ORIGINAL

1 Kevin J . Yourman Vahn Alexander 2 Jennifer R. Liakos WEISS & YOURMAN ~rC~LVED 3 10?40 Wilshire Boulevard FILFI] "'"~ SERIF-~ ~~ D 24 , Floor 4~ ES Of RECOR 4 Los An eles CA 90024 ~p{ NSElIPAR Tel: (3 m) 2d8-2800 5 Nadeem Faruq i AP B D 6 Shane T . Rowley Antonio Vozzol o 7 FARUQI &ARUQI, LLP CLERK RI 1SiR CEPL1 320 East 39 Street ~ 8 New York, NY 10016 Tel: (212) 983-9330 9 Co-Lead Counselfor the Class 10 William H. Stoddard 11 G . Mark Albright C . Adam Buck 12 , WARNICK A BRIGHI STODDARD 13 801 S. Rancho Drive Quail Park Suite D-4 14 Las Vegas, NV 89106 Tel : (7(T2) 384-711 1 15 Liaison Counsel for the Class 16 17 18 UNITED STATES DISTRICT COURT 19 DISTRICT OF NEVAD A 20

21 In Re PURCHASEPRO.COM, INC Master File No . : CV-S-0I-0483-JLQ 22 SECURITIES LITIGATIO N 23 CLASS ACTION THIS DOCUMENT RELATES TO : 24 SECOND AMENDED CONSOLIDATED CLASS ACTION 25 COMPLAINT 26 27 Plaintiffs Demand A Trial By Turn 28

213 1 TABLE OF CONTENTS 2 3 1 . SUMMARY OF THE ACTION ...... 2 4 II. JURISDICTION AND VENUE ...... 1 0 5 III . PARTIES ...... 1 0 6 IV. PURCHASEPRO 'S FRAUDULENT RECOGNITION OF REVENUE . 1 9 7 A. False And Misleading Revenue Recognized From Sham Transactions ...... 2 1 8 1 . Warrant-For-Revenue Transactions ...... 2 1 9 2 . Warrant Agreement With AOL ...... 22 10 3 . Warrant Agreement With Gateway ...... 2 6 11 4 . Importance of Warrant-For-Revenue Transactions ...... 2 7 1 2 5 . The Ad Swap ...... 2 9 13 6 . The Statement Of Work Between AOL And PurchasePro . . . 3 0 1 4 B . False And Misleadin g Revenue Recognition On Round Trip 15 Transactions In The Sale Of Purchase-Pro ' s Marketplace Software Licenses ...... 3 1 1 6 1 . Third Quarter 2000 Round Trip Transactions ...... 3 3 17 a. The I-Storm Transaction ...... 3 3 1 8 b . The LawCommerce Transaction ...... 3 3 19 c. The Computer Associates Transaction ...... 3 3 20 d. The Working Woman Transaction ...... 34 21 e. The InsureZone Transaction (Part 1) ...... 34 22 2 . Fourth Quarter 2000 Round Trip Transactions ...... 36 23 a. The Broad Vision Transaction ...... 36 24 b . The Thread. com Transaction ...... 36 25 c. The ProfitScape.com Transaction ...... 37 26 d. The V-Twin Holdings Transaction ...... 3 8 27 e. The Woosh! Transaction ...... 3 8 28

i 3 . First Quarter 2001 Round Trip Transactions ...... 3 9 2 a. The Chinadotcom Transaction ...... 3 9 3 b . The Bigstep, Inc . Transaction ...... 40 4 c. The Future Media Products Transaction ...... 40 d. The InsureZone Transaction (Part 2) ...... 4 1 61 e. The Homestore . com Transaction ...... 43 7 f. The BizPro Link. com Transactions ...... 44 8 C . False And Misleading Revenue Recognition Through Th e Overstatement Of Subscripti on Revenues ...... 45 9 D. Understatement Of Required Allowance For Doubtful Accounts . 48 10 E . False And Misleading Revenue Recognition Through Back Datin g 11 Of Key Contracts ...... 49 12 F. False And Misleading Revenue Recognition On Futur e Maintenance And Hosting ...... 5 1 13 G. False And Misleading Revenue Recognition On Marketplace 14 Software Licenses For Non-Functional Software ...... 5 2 15 V . INFORMATION PROVIDED BY FORMER EMPLOYEES OF PURCHASEPRO ...... 54 16 Former Employee 1 ...... 54 17 Former Employee 2 ...... 5 9 18 Former Employee 3 ...... 6 0 19 Former Employee 4 ...... 62 20 Former Employee 5 ...... 64 21 Former Employee 6 ...... 66 22 Former Employee 7 ...... 7 1 23 Former Employee 8 ...... 72 24 Former Employee 9 ...... 74 25 Former Employee 10 ...... 76 26 Former Employee 11 ...... 7 8 27 Former Employee 12 ...... 80 28 Former Employee 13 ...... 83

ii 1 VI . DEFENDANTS' FALSE AND MISLEADING STATEMENTS ...... 87 2 VII. PURCHASEPRO'S TRUE FINANCIAL CONDITION BEGINS T O EMERGE ...... 146 3 VIII . POST CLASS PERIOD NEWS ...... 15 4 4 IX. DEFENDANTS' SCIENTER ...... 165 5 A. PurchasePro Defendants ' Scienter ...... 165 6 1 . PurchasePro Defendants ' Insider Loans ...... 170 7 2 . PurchasePro Defendants' Insider Trading ...... 174 8 B . Scienter Of AOL Defendants ...... 17 5 9 X . VIOLATIONS OF GAAP AND SEC REGULATIONS ...... 177 1 0 XL DEFENDANTS FAILED TO ACT IN ACCORDANCE WITH GAA P 11 AND RELATED ACCOUNTING GUIDELINES ...... 182 12 XII . CLASS ACTION ALLEGATIONS ...... 183 13 XIII, STATUTORY SAFE HARBOR ...... 185 1 4 XIV. RELIANCE ALLEGATIONS FRAUD-ON-THE-MARKE T DOCTRINE ...... 186 15 XV. COUNTS ...... 18 7 16 XVI . PRAYER FOR RELIEF ...... 189 17 XVII . JURY DEMAND ...... 18 9 18 1 9 20 2 1 22 23 24 25 26 27 28

iii 1 Plaintiffs, as and for their second amended consolidated complaint, allege th e 2 following upon personal knowledge as to themselves and their own acts, and upon 3 information and belief as to all other matters . Plaintiffs' information and belief i s 4 based on the investigation conducted by plaintiffs' attorneys, including : (a) a review 5 of articles, books, press releases and public filings concerning PurchasePro .com, Inc. 6 ("PurchasePro" or the "Company"); (b) a review of articles, books, press releases 7 and public filings concerning Time Warner, Inc., AOL Time Warner, Inc ., and 8 America On-Line, Inc.; (c) a review of certain internal Company documents 9 including e-mails, drafts of press releases, and contracts with customers ; (d) 10 interviews with numerous witnesses, including 13 former employees ofPurchasePro 1 1 that were in managerial, executive, accounting and bookkeeping positions which 12 gave them personal knowledge of the matters set forth herein; (e) interviews with 13 PurchasePro customers and/or their legal representatives ; (f) a review of certain 14 public documents filed by the Department of Justice ("DOJ") and the Securities 15 Exchange Commission ("SEC") which led to the criminal convictions of defendant 16 Scott H. Miller, PurchasePro's Chief Accounting Officer, and defendant Jeffrey R . 17 Anderson, PurchasePro's former Senior Vice President of Sales and Strategic 18 Development; (g) a review of certain public documents filed by Pro-After, Inc . 1.9 ("Pro-After"), PurchasePro's successor and the debtor in possession concerning the 20 Company's bankruptcy proceedings ; and (h) a review of numerous lawsuits naming 21 PurchasePro and/or certain of the individual defendants, together with the discovery 22 in those actions, including deposition testimony and statements filed pursuant to 23 Rule 26 of the Federal Rules of Civil Procedure . In addition to all of the foregoing, 24 plaintiffs believe that further evidentiary support will exist for the allegations set 25 forth after a reasonable opportunity for discovery . 26 27 28

