of enterprise resources entrusted to it was violated. To the extent that management offers 14 securities of the enterprise to the public, it voluntarily accepts wider responsibilities for 15 accountability to prospective investors and to the public in general (FASB CON 1, ¶50); 16 (e) The principle that financial reporting should provide information about an 17 enterprise’s financial performance during a period was violated. Investors and creditors often use 18 information about the past to help in assessing the prospects of an enterprise. Thus, although 19 investment and credit decisions reflect investors’ expectations about future enterprise performance, 20 those expectations are commonly based at least partly on evaluations of past enterprise performance 21 (FASB CON 1, ¶42); 22 (f) The principle that financial reporting should be reliable in that it represents 23 what it purports to represent was violated. That information should be reliable as well as relevant is 24 a notion that is central to accounting (FASB CON 2, ¶¶58-59); 25 (g) The principle of completeness, which means that nothing is left out of the 26 information that may be necessary to insure that it validly represents underlying events and 27 conditions was violated (FASB CON 2, ¶79); and 28

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1 (h) The principle that conservatism be used as a prudent reaction to uncertainty to 2 try to ensure that uncertainties and risks inherent in business situations are adequately considered 3 was violated. The best way to avoid injury to investors is to try to ensure that what is reported 4 represents what it purports to represent (FASB CON 2, ¶¶95, 97). 5 477. Further, the undisclosed adverse information concealed by defendants during the 6 Class Period is the type of information which, because of SEC regulations, regulations of the 7 national stock exchanges and customary business practice, is expected by investors and securities 8 analysts to be disclosed and is known by corporate officials and their legal and financial advisors to 9 be the type of information which is expected to be and must be disclosed.

10 XIII. ADDITIONAL ALLEGATIONS SUPPORTING A STRONG INFERENCE OF SCIENTER 11 A. VeriSign Used Its Inflated Stock as Currency to Acquire Other 12 Businesses 13 478. During the Class Period, VeriSign took advantage of its inflated stock price by using 14 its stock as currency to acquire other companies, including many which were acquired simply to 15 show the market that VeriSign’s deferred revenue balances were continuing to show sequential 16 growth. These transactions provide additional strong evidence of scienter, as they further 17 demonstrate defendants’ motive to keep the Company’s stock price inflated during the Class Period. 18 479. For example, on December 12, 2001, VeriSign acquired Illuminet, a wireless carrier, 19 by issuing 30.6 million shares of VeriSign common stock, worth an estimated $1.2 billion. At the 20 time of this acquisition, Illuminet had deferred revenues in excess of $10 million that were included 21 in the deferred revenue balances reported by the Company for 4Q01. Around the same time, 22 VeriSign also acquired at least two other companies – .tv and eNIC – that added an additional $18 to 23 $30 million in deferred revenues to the Company’s 4Q01 financial statements. 24 480. VeriSign also acquired eleven privately-held companies through similar cash-and- 25 stock acquisitions involving 939,000 shares of common stock issued by VeriSign and cash payments 26 totaling approximately $151 million in cash. Each of these transactions was accounted for as a 27 purchase, permitting the results of the acquired companies’ operations, including any deferred 28 revenues, to be included on VeriSign’s consolidated financial statements.

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1 481. The Illuminet acquisition is an instructive example of VeriSign’s practices during this 2 period. According to both CW3 and CW6, Illuminet employees were not told of this acquisition 3 until the day it was announced, and there was no visible sign of any due diligence being conducted 4 by VeriSign before the deal closed. According to CW3, this was in stark contrast to the due 5 diligence conducted by NTC, which had conducted a detailed four month audit when it acquired 6 Illuminet just 18 months earlier, in July 2000. 7 482. VeriSign’s post-acquisition conduct demonstrates that it had little interest in acquiring 8 Illuminet outside of the deferred revenues that the company could bring to the bottom line. Both 9 CW3 and CW6 stated that there was little effort after the acquisition to integrate Illuminet’s 10 operations into VeriSign’s. In addition, CW3 stated that VeriSign cut back on customer service 11 hours and instituted new policies that had the effect of delaying equipment deliveries and making it 12 more difficult to respond to customer needs, such as setting aside blocks of wireless phone numbers 13 for future use. As a result, CW3 said that Illuminet’s reputation and business suffered. 14 483. In April 2002, just four months after the acquisition, VeriSign laid off 10% of 15 Illuminet’s workforce even though, according to CW3, the company was then profitable and there 16 were weekly discussions about the need to hire more workers to handle all the business the Company 17 was doing.

