In Re Portal Software, Inc. Securities Litigation 03-CV-5138

Case 3:03-cv-05138-VRW Document 148 Filed 03/08/2006 Page 1 of 3

1 BORIS FELDMAN, State Bar No. 128838 NINA F. LOCKER, State Bar No. 123838 2 PERI NIELSEN, State Bar No. 196781 RANDOLPH GAW, State Bar No. 223718 3 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 4 650 Page Mill Road Palo Alto, CA 94304-1050 5 Telephone: (650) 493-9300 Facsimile: (650) 565-5100 6 Email: [email protected]; [email protected]; [email protected]; [email protected]; 7 [email protected]

8 Attorneys for Defendants PORTAL SOFTWARE, INC., JOHN E. LITTLE, HOWARD A. BAIN, III 9 and ARTHUR C. PATTERSON

11 UNITED STATES DISTRICT COURT 12 NORTHERN DISTRICT OF CALIFORNIA 13

14 In re PORTAL SOFTWARE, INC. ) CASE NO.: C-03-5138 VRW SECURITIES LITIGATION ) 15 ______) SUPPLEMENTAL DECLARATION ) OF RANDLOPH GAW IN SUPPORT 16 This Document Relates To: ) OF DEFENDANTS’ MOTION TO ) DISMISS PLAINTIFFS’ FOURTH 17 ALL ACTIONS. ) CONSOLIDATED AMENDED ) COMPLAINT 18 ) ) Date: March 23, 2006 19 ) Time: 2:00 p.m. ) Dept: Courtroom 6 20 ) ) Before: Hon. Vaughn R. Walker 21 ) ) 22 ) ) 23 24 25 26 27 28

SUPP. DECL OF GAW ISO C:\NrPortbl\PALIB1\TB5\2831069_1.DOC DEFS. MTN TO DISMISS FCAC C-03-5138 VRW Case 3:03-cv-05138-VRW Document 148 Filed 03/08/2006 Page 2 of 3

1 I, Randolph Gaw, declare as follows: 2 1. I am an attorney duly licensed to practice law before this Court, and am associated 3 with the law firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel of 4 record for Defendants Portal Software, Inc. (“Portal”), John E. Little, Howard A. Bain, III, and 5 Arthur C. Patterson (collectively “Defendants”). I have personal knowledge of the facts set forth 6 in this declaration and can testify competently to those facts. I submit this supplemental 7 declaration in further support of Defendants’ Motion to Dismiss Plaintiffs’ Fourth Consolidated 8 Amended Complaint. The Court may take judicial notice of the documents attached hereto for 9 the reasons set forth in Defendants’ Request for Judicial Notice, filed June 2, 2005. 10 2. Attached hereto as Exhibit 1 is Portal’s Form 8-K filed with the Securities and 11 Exchange Commission on January 13, 2006. 12 3. Attached hereto as Exhibit 2 is Portal’s Form 8-KA filed with the Securities and 13 Exchange Commission on December 30, 2005 14 4. Attached hereto as Exhibit 3 is a true and correct copy of Portal’s press release dated 15 June 23, 2005. 16 5. Attached hereto as Exhibit 4 is a true and correct copy of Portal’s press release dated 17 February 3, 2005. 18 6. Attached hereto as Exhibit 5 is a true and correct copy of Portal’s press release dated 19 September 12, 2003. 20 7. Attached hereto as Exhibit 6 is a true and correct copy of the July 7, 2005 hearing 21 transcript in this matter. 22 8. Attached hereto as Exhibit 7 is a true and correct copy of the order in In re Applied Signal 23 Technology, Inc. Sec. Litig., No. C 05-1027 (N.D. Cal. Feb. 6, 2006). 24 I declare under penalty of perjury under the laws of the State of California that the 25 foregoing is true and correct. Executed in Palo Alto, California on March 8, 2006. 26

27 /s/ Randolph Gaw Randolph Gaw 28

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1 I, Peri Nielsen, am the ECF User whose identification and password are being used to file this Declaration of Randolph Gaw In Support of Defendants’ Motion to Dismiss the Second 2 Consolidated Amended Complaint. In compliance with General Order 45.X.B, I hereby attest that Randolph Gaw has concurred in this filing. 3 4 Dated: March 8, 2006 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 5

6 By: /s/ Peri Nielsen 7 Peri Nielsen

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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FORM 8-K PORTAL SOFTWARE INC - PRSF .PK

Filed : January 13, 2006 (period : January 09, 2006)

Report of unscheduled material events or corporate changes . Item 1 .01 Entry Into a Material Definitive Agreemen t

Item 9.01 Financial Statements and Exhibits .

EX-99 .1 (Exhibits not specifically designated by another number and by investment companies) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 8-K

CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 193 4

Date of Report (Date of earliest event reported) : January 9, 200 6

PORTAL SOFTWARE, INC . (Exact name of Registrant as specified in its charter)

Delaware 000-25829 77-0369737 (State or other jurisdiction of (Commission File Number) (I .R.S. Employe r incorporation or organization) Identification Number)

10200 South De Anza Boulevard Cupertino, CA 9501 4 (Address, including zip code, of principal executive offices)

(408) 572-200 0 (Registrant's telephone number, including area code)

Check the appropriate box below if the Form 8 -K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A .2 . below) :

❑ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230 .425)

❑ Soliciting material pursuant to Rule I4a- 12 under the Exchange Act (17 CFR 240.14a-12 )

❑ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240 .14d-2(b))

❑ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 1 .01 Entry Into a Material Definitive Agreemen t On January 9, 2006, the Board of Directors (the "Board") of Portal Software, Inc . (the "Registrant") approved a revised Board member compensation plan . Under the revised plan, the Lead Director's (Chairman of the Board's) annual retainer is $50,000 and each Board member annual retainer is $25,000 . In addition, the Audit Committee chair's annual retainer is $8,000, and the annual retainer for the chair of any other committee is $6,000 . The annual retainer for any committee member is $4,000 . Board members receive $2,000 for each Board meeting, whether in person or attending telephonically. If a Board meeting exceeds six (6) hours, the participating members will be paid an additional $2,000 . Board members receive $1,000 per committee meeting, whether the meeting is in person or by teleconference, and an additional $1,000 will be paid for committee meetings that exceed 2 .5 hours . A non-employee Board member will receive an initial option grant of 16,000 shares upon appointment . In addition, upon the date of each Annual Stockholders Meeting, non-employee Board members will continue to receive an annual option grant of 2,400 shares .

The Registrant received from John Little, the letter attached hereto as Exhibit 99 .1, dated January 12, 2006

Item 9 .01 Financial Statements and Exhibits .

99 .1 Letter from John Little dated January 12, 2006 . Pursuant to the requirements of the Securities Exchange Act of 1934 , the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized .

PORTAL SOFTWARE, INC .

Dated : January 13, 2006 By : /s/ Larry Bercovic h

Larry Bercovic h SVP, General Counsel & Secretary EXHIBIT INDEX

Exhibit Number Description

99 .1 Letter from John Little dated January 12, 2006 . Exhibit 99.1

Letter Aereemen t

January 12, 200 6

Dear Mr . Bercovich, As previously discussed and until further notice, I hereby disclaim my compensation for service on the Portal board as specified by the plan adopted by the board at the January 9, 2006 board meeting . More specifically, I disclaim 100 percent of the annual retainer, the per meeting fees, and the annual stock option grant . Please make this effective as of the Jan 9`h board meeting .

Sincerely,

/s/ John Littl e

John Little Board Membe r

Created by IOKWizard www.IOKWizard .com Exhibit 2 !O WIZAR D S t C 4 p W 4 N 5 C A p t„

FORM 8-K/A PORTAL SOFTWARE INC - PRSF .PK

Filed : December 23, 2005 (period : November 21, 2005) Amendment to a previously filed 8-K Item 2 .02 Results of Operations and Financial Condition

Item 4 .02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Compl e

Item 9 .01 Financial Statements and Exhibits .

EX-99 .1 (Exhibits not specifically designated by another number and by investment companies) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 193 4

Date of Report (Date of earliest event reported) : November 21, 200 5

PORTAL SOFTWARE, INC . (Exact name of Registrant as specified in its charter)

Delaware 000-25829 77-0369737 (State or other jurisdiction of (Commission File Number) (I.R .S . Employer incorporation or organization) Identification Number)

10200 South De Anza Boulevard Cupertino, CA 9501 4 (Address, including zip code , of p ri ncipal executive offices)

(408) 572-200 0 (Registrant 's telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A .2 . below) :

❑ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230 .425)

❑ Soliciting material pursuant to Rule 14a - 12 under the Exchange Act (17 CFR 240 .14a-12)

❑ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240 .14d-2(b) )

❑ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240 .13e-4(c)) Explanatory Note : The Registrant is filing this Amendment to our Current Report on Form 8-K, filed with the Commission on November 28, 2005, to amend and restate our previous disclosures with respect to the matters set forth in Item 4 .02 .

Item 2 .02 Results of Operations and Financial Conditio n On November 28, 2005, Portal Software, Inc. (the "Registrant") announced that it will restate its previously issued financial statements for the first, second and third quarters of fiscal 2005 and provided preliminary estimates of the principal effects of such restatements . These previously issued preliminary estimates of the principal effects of such restatements have been updated in Item 4 .02 below to reflect subsequent changes in those estimates . The Registrant also released preliminary bookings and cash information for its third quarter ended October 28, 2005 . A copy of the press release issued by the Registrant concerning the foregoing information is furnished herewith as Exhibit 99 .1 .

Item 4 .02 Non- Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review . (a) On November 21, 2005, the Registrant and the Audit Committee of the Registrant's Board of Directors (the "Audit Committee"), in consultation with Ernst & Young LLP ("Ernst & Young"), the Registrant's independent auditors, concluded that the Registrant's financial statements for the first, second and third quarters of fiscal 2005 should no longer be relied upon because of certain material errors in such financial statements, which errors were deemed by the Registrant as likely to be material in the aggregate .

The adjustments that give rise to the restatements and adjustments to the previously reported preliminary unaudited financials fall into four categories :

I . The accounting for revenue on certain complex multi-element contracts . The largest of the changes results from the Registrant's application of certain paragraphs of SOP 97-2 on one large multi-element contract where Vendor Specific Objective Evidence (VSOE) of fair value for consulting services was not present ;

2 . The accounting for deferred costs on certain long term projects . The Registrant had incorrectly deferred costs on ce rtain large fixed price serv ices contracts ;

3 . The accounting for certain international withholding and payroll taxes . The Registrant had over accrued for certain international withholding taxes and had not accrued properly for international payroll taxes in international countries where the company had small operations . This adjustment relates to a material weakness previously disclosed in the Registrant's press release dated June 30, 2005 ; and

4 . The impact of a number of individually insignificant adjustments .

The Registrant intends to restate its financial statements for the periods referenced above . The Audit Committee has discussed the matters disclosed in this Item 4 .02(a) with Ernst &Young .

Ernst & Young concurred with the Registrant's conclusion of the nature of the items contributing to the restatement . The Registrant and Ernst & Young have not yet completed their respective procedures and audit, respectively, with respect to the Registrant's financial statements for fiscal 2005, including, but not limited to, procedures relating to the Registrant's estimated adjustments disclosed in the November 28, 2005 press release, the Form 8-K and this Form 8-K/A, each of which is incorporated herein, as amended . On November 28, 2005, the Registrant issued a press release relating to these matters, a copy of which was furnished as Exhibit 99 .1 . Since November 28, 2005, and as a result of the Registrant's continuing procedures, the Registrant's estimate of the financial impact of certain of the restatement items has changed, including amounts pertaining to the previously identified large, multi-element contract entered into in fiscal 2005 .

As of December 15, 2005, individual quarterly revenue is expected to change from originally reported revenue as follows :

Quarte r Iner.Aceirneereac.i

QI FY2005 $ (200,000) Q2 FY2005 $ 100 .000 Q3 FY2005 8 (600 .000)

Ql-Q3 FY2005 Total $ (700,000)

As of December 15, 2005, the individual quarterly net loss is expected to change from originally reported net loss as follows : (Increase)/Decrease in Net Loss :

Revenue & Deferred International Other Cos t Quarte r Cost Taxes of Revenue Tota l

Q1 FY2005 $(1,500,000) $ (900,000) $(200,000) $(2,600,000) Q2 FY2005 $ 1,800,000 $ 100,000 $ 200,000 $ 2,100,000 Q3 FY2005 $(1,000,000) $ (400,000) $(100,000) $(1,300,000)

Q1-Q3 FY2005 Total $ 700,000 $(1,200,000) $(100,000) $(1,800,000)

Additional Information On December 13, 2005, the Registrant received a letter from the Securities and Exchange Commission's Division of Corporate Finance inquiring about the impact of these adjustments on the Registrant's prior period financial results . The Registrant has responded to the Commission as follows : Portal respectfully submits that, in its evaluation of the issues identified with respect to the fiscal 2005 quarterly financial statements summarized in the four restatement categories referenced in its Form 8-K, Portal assessed which issues were applicable to periods prior to fiscal 2005 .

In particular, with respect to the revenue restatement item, Portal respectfully notes that the largest of the adjustments relates to a large, multi-element contract entered into in fiscal 2005 where vendor specific objective evidence (VSOE) of fair value for consulting services was not present. Portal disclosed in its February 3, 2005 press release that, during the close of its third quarter of fiscal 2005, it had concluded that it could no longer determine VSOE of fair value for consulting services . The error relating to the adjustment for this large contract would not have impacted its fiscal 2004 financial statements because the contract at issue was executed during FY 2005 . Moreover, Portal maintained VSOE of fair value for its consulting services in fiscal 2004 .

The majority of the remaining revenue adjustments relate to certain contracts, which Portal initially accounted for as time and materials services contracts, rather than as fixed price services contracts, owing to a misinterpretation of the applicable contracts . Portal has determined that the accounting for these contracts, which relate to the material weaknesses previously disclosed in its press release dated June 30, 2005, as well as its Form 10-Q for the third quarter of fiscal 2005 filed on April 25, 2005, did not impact its year-end 2004 financial statements in a material amount . Portal is currently evaluating whether these contracts or any other contracts with similar issues could have impacted its quarterly financial statements in fiscal 2004 .