1 1 1. SUMMARY OF THE ACTIO N 2 1 . This is a consolidated class action on behalf of all purchasers of th e 3 I securities of PurchasePro (including those individuals who acquired thei r 4 PurchasePro securities in exchange for shares, ADRs, or options in other companies 5 that were acquired by the Company) (the "Class") between March 23, 2000, and 6 May 21, 2001, inclusive (the "Class Period") . This action seeks remedies under the 7 Securities Exchange Act of 1934 (the "Exchange Act") . Defendants include : Charles 8 E . Johnson, Jr., Christopher J. Benyo, Christopher Carton, John G . Chiles, James P . 9 Clough, Shawn P . McGhee, Scott H . Miller, Richard T . Moskal, and Jeffrey R . 10 Anderson (collectively, the "PurchasePro Defendants") . Defendants also include : 11 AOL Time Warner, Inc., America On-Line, Inc ., Robert W . Pittman, David Colburn, 12 Eric Keller, and Myer Berlow (collectively, the "AOL Defendants") . The 13 PurchasePro Defendants and the AOL Defendants may be referred to collectively 14 herein as "Defendants ." Furthermore, while PurchasePro is named as a defendan t 15 in this action, all claims against PurchasePro are subject to the automatic sta y 16 provisions of the Bankruptcy Rules, following its filing for bankruptcy protection 17 on or about September 11, 2002 . 18 2. Founded in 1996 by defendant Charles E . Johnson, Jr. ("Johnson" or 1.9 "Junior"), PurchasePro purportedto be abusiness-to-business c-commerce software 20 company that connected more than 140,000 businesses . The Company went public 21 in September 1999 with an initial asking price of $12 .00 per share . Through a series 22 of brazen misrepresentations, PurchasePro quickly captivated Wall Street investors, 23 sending its stock price to a high of over $60 per share during the Class Period .' 24 However, the meteoric rise of PurchasePro was not the result of a successful and 25 sustainable business model, nor the result of mere irrational exuberance . Rather, as 26 discussed in greater detail below, the Company was founded on little more tha n 27 28 ' All stock prices have been adjusted , when necessary, to account for a 2-for-1 stock split which occurred on or about October 13, 2000 .

2 fraud and deception . 3 . On January 10, 2000, America On-Line, Inc . ("AOL") announced an 3 unprecedented $1 12 billion all stock tender offer for Time Warner, Inc . (the "Tender 4 Offer") .' Even though the Tender Offer contained no dissolution clause that would 5 be triggered if either company's stock fell below certain values, former employees 6 have repeatedly stated that if AOL failed to meet its projected earnings and revenue 7 targets, Time Warner, Inc .'s shareholders would begin a campaign to terminate the 8 Tender Offer. Thus, both former and current employees of AOL have stated that the 9 $112 billion Tender Offer highly motivated company executives to meet AOL's 10 revenue targets. In order to accomplish this task, AOL used a plethora of 11 "creatively" structured "deals" with companies such as PurchasePro to bolster 12 AOL's financial reports. However, many of these "transactions " were without 13 substance . In fact, one transaction with PurchasePro was nothing more than pure 14 "science fiction," according to defendant David Colburn . 15 4. While AOL was struggling to maintain its revenues in order to 16 consummate the Tender Offer, the PurchasePro Defendants realized, by 17 approximately May-June of 2000, that they needed to change PurchasePro's business 18 model in order to maintain the illusion of revenue growth . Consequently, the 19 PurchasePro Defendants, and primarily defendant Johnson, shifted the Company's 20 focus from monthly subscription revenue, which only allowed PurchasePro to 21 recognize incremental revenue in the long tern, to licensing software revenue . 22 According to internal Company e-mails, the licensing software model allowed 23 PurchasePro to immediately recognize revenue up front, upon the purported "sale" 24 of a particular license. However, this change in business model did not provide the 25 Company with real and sustainable growth . On the contrary, it was simply a scheme 26 to accelerate the recognition of unfounded revenue . 27 28 2 For the ease of reference, "AOL" shall also include its successor in interest, AOL Time Warner, Inc ., where applicable .

3 1 5 . For example, defendant Jeffrey R . Anderson has admitted under oath 2 that PurchasePro was unable to generate interest in the Company's software . In fact, 3 the only way to stimulate "interest" in PurchasePro's products was for the 4 PurchasePro Defendants, together with the AOL Defendants, to structure "round 5 trip" transactions whereby they would enter into secret side agreements with 6 PurchasePro customers . These agreements provided that PurchasePro would 7 effectively reimburse its "customers" for an amount equal to, or greater than, what 8 the customer paid to PurchasePro for its software license . In effect, Defendants had 9 arranged for the Company to buy its own "revenues ." Moreover, these secret side 10 agreements were never revealed to PurchasePro's auditors, or the investing public, 11 so that the Company could record the money received in these sham transactions a s 12 revenue. 13 6 . While PurchasePro was facing serious resistance to the sale of its 14 software marketplace licenses, in or around October 2000, AOL was facing the 15 effects of an industry-wide downturn in revenues that could be generated from 16 online Internet advertising. In fact, on October 1 8, 2000, defendant Robert W. 17 Pittman, and other executives of AOL, were informed in a meeting at Dulle s 18 headquarters that AOL faced the risk of losing more than $140 million in ad revenue 19 the following year. While such a decline would represent only about 5% of AOL's 20 proceeds from advertising and commerce, it was a material amount in light of the 21 pending Tender Offer. As noted above, any such decline in revenues raised great 22 concern among AOL's executives because it could thwart the company's efforts to 23 take over Time Warner, Inc . Furthermore, this internal warning came whe n 24 investors were highly sensitive to any weakness in online advertising . 25 7. Thus, by the end of October 2000, defendant Robert W. Pittman was 26 seeking to allay investors ' concerns . When asked about the industry-wide downturn 27 in advert ising revenues by Wall Street stock analysts and the media, defendant 28 Pittman, AOL's President, stated: "I don 't see it, and I don 't buy it ." He made suc h

4 11 a statement even though one week earlier , shares of AOL's key competitor, Yahoo 2 Inc ., plunged 21 % after the company had reported strong ad growth, but 3 acknowledged that the pace could not be sustained. Moreover, one day before this 4 statement was made, AOL's shares dropped 17% on what analysts described a s 5 similar worries. 6 8 . In light of the foregoing, other officials of AOL were less optimistic 7 about the company's prospects . While overall revenue from online ads continued 8 to grow rapidly, internal company projections raised caution about one sector : dot- 9 com's . Failures were accelerating among Internet "start-ups," which represented a 10 significant amount of the company's ad business . In this atmosphere, and with its 11 takeover of Time Warner, Inc . imminent, AOL sought to maintain its growth in 12 advertising and commerce revenue by engaging in sham transactions with companie s 13 like PurchasePro . 14 9 . For example, on or about March 15, 2000, PurchasePro and AOL 15 entered into an Interactive Marketing Agreement ("IMA"), a Technology 16 Development Agreement ("TDA"), and a Warrant Agreement . This series of 17 agreements was heralded to the investing public as a strategic alliance that would 18 benefit both companies . In reality, it was the beginning of Defendants' fraudulent 19 scheme to manipulate PurchasePro's reported financial results, which simultaneously 20 allowed AOL to report unearned revenues that supported the company's stock price, 21 thereby enabling it to ultimately consummate its tender offer for Time Warner, Inc . 22 10. Moreover, PurchasePro and AOL entered into numerous sha m 23 transactions throughout the Class Period with PurchasePro's customers so that they 24 could overstate! PurchasePro revenues . As detailed herein, this was done through 25 barter transactions, revenue for warrant swaps, and round trip transactions . In 26 particular, Defendants were buying revenue for PurchasePro through coerced sales 27 of non-operative software to key suppliers, vendors, subscribers and customers . This 28 was done in secret side deals whereby the purchaser would receive additiona l