18 B. Defendants’ Insider Trading 19 484. As detailed in the charts below, VeriSign insiders Individual Defendants Sclavos, 20 Korzeniewski, Evan, and Gallivan took advantage of the artificial inflation of VeriSign stock by 21 selling or disposing of 245,375 shares, 163,326 shares, 96,600 shares, and 160,994 shares stock, 22 respectively, at as high as $77.75 per share, pocketing $13.23 million; $8.28 million; $5.35 million; 23 and $8.74 million respectively – approximately $35.60 million in total. 24 485. The four Individual Defendants’ insider sales as a percentage of their total available 25 holdings are set forth in the following table: 26 27 28

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1 Total Available Percentage of Holdings (1) Holdings Sales Proceeds Holdings Sold 2 Sclavos 1,900,784 2,146159 245,375 $13,234,267 11.43% 3 Korzeniewski 167,599 330,925 163,326 $ 8,283,614 49.35% 4 Evan 319,981 416,681 96,600 $ 5,345,364 23.19% 5 Gallivan 285,197 446,191 160,994 $ 8,744,666 36.08% 6 (1) Source: 2002 Proxy. Included common stock and options exercisable within 60 days of 7 February 28, 2002.

8 XIV. GROUP PLEADING AND CONTROL PERSON ALLEGATIONS 9 486. The Individual Defendants, because of their positions of control and authority as 10 officers and/or directors of the Company were able to and did control the contents of the various 11 quarterly and annual financial reports, SEC filings, press releases, and presentations to securities 12 analysts pertaining to VeriSign. Each Individual Defendant was provided with copies of VeriSign’s 13 press releases and SEC filings alleged herein to be misleading prior to or shortly after their issuance 14 and had the ability and opportunity to prevent their issuance or to cause them to be corrected. 15 Moreover, with respect to the financial information released by the Company, the “Management 16 Report” section signed by both Sclavos and Evan contained in the Form 10-K filing for FY01 17 expressly stated the following: 18 VeriSign’s management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in 19 this report. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and reflect the effects of 20 certain estimates and judgments made by management. 21 VeriSign’s management maintains a system of internal control that is designed to provide reasonable assurance that assets are safeguarded and transactions are 22 properly recorded and executed in accordance with management’s authorization. The system is continuously monitored by direct management review. 23 Management has reviewed with the audit committee the audited financial statements 24 contained in VeriSign’s Annual Report on Form 10-K for the year ended December 31, 2001. This review included a discussion of the accounting principles, 25 reasonableness of significant judgments, and clarity of disclosures to the financial statements. Management represented to the audit committee that VeriSign’s 26 consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and the audit 27 committee has reviewed and discussed the consolidated financial statements with management and the independent auditors. 28

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1 487. Because of their Board membership and/or executive and managerial positions with 2 VeriSign, each Individual Defendant had access to the adverse non-public information about 3 VeriSign’s business, finances, products, markets, and present and future business prospects 4 particularized herein, via access to internal corporate documents (including VeriSign’s operating 5 plans, departmentalized actual and projected quarterly reports, and weekly reports comparing actual 6 revenues to projected revenues and actual expenses to budgeted expenses), conversations or 7 connections with corporate officers and employees, attendance at VeriSign’s management and/or 8 Board of Directors’ meetings and committees thereof and via reports and other information provided 9 to them in connection therewith. The Individual Defendants are liable for the false statements 10 pleaded herein, as those statements were each “group published” information, the result of the 11 collective action of the Individual Defendants. 12 488. Each of the defendants either knew or deliberately disregarded the fact that the illegal 13 acts and practices and misleading statements and omissions described herein would adversely affect 14 the integrity of the market for VeriSign stock and would artificially inflate or maintain the price of 15 that stock. Each of the defendants, by acting as herein described, did so knowingly or in such a 16 reckless manner as to constitute a fraud and deceit upon plaintiffs and members of the Class 17 plaintiffs seek to represent.