The majority of the cost restatement items related to errors in calculating deferred costs on large, fixed price consulting services contracts, which errors resulted from the use of an incorrect methodology resulting in the deferral of costs to normalized margins on services contracts, inappropriate capitalization of costs on loss contracts, and inaccurate cost rates. Portal determined that these errors, which also relate to previously disclosed material weaknesses involving an insufficient number of qualified and experienced financial and accounting personnel, did not impact its year-end 2004 financial statements in a material amount . Portal is currently evaluating whether these errors could have materially impacted its quarterly financial statements in fiscal 2004 .

With respect to the restatement item relating to foreign payroll and withholding tax accruals, Portal has determined that these errors did not materially impact its year-end or quarterly financial statements in fiscal 2004 . Portal is still in the process of determining whether any of the individually insignificant adjustments impacted its fiscal 2004 financial statements in a material amount .

Based on the above and as of this writing, Portal does not believe that any of the restatement items, individually or in the aggregate, impacted its year-end fiscal 2004 financial statements in a material amount . Portal is still in the process of reviewing its fiscal 2004 quarterly financial statements to determine whether any of these items impacted these financial statements in a material amount .

As disclosed in Portal's November 28, 2005 press release, its original Form 8-K and the Form 8-K/A filed contemporaneously herewith, the estimates provided with respect to its restatement are preliminary . Portal is still in the process of completing its procedures with respect to its fiscal year 2005 financial statements and will continue to evaluate all adjustments identified, individually and in the aggregate, including whether those adjustments materially impact previously filed financial statements . Should, in the course of completing its procedures, Portal conclude that any of its previously issued financial statements should not be relied upon, Portal will promptly notify the Staff and issue the appropriate disclosures as required under Form 8-K requirements .

Forward Looking Statement s Our revised estimates constitute forward-looking statements and actual results could vary for the reasons described herein . In addition, the Registrant repeats its disclosures in Exhibit 99 .1 as follows : Statements in this release concerning the adjustments Portal expects to make in previously filed SEC reports for the first three quarters of fiscal year 2005, and to the preliminary financial results for the fourth quarter of fiscal 2005 and the first two quarters of fiscal year 2006, as well as statements regarding the completion of the audit of our fiscal year 2005 financial statements, are forward looking statements that involve a number of uncertainties and risks. Factors that could cause actual events or results to differ materially include the following : Portal's auditors have not completed their audit of our fiscal 2005 results, nor commenced their review of the first three quarters of fiscal 2006 results disclosed here and in previous releases . Consequently, our Audit Committee has not had an opportunity to complete its review of the preliminary financial results contained herein . During the course of completing these respective reviews and audit, we may determine we need to further revise materially the preliminary results reported herein, further adjust results reported for the first three quarters of fiscal year 2005 or further restate the results reported for previous periods . The material weaknesses in our internal controls significantly increase the risk that the preliminary financial results reported herein, including results reported as specific numbers or within ranges, as well as our previously issued financial results, may need to change . For instance, we may discover errors in determining these results or additional information that has a material impact upon them . In addition, customers are engaging in greater due diligence before making commitments and, as a result, some orders have been delayed and we may not reach our expected level of sales required to become operating cash flow positive in the fourth quarter of fiscal 2006 .

Significant consequences could result from one or more of these general or specific events occurring, particularly if they result in a material impact to our financial results. We would likely be further delayed in filing our Form 10-K for fiscal year 2005 and our Forms 10-Q for the first three quarters of fiscal year 2006 . In addition, we may incur additional costs, experience delays or the loss of new and existing business, as well as management distraction, private litigation, regulatory inquiries or enforcement action, and employee attrition . These consequences, if they materialize, would have a material adverse impact on our business and operations . Other factors which could cause actual results to differ from those discussed in this press release are described in detail in our Annual Report on Form 10-K for the fiscal year ended January 30, 2004, our subsequent quarterly reports on Form 10-Q, and our current reports filed on Form 8-K . All statements made in this press release are made only as of the date set forth at the beginning of this release . Portal undertakes no obligation to update the information in this release in the event facts or circumstances subsequently change after the date of this press release .

Item 9 .01 Financial Statements and Exhibits . (c) Exhibits

*99 .1 Press release, dated November 28, 2005, entitled "Portal Software to Restate Previously Filed Fiscal 2005 Quarterly Results and Provide Update on Business . "

* Previously filed . Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized .

PORTAL SOFTWARE, INC .

Dated : December 23, 2005 By : /s/ Larry Bercovic h

Larry Bercovich SVP, General Counsel & Secretary EXHIBIT INDE X

Exhibit Number Descriptio n

99 .1 Press release, dated November 28, 2005, entitled "Portal Software to Restate Previously Filed Fiscal 2005 Quarterly Results and Provide Update on Business . "

* Previously filed . Exhibit 99. 1

,. Press Release

10200 South De Anza Boulevard , Cupe rtino, California 95014 USA www .po rtal .com Tel : +1 408 .572 .200 0

Portal Software to Restate Previously Filed Fiscal 2005 Quarterly Results and Provide Update on Business Investor Conference Call Scheduled for Wednesday, November 3 0

CUPERTINO, Calif.- November 28, 2005 - Portal Software , Inc . (PRSF. PK), the premier provider of billing and Revenue Management solutions for the global communications and media markets, today announced that it will restate its financial results for its fi rst , second and third quarters for fiscal 2005 . The company also provided an update regarding its third qua rt er of fiscal 2006 . Portal will hold an investor call on Wednesday, November 30 to discuss today's news .

Restatement and SEC Filing Update The company reports that significant progress has been made in the year-end audit of Portal's fiscal 2005 financial results . In connection with the work completed to date on the company's fiscal year-end 2005 audit, management has identified adjustments that will be made to previously disclosed financial results . These adjustments will result in the restatement of previously filed results for the first, second and third quarters of fiscal year 2005 . The company will also revise the preliminary results reported for its fourth quarter of fiscal year 2005 through the second quarter of fiscal 2006.

The adjustments that give rise to the restatements and adjustments to the previously reported preliminary unaudited financials fall into four categories :

I . The accounting for revenue on certain complex multi-element contracts . The largest of the changes results from the company's application of certain paragraphs of SOP 97-2 on one large multi-element contract where Vendor Specific Objective Evidence (VSOE) of fair value for consulting services was not present ;

2 . The accounting for deferred costs on certain long term projects . The company had incorrectly deferred costs on certain large fixed price services contracts ;

3 . The accounting for ce rtain international withholding and payrcll taxes . The company had over accrued for ce rt ain international withholding taxes and had not accrued properly for international payroll taxes in international countries where the company had small operations . This adjustment relates to a material weakness previously disclosed in the company ' s press release dated June 30, 2005 ; and

4 . The impact of a number of individually insignificant adjustments .

Based on the expected adjustments, revenue for the first through third quarters of fiscal 2005 will be decreased by approximately $100,000 in the aggregate compared with the amounts reported on the company's Form IOQs for the respective quarters . These adjustments relate to material weaknesses previously disclosed . Individual quarterly revenue is expected to change as follows : Portal Software to Restate Previously Filed Fiscal 2005 Quarterly Results and Provides Update on Business

Revenu e

Quarte r Increase/(Decrease )

Q 1 FY2005 $ (900,000) Q2FY2005 $ 400,000 Q3FY2005 $ 400,000

QI-Q3 FY2005 Total $ (100,000)

Based in part on interpretations of recent relevant accounting pronouncements, the company has revised its application of revenue accounting on certain multiple element contracts which principally impacted the third and fourth quarter of fiscal 2005 and subsequent quarters . Compared with previously disclosed preliminary unaudited financial results, revenue for the fourth quarter of fiscal 2005 is expected to be reduced by $6 .2 million . Approximately 90 percent of the $6 .2 million revenue adjustment relates to changes in the application of certain paragraphs of SOP 97-2 on one large customer contract where VSOE for consulting services was not present . Adjustments to the previously disclosed preliminary unaudited revenue for the first and second quarters of fiscal 2006 are being calculated and will be reported at a later date . The net reduction in fiscal 2005 revenue as a result of the aforementioned adjustments are expected to be recognized in future periods .

As a result of these changes, deferred revenue is expected to increase by $6 .2 million as the company exited fiscal year 2005 .

The net loss for the first through third quarters of fiscal 2005 will be increased by an aggregate of $1 .5 million compared with the amounts reported on the company's Form I OQs for the respective quarters . These adjustments include the impact of the foreign tax withholding and foreign payroll tax accruals of $0 .5 million . Also included is the impact of the change in accounting for deferred costs on certain long term contracts. The individual quarterly net loss is expected to change as follows :

(Increase )/ Decreasein Net Los s

Revenue & Deferred International Other Cos t Quarte r Cost Taxes of Revenue Tota l

Q I FY2005 $(1,500,000) $(800,000) $(800,000) $(3,100,000) Q2FY2005 $ 2,500,000 $ 500,000 $ 100,000 $ 3,100,000 Q3FY2005 $(1,400,000) $ (200,000) $ 100,000 $(1,500,000 )

Q1-Q3 FY2005 Total $ (400,000) $ (500,000) $(600,000) $(1,500,000)

Compared with previously disclosed preliminary unaudited financial results for the fourth quarter of fiscal 2005, the net loss is expected to be increased by $5 .0 million . Adjustments to the previously disclosed preliminary unaudited net loss for the first and second quarters of fiscal 2006 are being calculated and will be reported at a later date .

"Portal is continuing to make significant progress in this complex and ongoing audit and, as a result, the company has decided to restate certain portions of our previously released financial information." said Dave Labuda, Portal's chief executive officer . "Portal remains committed to concluding this process as quickly as possible in order to file our Form 10-K for fiscal 2005 . "

Po rt al Press Release December 22 . 2005 Portal Software to Restate Previously Filed Fiscal 2005 Quarterly Results and Provides Update on Business

Third Ouarter Fiscal 2006 Bookings and Cash Result s

• Third quarter 2006 bookings were $20.8 million compared to bookings of $32 .3 million for the same period last year and $29 million for the second quarter of fiscal 2006 .

• Cash and investments at October 28, 2005 were $44 .6 million (including restricted cash of $13 .2 million) . Total cash usage during the third quarter of fiscal 2006 was $9 .7 million compared to $12 .4 million for the third quarter of fiscal 2005 .

Material Weaknesses in Internal Control s As previously disclosed in Portal's Form 10-Q for the quarter ended October 29, 2004 and in its press releases dated June 30, 2005 and August 31, 2005, at the end of the company's fiscal year ended January 28, 2005 and as of the date of this press release, Portal has identified multiple material weaknesses in its internal controls over financial reporting (the company's "internal controls") .

Portal has performed a significant portion of its internal control assessment process and has conducted incremental procedures where necessary to verify the accuracy of its financials . The company expects that its external auditors will not provide an opinion on the effectiveness of the company's internal controls or on management's opinion regarding the internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002 as part of the filing of its Form 10-K due to the fact that the company does not anticipate being able to complete its assessment prior to filing its Form 10-K . Rather, the company is focused on completing the year-end audit, filing its Form 10K, and remediating material weaknesses.

Investors should refer to the company's Form 10-Q for the fiscal quarter ended October 29, 2004, which was filed with the Securities and Exchange Commission on April 25, 2005, its previous 8-K filings, and to its press releases dated June 30, 2005 and August 31, 2005, for further detail as to the nature of these material weaknesses and control deficiencies .

As disclosed previously, as a result of the extended financial close process as well as the assessment of its internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002, Portal is currently delinquent in filing its Form 10-K for the fiscal year ended January 28, 2005 and in filing its Forms 10-Q for the fiscal quarters ended April 29, 2005 and July 29, 2005 . Although the company and its auditors continue to work diligently through the audit, no final date has been provided at this time for the completion and filing of the Form 10-K, nor the filing of Forms 10-Q for the first three quarters of fiscal year 2006 .

Investor Call Informatio n Portal will hold an investor call at 4 :30pm EST on Wednesday, November 30 . To access the Portal investor call, please dial one of the following numbers at 4 :20 p.m . Eastern (1 :20 p .m . Pacific) : 1-800-706-3415 (inside the U .S .) or +1-706-634-1314 (outside ofthe U .S .) . The conference ID is 2943691 . The teleconference can also be accessed via the web by visiting Portal's investor relations website at http ://investor .portal .com .

Portal Press Release December 22, 2005 Portal Software to Restate Previously Filed Fiscal 2005 Quarterly Results and Provides Update on Busines s

Additionally, an archive of the call will be available for seven days, commencing two hours following the live call on November 30, 2005, at Portal's investor relations web site at http ://investor .portal.com . A tele-replay of the call will also be available for one year by dialing 1-800-642-1687 (inside the U .S .) or 1-706-645-9291 (outside the U .S .) . The pass code for the tele-replay is 2943691 .

About Portal Software. Inc. Portal Software is the premier provider of billing and Revenue Management solutions for the global communications and media markets . The company delivers the only platform for the end-to-end management of customer revenue across offerings, channels, and geographies . Portal's solutions enable companies to dramatically accelerate the launch of innovative, profit-rich services while significantly reducing the costs associated with legacy billing systems . Portal is the Revenue Management partner of choice to the world's leading service providers including : Vodafone, AOL Time Warner, Deutsche Telekom, TELUS, NTT, China Telecom, Reuters, Telstra, China Mobile, Telenor Mobil, and France Telecom .