5 1 business and/or investments from PurchasePro and/or AOL in order to offset the 2 purchase price of non-operational PurchasePro software . This was also done by 3 falsifying accounting documents which allowed PurchasePro to recognize revenue 4 that was either prematurely recognized or in fact never earned. 5 11 . In light of the foregoing, and the detailed allegations contained herein, 6 plaintiffs' action arises from damages incurred by the Class as a result of a scheme 7 and common course of conduct by Defendants which operated as a fraud and deceit 8 on the Class during the Class Period . Defendants' scheme included rendering false 9 and misleading statements and/or omissions concerning the financial condition and 1.0 business prospects of the Company in order to artificially inflate the value of the 11 Company's securities . 12 12 . For example, throughout the Class Period, Defendants represented that : 13 (i) PurchasePro was having record quarters concerning revenue and growth with a 14 high recurring component and very high gross profit margins ; (ii) the Company 15 strictly evaluated the creditworthiness and ability to pay of all customers ; (iii) the 16 Company's growth strategy was working and PurchasePro was very strong; (iv) the 17 Company was a. dominant player in its industry ; (v) PurchasePro would experience 18 high growth which would continue in future quarters, despite a slowing economy ; 19 (vi) there was very high demand for the Company's products ; (vii) PurchasePro 20 would "absolutely" stay profitable once profitability was achieved ; (viii) the 21 Company was scaling very fast with a rapidly growing customer base; and (ix) the 22 purported partnerships with AOL, among other entities, were "true" partnerships and 23 of a great benefit to PurchasePro . 24 13 . In reality, nothing could have been further from the truth . Based on 25 numerous interviews with former employees, the review of internal corporate 26 documents and sworn testimony given in other actions, together with verified 27 discovery produced in such actions, it is apparent that throughout the Class Period, 28 PurchasePro was little more then a fledgling concern. In addition to the sham

6 l transactions referred to above, Defendants also engaged in a number of othe r 2 transgressions in order to artificially inflate the revenues and financial outlook o f 3 PurchasePro . 4 14 . Throughout the Class Period, PurchasePro's revenue was artificiall y 5 inflated as a result of the following : (i) non-functional software, known as "skins" 6 within the Company, was being shipped to "customers" so that PurchasePro could 7 prematurely and improperly recognize revenue from these transactions in violation 8 of Generally Accepted Accounting Principles ("GAAP") ; (ii) sales contracts were 9 being fraudulently backdated so that revenue could be prematurely recognized in a 10 current, rather then a later, quarter; (iii) the Company was improperly recognizing 11 revenue from the exchange of customer lists when no real revenue was being earned ; 12 (iv) PurchasePro engaged in barter transactions (internally known as "Barney" 13 contracts) in which PurchasePro would receive product for its services which was 14 subject to questionable valuation under GAAP ; (v) PurchasePro's "collections 15 department" was virtually non-existent, relative to the size of the Company . Since 16 minimal effort was being put into collections, and because the Company refused to 17 write-off bad debts, accounts receivable drastically increased . As a result, the 18 dramatic growth in accounts receivable did not reflect high demand for the 19 Company's products, but rather, the lack of payment by its customers ; (vi) 20 "customer creditworthiness" was also not being evaluated . All contracts were 21 immediately booked as revenue, regardless of whether or not PurchasePro's 22 customers had the ability to pay or whether PurchasePro even knew the identity of 23 these purported customers ; (vii) as reported by Arthur Andersen LLP ("Andersen, 24 LLP") early in the Class Period, accounting controls maintained by the Company 25 were seriously 'deficient . This ultimately lead to the resignation of the Company's 2 6 auditors and also became the subject of an SEC investigation of PurchasePro after 2 7 the end of the Class Period which led to an injunction against such activities, 28 including violations of the Exchange Act ; (viii) the number of PurchasePro's payin g

7 I customers was being dramatically overstated and many of PurchasePro' s 2 transactions were either fraudulently created by PurchasePro salespeople (so they 3 could increase their bonuses) or were nothing more then handshake deals which di d 4 not involve cash ; (ix) PurchasePro's software was not functional in many respects ; 5 (x) Company salespeople engaged in unethical practices and would promise 6 customers virtually anything in order to get them to sign a contract ; (xi) the 7 Company continued to show non-paying customers as collectible revenue when 8 there was no reasonable expectation that such revenue would ever be realized ; and 9 (xiii) warrant-for-revenue transactions were being entered into, with companies such 10 as AOL and Gateway, thereby falsely portraying not only the financial condition of 11 the Company, but the true sustainable demand for PurchasePro's products and its 12 services. 13 15 . Thus, throughout the Class Period, Defendants made numerous positive 14 representations , and issued financial statements, regarding the financial and busines s 15 prospects and .-esults of the Company, while either knowing, or with conscious or 16 deliberate and reckless disregard, that the Company was improperly recognizing 17 revenue in violation of the provisions of GAAP . These actions thereby artificially 18 inflated the Company's reported financial results and the trading value of 19 PurchasePro securities . 20 1.6 . Since the disclosure of these and other adverse facts would cause a 21 severe collapse in the price of the Company's securities, the PurchasePro 22 Defendants, together with the AOL Defendants, set out on a scheme to artificiall y 23 inflate PurchaF!ePro's stock price for their own benefit so that the PurchasePro 24 Defendants could : (i) maintain the Company as a going concern ; (ii) maintain their 25 lucrative positrons with PurchasePro ; (iii) maintain the loan-to-value ratios on 26 millions of dolars of loans and lines of credit, secured by pledges of PurchasePro 27 stock as collateral, made to certain defendants and Company insiders ; (iv) enable 28 PurchasePro to complete two acquisitions, financed by the Company's inflated share

8 1 price, in a desperate attempt to generate alternative revenue for the Company ; and 2 (v) earn ill-gotk.en gains of over $43 million through their insider trading practices . 3 17 . In addition, the AOL Defendants engaged in this scheme to artificially 4 inflate the revenues of PurchasePro so they in turn could simultaneously recogniz e 5 additional and artificial revenues at AOL . This allowed AOL to : (i) maintain the 6 trading price cf stock needed to complete the Tender Offer ; (ii) maintain their 7 lucrative posit rons at AOL; and (iii) obtain bonuses, stock options and lavish 8 rewards award, .d by AOL for those who successfully completed deals . 9 18 . A~; a result of Defendants ' false statements, misrepresentations, and 10 omissions, the price of PurchasePro securities was artificially in flated during the 11 Class Period. As noted above, the Company ' s stock traded at over $60 per share 12 during the Cla1 ;s Period, and was maintained at an artificially inflated level until 13 PurchasePro ' s true financial condition began to emerge between Ap ril 25, 2001, an d 14 May 21, 2001 . 15 19 . During this time: (i) PurchasePro twice delayed reporting its financia l 16 results for the first quarter of 2001 ; (ii) PurchasePro twice revised downwards its 1 7 financial result's for the first quarter of 2001 ; (iii) and defendant Johnson, 18 PurchasePro's Chief Executive Officer and Chairman of the Board, was fired. 19 PurchasePro's revenues also dropped from the expected $41-$43 million (a figure 20 which was publicly confirmed as recently as March 2001) to $29 .8 million, only to 21 be cut drastical'y once again, and without explanation, to $17 .1 million on May 22, 22 2001 . These disclosures caused the stock price of PurchasePro to lose approximatel y 23 60%, of its remaining value, falling from its closing price of $6 .22 on April 24, 2001 , 24 to $2 .48 per share on May 23, 2001 . 25 20 . Today, PurchasePro is but a memory. The Company filed for 26 bankruptcy after confirming reports that PurchasePro was the subject of an SEC 27 investigation . DOJ and SEC investigations concerning a number of former 28 PurchasePro employees also continue as of the filing of this complaint . The AOL