18 XV. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON- THE-MARKET DOCTRINE 19 489. At all relevant times, the market for VeriSign’s securities was an efficient market for 20 the following reasons, among others: 21 (a) VeriSign’s stock met the requirements for listing, and was listed and actively 22 traded on the NASDAQ National Market, a highly efficient and automated market; 23 (b) As a regulated issuer, VeriSign filed periodic public reports with the SEC and 24 the NASDAQ; 25 (c) VeriSign regularly communicated with public investors via established market 26 communication mechanisms, including through regular dissemination of press releases on the 27 28

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1 national circuits of major newswire services and through other wide-ranging public disclosures, such 2 as communications with the financial press and other similar reporting services; and 3 (d) VeriSign is followed by securities analysts employed by two dozen major 4 brokerage firms including A.G. Edwards, Goldman Sachs, Merrill Lynch, and Morgan Stanley Dean 5 Witter & Co. Analysts employed by these and other firms wrote reports during the Class Period 6 which were distributed to the sales force and certain customers of their respective brokerage firms, 7 and were also publicly available such that the information contained therein entered the public 8 marketplace. 9 490. As a result of the foregoing, the market for VeriSign’s securities promptly digested 10 current information regarding VeriSign from all publicly available sources and incorporated such 11 information in the prices of VeriSign’s publicly traded securities. Under these circumstances, all 12 purchasers of VeriSign publicly traded securities during the Class Period suffered similar injury 13 through their purchase of VeriSign publicly traded securities at artificially inflated prices and a 14 presumption of reliance applies.

15 XVI. STATUTORY SAFE HARBOR 16 491. The statutory safe harbor provided for forward-looking statements under certain 17 circumstances does not apply to the false statements pleaded in this Complaint, as the statutory safe 18 harbor does not apply to the defendants’ misrepresentations of currently existing or historical facts, 19 including warnings of potential risks which had already arisen, but not been disclosed, as of the date 20 the false or misleading statements were made.

21 XVII. CLASS ACTION ALLEGATIONS 22 492. Plaintiffs bring this lawsuit pursuant to Rule 23(a) and (b)(3) of the Federal Rules of 23 Civil Procedure, on behalf of themselves and on behalf of a class of persons who purchased VeriSign 24 stock during the Class Period (the “Class”). Excluded from the Class are defendants herein, 25 members of the immediate families of each of the defendants, any person, firm, trust, corporation, 26 officer, director or other individual or entity in which any defendant has a controlling interest or 27 which is related to or affiliated with any of the defendants, and the legal representatives, agents, 28 affiliates, heirs, successors-in-interest or assigns of any such excluded party.

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1 493. This action is properly maintainable as a class action for the following reasons: 2 (a) The Class is so numerous that joinder of all Class members is impracticable. 3 As of February 28, 2002, VeriSign had approximately 236 million shares outstanding. Members of 4 the Class are scattered throughout the United States. 5 (b) There are questions of law and fact which are common to members of the 6 Class and which predominate over any questions affecting only individual members. The common 7 questions include, inter alia, the following: 8 (i) Whether the defendants’ acts as alleged herein violated the federal 9 securities laws; 10 (ii) Whether defendants participated in and pursued the common course of 11 conduct complained of herein; 12 (iii) Whether documents, SEC filings, press releases, and other statements 13 disseminated to the investing public and VeriSign’s common stockholders during the Class Period 14 misrepresented material facts about the operations, financial condition and earnings of VeriSign; 15 (iv) Whether the market prices of VeriSign stock during the Class Period 16 were artificially inflated due to material misrepresentations and the failure to correct the material 17 misrepresentations complained of herein; and 18 (v) To what extent the members of the Class have sustained damages and 19 the proper measure of damages. 20 (c) Plaintiffs’ claims are typical of the claims of other members of the Class and 21 plaintiffs have no interests that are adverse or antagonistic to the interests of the Class. 22 (d) Plaintiffs are committed to the vigorous prosecution of this action and have 23 retained competent counsel experienced in litigation of this nature. Accordingly, plaintiffs are 24 adequate representatives of the Class and will fairly and adequately protect the interests of the Class. 25 (e) Plaintiffs anticipate that there will not be any difficulty in the management of 26 this litigation as a class action. 27 494. For the reasons stated herein, a class action is superior to other available methods for 28 the fair and efficient adjudication of this action and the claims asserted herein. Because of the size

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1 of the individual Class members’ claims, few, if any, Class members could afford to seek legal 2 redress individually for the wrongs complained of herein.