Forward Looking Statement s Statements in this release concerning Portal Software, Inc .'s bookings and cash are preliminary, unaudited financial information for the third quarter fiscal year 2006 . These statements, as well as statements regarding the adjustments management expects to make in previously filed SEC reports for the first three quarters of fiscal year 2005, and to the preliminary financial results for the fourth quarter of fiscal 2005 and the first two quarters of fiscal year 2006, as well as statements regarding the completion of the audit of our fiscal year 2005 financial statements and completion of Sarbanes Oxley Section 404 requirements, as well as the remediation of our material weaknesses, are forward looking statements that involve a number of uncertainties and risks . Factors that could cause actual events or results to differ materially include the following : Portal's auditors have not completed their audit of our fiscal 2005 results, nor commenced their review of the first three quarters of fiscal 2006 results disclosed here and in previous releases . Consequently, our Audit Committee has not had an opportunity to complete its review of the preliminary financial results contained herein . During the course of completing these respective reviews and audit, we may determine we need to further revise materially the preliminary results reported herein, further adjust results reported for the first three quarters of fiscal year 2005 or further restate the results reported for previous periods . The material weaknesses in our internal controls significantly increase the risk that the preliminary financial results reported herein, including results reported as specific numbers or within ranges, as well as our previously issued financial results, may need to change . For instance, we may discover errors in determining these results or additional information that has a material impact upon them . In addition, customers are engaging in greater due diligence before making commitments and, as a result, some orders have been delayed and we may not reach our expected level of sales required to become operating cash flow positive in the fourth quarter of fiscal 2006 .

Po rt al Press Release December 22, 2005 Portal Software to Restate Previously Filed Fiscal 2005 Quarterly Results and Provides Update on Business materialize , would have a material adverse impact on our business and operations . Other factors which could cause actual results to differ from those discussed in this press release are described in detail in our Annual Repo rt on Form 10-K . for the fiscal year ended Janua ry 30, 2004, our subsequent quarterly repo rt s on h at the beginning of this Form 10- Q, and our current repo rts filed on Form 8-K . All statements made in this press release are made only as of the date set fo rt release. Po rtal unde rtakes no obligation to update the information in this release in the event facts or circumstances subsequently change after the date of this press release .

Copyright 1996-2005 . PORTAL, the PORTAL LOGO, INFRANET, INFRANET CABLE, INFRANET DNA, INFRANET IPT, INFRANET WIRELESS, INFRANET WIRELINE, INTERCONNECT, INTEGRATE, RETURN ON INNOVATION, TELCOONE, REAL TIME- NO LIMITS, CONTENT CONNECTOR and BILLINGAGILITY are trademarks or registered trademarks in the United States and in other countries , all owned by Portal Software , Inc . or its subsidiaries .

Contacts : Investor Relations 408-572-2345, investor relationsnaortal .com

Amy Cozamanis, Financial Relations Board 310-854-831 4 acozamanis@financi alre lationsboard .com

Media : Kevin Payne, Portal 408-572-3614, kpayne@portal .com

Josh Aroner, Zeno Group 415-369-8107, josh.aroner@zenogroup .com

## #

Portal Press Release December 22, 2005

Created by lOKWizard www .10KWizard .corn Exhibit 3 Portal: Portal Names Maury Austin Chief Financial Officer Page 1 of 2

PR[.--..E,S RELEASES

EVENT S

AR ICt E S C . . ; .. ._.i..._" . .

ESEMINARS Portal Names Maury Austin Chief Financial Officer

TESTIMONIALS Seasoned Financial and Technology Executive Joins Portal Management Tea m

ABOU r PORTAL CUPERTINO , CA (June 23 , 2005)-Portal Software , Inc. (Nasdaq : PRSFE ), the premier global provider of billing and Revenue Management solutions, announced today it has appointed Maury i~aI~ fo ` recftor~' `''s Austin as Chief Financial Officer . Austin assumes the role from Ron Kisling , who will remain wit h r 'act Sheet the company as senior vice president of finance . invest.or Re'ahicns Prior to joining Portal, Austin was senior vice president and CFO of Southwall Technologies, a Palo PR CONTACT Alto-based publicly -traded manufacturer and marketer of thin film products . At Southwall, he helped the company achieve and maintain profitability , regain its SEC repo rting status, and created a new finance team to support the company 's continued growth .

"Maury is a proven CFO and leader who brings 24 years of highly applicable financial experience guiding companies through growth and leading them to sustainable profitability," said Dave Labuda, Portal's chief executive officer . "I am confident that Maury will build on the work that Ron Kisling accomplished over the past months to improve our cash flow and profitability and streamline our SEC reporting processes . "

Prior to Southwall, Austin was CFO at Vicinity Corporation, a Sunnyvale-based company that provided hosted enterprise marketing services . Austin, who began his career with General Electric, has also held positions at McDonnell Douglas Information Systems, Apple Computer, Flashpoint Technology, and Syrnmetricon .

Austin holds a bachelors degree in finance and marketing from the University of California at Berkeley and a masters of business administration from the University of Santa Clara .

"I am excited to join the Portal team at such an important time in the company's effort to transform the billing and Revenue Management market," said Austin . "Portal's financial reporting challenges, while critical, are clearly outweighed by the opportunities for the company to grow profitably and build on its rich tradition of innovation and customer focus ."

About Portal Software, Inc.

Portal is the leading worldwide provider of billing and Revenue Management solutions for the global communications and media markets . The company delivers the only platform for the end- to-end management of customer revenue across offerings, channels, and geographies . Portal's solutions enable companies to dramatically accelerate the launch of innovative, profit-rich services while significantly reducing the costs associated with legacy billing systems . Portal is the Revenue Management partner of choice to the world's leading service providers, including Vodafone, AOL Time Warner, Deutsche Telekom, Telstra, NTT, China Telecom, Reuters, China Mobile, Telenor Mobil, and France Telecom .

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Media Contac t Kevin Payne , kpa ne or tal .co m, 408-572-3614

Forward Looking Statemen t Statements in this release contain forward looking statements that involve uncertainties and risks . These and other factors are described in detail in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004 and our quarterly reports on Form 10-Q . All statements made in this press release are made only as of the date set forth at the beginning of this release . Portal undertakes no obligation to update the information in this release in the event facts or circumstances subsequently change .

Portal has inserted into several releases links to other parts of the Portal Web site containing related topics . Portal press releases speak only as of the date of their release, and Portal makes no effort to update the content subsequently . No inference should be drawn that the continuing presence of a release in this historical archive means that the information contained in it continues to be accurate or complete .

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http ://www.portal.com/news%5Fevents/press_releases/austin.htm 3/7/2006 Exhibit 4 Portal Software, Inc . Page 1 of 4

Portal Software, Inc . Provides Fiscal 2005 Third Quarter Update

CUPERTINO , February 3, 2005 -Portal Software, Inc . (Nasdaq : PRSFE) today provides preliminary financial results for the fiscal 2005 third quarter ended October 29, 2004 . As previously reported, Portal has been delayed in reporting its fiscal 2005 third quarter results as management reviewed certain revenue recognition methodologies . This review has included over 280 contracts, not only for the current quarter, but also for the previous six quarters . While management has completed its evaluation and has concluded that the revenue recognition methodologies under review have been accurately applied, Portal's Audit Committee and external auditors have not yet completed their review . Consequently, actual reported results could differ materially from those provided in this release .

"The third quarter was significant for Portal, as we made strategic organizational changes to enhance our focus on key customer relationships and improve operational efficiency," said Dave Labuda, Portal's chief executive officer . "At the same time we recognize that there is significant work ahead . "

Fiscal 2005 Third Quarter Financial Result s

• Revenue for the third quarter of fiscal 2005 grew 2 .6% to $26 .0 million, from $25 .4 million for the same period last year, and increased 40 .2% from $18.6 million for the second quarter of fiscal 2005;

• Deferred revenue at October 29, 2004 was $39 .8 million, compared to $37 .4 million in the second quarter of fiscal 2005 ;

• Bookings for the third quarter of fiscal 2005 were $32 .3 million compared to bookings of $37 .1 million for the same period last year, and $46 .3 million for the second quarter of fiscal 2005 ;

• Cash and investments at October 29, 2004 were $71 .2 million (including $14 .2 million in restricted cash and investments), down from $83 .7 million at the end of the second quarter of fiscal 2005 ;

• GAAP net loss for the third quarter of fiscal 2005 was $17 .2 million, or $0 .40 per diluted share, compared to a GAAP net loss of $15 .2 million, or $0 .39 per diluted share, in the prior year period, and a GAAP net loss of $22 .3 million, or $0 .53 per diluted share, in the second quarter of fiscal 2005 ;

• Pro forma net loss for the third quarter of fiscal 2005 was $15 .9 million, or $0 .37 per diluted share, compared to a pro forma net loss of $11 .5 million, or $0 .30 per diluted share, in the prior year period, and a pro forma net loss of $25 .5 million, or $0 .60 per diluted share, in the second quarter of fiscal 2005 .

Pro forma net loss in the third quarter of fiscal 2005 excludes amortization of acquired intangibles of $0 .7 million, a net restructuring credit of $0 .9 million, and a $1 .5 million write-off of an investment in a privately held company . The $0 .9 million in restructuring credit resulted from a $3 .8 million restructure charge related to the Company's initiative to move from a regional general manager model to an integrated global sales and services organization (as announced on October 8, 2004) . As a result of its efforts, beginning in FY'06 Portal expects to reduce its expenses and cash utilization by approximately $15 to $19 million on an annual basis . The restructure charge was offset by a $4 .7 million credit to a previous restructure reserve, as the Company successfully subleased vacant space, and a portion of its main headquarters was reoccupied . The pro forma net loss in the third quarter of fiscal 2004 excludes a stock option compensation charge of $3 .0 million and amortization of acquired intangibles of $0 .7 million . The pro forma net loss in the second quarter of fiscal 2005 excludes a stock option compensation benefit of $3 .6 million, amortization of acquired intangibles of $0 .7 million and a credit to restructuring costs of $0 .4 million .

During the closing of our fiscal year 2005 third quarter, we also concluded that, as a result of pricing to market levels, our services pricing was more variable and we no longer have the ability to estimate the fair value of consulting services . As a result, when consulting services are sold with license fees, license revenue will be recognized when the consulting services are delivered or completed, rather than upon delivery of the licensed software .

http://investor.portal.comlphoenix .zhtml?c=64835&p=irol-newsArticle _print&ID=687679&highlight= 3/7/2006 Portal Software, Inc . Page 2 of 4

Material Weaknesses in Internal Controls

At the end of our fiscal year ended January 31, 2005 and as of the date of this press release, we have identified multiple unremediated material weaknesses in our internal control over financial reporting (our "internal controls") . These include not only material weaknesses previously identified in our public filings with the Securities and Exchange Commission (the "SEC"), but also material weaknesses identified during the close process of this third quarter relating to an insufficient number of qualified and experienced financial and accounting personnel . These staffing deficiencies have resulted in insufficient segregation of duties among our existing finance and accounting personnel, delays and inadequate reviews in preparing our financial statements and related disclosures, and delays in filing our 10-Q with the SEC . Some of these identified weaknesses resulted in errors that were not identified during our normal close process and have increased the potential for errors in our financial statements . Consequently, as of January 31, 2005, Portal has a significant number of internal controls that are not effective, and management's report on our internal controls will include material weaknesses .

We have nonetheless been diligently working to remediate all of these material weaknesses in our internal controls . We have been recruiting additional finance and accounting personnel to address our staffing shortage in this area . We are committed to fixing these deficiencies in our internal controls .

Information About Pro Forma Presentatio n

To supplement Portal's consolidated financial statements presented on a GAAP basis, the Company uses additional non-GAAP or "pro forma" measures of operating results, net profit or loss, and net profit or loss per diluted share adjusted to exclude certain costs, expenses and losses . Portal believes these measures are appropriate to enhance an overall understanding of its operating results, past financial performance, and also its prospects for the future . In addition, these adjusted non-GAAP results are among the primary indicators used by management as a basis for planning, including making personnel decisions, budgeting, an d forecasting of future periods . Because there are no generally accepted industry standards for presenting non-GAAP results, the methods used by Portal may differ from the methods used by other companies . The presentation of this additional information is not meant to be considered in isolation or as a substitute for measures prepared in accordance with GAAP . Information relating to the corresponding GAAP measures and a reconciliation of the pro forma and GAAP items can be found in the Portal investor web site at www .portal .com.

Conference Call Informatio n

Portal will discuss its third quarter fiscal 2005 results and other financial and business information in a conference call and audio web cast on Thursday, February 3, 2005 at 5 : 00 p .m . Eastern (2 :00 p . m . Pacific) .

To access the call, please dial one of the following numbers at 4 :50 p .m . Eastern (1 :50 p .m . Pacific) on February 3, 2005 : (800) 946-0786 (inside the U .S .) or (719) 457-2662 (outside of the U .S .) . Portal's third quarter fiscal 2005 earnings call will also be simulcast at Portal's investor relations web site at http 11 nve :3 tor.portal .com .

Additionally , an archive of the call will be available for one year , commencing one hour following the live call on February 3, 2005 at Portal 's investor relations web site at http_L investor .portal .com . A tele - replay of the call will also be available for one year by dialing (888) 203-1112 ( inside the U .S .) or (719) 457-0820 (outside the U .S .) . The pass code for the tele-replay is 4586595 .

This press release and full Company balance sheet and consolidated operations details will be filed as an exhibit to a current report on Form 8-K and will be posted on Portal's web site prior to the conference call described above . For a copy of this press release and the Company balance sheet and consolidated operations details, please visit Portal's Investor Relations site at http ://investor .portal .com

About Portal Software, Inc .

Portal is the leading worldwide provider of billing and Revenue Management solutions for the global communications and media markets . The Company delivers the only platform for the end-to-end management of customer revenue across offerings, channels, and geographies . Portal's solutions enable companies to dramatically accelerate the launch of innovative, profit-rich services whil e

http://investor.portal.com/phoenix.zhtml?c=64835&p=irol-newsArticle print&ID=687679&highlight= 3/7/2006 Portal Software, Inc . Page 3 of 4

significantly reducing the costs associated with legacy billing systems .

Portal is the Revenue Management partner of choice to the world's leading service providers including : Vodafone , AOL Time Warner, Deutsche Telekom, TELUS, NTT, China Telecom , Reuters, Telstra, China Mobile, Telenor Mobil, and France Telecom .