9 1 Defendants' participation in the financial fraud at PurchasePro also led to a federal 2 investigation regarding AOL, as well as defendants Eric Keller and David Colburn . 3 21 . Due to Defendants' deceptive and illegal conduct, plaintiffs and the 4 other Class members purchased their PurchasePro securities at grossly inflate d 5 prices. Had plaintiffs and the other Class members been aware of the truthful 6 condition of the Company and the adverse impact that Defendants' actions and 7 omissions were having on the Company, they would not have purchased their shares, 8 or at least not at the artificially inflated prices at which they purchased those shares . 9 II. JURISDICTION AND VENUE 10 22 . The claims herein arise under §§10(b) and 20(a) (15 U .S .C . §§78j(b) 11 and 78t(a)) of the Exchange Act and Rule l Ob-5 promulgated thereunder (17 C .F .R. 12 240 .1 Ob-5 ) . 13 23 . This Court has subject matter jurisdiction of this action pursuant to 1 5 14 U .S.C . §78u. 15 24. Venue is proper in this District pursuant to 28 U .S .C . § 1391(b) . At all 16 relevant times, PurchasePro maintained its corporate offices in this District and the 17 violations of law complained of herein occurred primarily in this District, including i8 the dissemination of materially false and misleading statements and the omission o f 19 material information complained of herein . 20 25 . In connection with the conduct complained of herein, Defendants , 21 directly or indi',-ectly, used the means and instrumentalities of interstate commerce, 22 including the mails and interstate telephone communications, and the facilities of a 23 national securilties exchange . 24 III. PARTIES 25 26 . Plaintiffs Stuart Sokolin and Ron Turner are the same person s 26 previously appointed in this consolidated action as Lead Plaintiffs . 27 27 . Plaintiffs, including the Lead Plaintiffs described above, and 28 representative plaintiff Michael Braeuel, purchased securities of PurchasePro, and/o r

10 1 acquired PurclhasePro securities in exchange for shares, ADR's, or options in othe r 2 I companies wh-ch were acquired by the Company during the Class Period and hav e 3 been damaged thereby . 4 28 . Throughout the Class Period, PurchasePro was a Nevada Corporatio n 5 with its headquarters in Las Vegas . It was purportedly one of the largest business-to- 6 business ("B213") e-commerce software companies in the world and was noted for 7 its extremely flexible and affordable solutions that supposedly helped businesses of 8 all sizes buy, s,,-1l, and collaborate more efficiently . PurchasePro also operated the 9 Global Marketplace, which was described by many as a "Yellow Pages for the 10 Internet ." It was claimed during the Class Period that the Global Marketplace 11 interconnected more than 140,000 businesses and powered hundreds of private and 12 public marketpaces with its software . While PurchasePro is named as a defendant 13 in this action, all claims against PurchasePro are subject to the automatic stay 14 provisions of the Bankruptcy Rules, following its filing for bankruptcy protection 15 on September '.1, 2002 . 16 29 . At all relevant times, until May 21 , 2001, when it was announced that 17 he had "left the company and resigned his position on the board," defendant Johnson 18 was the founde-, Chairman and Chief Executive Officer ("CEO") of PurchasePro . 19 He was the driving force behind the Company since its inception in 1996 . Johnson 20 also agreed to forgo any compensation until the Company was profitable . However, 21 Johnson pledged 12 .3 million shares of PurchasePro common stock as collateral for 22 a $100 million'line of credit obtained from CS First Boston, an underwriter for 23 PurchasePro's initial and secondary public offerings, and as collateral for a $2 .79 24 million loan from Bank One, Kentucky, N .A. ("Bank One"). Under Johnson's line 25 of credit with CS First Boston, Johnson was required to maintain a collateral balance 26 equal to four (4) times the amount drawn on the line of credit . During the Class 27 Period, Johnson drew approximately $40 million on the line of credit . He also knew 28 that if the trading price of PurchasePro common stock fell below $13 .89 per share,

11 1 he would be in default under the terms of the CS First Boston line of credit . 2 Likewise, Johnson pledged 410,000 shares of PurchasePro common stock as 3 collateral for a $2 .79 million loan from Bank One, which required Johnson to 4 maintain a 40°x% loan-to-value ratio. Pursuant to the agreement, he knew that if the 5 trading price of PurchasePro common stock fell below $16 .89 per share he would be 6 in default under the terms of the Bank One loan . As set forth below, during the 7 Class Period, the trading price of the Company's stock fell below the minimu m 8 levels required by the loan agreements leading to a liquidation of portions of 9 Johnson's holdings. As a result, Bank One Kentucky sued defendant Johnson for 10 default under the loan, won a $2 .26 million judgment against Johnson in July of 11 2003, and attempted to garnish his wages in order to satisfy the judgment . 12 Defendant Johnson also sold over 6 million shares of PurchasePro stock at 13 artificially inflated prices for proceeds of over $32 million . Currently, Johnson is 14 the Chairman of NEXX, a network marketing company that purportedly distributes 15 premier products and services offered by world-class providers, to both residential 16 and small business . Johnson co-founded NEXX with defendant Christopher P. 17 Carton. 18 30 . A f all relevant times, defendant Christopher J . Benyo ("Benyo") serve d 19 I as PurchasePro's Senior Vice President of Marketing beginning in March 2000 . 20 Prior to joining, PurchasePro, Benyo was employed by BellSouth, a provider of 21 telecommunications products and services, from July 1996 to March 2000, where he 22 served as assistant vice president, strategic supplier relationships, from August 199 9 23 to March 2000. 24 31 . A ,,. all relevant times, until November 28, 2000, defendant Christophe r 25 Carton ('Carton') was the acting President and Chief Operating Officer ("COO") of 26 PurchasePro, as well as a Director of the Company . From November 28, 2000, unti l 27 February 22, 2001, Carton continued to serve as President and as a Director of th e 28 Company. A?; with Johnson, Carton agreed to forgo any compensation unti l

12 l PurchasePro was profitable . Further, he pledged his PurchasePro stock as security 2 on an $8 million loan when the Company went public. Carton was also the direct 3 supervisor of defendant Jeffrey R. Anderson who has pled guilty to conspiring with 4 PurchasePro senior management to falsely inflate PurchasePro's revenues. Carton 5 is currently President of NEXX, a multilevel marketing company founded by both 6 1 Johnson and Carton. 7 32 . A-. all relevant times, defendant John G. Chiles ("Chiles") was a 8 member of the Board of Directors at PurchasePro . Chiles was also a member of the 9 Audit and Compensation Committees . As such, defendant Chiles was directly 10 responsible fo-- assuring that the Company's financial outlook was being fairly 11 presented to fie investing community and in accordance with GAAP . In this 12 capacity, defendant Chiles signed PurchasePro's 10-K for fiscal year 2000 . During 13 the Class Period, defendant Chiles sold 165,000 shares of PurchasePro stock at 14 artificially inflated prices for proceeds of over $5 .5 million . 15 33 . A-.. all relevant times, defendant James P . Clough ("Clough") was Senior 16 Executive Vice President, Corporate Operations and Development for PurchasePro . 17 During the Ck.ss Period, he also served as the "interim" Chief Financial Officer 18 ("CFO") of PurchasePro. Clough became the interim CFO of PurchasePro in 19 approximately April of 2000, and served as such until his replacement by Richard 20 Clemmer was b>nnounced on April 24,200 1 . Clough signed numerous public filings 21 on behalf of the Company throughout the Class Period while also selling 150,00 0 22 shares of Purcl .asePro stock for proceeds of over $4.7 million . 2 3 34. A: all relevant times, after November 2000, defendant Shawn P . 2 4 McGhee ("McGhee") was the COO of PurchasePro . After February 22, 2001, 25 McGhee served as PurchasePro ' s President as well. On June 6, 2001, PurchasePro 26 announced that, in a change "to its senior management team designed to add greater 27 focus to the company's systematic and structured approach to its strategy," the 28 Company was, eplacing McGhee with a new COO, Allen Winder. McGhee was the