3 FIRST CLAIM FOR RELIEF 4 For Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder (Against All Defendants) 5 495. Plaintiffs repeat and reallege each and every allegation as set forth above as though 6 fully set forth herein. 7 496. This Claim is brought by plaintiffs pursuant to §10(b) of the Exchange Act and Rule 8 10b-5 promulgated thereunder by the SEC against all defendants. 9 497. The defendants: (a) employed devices, schemes, and artifices to defraud; (b) made 10 untrue statements of material fact and/or omitted to state material facts necessary in order to make 11 the statements made not misleading; and (c) engaged in acts, practices, and a course of business 12 which operated as a fraud and deceit upon the purchasers of VeriSign stock in an effort to maintain 13 artificially high market prices for VeriSign stock in violation of §10(b) of the Exchange Act and 14 Rule 10b-5. Defendants are sued as primary participants in the wrongful and illegal conduct charged 15 herein and/or as controlling persons as alleged below. 16 498. In addition to the duties of full disclosure imposed on the defendants by their status as 17 controlling persons of VeriSign, as a result of their affirmative statements and reports, or 18 participation in the making of affirmative statements and reports to the investing public, defendants 19 had a duty to promptly disseminate truthful information that would be material to investors in 20 compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulations S- 21 X (17 C.F.R. §210.01, et seq.) and S-K (17 C.F.R. §229.10, et seq.) and other SEC Regulations, 22 including accurate and truthful information with respect to VeriSign’s stock, operations, financial 23 condition and earnings so that the market price of VeriSign stock would be based on truthful, 24 complete, and accurate information. 25 499. Defendants, individually and in concert, directly and indirectly, by using the means 26 and instrumentalities of interstate commerce and/or of the mails, engaged and participated in a 27 continuous course of conduct to conceal adverse material information about the business, operations 28

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1 and future prospects of VeriSign as specified herein. The defendants employed devices, schemes, 2 and artifices to defraud, while in possession of material adverse non public information and engaged 3 in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of 4 VeriSign’s value and performance and continued substantial growth, which included the making of, 5 or the participation in the making of, untrue statements of material fact and omitting to state material 6 facts necessary in order to make the statements made about VeriSign and its business operations and 7 future prospects, in light of the circumstances under which they were made, not misleading, as set 8 forth more particularly herein, and engaged in transactions, practices and a course of business which 9 operated as a fraud and deceit upon the purchasers of VeriSign stock during the Class Period. 10 500. The primary liability and controlling person liability of defendants arises from the 11 fact that during the Class Period, the defendants engaged in a scheme to conceal VeriSign’s badly 12 flagging growth in order to prevent the decline in the price of VeriSign stock so that defendants 13 could use VeriSign’s artificially inflated stock as currency to complete an acquisition and to reap at 14 least $26.8 million in insider trading proceeds. 15 501. The defendants had actual knowledge of the misrepresentations and omissions of 16 material facts set forth herein. Defendants’ material misrepresentations or omissions were done 17 knowingly and for the purpose and effect of concealing VeriSign’s operating condition and future 18 business prospects from the investing public and supporting the artificially inflated price of their 19 stock, as demonstrated by said defendants’ overstatements and misstatements of VeriSign’s business, 20 operations and future earnings prospects and/or financial statements throughout the Class Period. 21 502. As a result of the dissemination of the materially false and misleading information 22 and failure to disclose material facts by all defendants, as set forth above, the market price of 23 VeriSign stock was artificially inflated during the Class Period. In ignorance of the fact that the 24 market price for VeriSign stock was artificially inflated, and relying directly or indirectly on the 25 false and misleading statements made by defendants, or upon the integrity of the market in which the 26 shares trade, and the truth of any representations made to appropriate agencies and to the investing 27 public, at the times at which any statements were made, and/or on the absence of material adverse 28 information that was known by defendants but not disclosed in public statements by defendants