Forward Looking Statement s Statements in this release concerning Portal Software, Inc .'s overall future prospects, including our preliminary financial results for the third quarter of fiscal 2005, including future expense benefits and cost savings from its recent restructuring, are forward looking statements that involve a number of uncertainties and risks . Factors that could cause actual events or results to differ materially include the following : Our auditors and/or Audit Committee may not agree with the conclusions we have reached regarding our revenue recognition methodologies, and we may need to revise the results announced in this release for our fiscal year 2005 third quarter, and/or we may need to restate earnings and results provided for previous quarters, including fiscal year 2004 and the first and second quarter of fiscal year 2005 . Significant consequences could result from this, including, but not limited to, incurring additional costs, delaying or losing entirely new business, employee attrition, and distracting management from leading and managing the business . Additional uncertainties and risk include the following : Reduced technology spending by our customers and prospects ; an inability to forecast accurately, or a delay in, the signing, commencement, implementation, and performance of projects or contracts, or an inability to deliver our products and services under such contracts in a manner satisfactory to our customers, all of which could harm our ability to earn revenue ; limited market acceptance of Portal's products and services ; negative customer and industry analyst perceptions of Portal and its technology vision and future prospects ; fluctuations in the market price of Portal stock that can result in unpredictable compensation expense charges ; our inability to improve our disclosure and internal controls : limited or no ability to implement or realize the benefits of cost reduction efforts, such as our ability to sublease or eliminate excess office facilities in a timely and cost effective manner ; failure to properly train our sales force and failure to realize forecasted sales productivity ; failure to recruit, train, and retain skilled management and other personnel ; an inability to establish, maintain, and effectively implement relationships with system integrators and other strategic resellers and vendors and to manage large multi-party projects involving system integrators and other parties ; failure to adequately manage rapid technological changes and to compete effectively ; and unanticipated delays in scheduled product availability . We may also identify additional deficiencies or material weaknesses in our internal controls, or may be unable to remediate such deficiencies and weaknesses ; our auditors may be delayed or even prevented from issuing a report on our financial statements, which may delay or prevent us from filing our 10-K . Despite the significant expense, time, and effort being expended on our efforts to remediate our internal controls, there is no assurance that we will be able to prevent additional errors, or that we will be able to successfully remediate the significant deficiencies or material weaknesses in our internal controls . Potential consequences of a failure to remediate such significant deficiencies and material weaknesses could include, among other things : enforcement action against us by the SEC or other federal or state regulatory agency, lawsuits by private plaintiffs, adverse reaction by investors and potential investors, and harm to our reputation in the business and financial community . If any of our internal control significant deficiencies or material weaknesses are not adequately addressed, we could continue to experience accounting errors that could result in misstatements of our results of operations, restatements of our financial statements, loss of confidence in us as a company, a decline in our stock price, or otherwise adversely affect our business, reputation and results of operations . Other factors which could cause actual results to differ from those discussed in this press release are described in detail in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004 and our subsequent quarterly reports on Form 10-Q . All statements made in this press release are made only as of the date set forth at the beginning of this release . Portal undertakes no obligation to update the information in this release in the event facts or circumstances subsequently change after the date of this press release .

Copyright 1999-2005 . PORTAL, the PORTAL LOGO, INFRANET, INFRANE-- CABLE, INFRANET DNA, INFRANET IPT, INFRANET WIRELESS, INFRANET WIRELINE, INTERCONNECT, INTEGRATE, RETURN ON INNOVATION, TELCOONE, REAL TIME- NO LIMITS, CONTENT CONNECTOR and BILLINGAGILIT Y are trademarks or registered trademarks in the United States and in other countries, all owned by Portal Software, Inc . or its subsidiaries .

Investor Relations Contacts : At Portal - investor relations anoortal .com , 408 .572 .234 5 At Financial Relations Board - Amy Cozamanis, acozamanis@financialrelationsboard .com , 310 .854 .831 4

Media Contacts : At Portal - Kevin Payne, kpavneA!,aportal com, 408 .572 .361 4 At Edelman - Daylan Burlison, daylan .burlison@zenogroup .com , 415 .369 .811 6

• Statement of ._Operations -a nd Balance Shee t

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• Main investor relations area

http ://investor.portal.comlphoenix .zhtml?c=64835&p=irol-newsA-rticle-Print&ID=687679&highlight= 3/7/2006 Exhibit 5 PRESS RELEASE S

EVEN 1'S

AR FIa.LC-`.a r E . E

ESEF I NAR Portal to Raise Approximately $60 Million Through Sale of Common Stock S

.ES_ I M0 N TAE S CUPERTINO , CA (September 12, 2003 )-Portal Software, Inc . (Nasdaq : PRSF) toda y [ announced that it has priced a registered direct offering for the sale of 22 ,641,509 shares of it s common stock at a price of $2 .65 per share to institutional investors . Raymond James & OL @ I Associates , Inc . served as placement agent for the transaction . Kaufman Bros ., L.P . served as co - Key iy€a}i~ T, y placement agent . The company expects this transaction to close on Wednesday, September 17 , B0a,rd of :.. E Lt. 2003 .

e. a d Sheett I{1Vf.'stor :~f:'ii:3(. ons The offered shares are registered pursuant to Portal 's $50 million shelf registration statemen t that was declared effective by the Securities and Exchange Commission on September 13, 200 2 PR C0NT_ AC' and a related registration statement registering an additional $ 10 million of Po rtal 's commo n stock.

Registration Statements relating to these securities have been filed with and declared effective by the Securities and Exchange Commission . This press release does not constitute an offer to sell or the solicitation of an offer to buy, and these securities cannot be sold in any state which this offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state .

A Prospectus may be obtained from Raymond James & Associates , Inc . at 880 Carillon Parkway, St . Petersburg , FL, 33716, Prospectus Depa rt ment .

About Portal Software, Inc.

Portal Software provides flexible billing and subscriber management solutions to enable organizations to monetize their voice and digital transactions . Portal's convergent billing platform enables service providers to charge, bill, and manage a wide range of services via multiple networks, payment models, pricing plans, and value chains . Portal's flexible and scalable product-based solutions enable customers to introduce new value added services quickly, providing maximum business value and lower total cost of ownership . Portal's customers include thirty-five of the top fifty wireless carriers as well as organizations such as Vodafone, AOL Time Warner, Deutsche Telekom, TELUS, NTT, China Telecom, Reuters, Telstra, China Mobile, Telenor Mobil, and France Telecom .

This press release contains forward-looking statements regarding the expected timing of the closing of the offering described herein . This statement is based on Portal's current expectations and is subject to risks and uncertainties, including the risk that the financing does not close due to the failure of one or more conditions to closing or the triggering of a termination event set forth in the Placement Agency Agreement entered into among Portal and the placement agents, a copy of which is filed with the SEC under a Form 8-K . Conditions include, among other things, the absence of any material adverse change in Portal, its business or financial condition, the absence of any loss due to force majeure and the absence of any stop order relating to the registration statements issued by the SEC . Termination events include, among other things, any suspensio n

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in trading on the New York Stock Exchange or declaration of a general banking moratorium by federal or New York State authorities or outbreak or escalation of hostilities involving the United States .

## #

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Case 3:03-cv-05138-VRW Document 148 Filed 03/08/2006 Page 16 of 39

Exhibit 7 Case 4 :05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 1 of 34

1 2 IN THE UNITED STATES DISTRICT COURT 3 FOR THE NORTHERN DISTRICT OF CALIFORNIA 4 1

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

U i~ 12 .~ v 13 This matter comes before the Court on the Motion to Dismiss Plaintiffs Consolidated Amended ° 14 Class Action Complaint (the "Consolidated Amended Complaint") [Docket No . 35] filed by Defendants 15 c~ 0 Applied Signal Technology, Inc ., Gary Yancey, and James Doyle (collectively "Defendants") and v 16 b ti Plaintiffs Motion for Class Certification [Docket No . 25]. Having read and considered the papers .,r 17 presented by the parties, the Court finds this matter appropriate for disposition without a hearing . The 1 8 Court hereby GRANTS Defendants' Motion to Dismiss [Docket No . 35] and DISMISSES Plaintiffs 19 Consolidated Amended Class Action Complaint WITH PREJUDICE . Accordingly, the Court DENIES 20 Plaintiffs Motion for Class Certification [Docket No . 25] AS MOOT . 21 BACKGROUND 22 A. Background Regarding the Partie s 23 1. Applied Signal Technology, Inc. 24 Defendant Applied Signal Technology, Inc . ("Applied Signal" or the "Company") is a California 25 corporation and a publicly traded company with over 11 million shares of stock outstanding . CAC' at 26 ¶ 15. The Company's financial year is not concurrent with the calendar year . Instead, it ends on the las t 27

28 'The Consolidated Amended Complaint is referred to herein as "CAC." Case 4 :05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 2 of 3 4

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

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

3 Applied Signal's corporate headquarters are located in Sunnyvale, California. CAC at ¶¶ 7, 23-

4 24; Harris-Sutton Decl. at Ex. H. The Company also maintains engineering offices in Annapolis

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

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

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

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

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

10 Applied Signal is in the business of supplying various United States government agencies wit h I' 1 1 customized communications signal processing systems, which it designs, develops, and installs . CAC v o 12 at ¶ 27. Since 1984, the United States government and various governmental agencies have accounted CJ 7~ 13 for almost all of the Company's revenues . Id. Although the government agencies are the Company's o A 'E 14 primary customer, purchases occur in two ways : (1) contracts directly with the government, and (2) v~ Q 15 subcontracts to prime contractors. See Harris-Sutton Decl. at Ex. H. Within the Company's primary c~ z 16 customer agencies, the Company has contracts with approximately twenty different offices, each with

17 separate budgets and contracting authority . Id.

18 In the past two fiscal years, just under three quarters of the Company's contracts were "cos t

19 reimbursement" contracts, including contracts for the design, installation, and/or servicing of customized

20 products . CAC at ¶ 25 . Under these contracts, the Company is reimbursed for direct and indirect costs

21 and paid a negotiated profit . Id. However, the Company is not entitled to payment until after its

22 employees provide the services delineated in the contract . Id. Further, most of the Company's contracts 23 contain a provision that allows the Company's customers to force Applied Signal to stop work on all o r 24

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

28 2 Case 4 :05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 3 of 34

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

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

3 thus:

4 (a) The Contracting Officer may, at any time, by written order to the Contractor, require the Contractor to stop all, or any part, of the work 5 called for by this contract for a period of [up to]3 90 days after the order is delivered to the Contractor, and for any further period to which the 6 parties may agree. The order shall be specifically identified as a stop-work order issued under this clause . Upon receipt of the order, the 7 Contractor shall immediately comply with its terms and take all reasonable steps to minimize the incurrence of costs allocable to the 8 work covered by the order during the period of work stoppage . Within a period of 90 days after a stop-work order is delivered to the 9 Contractor, or within any extension of that period to which the parties shall have agreed, the Contracting Officer shall either - 10 (1) Cancel the stop-work order; or 11 (2) Terminate the work covered by the order as provided in 12 the Default, or the Termination for Convenience of the Government, clause of this contract . U 13 0 (b) If a stop-work order issued under this clause is canceled or the period 14 A of the order or any extension thereof expires, the Contractor shall resume work. The Contracting Officer shall make an equitable a~ 15 adjustment in the delivery schedule or contract price, or both, and the contract shall be modified, in writing, accordingly, if - Z 16 b a~ 0 (1) The stop-work order results in an increase in the time 17 required for, or in the Contractor's cost properly C allocable to, the performance of any part of this 18 contract; and

19 (2) The Contractor asserts its right to the adjustment within 30 days after the end of the period of work stoppage ; 20 provided, that, if the Contracting Officer decides the facts justify the action, the Contracting Officer may 21 receive and act upon a proposal submitted at any time before final payment under this contract . 22 (c) If a stop-work order is not canceled and the work covered by the order 23 is terminated for the convenience of the Government, the Contracting Officer shall allow reasonable costs resulting from the stop-work order 24 in arriving at the termination settlement . 25

26 'Revisions to the regulations provide that the 90-day period may be reduced to less than 90 days . 27 See 48 C.F .R. 52 .242-15. 28 Case 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 4 of 3 4

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

4 48 C .F.R. 52.242-15 . Thus, when a SWO is issued, it is possible, but not necessarily definite, that future

5 revenues may be affected . Id. ; CAC at ¶ 26 .