13 1 direct supervis )r of defendant Jeffrey R. Anderson who has pled guilty to conspiring 2 with PurchasePro senior management to artificially inflate PurchasePro ' s revenues . 3 35 . A` all relevant times, defendant Scott H . Miller ("Miller") served as 4 Vice President of Finance and Chief Accounting Officer of PurchasePro from July 5 1999, and as Senior Vice President of Finance and Administration from April 2000 . 6 From April 1{,99, through June 1999, Miller served as the Company's Chief 7 Financial Officer. From October 1998, through April 1999, Miller served as 8 PurchasePro's Controller. From September 1997, through September 1998, Miller 9 was the Chief Financial Officer of Max Riggs Construction Company in Las Vegas, 1 0 Nevada. From 1984 to September 1997, Miller held various management and senior manager positions at Andersen, LLP, the Company's auditors during the Class 12 Period, in Denver and Las Vegas . In September, 2003, Miller pled guilty to 13 obstruction of ustice as a result of his destruction of documents summarizing the 14 transactions all,:ged herein whereby Defendants materially overstated the financial 15 results of PurchasePro during the fourth quarter of 2000 and the first quarter of 2001 . 16 36 . At all relevant times, defendant Richard T . Moskal ("Moskal") was a 17 Vice President of PurchasePro . During the Class Period, defendant Moskal sold 18 90,000 shares o 1-PurchasePro stock at artificially inflated prices for proceeds of over 19 $964,000. 20 37 . At all relevant times, defendant Jeffrey R . Anderson ("Anderson") was 21 PurchasePro's senior Vice President of Sales and Strategic Development. In that 22 capacity, Anderson was responsible for, among other things, sales of software, 23 materials management, supervising PurchasePro's sales force, managing 24 relationships with "strategic partners," calculating and projecting revenue from 25 PurchasePro's sales of marketplace software licenses, and executing written 26 confirmations to the Company's auditors that PurchasePro's revenues were no t 27 subject to side Lgreements or other obligations that would preclude recognition of 28 revenue . Throe ghout the Class Period, Anderson reported directly to defendant s

14 1 Carton and McGhee. In September 2003, Anderson pled guilty to conspiring with 2' PurchasePro senior management and what plaintiffs believe to be is AOL, in order 3 to "falsely inflate the revenue that PurchasePro recognized and announced to the 4 investing public from the sale of PurchasePro marketplace licenses and other 5 products ." In conjunction with his guilty plea, Anderson admitted, under oath, the 6 details of many of the specific transactions alleged herein whereby Defendants 7 materially overstated the financial results of PurchasePro during the fourth quarte r 8 of 2000 and th;~ first quarter of 2001 . 9 38 . Defendants Johnson, Benyo, Carton, Chiles, Clough, McGhee, Miller, 10 Moskal and Anderson are collectively referred to in this Complaint as the "PurchasePro Defendants" and were at all relevant times during the Class Period 12 controlling persons of PurchasePro within the meaning of §20(a) of the Exchange 13 Act. By reason of their stock ownership, management positions, and/or membership 14 on PurchasePro's Board, the PurchasePro Defendants were controlling persons o f 15 PurchasePro ar;d had the power and influence, and exercised the same, to cause it t o 16 engage in the it egal conduct complained of herein. The PurchasePro Defendants are 17 liable for the false statements pled herein, as those statements were each "group 18 published" infarmation, the result of the collective action of the PurchasePro 19 Defendants. 20 39 . A ; officers, directors and/or controlling persons of a Company 21 registered with the SEC under the federal securities laws, whose securities are traded 22 on the NASDAQ, and governed by the provisions of the federal securities laws, the 23 PurchasePro Defendants each had a duty to : disseminate truthful information 24 promptly and accurately with respect to the Company's operations, products, 25 markets, management, earnings and business prospects ; to correct any previously 26 issued statements that had become materially misleading or untrue ; and to disclose 27 any trends thc,:.t would materially affect earnings and the financial results of 28 PurchasePro, so that the market price of the Company's publicly traded securities

15 I would be based upon truthful and accurate information . 40. U,ider rules and regulations promulgated by the SEC under the Exchange Act; the PurchasePro Defendants also had a duty to report all trends, demands or uncertainties that were likely to influence : (a) PurchasePro's liquidity; (b) PurchasePro's net sales, revenues and/or income ; and (c) previously reported 6 financial infori nation such that it would not be indicative of operating results . The 7 PurchasePro Defendants' representations during the Class Period violated these 8 specific requirements and obligations . 9 41 . The PurchasePro Defendants, because of their positions with th e 1 0 I Company, controlled and/or possessed the power and authority to control the 11 contents of ParchasePro's quarterly and annual reports, press releases and 12 presentations to securities analysts, which information was conveyed through th e 13 analysts to the =.nvesting public. Each of the PurchasePro Defendants was provided 14 with copies of the Company's reports and press releases alleged herein to be 15 misleading prier to or shortly after their issuance and had the ability and opportunity 16 to prevent their issuance or cause them to be corrected . 17 42 . In fact, these defendants have repeatedly admitted in numerous filings 18 with the SEC that they exercised control not only over the activities of the Company 19 but also over each other. For example, the Company stated in a document filed with 20 the SEC on or about March 7, 2000, that PurchasePro's directors and executive 21 officers as a group owned 23,778,399 shares or 18 .7% of the outstanding common 22 stock of the Company. As a result, these defendants were able to exercise significant 23 influence over r,ll matters requiring shareholder approval, including the election o f 24 directors and approval of significant corporate transactions . 25 43 . Because of their positions and. access to material non-public information 26 available to then but not to the public, each of the PurchasePro Defendants knew , 27 or with conscious or deliberate recklessness disregarded, that the adverse facts 28 specified herein had not been disclosed to, and were being concealed from the

16 1 public, and that the positive representations which were being made were the n 2 materially false and misleading . 3 44 . It is also appropriate to treat the PurchasePro Defendants as a group fo r 4 pleading purpoases under the federal securities laws, and the Federal Rules of Civil 5 Procedure, and to presume that the false and misleading information complained of 6 herein was disseminated through the collective actions of these defendants. The 7 PurchasePro Defendants were involved in the drafting, producing, reviewing, and/or 8 disseminating of the false and misleading information detailed herein, and knew, or 9 with conscious or deliberate recklessness disregarded, that such materially 10 misleading statements were being issued by the Company, and/or approved or 11 ratified these statements in violation of the federal securities laws . The PurchasePro 12 Defendants' false and misleading statements and omissions of fact consequently had 13 the effect of, both on their own and in the aggregate, artificially inflating the price 14 of the securities of PurchasePro at all times during the Class Period . 15 45 . Defendants AOL Time Warner, Inc ., and America On-Line, Inc . are 16 Delaware corporations with headquarters in New York, New York, and Dulles, 17 Virginia, respectively. AOL Time Warner, Inc . was formed in connection with the 18 merger of Time Warner, Inc ., and America On-Line, Inc ., on January 11, 2001 (the 19 "Merger") and is the successor in interest to all of the liabilities and wrongdoings o f 20 America On-Line, Inc., as is the current Time Warner, Inc . Prior to the Merger, 21 America On-Lne, Inc . was an independent publicly traded company, but after the 22 Merger it became a wholly owned subsidiary of AOL Time Warner, Inc. On 23 September 18, 2003 , the Board of Directors of AOL Time Warner, Inc . voted to drop 24 AOL from the AOL Time Warner, Inc . name, and on October 16, 2003 , AOL Time 25 Warner, Inc. was officially renamed and began operating as Time Warner, Inc . 26 46 . Defendant Robert W. Pittman ("Pittman") was AOL' s President and 27 Chief Operating Officer during the Class Period . By his own admission, he 28 reviewed and approved the sham transactions between PurchasePro and AOL which