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1 during the Class Period, plaintiffs and the other members of the Class acquired VeriSign stock 2 during the Class Period at artificially high prices and were damaged thereby. 3 503. At the time of said misrepresentations and omissions, plaintiffs and other members of 4 the Class were ignorant of their falsity and believed them to be true. Had plaintiffs and the other 5 members of the Class and the marketplace known of the true financial condition and business 6 prospects of VeriSign, which were not disclosed by defendants, plaintiffs and other members of the 7 Class would not have purchased VeriSign stock during the Class Period, or, if they had purchased 8 such stock during the Class Period, they would not have done so at the artificially inflated prices 9 which they paid. 10 504. By virtue of the foregoing, defendants have violated §10(b) of the Exchange Act and 11 Rule 10b-5 promulgated thereunder. 12 505. As a direct and proximate result of the wrongful conduct of the defendants, plaintiffs, 13 and the other members of the Class suffered damages in connection with their purchases of VeriSign 14 stock during the Class Period.

15 SECOND CLAIM FOR RELIEF 16 For Violation of Section 20(a) of the Exchange Act (Against All Individual Defendants) 17 506. Plaintiffs repeat and reallege each and every allegation as set forth above as though 18 set forth herein. 19 507. Defendants acted as controlling persons of VeriSign within the meaning of §20(a) of 20 the Exchange Act as alleged herein. By virtue of their high-level positions, substantial stock 21 holdings, participation in and/or awareness of VeriSign’s operations and/or intimate knowledge of its 22 internal financial condition, business practices, products and the actual progress of development and 23 marketing efforts, the Individual Defendants had the power to influence and control and did 24 influence and control, directly or indirectly, the decision-making of VeriSign, including the content 25 and dissemination of the various statements which plaintiffs contend are false and misleading. 26 VeriSign controlled the Individual Defendants and all of its employees. Each of the Individual 27 Defendants was provided with or had unlimited access to copies of VeriSign’s internal reports, press 28

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1 releases, public filings and other statements alleged by plaintiffs to be misleading prior to and/or 2 shortly after these statements were issued and had the ability to prevent the issuance of the 3 statements or cause the statements to be corrected. 4 508. In particular, each of the Individual Defendants had direct involvement in or intimate 5 knowledge of the day-to-day operations of VeriSign and therefore is presumed to have had the 6 power to control or influence the particular transactions giving rise to the securities violations as 7 alleged herein, and exercised the same. 8 509. As set forth above, defendants violated §10(b) of the Exchange Act and Rule 10b-5 9 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling 10 persons, defendants are liable pursuant to §20(a) of the Exchange Act. 11 510. As a direct and proximate result of the wrongful conduct of defendants, plaintiffs and 12 other members of the Class suffered damages in connection with their purchases of VeriSign stock 13 during the Class Period.

14 THIRD CLAIM FOR RELIEF 15 For Violation of Section 11 of the Securities Act (Against VeriSign, Sclavos and Evan) 16 511. Plaintiffs Wilson Telephone, Oregon Telephone and Donnelly repeat and reallege 17 each and every allegation as set forth above as though fully set forth herein. 18 512. This claim is brought pursuant to §11 of the Securities Act, 15 U.S.C. §77k, on behalf 19 of all persons or entities, excluding those previously excluded from the Class, who purchased or 20 otherwise acquired shares of VeriSign pursuant or traceable to the registration statement and 21 prospectus filed October 10, 2001 and amended October 26, 2001 for the acquisition of Illuminet by 22 VeriSign which was completed on or about December 12, 2001 (collectively, the “Prospectus”). 23 513. The Prospectus, inter alia, incorporated by reference the Form 10-K filed by VeriSign 24 for the year ended December 31, 2000, and the Forms 10-Q filed thereby for the quarters ended 25 March 31, 2001 and June 30, 2001. For the reasons set forth above, the FY00 financial results 26 reported in the Form 10-K were materially false and misleading. For the reasons set forth above, the 27 1Q01 financial results reported in the Form 10-Q were materially false and misleading. For the 28

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1 reasons set forth above, the 2Q01 financial results reported in the Form 10-Q were materially false 2 and misleading. 3 514. VeriSign, Sclavos and Evan are statutorily liable under §11 of the Securities Act. 4 These defendants issued, caused to be issued and participated in the issuance of the materially false 5 and misleading written statements and/or omissions of material facts that were contained in the 6 Prospectus. Defendants Sclavos and Evan signed the Prospectus. 7 515. Plaintiffs and the Class have sustained damages pursuant to §11(e) of the Securities 8 Act. At the time they purchased or acquired the VeriSign shares pursuant and/or traceable to the 9 defective Prospectus, plaintiffs and Class members were without knowledge of the facts concerning 10 the false and misleading statements or omissions alleged herein and could not reasonably have 11 possessed such knowledge.