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

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

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

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

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

11 public filings, with respect to future revenues, and other contingent events, the investing public is 0 Ct 12 expressly warned that any statements regarding future events are "not guarantees of future performance Ct L) 13 and are subject to certain risks ." See Harris-Sutton Decl . at Ex . A (FY03 Form 10-K) . For example, 0 U 14 A the Form 10-K for Fiscal Year 2003 states the following : a~ 15 This Annual Report on Form 10-K contains forward-looking statements made e~ pursuant to the provisions of Section 21E of the Securities Exchange Act of 16 1934. These forward-looking statements are based on management's current b a~ expectations and beliefs, including estimates and projections about our 17 industry. Forward-looking statements may be identified by the use of terms such as "anticipates," "expects," "intends," "plans," "seeks," "estimates," 18 "believes," and similar expressions, although some forward-looking statements are expressed differently . Statements concerning financial position, business 19 strategy and plans or objectives for future operations are forward-looking statements. These statements are not guarantees of future performance and 20 are subject to certain risks, uncertainties , and assumptions that are difficult to predict and may cause actual results to differ materially from 21 management's current expectations . Such risks and uncertainties include those set forth herein under "Summary of Business Considerations and Certain 22 Factors that May Affect Future Operating Results and/or Stock Price" and "Management's Discussion and Analysis of Financial Condition and Results 23 of Operations ." The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect management's outlook at 24 any other point in time . We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information , future 25 events, or for any other reason. However, readers should carefully review the risk factors set forth in other reports or documents we file from time 26 to time with the Securities and Exchange Commission (SEC) after the date of the Annual Report. These SEC filings, as well as our latest annual report, can 27

28 4 Case 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 5 of 3 4

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

3 I Id. (emphasis added).

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

5 public:

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

13 0 Id. (emphasis added) . Z 14 A 2. The Individual Defendants a~ 15 e~ a At all times relevant to this action , defendant Gary Yancey ("Yancey") was the Chairman , z 16 b President, and Chief Executive Officer ("CEO") of Applied Signal . CAC at ¶ 8 . As the CEO, Yancey a~ w0 .w 17 C signed and certified all SEC quarterly and annual reports . Id. Additionally, he owned shares of the 18 Company's stock ; although, during the period between January 3, 2005 and January 18, 2005, he sold 19 over forty percent of his holdings . I. Also during this period of time, defendant James Doyle 20 ("Doyle") was the Company's Chief Financial Officer ("CFO") and Vice President of Finance . Id. at 21 ¶ 9. As the CFO, Doyle participated in quarterly earnings report conference calls for the quarters ending 22 in July and October 2004 and January and April 2005 . Id. Doyle also signed and certified all SEC 231' quarterly and annual reports . Id. 24 3. Plaintiffs 25 Lead Plaintiff Frank Whiting ("Plaintiff'), is a common stock purchaser who purchased shares 26 of Applied Signal during the relevant time period, August 24, 2004 and February 22, 2005 (the "Clas s 27

28 5 Case 4:05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 6 of 3 4

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

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

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

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

5 Period. Id. at ¶ 14.

6 B. Background Regarding the Confidential Witnesses

7 The allegations contained in the Consolidated Amended Complaint are based, in part, on certai n

8 information obtained from the following Confidential Witnesses :

9 (a) Confidential Witness No . 1 . Confidential Witness No. 1 ("CWV) was employed as a software engineer during the beginning of the Class Period up until November, 2004 . 1 0 Id. at ¶ 22(a) . He worked in Applied Signal's Annapolis Junction, Maryland Office . Id. His duties included system and process design, implementation, testing, life cycle 11 documentation, design and code review, team tasking, and scheduling . Id.

U 0 12 (b) Confidential Witness No . 2. Confidential Witness No . 2 ("CW2") was employed as a software engineer in Applied Signal's Maryland office until some months before the L) 13 0 beginning of the Class Period . Id. at ¶ 22(b). 14 A (c) Confidential Witness No . 3 . Confidential Witness No. 3 ("CW3") was employed as a software engineer at Applied Signal ' a~ s Utah office from well before the Class Period until 15 January 2005 . Id. at ¶ 22(c) . CW3's c~ z duties included the design and implementation of software. z 16 b a~ 00 (d) Confidential Witness No . Confidential Witness No . 4 ("CW4") was employed as a w 17 C technical editor at Applied Signal's Sunnyvale office from before the beginning of the Class Period until November 2004. Id. at ¶ 22(d). He was responsible for editing and 18 proofreading technical manuals, proposals, presentations, brochures, newsletters, and other technical and marketing material . Id. He was also responsible for creating 19 processes and flowcharts for the Finance Department in accordance with Sarbanes-Oxley requirements. Id. 20

21 C . The Factual Allegations 22 This action is premised on Plaintiffs theory that Applied Signal and two of its individua l 23 officers, Yancey and Doyle, (collectively, "Defendants"), knowingly issued a series of false and 24 misleading statements regarding Applied Signal in order to artificially inflate Applied Signal's stock 25 price throughout the Class Period . In particular, the Consolidated Amended Complaint is premised on 26 certain representations Defendants made regarding the Company's "backlog" and certain SWOs tha t 27

28 6 Case 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 7 of 3 4

1 were purportedly received by the Company during the relevant period .4 The Consolidated Amende d

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

3 11 personnel. The pertinent facts are set forth below .

4 1. The Third Quarter of Fiscal Year 200 4

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

6 During that quarter, at some point in June 2004, Applied Signal received a stop-work order ("SWO 1 "),

7 which instructed the Company to stop work on a portion of the Company's largest single contract. CAC 8 at ¶ 29(a) . In accordance with the instructions provided by the customer, the Company prepared a

9 proposal that detailed the tasks that were stopped and estimated the reduction in contract costs. Id. 10 Also in June 2004 or possibly in May 2004 , according to CW1, the Wireless Communications 11 System Division of Applied Signal received another stop-work order ("SWO2") on a project for the 12 U ' E United States military that was referred to as "Cowbird ." Id. at ¶ 30. CW1 knew about SWO2 because U i 13 o it required employees at the Company's Maryland facility, where he worked, to stop performing services

14 for the government agency related to the contract . Id. at ¶¶ 22(a), 30(b) . According to CW2, who v~ Q 15 worked at Applied Signal up until a few months before August 2004, the contract implicated by SWO2

16 was worth about $8 million . Id. at ¶¶ 22(b), 30(b) . a~ o 17 On August 24, 2004, Applied Signal issued a press release and hosted a conference call ("Augus t 18 Conference Call") to discuss financial results for the third quarter of FY04. CAC at ¶ 28. Yancey and 19 Doyle represented the Company during the August Conference Call. Id. In the course of that call, 20 Doyle reported that the Company's backlog was approximately $ 111 million.' Id. 21 Additionally, in the August 24, 2004 press release ("August 2004 Press Release"), Yancey wa s 22 quoted as saying that he was "pleased" that Applied Signal had "met the challenge" of meetin g 23 "aggressive hiring requirements." Id. at ¶ 39. During the August Conference Call, he also stated tha t 24

25 4Specifically, the following four SWOs are relevant to the instant discussion: (1) a June 2004 SWO ("SWOT "), (2) a May or June 2004 SWO ("SWO2"), (3) an August or September 2004 SWO 26 ("SWO3"), and (4) a December 2004 SWO ("SWO4") . CAC at ¶¶ 29, 30, 35 . 27 5Defendants did not discuss SWO1 or SWO2 during the call . CAC at ¶ 29 . 28 7 Case 4 :05-cv-01 027-SBA Docurrient 61 Filed 02/08/2006 Page 8 of 34

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

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

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

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

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

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

7 increase ." Id.

8 On September 9, 2004, Defendants filed a Form 10-Q ("Third QuarterForm 10-Q") with th e

9 SEC, which reported the $111 million backlog amount that was disclosed during the August 2004

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

1 1 received SWOT and that, pursuant to SWO 1, the Company was instructed to stop work on a portion of

U o 12 1 its largest single contract . Id. Additionally, the report stated that "new orders and backlog [were]

•~ U 13 1 ,L w expected to be reduced by approximately $11 to $13 million" after the completion of negotiations

14 relating to SWO1 and that the Company "anticipate[d] the completion of these negotiations during the A Q 15 first or second quarter of fiscal 2005 .i6 Id. e~ C Z 16 2. The Fourth Quarter of Fiscal Year 2004 and Disclosures Concerning the Third •o y o Quarter of Fiscal Year 2004 ~ w 17 According to CW3, who was employed as a software engineer at Applied Signal's Utah office 18 at the time, the Company also received another stop-work order ("SWO3" ) in August or September 19 2004. Id. at ¶¶ 22(c), 35(b). SWO3 was purportedly related to a contract with one of the Company's 20 largest customers that was worth more than $20 million. Id. at ¶¶ 35(b). CW3 was aware of SWO3 21 because he had been working on the project, which was known as "Excelsior ." Id. at ¶ 35(b) . SWO3 22 affected the Multichannel Systems Division ("MSD") at the Utah facility, as well as the MSD group in 23 the Company 's Sunnyvale, California facility. Id. At the Sunnyvale facility, approximately 50 to 75 24 workers were involved in the project . Id. CW4, who was employed as a technical editor at Applie d 25

26 'The Third Quarter Form 10-Q (lid not mention SWO2 . CAC at ¶ 30 . In fact, to date, SWO2 has 27 not been mentioned in any Company public filings . Id. at ¶ 32 .

28 I 8 Case 4 :05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 9 of 3 4

1 Signal's Sunnyvale office during August and September 2004, was aware of SWO3 . Id. at ¶¶ 22(d),

2 35(b). According to CW3, after the Company received SWO3, work on "Excelsior" stopped for

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

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

5 office a "ghost town." Id.

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

7 I analyst covering Applied Signal's stock informed investors that he was changing the rating of th e 8 Company's stock from "buy" to "neutral ." Id. at ¶ 31 . The price of Applied Signal's stock dropped fro m

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

10 1 3 . The First Quarter of Fiscal Year 2005 and Disclosures Regarding Fiscal Year 2004

1 1 According to CW3, the software engineer who worked in the Company's Utah office during thi s

U 12 1 time, the Company also received a stop-work order in December 2004 ("SWO4") . Id. at ¶¶ 22(c), 35(c) .

•~ U 13 SWO4 involved a gove ment agency that had cancelled other large contracts with Applied Signal in it C rn r 14 the past. Id. at ¶ 35(c) . r 15 On December 21, 2004, Applied Signal issued a press release (the December 2004 Pres s c~ C 1 6 Release") and hosted a conference call ("December 2004 Conference Call") to discuss financial results b Y a~ o 17 for the fourth quarter of FY04 . CAC at ¶ 33 . Yancey and Doyle represented the Company during the rD 18 December Conference Call and reported that the backlog for the fourth quarter was $143 million . Id.

19 The December 2004 Press Release reported that the Company earned 21 cents per share during the

20 fourth quarter of FY04, which was below the analysts' consensus estimate of 29 cents per share . Id. at

21 ¶ 42. Defendants did not mention SWO2, SW03 or SWO4 during the call or in the press release . Id.

22 at ¶ 35(a)-(c).

23 Additionally, Doyle reported, during the December 2004 Conference Call, that the Company ha d

24 I added a "net" of 20 employees during the fourth quarter of FY04. Id. at ¶ 40(a) . Doyle then stated that 25 the Company had "about" 500 employees . Id. at ¶ 40(a). According to the Form 10-K for FY04, the

26 exact number was 498 employees . Id. 27

28 9 Case 4:05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 10 of 3 4

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

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

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

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

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

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

7 to $35 .74 at the market's close on December 22, 2004 . Id.

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

9 I window, Yancey sold 141,400 shares of Company stock, which represented 43% of his total stoc k

10 holdings, at prices ranging from $31 .40 to $34 per share. Id. at ¶ 48 .

1 1 On January 14, 2005, Defendants filed a its Form 10-K for FY04 . CAC at ¶ 34. The Form 10-K

12 1 indicated that the backlog at the end of FY04 was $143 million but that the $143 million could b e

13 reduced by $11 million to $13 million in future quarters once negotiations relating to SWO1 concluded . 14 A Q See Harris-Sutton Decl. at Ex. H. 15 On February 22, 2005, the Company issued a press release (the "February 2005 Press Release") x 1 6 and hosted a conference call (the "February 2005 Conference Call") concerning the Company's financial a~ - 17 results for the first quarter of FY05, which ended on January 31, 2005 . CAC at ¶ 44. During the

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

19 preceding quarter, with net income and earnings per share declining as well . Id. To explain these

20 financial results, Yancey stated :

21 [W]e are a bit behind on execution on our contracts . Part of this is for a bit of healthy reason. We've seen higher-than-anticipated proposal activity in the first 22 quarter, which has diverted some of our labor resources to proposal activity . The other phenomena that we're experiencing is, as we become more an 23 integrating contractor on some of our programs, as we've stated before we are evolving to, we find that invoicing from our subcontractors can have some 24 impact on the revenue . And we saw that some of the invoicing was lagging behind a bit compared to the work that they were putting in . So we feel that we 25 will be back on our track of our projected revenue as we build up our own staff and as the invoicing comes about . 26

28 10 Case 4:05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 11 of 3 4

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

2 The Company's stock price subsequently dropped from $27.52 per share on February 22, 2005

3 to $23 .24 at the close of the market on February 23, 2005. Id. at ¶ 45 .

4 D. Procedural History

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

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

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

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

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

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

11 misleading statements .

Uo 12 The proposed class period for the Berson complaint was May 25, 2004 through February 22 ,

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

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

19 FY04; and (6) the Company's FY04 Form 10-K . In the complaint, Berson alleged that the statements

20 were materially false and misleading because Defendants failed to disclose or indicate the following:

21 (1) that the Company lacked the staffing necessary to execute on current projects while bidding for new

22 business ; and (2) that the Company "struggled to maintain adequate levels of backlog ." The Berson

23 complaint further alleged that the aforementioned false and misleading statements were proven fals e 24

25 'Although this SEC filing was not provided to the Court by the parties, since the Consolidated 26 Amended Complaint necessarily relies on it, the Court has taken judicial notice of it pursuant to Federal Rule of Evidence 201 . See Branch v. Tunnell, 14 F .3d 449, 454 (9th Cir. 1994); Steckman v. Hart 27 Brewing, Inc. 143 F.3d 1293, 1295 (9th Cir . 1998). 28 11 Case 4 :05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 12 of 3 4

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

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

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

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

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

6 Berson - was identical to the Berson complaint.

7 On May 10, 2005, this Court ordered that the Berson case and the Sameyah case be deeme d

8 related.

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

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

11 On July 1, 2005, Defendants submitted a Statement of Non-Opposition to the Motion fo r

Vo 12 Appointment of Lead Plaintiff. Defendants also requested that the Berson case and Sameyah case be 13 consolidated by order of this Court pursuant to Federal Rule of Civil Procedure 42(a) . 6 0o 14 A Q On July 13, 2005, the Court consolidated the Berson and Sameyah cases . Also on that date, the E 15 Court granted the Motion for Appointment of Lead Plaintiff. Accordingly, Frank Whiting was 0 16 appointed to serve as Lead Plaintiff. Plaintiffs choice of counsel was also approved.

O w 17 On August 12, 2005, the instant Consolidated Amended Complaint was filed. In the

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

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

20 violation of Section 10(b) of the Exchange Act and Rule I Ob-5. Plaintiff also contends that Yancey and

21 Doyle directly or indirectly influenced and controlled the alleged fraudulent conduct of Applied Signal,

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

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

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

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

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

28 12 Case 4:05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 13 of 3 4

1 issued during May 2004 through December 2004 .