17 are the subject of this complaint . Moreover, Pittman made and/or controlled the 2 sham transactions and manipulations of PurchasePro's revenues as well as AOL's 3 public statements, including the joint statements of PurchasePro and AOL alleged 4 herein . 5 47 . Defendant David Colburn ("Colburn") was Senior Vice President o f 6 Business Affairs for AOL during the Class Period . He also reported directly to 7 defendant Pittman . Following the Merger, Colburn was named Executive Vice 8 President of Business Affairs and Development for AOL, and continued to report 9 directly to Pittman . Colburn was AOL's chief deal maker and was ultimately 10 terminated by AOL in mid-2002 when he was identified as the target of SEC and 11 DOJ investigations regarding certain transactions between AOL and PurchasePro . 12 Colburn not only structured, but also controlled and executed the fraudulent 13 transactions between AOL and PurchasePro alleged herein . 14 48 . Defendant Eric Keller ("Keller") was a Senior Executive Vice Presiden t 15 of Business Affairs at AOL during the Class Period and reported directly to 16 defendant Colburn. Following the Merger, Keller was named Executive Vice 17 President of Business Affairs and Development for AOL, and continued to report 18 directly to Colhurn . Keller was AOL's number two deal maker and is also under 19 investigation by the SEC and DOJ regarding certain transactions between AOL and 20 PurchasePro . In June of 2002, Keller was placed on administrative leave and then 21 ousted or fired two months later in August of 2002 . After Keller left AOL, Senior 22 AOL executive Ted Leonsis hired Keller as a consultant . Leonsis later ended his ties 23 with Keller on the advice of an AOL attorney . Keller and Colburn.j ointly structured, 24 controlled, and executed the fraudulent transactions between AOL and PurchasePro 25 which are alleged herein . 26 49 . Di:'fendant Myer Berlow ("Berlow") was Vice President for Nationa l 27 ~ Accounts for 2!AOL during the Class Period and also became President of AOL' s 28 Interactive Marketing Division in the Business Affairs Department during that tim e

1.8 1 frame . Follow,_ng the Merger, in August 2001, Berlow became President of Global 2 Marketing Solutions Group. In September, 2002, Berlow became a senior adviser 3 to AOL . 4 50. Defendants AOL, Pittman, Colburn, Keller and Berlow , i.e., the "AOL 5 Defendants," are each primarily liable as individual participants in a fraudulent 6 scheme and course of conduct that operated as a fraud and/or deceit upon the Class . 7 Because of the r access to the adverse, non-public information about the business, 8 finances and business prospects ofPurchasePro, and their ability to conspire with the 9 PurchasePro Defendants to effectuate the fraudulent transactions described herein, 1 0 these defendants acted to misrepresent, misstate or conceal such information from plaintiffs and the investing public and are primarily liable under the federal securities 12 laws for their ti ansgressions . 13 IV. PURCHASEPRO'S FRAUDULEN T 1 4 RECOGNITION OF REVENUE 15 51 . PurchasePro purported to be one of the largest B2B e-commerc e 16 software comp, .nies in the world . According to PurchasePro, it operated the Global 17 Marketplace, a form of electronic "Yellow Pages," interconnecting more than 18 140,000 businesses and powering hundreds of private and public marketplaces wit h 19 its highly scalable, hosted e-commerce software . The Global Marketplace allegedly 20 enabled PurchasePro's customers to compete more effectively by enhancing sale s 21 opportunities, r:nducing procurement costs, and increasing employee productivity . 22 52 . Specifically, PurchasePro claimed to allow trading partners to procur e 23 goods and services, advertise their services throughout the network, post and 24 respond to purchase orders and requests for quotes, and display their product 25 catalogs for customers . As noted in PurchasePro's internal Company manuals o r 26 policies, the Company 's stated goal was to "create the standard platform where 27 businesses of all sizes can transact business seamlessly and efficiently . " 28 53 . However, in order to accomplish that goal, the Company needed to

19 1 achieve "critic::tl mass," or the appearance of a marketplace large enough and with 2 a significant <

20 1 (a) buy an equivalent or greater amount of products from license purchasers, (b) 2 provide on line advertising to licensee purchasers, and (c) invest in license 3 purchases, and otherwise make the license purchasers whole in the future for the cost 4 of the marketplace license purchasers (collectively "side agreements") ; (iii) the 5 improper recognition of revenue attributable to non-monetary barter, or "Barney," 6 exchange transactions wherein PurchasePro recorded revenue far in excess of the 7 value received in exchange ; (iv) the premature and improper recognition of revenue 8 that should have been deferred to later periods for the delivery of software products 9 that required substantial additional production, modification or customization in 10 order to work ; (v) the improper recognition of revenue from customers through the 11 overstatement of subscription revenues ; (vi) the improper recording of accounts 12 receivable without the consideration of an adequate reserve for doubtful accounts 13 where they knew the accounts would never be collected ; and (vii) improperly 14 recognizing reti enue by backdating and forging contractual documents that were not 15 executed prior .:o the period being reported . 16 A. False And Misleading Revenue Recognized From Sham Transactions 17 1 . Warrant-For-Revenue Transaction s 18 57 . Throughout the Class Period, PurchasePro improperly recognize d 19 revenue generated by payments made to PurchasePro by customers, which payments 20 were in fact and substance payments for warrants to purchase PurchasePro stock that 21 PurchasePro had granted to those customers in order to gain their business . The SEC 22 has ruled that such payments cannot properly be classified as revenues, because they 23 are not paymen's for the company's goods or services but rather for the company's 24 warrants. 25 58 . Spylcifically, PurchasePro' s fi nancial results during the Class Perio d 26 I were in large part subsidized and distorted by PurchasePro's warrants-for-revenue s 27 business model , which included transactions with AOL, Advanstar, Office Depot, 28 Gateway, Springy., and Computer Associates.

21 1 2 . Warrant Agreement With AOL 2 59 . O i or about March 15, 2000, PurchasePro and AOL entered into an 3 Interactive Marketing Agreement ("IMA"), Technology Development Agreement 4 ("TDA") and a Warrant Agreement . Pursuant to the original terms of the IMA, 5 PurchasePro was required to pay AOL $50 million in cash -- $25 upon the signing 6 of the IMA and $3 .57 million a quarter for seven quarters, ending December 2001 . 7 In exchange, AOL would allow PurchasePro to be AOL's "strategic partner" and co- 8 develop a busness-to-business global marketplace on AOL's Internet platform 9 called the Netbusiness Marketplace ("Netbusiness") . In addition, the original terms 10 of the TDA r quired PurchasePro to pay AOL a total of $20 million in equal 11 quarterly payments of $2 .5 million for each of 8 quarters beginning in August 2000 . 12 60 . However, Netbusiness was never fully implemented because it lacke d 13 much of the functionality promised by PurchasePro . In fact, it was virtually 14 abandoned and: the business arrangement quickly deteriorated to the point that it 1.5 became nothing more than a shell used by both companies to falsify their reported 16 revenue and financial statements . 17 61 . A.; a result, the remaining focal point ofPurchasePro's relationship wit h 18 AOL was the Warrant Agreement. The original terms of the Warrant Agreement 19 provided that AOL was granted warrants to buy PurchasePro stock based on how 20 much business 'it "referred" to PurchasePro. In other words, in order for AOL to be 21 credited with referred business, the marketplace licenses or subscription agreements 22 would actually have to be sold to third parties . The original Warrant Agreement 23 granted to AOL as many as 4 million warrants for PurchasePro stock, adjusted fo r 24 stock splits, with an exercise price of $63 .26 per share. Because such a strike price 2 5 soon became i :iconceivable due to a decline in PurchasePro's stock price, these 26 warrants became worthless and gave AOL no incentive to refer business t o 27 II PurchasePro . 28 62 . Fi..rthermore, in or around October 2000, AOL was facing the effect s