12 FOURTH CLAIM FOR RELIEF 13 For Violation of Section 15 of the Securities Act (Against All Individual Defendants) 14 516. Plaintiffs repeat and reallege each and every allegation as set forth above as though 15 fully set forth herein. 16 517. This claim is brought pursuant to §15 of the Securities Act, 15 U.S.C. §77o, against 17 the Individual Defendants, as control persons of VeriSign on behalf of all persons or entities, 18 excluding those previously excluded from the Class, who purchased or otherwise acquired shares of 19 VeriSign pursuant or traceable to the Prospectus. 20 518. VeriSign is liable under §11 of the Securities Act as set forth herein. 21 519. Each of the Individual Defendants was a “control person” of VeriSign within the 22 meaning of §15 of the Securities Act, by virtue of their position of operational control and/or 23 authority over the Company – the Individual Defendants, directly and indirectly, had the power and 24 authority, and exercised the same, to cause VeriSign to issue, cause to be issued and participated in 25 the issuance of the materially false and misleading statements in the Prospectus. 26 27 28

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1 520. Pursuant to §15 of the Securities Act, by reason of the foregoing, the Individual 2 Defendants are liable to plaintiffs to the same extent as VeriSign for its primary violation of §11 of 3 the Securities Act. 4 521. By virtue of the foregoing, plaintiffs and all persons or entities who purchased or 5 otherwise acquired shares of VeriSign pursuant or traceable to the Prospectus are entitled to 6 damages.

7 XVIII. PRAYER FOR RELIEF 8 WHEREFORE, plaintiffs, on behalf of themselves and the Class, pray for judgment as 9 follows: 10 A. Declaring this action to be a class action properly maintained pursuant to Rule 23 of 11 the Federal Rules of Civil Procedure; 12 B. Awarding plaintiffs and other members of the Class damages together with interest 13 thereon; 14 C. Awarding plaintiffs and other members of the Class costs and expenses of this 15 litigation, including reasonable attorneys’ fees, accountants’ fees and experts’ fees and other costs 16 and disbursements; and 17 D. Awarding plaintiffs and other members of the Class such equitable/injunctive and/or 18 other and further relief as may be just and proper under the circumstances. 19 20 21 22 23 24 25 26 27 28

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1 XIX. JURY DEMAND 2 Plaintiffs demand a trial by jury. 3 DATED: January 17, 2006 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 4 PATRICK J. COUGHLIN JEFFREY W. LAWRENCE 5 DENNIS J. HERMAN CHRISTOPHER P. SEEFER 6 SHIRLEY H. HUANG SHANA E. SCARLETT 7 JENNIE LEE ANDERSON 8 9 /s/ JEFFREY W. LAWRENCE 10 100 Pine Street, Suite 2600 11 San Francisco, CA 94111 Telephone: 415/288-4545 12 415/288-4534 (fax) 13 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 14 WILLIAM S. LERACH 655 West Broadway, Suite 1900 15 San Diego, CA 92101 Telephone: 619/231-1058 16 619/231-7423 (fax) 17 Lead Counsel for Plaintiffs 18 19 20 21 22 23 24 25 26 27 28

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1 LAW OFFICES OF BERNARD M. 2 GROSS, P.C. BERNARD M. GROSS 3 DEBORAH R. GROSS 1515 Locust Street, 2nd Floor 4 Philadelphia, PA 19102 Telephone: 215/561-3600 5 215/561-3000 (fax) 6 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 7 STEVEN J. TOLL LISA M. MEZZETTI 8 JOSHUA S. DEVORE 1100 New York Avenue, N.W. 9 West Tower, Suite 500 Washington, DC 20005-3964 10 Telephone: 202/408-4600 202/408-4699 (fax) 11 SCHATZ & NOBEL, P.C. 12 ANDREW M. SCHATZ JEFFREY S. NOBEL 13 NANCY A. KULESA One Corporate Center 14 20 Church Street, Suite 1700 Hartford, CT 06103 15 Telephone: 860/493-6292 860/493-6290 (fax) 16 Additional Counsel for Plaintiffs 17