2 LEGAL STANDARD

3 A. Federal Rule of Civil Procedure 12(b)(6 )

4 Under Federal Rule of Civil Procedure 12(b)(6), a motion to dismiss should be granted if i t

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

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

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

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

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

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

Lu 11 1999). The court does not accept as trite unreasonable inferences or conclusory legal allegations cast

U a 12 in the form of factual allegations . Western Mining Council v. Watt, 643 F .2d 618, 624 (9th Cir . 1981);

•~ U 13 see Miranda v. Clark County, Nev., 279 F .3d 1102, 1106 (9th Cir . 2002). L o 14 Although the court is generally confined to consideration of the allegations in the pleadings ,

15 when the complaint incorporates documents or alleges the contents of documents, and no party e~ 0 16 questions the authenticity of such documents, a court may also consider such documents when

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

18 (9th Cir. 1996).

19 When the complaint is dismissed for failure to state a claim, "leave to amend should be grante d

20 unless the court determines that the allegation of other facts consistent with the challenged pleading

21 could not possibly cure the deficiency ." Schreiber Distrib. Co. v. Serv- Well Furniture Co ., 806 F.2d

22 1393, 1401 (9th Cir . 1986). The Court should consider factors such as "the presence or absence of undue

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

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

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

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

28 13 Case 4:05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 14 of 3 4

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

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

3 11992).

4 B. Federal Rule of Civil Procedure 9(b)

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

6 In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity . Malice, intent, 7 knowledge, and other condition of mind of a person may be averred generally . 8 Fed. R. Civ . P . 9(b) . 9 "[The Ninth Circuit] has interpreted Rule 9(b) to require that 'allegations of fraud are specific 10 enough to give defendants notice of the particular misconduct which is alleged to constitute the frau d I- 11 charged so that they can defend against the charge and not just deny that they have done anything Uo 12 - w wrong."' Neubronner v. Milken, 6 F .3d 666, 671 (9th Cir . 1993) (quoting Semegen v. Weidner, 780 F .2d 13 o 727, 731 (9th Cir . 1985)) . "The pleader must state the time, place, and specific content of the false 14 representations as well as the identities of the parties to the misrepresentation ." Schreiber Distributing E 15 e~ 0 Co. v. Serv- Well Furniture Co ., 806 F.2d 1393, 1401 (9th Cir. 1986) (citing Semegen, 780 F .2d at 731) . z 16 a~ o C. Pleading Requirements in Securities Fraud Action s 17 Section 10(b) of the Exchange Act makes it unlawful "for any person . . . to use or employ, in 18 connection with the purchase or sale of any security . . . any manipulative or deceptive device or 19 contrivance in contravention of such rules and regulations as the Commission may prescribe[ .]" 15 20 U.S .C. § 78j(b) . 21 Rule I Ob-5, promulgated under the authority of Section 10(b), in turn, provides that "[i]t shall 22 be unlawful for any person . . . (a) To employ any device, scheme, or artifice to defraud, (b) To make 23 any untrue statement of a material fact or to omit to state a material fact necessary in order to make th e 24 statements made, in light of the circumstances under which they were made, not misleading, or (c) To 25 engage in any act, practice, or course of business which operates or would operate as a fraud or deceit 26 upon any person, in connection with the purchase or sale of any security ." 17 C.F.R 27 . § 240. l Ob-5. Thus,

28 14 Case 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 15 of 3 4

1 the basic elements of a Rule I Ob-5 claim are : (1) a material misrepresentation or omission of fact, (2)

2 I scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, an d 3 1 (5) economic loss. In re Daou Systems, Inc. 411 F. 3d 1006, 1014 (9th Cir . 2005).

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

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

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

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

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

9 Reform Act ("PSLRA") .

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

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

U o 12 falsity and (2) scienter. See Gompper v. VISX, Inc., 298 F .3d 893, 895 (9th Cir . 2002) (citing Ronconi y~ w V _a 13 C v. Larkin, 253 F .3d 423, 429 (9th Cir . 2001)). "If a plaintiff fails to plead either the alleged misleading

14 statements or scienter with particularity , the court must dismiss the complaint ." Carol Gamble Trust 86 v~ Q 15 v. E-Rex, Inc., 84 Fed.Appx. 975, 977 (9th Cir. 2004) .

16 Thus, under both the PSLRA and Rule 9(b), a plaintiff must specify each statement alleged t o b Y a~ o 17 have been misleading and the specific reason or reasons why such statement is misleading. See 15

18 U.S .C . § 78u-4(b)(1) ; Fed. R. Civ. P . 9(b). This is accomplished by identifying either (1) inconsistent

19 contemporaneous statements ; or (2) inconsistent contemporaneous information (such as an internal

20 document) that was made by or available to the defendants . In re Splash Technology Holdings, Inc. Sec.

21 Litig., 2000 WL 1727377, * 13 (N .D. Cal. 1997); see also Nursing Home Pension Fund, Local 144 v.

22 Oracle Corp., 380 F.3d 1226,1230 (9th Cir . 2004). "A plaintiff may satisfy [Rule 9(b)] through reliance

23 upon a presumption that the allegedly false and misleading 'group published information' complained

24 of is the collective action of officers and directors ." In re GlenFed, Inc. Sec. Litig., 60 F .3d 591, 593 (9th

25 Cir. 1995) . In cases where the falsities are conveyed in "group-published information," for example,

26 in press releases and annual reports, "it is reasonable to presume that these are the collective actions o f 27 1

28 15 Case 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 16 of 3 4

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

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

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

4 2005).

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

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

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

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

9 1 However, "where the pleading gives some basis for ascribing knowledge, participation or authorship,

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

11 Cornerstone, 2005 U .S .Dist. LEXIS at *22 .

U E 12 When dealing with allegations based on information and belief, and not plaintiffs persona l

U 1 3 knowledge, the PSLRA imposes further pleading requirements . "Allegations are deemed to be held on V 14 A information and belief, and thus subject to the particularity requirements, unless plaintiffs have personal a~ 15 knowledge of the facts ." Cornerstone, 2005 U.S.Dist. LEXIS at *8 (citing In re Vantive Corp . Sec.

16 Litig., 283 F.3d 1079, 1085 n.3 (9th Cir, 2002)) . Any allegation that is made on information and belief, b 17 must "state with particularity all facts on which that belief is formed ." 15 U.S.C . § 78u-4(b)(1) . "Naming C 18 sources is unnecessary so long as the sources are described with sufficient particularity to support the

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

20 and the complaint contains adequate corroborating details ." Daou, 411 F.3d at 1015 (citing Nursing

21 Home, 380 F.3d at 1233). Therefore, to sufficiently plead falsity, a plaintiff must: (1) identify each

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

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

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

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

28 16 Case 4:05-cv-0 1 027-SBA Document 61 Filed 02/08/2006 Page 17 of 3 4

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

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

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

4 Home, 380 F.3d at 1230 (citing Silicon Graphics, 183 F.3d at 977). A complaint will not survive if it

5 just relies on generic allegations . See Silicon Graphics, 183 F .3d at 974, 985 . To assess whether a

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

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

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

9 consider "all reasonable inferences, whether or not favorable to the plaintiff ." Id. (citing Gompper, 298 10 F.3d at 897) .

11 ANALYSIS

w 12 1. Defendants' Request for Judicial Notice 13 As a preliminary matter, the Court notes that Defendants have requested that the Court take o 14 judicial notice of the following documents, each of which is attached to the accompanying Declaration

15 of Tiffany Harris-Sutton ("Harris-Sutton Declaration"): e~ 0 16 (1) Applied Signal's Form 10-K for FY03, filed on January 27, 2004 ; a~ a 17 (2) Applied Signal's Form 10-Q for the second quarter of FY04, filed June 9, 2004 ;

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

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

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

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

23 (10) A copy of 48 C .F .R. 52 .242-15 .

24 Pursuant to Federal Rule of Evidence Rule 201, documents that are alleged in a complaint and

25 are essential to plaintiffs allegations may be judicially noticed . See Branch v. Tunnell, 14 F.3d 449, 454 26 (9th Cir. 1994); Steckman v. Hart Brewing, Inc. 143 F .3d 1293, 1295 (9th Cir . 1998). A court may als o 27

28 17 Case 4:05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 18 of 3 4

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

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

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

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

5 11986)) .

6 Since Plaintiff does not oppose the taking of judicial notice of any of these documents, and since

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

8 No. 36] .

9 II. Defendants' Motion to Dismiss

10 In Defendants' Motion to Dismiss, Defendants argue that Plaintiffs Consolidated Amended

11 Complaint must be dismissed because : (1) the PSLRA's safe harbor provision precludes liability for any

w 12 of the purportedly false or misleading statements related to the Company's backlog ; and (2) Plaintiff has

•~ U 13 not stated, and cannot state, a cause of action under Section 10(b) of the Exchange Act or Rule I Ob-5 yL.~ Co 14 for any of the allegedly false or misleading statements because the elements of falsity, scienter, and los s

15 causation are not supported by Plaintiffs allegations . Since Defendants assert that no liability can be e~ C 16 established under Section 10(b) and Rule lOb-5, Defendants also argue that the Section 20(a) clai m a~ o .- w 17 against Yancey and Doyle must be dismissed .

18 A. The Safe Harbor Provision

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

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

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

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

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

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

25 statement." 15 U.S.C. § 78u-5(c)(1)(A)(i); Harris v. Ivax Corp ., 182 F.3d 799, 803 (11th Cir . 1999). The

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

28 18 Case 4:05-cv-0 1 027-S BA Document 61 Filed 02/08/2006 Page 19 of 3 4

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

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

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

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

5 Cir. 2004).

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

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

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

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

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

1 1 statement as long as the truth or falsity of the statement cannot be discerned until some point in time

1 2 after the statement is made . See Harris, 182 F.3d at 805 . Statements concerning historical or current

13 facts are not forward-looking . See Gross v. Medaphis Corp., 977 F. Supp. 1463, 1473 (N .D. Ga.1997);

AN 14 In re Valujet, Inc. Sec. Litig., 984 F .Supp. 1472, 1479 (N .D. Ga. 1997). 15 With respect to statements regarding backlog, only four purportedly false and misleading

16 statements are identified : (1) that the backlog as of the third quarter of FY04 was "[a]pproximately 11 b Y a~ . ~ w 17 million," made during the August 2004 Conference Call ; (2) that the backlog at the end of the fourth

1 8 quarter was about $143 million, made during the December 2004 Conference Call ; (3) that the backlog

19 at the end of the fourth quarter was $143 million, set forth in the December 2004 Press Release ; and (4)

20 that the backlog at fiscal year-end was $143 million, set forth in the FY04 Form 10-K .

21 The Court finds that each of these statements is a forward-looking statement that was 22 I accompanied by the appropriate cautionary language . Specifically, for both the August 200 4 23 Conference Call and the December 2004 Conference Call, Doyle stated the following :

24 I'll review our financial performance, but let me begin with the obligatory safe harbor statement. Our presentation today may contain forward-looking 25 statements which reflect the Company's current judgment on future events . Because these statements deal with future events, they are subject to risks and 26 uncertainties that could cause the actual results to differ materially . In addition to the factors that may be discussed in this call, important factors which coul d 27

28 19 Case 4 :05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 20 of 3 4

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

Form 8-K) (stating same) . 4 The Company's Form 10-Q filing, issued with respect to the previous quarter, provided the 5 following additional cautionary language : 6 Forward-looking statements may be identified by the use of terms such as 7 "anticipates," "expects," "intends," "plans," "seeks," "estimates," "believes," and similar expressions, although some forward-looking statements are 8 expressed differently. Statements concerning financial position, business strategy, and plans or objectives for future operations are forward-looking 9 statements . These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to 10 predict and may cause actual results to differ materially from management's current expectations . Such risks and uncertainties include those set forth in this 11 document under "Summary of Business Considerations and Certain Factors that May Affect Future Operating Results and/or Stock Price ." The forward-looking U 12 statements in this report speak only as of the time they are made and do not Ct necessarily reflect management's outlook at any other point in time . We U 13 undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or for any other reason . V 14 A However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and a~ 15 Exchange Commission (SEC) . z0 16 See Harris-Sutton Decl . at Ex. B .8 b s a~ 0 w 17 In the section entitled "Summary of Business Considerations and Certain Factors that May C 18 Affect Future Operating Results and/or Stock Price," the Company also noted that Applied Signa l

19 "depend[s] on revenues from a few significant contracts, and any loss, cancellation, reduction, or delay

20 in these contracts could harm our business ." Id.

21 Additionally, the Form 10-Q for the third quarter of FY04, which was filed on September 9 ,

22 2004, specifically stated :

23 Stop-work orders could negatively impact our operating results andfinancial condition. Almost all of our contracts contain stop-work clauses that permit 24 the other contracting party, at any time, by written order, to stop work on all or any part of the work called for by the contract for a period of ninety days . 25 Within the ninety-day period, the other contracting party may cancel the 26

27 'This same language was set forth in the FY04 Form 10-K . See id at Ex. H.

28 20 Case 4 :05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 21 of 34

stop-work order and resume work or terminate all or part of the work covered by the stop-work order . During June 2004, we received a stop-work order 2 instructing us to stop work on a portion of our largest single contract . In accordance with the instructions received from the other contracting party, we 3 prepared a proposal that detailed the tasks that were stopped and estimated the reduction in contract costs. If all the stopped tasks are terminated, the result 4 could be a significant reduction in orders and backlog in the period in which it occurs. There can be no assurance that stop-work orders will not be received 5 in future periods .