22 1 of an industry wide downturn in revenues that could be generated from online 2 Internet advert0 sing . In fact, on October 18, 2000, defendant Pittman and other AOL 3 executives were informed at a meeting at Dulles headqua rters that AOL faced the 4 risk of losing more than $140 million in ad revenue the following year . While such 5 a decline would represent only 5 % of AOL' s proceeds from advertising and 6 commerce, giN en the tenuousness of the Tender Offer AOL was attempting to 7 consummate with Time Warner, Inc., any such decline in revenues raised great 8 concern among AOL executives, including the AOL Individual Defendants named 9 herein. 10 63 . Furthermore, certain AOL executives had begun internally questioning 11 the validity of riany of the deals whereby AOL was recognizing advertising revenue . 12 For example, James Patti ("Patti"), a senior manager in AOL's Business Affairs 13 Department, ht aded by defendants Colburn and Keller, stated that by October 2000, 14 "[t]he bubble had clearly burst, but senior management was under enormous 15 pressure to hit the [financial] numbers and close the Time Warner transaction, which 16 would diversif- ' the revenue base and lower the risk profile of the company ." Patti 17 also told senior executives that he was uncomfortable with some of the transactions 18 pushed by his unit . Patti further reported that "I had been asked to paper many of 19 these questionable deals and was unwilling to cooperate, making my concerns 20 known to management ." Then, one week after expressing these concerns, and 21 shortly after re;eiving a merit promotion, Patti was terminated in 2001, a move he 22 said he believe .3 was directly related to his refusal to participate .

23 64 . Likewise, Robert O'Connor ("O'Connor"), then Vice President o f 24 Finance for AOL's advertising division, outlined his concerns in a series of meetings 25 in late 2000 and early 2001 with defendants Pittman and Colburn, along with J. 26 Michael Kelly. Chief Operating Officer of the Online Division, and other high- 27 ranking company executives . Based upon O'Connor's review of AOL's internal 28 financial documents, he has stated: "Clearly, a lot of what [the AOL Defendants ]

23 1 were living on was revenue that was not of the highest quality . . .1 don't know if 2 they're still in denial, but there were some pretty big business issues they were not 3 willing to face .. For nine months, [ tried to get these guys out of denial . I tried to take 4 the perfume off the pig ." However, rather than listen to such warnings, the AOL 5 Defendants engaged in the sham transactions discussed herein and replaced 6 O'Connor. 7 65 . These internal warnings also came when investors were highly alert t o 8 any weakness :.n online advertising and also shortly before the Tender Offer was 9 scheduled to be completed. Thus, by the end of October 2000, defendant Pittman 10 was seeking to allay investors conce rns . When asked by Wall Street analysts and the 11 media about the industry -wide downturn in advertising revenues, defendant Pittman 12 offered a resounding answer : "I don't see it, and I don't buy it ." Interestingly, just 13 a week before Pittman's public statements , shares of AOL' s key competitor, Yahoo 14 Inc., plunged 21 % after the company reported strong ad g rowth but acknowledged 15 that the pace could not be sustained. A day before Pittman spoke, AOL shares also 16 dropped 17% on what analysts described as similar worries . 17 66 . In addition, internal company projections raised caution about on e 18 particular secto r: dot-com's . Failure s were accelerating among those Internet start- 19 ups, which represented a significant amount of the company ' s ad business . In such 20 an atmosphere , and with its takeover of Time Warner, Inc . imminent, it became more 21 important then ever for AOL to maintain its breakneck growth in advertising and 22 commerce revenue . 23 67 . As such, PurchasePro was one source by which the AOL Defendants 24 could attain the r goals . However, AOL no longer had an incentive to refer business 25 to PurchasePro since the warrants it had been granted in the Warrant Agreement 26 were out of tht! money -- i.e., it cost far more to exercise the warrants than to 27 purchase the shares on the open market. In addition, against the back drop of 28 internal wamin ;s concerning declining advertising revenue, and just when AO L

24 needed all of its available revenue in order to complete the Tender Offer, defendan t 2 I Johnson threati-Ined to withhold payments due to AOL under the IMA and the TDA 3 for AOL' s fail-, ire to refer substantial business to PurchasePro . 4 68 . In response to Johnson's threats, on or about November 18, 2000 , 5 PurchasePro a :id AOL amended the Warrant Agreement, decreasing the exercise 6 price of the warrants by over 99%, from $63 .26 to $0.01, in order to motivate AOL 7 to promote Pw:chasePro and "refer" business to the Company . Under the revised 8 Warrant Agreement, AOL earned a $3 credit for each $1 of revenue it referred to 9 PurchasePro. AOL and PurchasePro valued the warrants issued under the amended 10 Warrant Agreement at $30 million, requiring AOL to refer only $10 million in third 11 party business to receive the maximum number of warrants granted under the 12 Agreement. In exchange for the amendments to the Warrant Agreement, AOL 13 agreed to assist PurchasePro in reaching its revenue targets in future quarters through 14 coerced sales and round trip transactions with suppliers, partners and customers, as 15 more fully described below. Moreover, to assure that it would be able to "earn" the 16 maximum $30 million in PurchasePro warrants, AOL bought $10 million worth of 17 bulk subscription agreements and marketplace licenses with the declared intent to 18 distribute them to its suppliers, partners, customers, subscribers, and/or vendors . 19 69 . Defendant Anderson has admitted under oath that following th e 20 amendment to the Warrant Agreement , PurchasePro ' s auditors questioned whether 21 PurchasePro could recognize revenue from AOL's bulk purchase of subscription 22 agreements ant. marketplace licenses which had not yet been sold to third parties and 23 whether AOL could vest or "earn" $30 million in warrants without the referral or 24 actual sale of tt e licenses to third parties . Such concerns by PurchasePro ' s auditors 25 would have n°cessarily been expressed to the PurchasePro Defendants, and 26 especially Johr.,son, an admittedly hands-on CEO, and defendant Miller. 27 70. Defendant Anderson, who at that time reported directly to defendan t 28 McGhee, has also disclosed that he discussed these matters with "co-conspirator s

25 l within PurchasePro," i.e., senior management, who devised the fraudulent scheme 2 to falsely credit AOL with the referral of $10 .5 million in business by third parties 3 during the fouxth quarter , even though they knew that AOL "had referred less than 4 half that amount ." To perpetrate the scheme, defendant Anderson has further 5 admitted that "at the direction of a senior officer of PurchasePro, Anderson wa s 6 responsible for the creation of false business records prepared at Anderson's 7 direction by his subordinate that he knew would be used to falsely credit [AOL] with 8 referral revenue that he knew [AOL] had not generated for PurchasePro in the fourth 9 quarter of 2000." These records were also transmitted to and relied upon by the 10 Company's auditors in approving the revenues recognized by PurchasePro in the 11 fourth quarter of 2000 . 12 71 . Thus, not only did the PurchasePro Defendants engage in a questionable 13 warrant-for-revenue arrangement with AOL, they fraudulently credited AOL with 14 the referral of approximately $5 .5 million in third party "purchases," in order to 15 enable the Company to record $10 .5 million in revenues . This in turn allowed AOL 16 to "earn" its full $30 million in warrants . In addition, it allowed the AOL 17 Defendants to record the $20 million gain on the warrants as advertising revenue, 18 which artificially inflated AOL's revenues on the eve of closing the Merger wit h 19 Time Warner, Inc . 20 3 . Warrant Agreement With Gatewa 21 72 . The pleadings and discovery materials in an action currently pending 22 between Pro-After and Gateway have also revealed that on or about September 29, 23 2000, defendant Carton - on behalf of PurchasePro - entered into a Training and 24 Marketing Ag{-eement with Gateway in exchange for warrants valued by 25 PurchasePro and Gateway at $38 .2 million under the Black Scholes method . The 26 agreement called for Gateway to install the PurchasePro icon and an imbedded dem o 27 on 3,000,000 Giteway computers . PurchasePro and Gateway allocated $9 millio n 28 as the value for these icons. The agreement also called for Gateway to provid e