18 T:\CasesSF\VeriSign\CPT00025858_redacted.doc 19 20 21 22 23 24 25 26 27 28

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1 DECLARATION OF SERVICE BY E-FILING AND U.S. MAIL 2 I, the undersigned, declare:

3 That declarant is and was, at all times herein mentioned, a citizen of the United States and 4 employed in the City and County of San Francisco, over the age of 18 years, and not a party to or 5 interested party in the within action; that declarant’s business address is 100 Pine Street, Suite 2600, 6 San Francisco, California 94111. 7 That on January 17, 2006, declarant served by e-filing pursuant to N.D. of Cal. General 8 9 Order No. 45, Electronic Case Filing Guidelines Sec. IX and U.S. Mail the PLAINTIFFS’ THIRD

10 AMENDED CLASS ACTION COMPLAINT (REDACTED VERSION) to the parties listed on

11 the attached Service List and this document was forwarded to the following designated Internet site 12 at: 13 http://securities.lerachlaw.com/ 14 That there is a regular communication by mail between the place of mailing and the places so 15 16 addressed. 17 I declare under penalty of perjury that the foregoing is true and correct. Executed this 17th 18 day of January, 2006, at San Francisco, California. 19 /s/ 20 CAROLYN BURR 21 22 23 24 25 26 27 28

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1 Service List – 1/17/06 VERISIGN (LEAD) 2 Counsel For Defendant(s) 3 Dhaivat H. Shah David M. Furbush 4 Jessica A. Hoogs O'Melveny & Myers LLP O’Melveny & Myers LLP David M. Furbush 5 275 Battery Street, Suite 2600 2765 Sand Hill Road San Francisco, CA 94111-3305 Menlo Park, CA 94025 6 415/984-8700 650/473-2600 415/984-8701(Fax) 650/473-2601(Fax) 7 EMAIL: [email protected] EMAIL: [email protected] [email protected] [email protected] 8 [email protected] [email protected] 9 Counsel For Plaintiff(s) 10 Steven J. Toll Bernard M. Gross 11 Lisa M. Mezzetti Deborah R. Gross Joshua S. Devore Law Offices Bernard M. Gross, P.C. 12 Cohen, Milstein, Hausfeld & Toll, P.L.L.C. 100 Penn Square East, Suite 450 1100 New York Ave., N.W., Suite 500 Wanamaker Bldg. 13 Washington, DC 20005-3964 Philadelphia, PA 19107 202/408-4600 215/561-3600 14 202/408-4699(Fax) 215/561-3000(Fax) EMAIL: [email protected] EMAIL: [email protected] 15 [email protected] [email protected] 16 William S. Lerach Patrick J. Coughlin 17 Lerach Coughlin Stoia Geller Rudman & Jeffrey W. Lawrence Robbins LLP Shirley H. Huang 18 655 West Broadway, Suite 1900 Lerach Coughlin Stoia Geller Rudman & San Diego, CA 92101 Robbins LLP 19 619/231-1058 100 Pine Street, Suite 2600 619/231-7423(Fax) San Francisco, CA 94111-5238 20 EMAIL: [email protected] 415/288-4545 415/288-4534(Fax) 21 EMAIL: [email protected] [email protected] 22 [email protected] [email protected] 23 [email protected]

24 Andrew M. Schatz Arthur L. Shingler III Jeffrey S. Nobel Scott + Scott, LLC 25 Nancy A. Kulesa 600 B Street, Suite 1500 Schatz & Nobel, P.C. San Diego, CA 92101 26 One Corporate Center 619/233-4565 20 Church Street, Suite 1700 619/233-0508(Fax) 27 Hartford, CT 06103 EMAIL: [email protected] 860/493-6292 28 860/493-6290(Fax)

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1 EMAIL: [email protected] [email protected] 2 Robert M. Roseman 3 Spector, Roseman & Kodroff, P.C. 1818 Market Street, Suite 2500 4 Philadelphia, PA 19103 215/496-0300 5 215/496-6611(Fax) EMAIL: [email protected] 6 [email protected]

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