6 See Harris-Sutton Decl . at Ex. E (emphasis in original) .

7 Further, the December 2004 Press Release included the following language:

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

20 See id at Ex. F (December 21, 2004 Form 8-K).

21 Plaintiff does not dispute that these cautionary statements were made, but attempts to dismis s

22 the language as mere "boilerplate" language, devoid of any meaning . In the context of this litigation,

23 however, Plaintiffs argument is unavailing. Indeed, in addition to all of the disclosures set forth above,

24 the Company consistently described the contingent nature of the Company's backlog figures in all of 25 its public filings. For example, the following statement was set forth in the FY03 Form 10-K and thus

26 preceded all of the aforementioned cautionary language : 27

28 21 Case 4 :05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 22 of 3 4

Our backlog . . . consists of anticipated revenues from the uncompleted portions of existing contracts[ .] . . . Anticipated revenues included in backlog 2 may be realized over a multi-year period . We include a contract in backlog when the contract is signed by us and by our customer . We believe the backlog 3 figures are firm, subject only to the cancellation and modification provisions contained in our contracts . (See Item 7: "Management's Discussion and 4 Analysis of Financial Condition and Results of Operations-Backlog .") Because of possible future changes in delivery schedules and cancellations of 5 orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period , and actual sales for 6 the year may not meet or exceed the backlog represented . We may experience significant contract cancellations that were previously booked 7 and included in backlog .

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

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

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

11 "lacked meaning" is completely disingenuous . 0 12 Plaintiffs alternative argument that the allegedly false and misleading statements do not qualify Ct U 13 for safe harbor protection because the statements were not, in fact, forward-looking is equally without U 14 A merit. Indeed, for the Court to accept Plaintiffs argument, it would have to completely ignore the fact a~ 15 that Plaintiffs Consolidated Amended Complaint expressly identi fies the allegedly false and misleading

Z 16 statements as statements concerning the Company's backlog. See, e.g., CAC at ¶ 29 ("The amounts b 17 reported as 'backlog' by the Defendants on August 24, 2004 . . . were materially false and misleading C 18 because the Defendants failed to disclose that the Company had received a 'stop-work order' in June

19 2004") and ¶ 35 ("The amounts reported as 'backlog' by the Defendants on December 21, 2004, and

20 January 14, 2005 . . . . were materially false and misleading "). The Court would also have to ignore the

21 fact that Plaintiff admits, in the Consolidated Amended Complaint, that it was widely understood that

22 the term "backlog" relates to future revenues. See, e.g., CAC at ¶ 26. Thus, according to Plaintiffs own

23 allegations , which are based on Plaintiffs own information and belief, the Company's backlog is, by

24 definition, merely a "projection of revenue " or a "prediction of future economic performance," thus

25 falling squarely within the safe harbor. See 15 U.S.C . § 78u-5(i)(1)(A)-(C). Id. at ¶ 26. 26 Further, contrary to Plaintiffs current assertion, the fact that the Company used the word "firm " 27

28 22 Case 4:05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 23 of 3 4

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

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

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

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

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

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

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

8 Finally, Plaintiffs argument that the safe harbor is inapplicable because the Company did not

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

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

understand the inherently contingent nature of a stop-work order. Indeed, Plaintiffs entire securities Ct U fraud theory relating to backlog is based on Plaintiffs belief that "the receipt of a 'stop-work order' ro U means that any previously reported 'backlog' amounts attributable to revenue within the scope of the 0 A 'stop-work' order are no longer valid ." See CAC at ¶ 26 . However, this statement is not supported by

the applicable regulations or the Company's actual manner of accounting for its backlog . See 48 C.F .R. 0 z 16 52 .242-15 (describing how the receipt of a stop-work begins the negotiation process and how a stop- b a~ 0 17 c work order is subject to cancellation at any time during this negotiation period) ; see also Harris-Sutton 18 Decl . at Ex. E (Third Quarter FY04 Form 10-Q) (stating that the Company's backlog would not be

1 9 reduced until the negotiations relating to SWO1 were completed and the Company was able to ascertain 20 whether parts of the applicable contract would actually be terminated) . Even under the lenient pleading

21 standard afforded to a plaintiff on a 12(h)(6) motion, this Court "need not accept as true allegations that 22 contradict facts which may be judicially noticed ." Mullis v. United States Bankruptcy Ct., 828 F.2d 23 1385, 1388 (9th Cir.1987), cert. denied, 486 U.S. 1040 (1988). Accordingly, Defendants have 24

25 9This is a distinction with a significant difference in the context of a publicly traded company . See, e.g., Release No . SAB - 101, 1999 WL 1100908 (SEC bulletin providing guidance with respect to 26 revenue recognition) . Ironically, had the Company actually characterized its potential revenue as "real" revenue in the manner that Plaintiff suggests is appropriate, the ramifications under the applicable SEC 27 rules and regulations would have likely been catastrophic . 28 23 ICase 4:05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 24 of 3 4

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

2 statements relating to the Company's backlog. Therefore, Plaintiffs claims pertaining to the backlo g 3 11 are hereby DISMISSED WITH PREJUDICE .

4 B. Plaintiffs Failure to State a Claim under Section 10(b) of the Exchange Act or Rule 10b-5 5 Additionally, Defendants have also shown that Plaintiff has not stated a claim under Section 6 10(b) the Exchange Act or Rule lOb-5 with respect to both : (1) the allegedly false and misleading 7 statements pertaining to the Company's backlog ; and (2) the allegedly false and misleading statement s 8 pertaining to the Company's hiring of personnel. The sufficiency of Plaintiffs claims regarding the 9 Company's backlog will be discussed first. 10 1 . Statements Regarding the Company' s Backlog 11 a. The False and/or Misleading Element 12 As noted in the previous discussion of the safe harbor provision, supra, Plaintiffs Consolidated 13 •4.1 O Amended Complaint is premised on the following four allegedly false and/or misleading statements 14 AN concerning the Company's backlog : (1) the August 2004 Conference Call ; (2) the December 2004 15 c~ C Conference Call ; (3) the December 2004 Press Release ; and (4) the FY04 Form 10-K . Plaintiff alleges 16 a~ o that the statement concerning the Company's backlog made during the August 2004 Conference Call 17 was materially false and/or misleading because Defendants failed to disclose that, prior to the time the 18 call took place, the Company had received two stop-work orders, SWO1 and SWO2 . Plaintiff allege 19 s that statements concerning the Company's backlog made during the December 2004 Conference Call, 20 the December 2004 Press Release, and the FY04 Form 10-K were materially false and/or misleadin 21 g because Defendants failed to disclose that, at the time the statements were made, the Company ha 22 d received SWO2, SWO3, and SWO4 . 23 As an initial matter, the Court notes that Plaintiff has not alleged any facts sufficient to show tha 24 t any of the statements concerning the Company's backlog were actually false when made 25 . Indeed, the theory set forth in Plaintiffs Consolidated Amended Complaint is that 26 : (1) the statement made in Augus t 2004 regarding the $111 million backlog was false because the $111 million backlog figure did no 27 t

28 24 Case 4:05-cv-0 1 027-S BA Document 61 Filed 02/08/2006 Page 25 of 3 4

1 account for SWO1 and SWO2 ; (2) the statements made in December 2004 and January 2005 regarding

2 the $143 million backlog was false because the $143 million backlog figure did not account for SWO2 ,

3 SWO3, or SWO4. However, the Company's public statements make clear that anticipated revenues are

4 not "debooked" from the total backlog figure until the contract affected by the stop-work order is

5 actually terminated. See Harris-Sutton Decl . at Ex. E (Third Quarter FY04 Form 10-Q) (confirming that

6 the backlog for the third quarter of FY04 was $111 million, but indicating that it might be reduced i n

7 FY05 ifthe "stopped tasks are [actually] terminated .").

8 For example, during the December 2004 Conference Call, an analyst specifically asked whether

9 the $143 million included any potential "debookings," and Yancey replied as follows :

10 Q: And does the - one more question for you, or two more questions, please . Does the $143 million include - is that net of any potential debooking ? I. 11 A: That includes the $12 million that has not been debooked . 12 Q : So it's not net of any potential debooking? Includes ? 13 A: That's right. A Q 14 See Harris-Sutton Decl. at Ex. F (December 2004 Form 8-K) (emphasis added) . 15 Again, on February 22, 2005, Yancey responded to the following questions regarding backlog : 16 b Y Q : Okay. During the last quarter, you had a nice - Q4 of 2004 was a big bookings quarter 17 and also backlog came in pretty robust . Can you give us an idea of where your backlog is right now? 18 A: Sure, at the end of the first quarter, Jay, it's a little over $124 million . 19 Q: And that is not net of any potential debooking, correct? 20 A: Well, that's correct. 21 A: Yes. We had to - we had to figure out how many negatives was in there, but you're 22 correct. You're correct . 23 A: So it still includes the $12 million - the 11 to 13 million in that range - $12 million of anticipated debooking. 24 See SEC Form 8-K, filed on February 22, 2005, at Ex . 99.2 (transcript of February 22, 2005 Conferenc 25 e Call). 26

28 25 Case 4 :05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 26 of 3 4

1 Thus, with respect to SWO2, SWO3, and SWO4 ,1° Plaintiff would have to prove both : ( 1) that

2 the stop-work orders actually resulted in a termination of all or a portion of the relevant contracts ; and

3 (2) that the effect of the termination was immediately calculable in the third or fourth quarters of FY04

4 or the first quarter of FY05 . Even construed in the light most favorable to Plaintiff, Plaintiffs

5 Consolidated Amended Complaint does not contain any allegations sufficient to meet these

6 requirements .

7 Additionally, in order for Plaintiff to prove that Defendants' statements were misleading, Plaintiff

8 would have to show that the Company had a duty to disclose SWO1 prior to September 9, 2004 ; that

9 the Company had a duty to disclose SW02 during the August 2004 Conference Call or thereafter ; and

10 that the Company had a duty to disclose SW03 and SWO4 as of the time of the December 2004

11 Conference Call or thereafter . See Gallagher v. Abbott Labs., Inc., 269 F.3d 806, 809 (7th Cir. 2001)

Uo 12 ("Much of plaintiffs' argument reads as if firms have an absolute duty to disclose all information

13 material to stock prices as soon as news comes into their possession . Yet that is not the way the o 1 4 A ~ securities laws work . We do not have a system of continuous disclosure . Instead firms are entitled to

15 keep silent (about good news as well as bad news) unless positive law creates a duty to disclose."). As

16 Defendants point out, however, Plaintiff has not affirmatively alleged such duty, and it clear to the w 17 Court, based on the applicable facts and the law that has been presented, that no such duty existed . For

18 example, as to the pertinent facts, the allegations in the Consolidated Amended Complaint are 19 ambiguous, at best, as to the : (1) dates the stop-work orders were issued ; (2) the dates the stop-work 20 orders were to expire ; (3) whether the stop-work orders affected all or part of the relevant contracts ; (4) 21 whether the stop-work orders were subject to any extensions; (5) whether the stop-work orders actually

22 resulted in any contract terminations ; and (6) the amount of future revenues affected by the contract

23 terminations, if such terminations occurred. 24

25 "Plaintiffs argument that the August 2004 Conference Call statement was false is foreclosed 26 by the fact that Plaintiff admits that the statement that backlog was "approximately $111 million" was, in fact, correct . See CAC at ¶ 29(a) ("The Third Quarter Form 10-Q reported the same 'backlog' number 27 that the Defendants had announced in the August Conference Call ."). 28 26 Case 4:05-cv-01 027-S BA Document 61 Filed 02/08/2006 Page 27 of 3 4

1 Further, in his opposition, Plaintiff does not identify a single statute or regulation that requires

2 a company to disclose either the possibility that contracts with customers may be terminated or the

3 actual termination of the customer contract . Indeed, as Defendants aptly note, although the SEC

4 considered proposing such a regulation, it ultimately decided against it . See SEC, Final Rule :

5 Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release Nos . 33-8400,

6 34-49424 (Mar. 16, 2004) (declining to adopt Proposed Item 1 .03, "Termination or Reduction of a

7 Business Relationship with a Customer ."). Where, as here, a plaintiffs complaint is devoid of the

8 pertinent details and fails to otherwise affirmatively plead the basis for the duty of disclosure, the Court

9 must dismiss the claim . See, e.g., In re Digital Island Sec. Litig., 357 F.3d 322, 329 n . 10 (3rd Cir .

10 2004) .

11 b. Scienter,

U w 12 Plaintiffs Consolidated Amended Complaint also fails to sufficiently establish scienter . Under 13 C the PSLRA, Plaintiff must allege particular facts giving rise to a strong inference of scienter . 15 U.S .C. 14 A sec 78u-4(b)(2). With respect to SWO 1, the Consolidated Amended Complaint does not plead any facts 15 showing that the decision to disclose the stop-work order on September 9th, rather than August 24th, el C 16 was the product of fraud or even the product of recklessness . In fact, the Consolidated Amended w . w 17 Complaint does not say anything at all with regard to Doyle or Yancey's state of mind as of August 24,

18 2004, other than the conclusory assertion that Doyle and Yancey "did not deny" in the Form 10-Q that

19 they "knew about [SWO1] at the time that it was first issued by the government contractor." See CAC

20 at ¶ 29(b). Not only is this insufficient, but the fact that Defendants disclosed the SWO1 in the

21 Company's Form 10-Q only two weeks later cuts heavily against an inference of scienter . See, e.g., In

22 re Segue Software, Inc. Sec. Litig., 106 F. Supp. 2d 161, 170 (D. Mass. 2000) . The inference of scienter

23 is further negated by the fact that neither Yancey nor Doyle sold any stock during this two-week period .

24 With respect to SWO2, SWO3, and SWO4 , the Consolidated Amended Complaint also fails to 25 I set forth any allegations sufficient to show that Yancey or Doyle even knew of the stop-work orders , 26 much less that Yancey and Doyle deliberately attempted to deceive stockholders by providing false o r 27

28 27 1Case 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 28 of 3 4

1 misleading information pertaining to the Company's backlog . To the contrary, as noted previously,

2 Yancey and Doyle candidly disclosed during the relevant period that potential debookings affecting

3 future revenue were not excluded from the Company's backlog. See Harris-Sutton Decl. at Ex. F

4 (December 2004 Form 8-K). The Company also repeatedly warned shareholders in its public filings

5 that the Company's backlog was not necessarily representative of actual future sales or revenue .

6 Further, with respect to Doyle, there is no allegation that he sold any stock during the Clas s

7 Period. As to Yancey, it has not been sufficiently shown that his stock sales - which occurred during

8 January 2005 - were "dramatically out of line with prior trading practices" or that they took place during

9 a time specifically "calculated to maximize the personal benefit from undisclosed inside information ." 10 See Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir. 2001). To the contrary, the allegations in the

11 Consolidated Amended Complaint plainly state that Yancey - like most of the other shareholders - sold

U o 12 stock after the Company announced fourth quarter operating results for FY04 that did not meet the U ~s 13 analysts' expectations . See CAC at ¶ 42 ("Only once in the preceding six months had more than 1 con t 14 million shares of Applied Signal stock traded in a day ; at no other time did volume exceed 600,000

E 15 shares in a day .") . The only allegation in the Consolidated Amended Complaint that even suggests an 16 b y inference that the stock sales were suspicious is Plaintiffs bare assertion that "Yancey had complete a~ o 17 ~C knowledge of the 'stop-work orders' and their expected impact on the Company's revenues and earning s 18 for the quarter." See CAC at ¶ 49. However , this assertion is completely undermined by the fact that 19 Plaintiffs Consolidated Amended Complaint does not actually allege any facts showing that the stop- 20 work orders had any impact on the Company's recognized revenue or earnings for the first quarter o f 21 FY05. See CAC at ¶¶ 44-47 . 22 C. Loss Causation 23 Finally, Defendants correctly argue that the Consolidated Amended Complaint does not provid e 24 an adequate basis for the required element of loss causation for SWO2, SWO3, or SWO4 .' ` Indeed, the 25

26 " Defendants concede in their Motion that loss causation relating 27 to SWO1 is adequately plead .

28 28 ICase 4 :05-cv-0 1 027-SBA Document 61 Filed 02/08/2006 Page 29 of 3 4

1 internal inconsistencies of the Consolidated Amended Complaint actually defeat a finding of loss

2 causation . For example, as noted above, although Plaintiffs securities fraud theory is premised on his

3 contention that the Company's misleading statements regarding backlog resulted in substantial financial

4 loss to the shareholders , Plaintiff actually states , in his Consolidated Amended Complaint , that the price

5 per share of the Company 's stock declined in December 2004 because the Company announced that : (1)

6 the earnings would only be 21 cents per share for the fou rth quarter of FY04, as opposed to the analysts'

7 consensus estimate of 29 cents per share ; and (2) the Company 's revenue had only increased by 3%.

8 See CAC at ¶ 42. Plaintiff also states that the price per share of the Company' s stock declined in

9 February 2005 because the Company reported that "revenue declined almost 25 percent from the

10 preceding quarter, with net income and earnings per share declining as well." See CAC at ¶ 44 .

11 Although Plaintiff vigorously contends, in his Opposition brief, that the stop-work orders were

U o 12 I the actual cause of the losses in revenue, the Consolidated Amended Complaint does not actually state U ~a 13 ~. o this . Indeed, the Consolidated Amended Complaint does not set forth any facts establishing a causal 1 4 connection between the contracts purportedly affected by the stop-work orders and the actual revenu e

E 15 for the fourth quarter of FY04 or the first quarter of FY05 . Plaintiffs argument that it is "facially Z 16 absurd" to assume anything other than that SWO2, SWO3, and SWO4 directly impacted revenue in th ^C Y e a~ o 17 fourth quarter of FY04 and the first quarter of FY05 is undermined considerably by the relevant 18 government regulations concerning stop-work orders, which expressly provide that stop -work orders 19 are contingent for a ninety-day period and are otherwise subject to negotiations , revisions, and 20 extensions . Plaintiffs argument is further undermined by the fact that contracts are included in the 21 "backlog" precisely because the revenue is not recognizable until the relevant po rtion of the contract

22 is completed and the fact that it is undisputed that anticipated revenues included in the backlog are

23 typically realized over a multi-year period. 24 2. Statements Concerning Hirin g 25 Next, with respect to Plaintiffs allegations concerning the Company's purportedly false an d 26 misleading statements regarding the hiring of personnel, Defendants have effectively shown that 27

28 29 (Case 4 :05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 30 of 3 4

Plaintiffs Consolidated Amended Complaint fails to state a claim under Section 10(b) or Rule lOb-5 .

Over the course of the entire Class Period, only three statements concerning hiring are challenged in the

Consolidated Amended Complaint : (1) two statement made during the August 2004 Conference Call ;

and (2) a statement made in the August 2004 Press Release .' 2

Plaintiff first challenges the fact that Yancey stated, during the August 2004 Conference Call,

that he was "pleased that we've been able to stay up with a fairly aggressive growth requirement and,

in particular, hiring of staff and staff that we can get cleared and hiring cleared staff and we believe that

we're keeping our program performance on par with adequate performance to where we will continue

to be looked upon as an asset to the defense community by the U.S . government." See Harris-Sutton

10 Decl. at Ex. C. 11 The second August 2004 Conference Call statement challenged by Plaintiff is as follows :

12 Q: Okay. Thank you. Secondly, how many engineers did you add during the quarter? U 13 0 A (Doyle) : We've had total hiring of about 100 people year-to-date . Let's 14 A see, I don't know Gary, what, about 30 through the quarter? a~ E 15 A (Yancey) c~ : I would have actually guessed maybe 20 . It slowed a bit into 0 the summer, although perhaps not. The simple answer would z 16 b y be to go ahead and use 30, Steve, and kind of assume we've 0 been close to linear in our increase . 17 C See Harris-Sutton Decl. at Ex. C. 18 As to the August 2004 Press Release, Plaintiff alleges that the following statement was false an d 19 misleading: 20 Regarding the third quarter operating results, Mr . Gary Yancey, President and 21 Chief Executive Officer of the Company, commented, "The greatly increased level of orders compared to fiscal 2003 has challenged us to meet aggressive 22 hiring requirements and to control capital expenditures . I am pleased that we have met these challenges and have been able to meet our contractual 23 commitments . This has resulted in our increase in revenue compared to fiscal 2003 . " 24

26 12The Consolidated Amended Complaint makes mention of other statements of similar nature made by Defendants, but these statements fall outside of the relevant Class Period 27 . See CAC at ¶ 38 .

28 30 ICase 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 31 of 3 4

1 II See id.

2 a. The False and/or Misleading Element

3 Plaintiff alleges that the aforementioned statements were materially false and misleading becaus e

4 "[i]f Applied Signal had, in fact, added 100 employees 'year-to-date' as of August, 2004, as reported by

5 Defendant Doyle during the August Conference Call, the Company would have had 525 employees"

6 at the time of the December 2004 Conference Call and "should have had approximately 545 employees

7 at the end of the year." See CAC at 40(b). As an initial matter, given that Plaintiffs entire argument

8 is based on the fact that the Company had 498 employees in December instead of Plaintiffs speculation

9 that it should have had 525 or 545 employees , Plaintiffs claim borders on frivolous. See, e.g., Central

10 Laborers Pension Fund v. Merix Corp., 2005 WL 2244072, * 4 (D . Or. 2005) ("Plaintiff cannot meet

11 the heightened pleading standards applicable to fraud claims by simply characterizing Defendants'

12 statements , embedding in those characterizations assumptions not found in the statements themselves, 13 'Yr w and then explaining why Plaintiffs own assumptions are false .") . 0 A 'E 14 Further, with respect to the element of falsity, Plaintiffs securities fraud "theory" is hopelessl y

15 flawed. First, as Defendants point out, the statement made by Doyle in the August 2004 Conference 16 Call makes clear that Doyle is not referring to a "net" gain of 100 employees . Thus, a theory that a~ o 17 attempts to prove falsity by comparing Doyle's statement with the total Ci number of employees within the 18 Company in December 2004 is inherently defective . Indeed, there are no allegations in the Consolidated

19 Amended Complaint showing that the Company did not, in fact, hire the indicated number of 20 employees . As such, Plaintiff has not adequately plead that the statements made by Doyle or Yance y

21 were false. Second, and more importantly, Plaintiff utterly fails to show how Doyle and Yancey's 22 statements were misleading. Indeed, it does not appear that Plaintiff could show this, as Doyle's an d 23 Yancey's answers regarding hiring are replete with qualifiers such as "I don't know," "maybe," and "I 24 would have guessed."

25 b. Scienter 26 The fact that Doyle and Yancey expressly stated in the August 2004 Conference Call that the y 27

28 31 Case 4 :05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 32 of 3 4

1 were not expressing a firm opinion with regard to the exact number of employee hires, and were only

2 guessing, also negates a finding that Doyle or Yancey acted out of deliberate recklessness or with an

3 intent to defraud shareholders. The inference of scienter is further negated by the fact that Doyle an d

4 Yancey did not experience any personal gain as a result of the allegedly false or misleading statements .

5 Indeed, even Plaintiff admits that Yancey did not sell any Company stock until after the December 200 4

6 disclosure which clarified the exact number of Company employees.

7 c. Loss Causation

8 Additionally, the Consolidated . Amended Complaint does not establish a causal connectio n

9 between the August 2004 statements regarding hiring and the December 2004 decline in stock price .

10 To the contrary, as set forth previously, Plaintiff alleges, instead, that the stock price fell in December

11 because the Company announced that it was not meeting the analysts ' consensus estimate and because 12 U w the Company's revenue only increased by 3%. See CAC at ¶ 42. Plaintiffs contention that the Februa ry

~. o 13 2005 decline in stock price is also attributable to the Company 's August 2004 statements is foreclosed 14 A Q by the fact that Plaintiff admits that the investing public was apprised of the true number of employee s 15 in December 2004 .

16 In sum, Plaintiff has failed to state claim under Section 10(b) of the Exchange Act and Rule I Ob- o 17 5 promulgated thereunder . Accordingly, these causes of action are hereby DISMISSED .

18 C. Liability Under § 20(a) of the Exchange Act

19 With respect to Plaintiffs second cause of action, to establish "control person" liability under 20 Section 20(a) of the Exchange Act, Plaintiff must show that a primary violation of Section 10(b) or Rule 21 I Ob-5 was committed and that each individual defendant "directly or indirectly" controlled the violator . 22 See Paracor Finance, Inc . v. General Electric Capital, 96 F.3d 1151, 1161 (9th Cir.1996). Since 23 Plaintiff has not stated a viable Section 10(b) or Rule 10b-5 claim, Plaintiffs claim under Section 20(a ) 24 of the Exchange Act necessarily fails . Accordingly, the entire Consolidated Amended Complaint i s 25 DISMISSED .

26 III. Dismissal with Prejudice 27

28 32 Case 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 33 of 3 4

1 Further, given the deficiencies in Plaintiffs Consolidated Amended Complaint identified herein ,

2 the Court has concluded that it is appropriate to DISMISS the Consolidated Amended Complaint WITH

3 PREJUDICE . In making this determination, the Court finds it important to point out that this case

4 departs from the usual circumstances where dismissal with leave to amend is appropriate because the

5 plaintiff has merely failed to allege , with sufficientparticularity , facts suppo rting a viable legal theo ry

6 of securities fraud . In this case, by way of contrast, the Consolidated Amended Complaint is defective

7 because Plaintiffs theory of fraud, itself, is legally flawed and is premised on either a fundamental

8 misunderstanding of Applied Signal 's business model, at best , or a blatant misrepresentation of the

9 pertinent facts. Since Plaintiff could only amend his Consolidated Amended Complaint to allege

1 0 additional facts that are consistent with the facts that have already been plead , the Court finds that

11 granting Plaintiff leave to amend in order to augment the Consolidated Amended Complaint with

U w 12 additional facts would be futile . Further, since Plaintiff has already changed his theory offraud twice,13

•~ U 13 ~r C granting fu rther leave to amend would be highly prejudicial to Defendants . The typically liberal y.~ o 14 A Q standard of allowing leave to amend should not be employed to require Defendants to defend against 15 an amorphous , "moving target" securities fraud case that is not well thought-out or well supported. z 16 Further, the Court finds that dismissal without leave to amend is also appropriate given th e

17 length of time that has passed since the initial complaint was filed . Indeed, the initial complaint was

18 filed on March 11, 2005 and the Consolidated Amended Complaint was filed five months later, on

19 August 12, 2005 . Plaintiff has been on notice with regard to the defects of his Consolidated Amended

20 Complaint since September 14, 2005, when Defendants filed the instant Motion to Dismiss .

21 Accordingly, dismissal with prejudice Is warranted on this basis as well . See Lipton v. Pathogenesis

22 Corp., 284 F.3d 1027, 1038-39 (9th Cir . 2002) (affirming district court's dismissal with prejudice after

23 finding that : (1) more than six months had elapsed between the filing of the original lawsuit and the

24 filing of the consolidated amended complaint, and (2) three additional months had passed between th e 25

26 "As noted in the discussion of the procedural history of this case, the complaints initially filed set forth a different class period and were not expressly premised on the statements concerning the 27 Company's stop-work orders and backlog . 28 33 Case 4:05-cv-01027-SBA Document 61 Filed 02/08/2006 Page 34 of 3 4

1 time the defendants filed their motion to dismiss and the district court's ruling) .14

2 CONCLUSIO N

3 For all of the reasons set forth above, IT IS HEREBY ORDERED THAT Defendants' Motion

4 to Dismiss [Docket No . 35] is GRANTED . The Court hereby DISMISSES the Consolidated Amended 5 Complaint WITH PREJUDICE .

6 IT IS FURTHER ORDERED THAT Defendant's Request for Judicial Notice [Docket No . 36] 7 is GRANTED .

8 IT IS FURTHER ORDERED THAT Plaintiffs Motion for Class Certification [Docket No . 25] 9 is DENIED AS MOOT.

10 IT IS SO ORDERED . 11

U it 12 Dated: 2/6/06 SA DRA BROWN A TRONG United States District Judge U e 13 0 14 A ~ ~ Q 15 c~ z z 16 o 17

1 8

2 1

26 "Further, the Court cannot overlook the fact that Applied Signal is currently in its 2006 fiscal year, and yet Plaintiffs Opposition does not even suggest that Plaintiff is aware of any additional facts 27 or events that have occurred during this passage of time that would lend further support to his case . 28 34