26 1 training in their company stores on the usage of PurchasePro's software and 2 marketplace, and to include PurchasePro in Gateway's website, catalogues and 3 various marketing materials . Based upon this contract, PurchasePro recognized $9 4 million in advertising revenue and continued to carry the "asset" represented by the 5 3,000,000 Gateway icons on its books throughout the Class Period . However,, the 6 PurchasePro icon appeared on only 22,800 computers, PurchasePro received little 7 or no training from Gateway, and PurchasePro failed to appear in Gateway's 8 catalogues and marketing materials . Thus, throughout the Class Period, the 9 PurchasePro Defendants knew that the Company's revenue and financial statements 10 were overstated by carrying the value of this worthless asset which was falsely 11 created through its warrant arrangement with Gateway . 12 4. Importance of Warrant-For-Revenue Transactions 13 73 . To note the magnitude of such warrants-for-revenue transactions, in th e 14 first quarter of 2001, payments derived from PurchasePro's partnership with AOL 15 accounted for f 5% of PurchasePro's revenues (according to the figures reported by 16 the Company c n April 26, 2001). PurchasePro had, at prior times during the Class 17 Period, also entered into warrants-for-revenues contracts with Gateway (as described 18 above) Office Depot, and Sprint . Thus, the PurchasePro Defendants, together with 19 the AOL Defendants, engaged in an ongoing pattern of improperly generating 20 "revenue" through the issuance of warrants . 21 74. The upshot of such warrants-for-revenue transactions is that : (i) 22 PurchasePro generated artificial "revenue" by issuing warrants to business partners 23 that offered the partner much more in warrant profits than the partner paid to 24 PurchasePro ; (i) such "revenue" continued only so long as the warrants did, and 25 once the warrants were "earned" there was no incentive for referrals or payments to 26 the Company tr F continue (because, at such point, the payments actually became real 27 payments rather than a game in which one receives $3 for every $1 one pays). Thus, 28 as the SEC has held, calling such payments revenues is materially misleadin g

27 because these payments are neither entered into purely for the company's goods or 2 services nor indicate anything about the market demand for, or acceptance of, th e 3 company's goods or services . Such payments are not payments for the company's 4 goods or services but for its warrants . 5 75 . Wedbush Morgan Securities analyst George Santana, in an analyst 6 report published on April 27, 2001, summarized the issue as follows : 7 PPRO: 1 Earnings Fiasco, Reiterate Sell - STILL BELIEVE REVEN~JES ARE BING DRIVEN BY AGGRESSIVE WARRANTS 8 FOR REVENUES DEAL S 9 We believe PurchasePro has failed to address our main point of criticism . We contend that PurchasePro ' s revenues are being driven by 10 aggressive warrants for revenues deals that raise serious questions a gout the long-term sustainabi lity of PurchasePro's revenues . We 11 believe investors should take zero comfo rt in PurchasePro's relationship with AOL . True, the AOL pa rtnership accounted for 65% 12 of PurchasePro ' s revenues in the first q uarter 2001 . We believe a hi h revenue concentration is to be expected in the very near term, precisely 13 because AOL is ea rnin warrants at a rapid clip as it refers business to Purchase.Pro. Specifically AOL is earning $3 worth of warrants (at an 1.4 exercise ` price of 0 .01 5 for every $1 of revenue referred to PurchasePro. We believe that the current warrant agreement for AOL 15 encourages a very sho rt-term revenue benefit for PurchasePro and very little long-term benef t . When AOL earns and exercises its warrants 16 and sells its PurchasePro shares, we believe the referral of business to PurchasePro will drop sharply . 17 In addition to the referral of license fees, PurchasePro is benefittin 18 from significant nonrecurring revenues from AOL that are an offshoot we believe, of the same warrant award to AOL. These revenues helped 19 PurchasePro's fourth quarter, as AOL paid $4 .9 million for 100,000 one-month promotional subscriptions to PurchasePro ' s network for the 20 month of December 2000 . In the first quarter 2001 , PurchasePro recognized $9 million of revenues from AOL for subscriptions to the 21 PurchasePro network and an additional $3 .7 million of revenues from AOL for `integration services ' that weren't very well exp ~la~ ined . We 22 believe this type ofrevenue will prove to be short-lived . We could be wrong but we believe it less than coincidental that these revenues from 23 AOL began after PurchasePro re-priced the warrants to AOL, in November 2000 from the original strike price of $63 . 26 to the new 24 strike price of $d.01 . 25 Overall, it is our belief that AOL has every incentive to refer business to Purch-isePro as quickly as possible to earn i ts warrants as quickly as 26 possible We contend AOL will exercise these warrants and sell its Purchasf.Pro shares sooner rather than later . We believe that once AOL 27 earns its. warrants and sells its PurchasePro shares it will have little incentive; to refer additional business to PurchasePro and will scale 28 down resources devoted to the relationship , leaving PurchasePro with a sharply reduced revenue outlook .

28 1 76 . A.- a result of these warrant transactions , PurchasePro recognized 2 significant amounts of revenue from certain entities, that was in fact , merely the 3 return of monks that PurchasePro had previously given these entities . For example, 4 during the Class Period, AOL received $48,707,000 in cash from PurchasePro while 5 AOL remitted )ack only $19 ,063,000 to the Company during the same time frame. 6 All of the $ 19,063,000 was treated as operating revenues by PurchasePro during the 7 Class Period. 8 77 . According to GAAP, APB 29, ¶21, the exchange transaction is not the 9 culmination of an earning process if the transaction involves the exchange of a 10 productive asset not held for sale in the ordinary course of business for a similar 11 productive asset not held for sale. Many of these transactions were based upon, 12 among other things, the exchange of customer lists . They were also supplemented 13 with supposed payments for marketing rights, shared sales and website design sales . 14 78 . TI e SEC has said that the simultaneous exchange of non-monetary 15 assets along w!th equal amounts of cash consideration between the parties to an 16 exchange woul 1 raise significant substance over "form" questions . 17 5 . The Ad Swap 18 79 . In another deal arranged between PurchasePro and AOL towards the 1 9 end of the first quarter 2001, the parties agreed to exchange "advertising" of little or 20 no value to either company in order to generate sham revenues . Under this deal, 21 according to an internal AOL document dated March 21, 2001, PurchasePro would 22 receive $1 .8 million worth of advertising on the AOL service . In return, AOL would 23 receive $1 .8 million worth of promotions that mentioned its Netscape brand when 24 PurchasePro ran television ads on CNN and Headline News, which were now part 25 of the merged company, AOL Time Warner, Inc . 26 80 . In reality, PurchasePro got little value from the ads it ran on the AOL 27 service, accorc:ing to internal AOL documents, since AOL controlled where 28 PurchasePro's .ds would run. For example, the "carriage plan" for the PurchasePro

29 I ads showed that many of the PurchasePro ads would run on AOL's ICQ instant- 2 messaging service . Instant messages allow users to converse by text in real time 3 over the Internet . The ICQ service targets a largely teenage and international 4 audience who would have little use for PurchasePro 's business-to-business software . 5 The ads appearing on ICQ's application also had "almost no click through," 6 according to AOL inside sources, meaning that few users actually clicked on the ad s 7 to find out more about the product being touted. PurchasePro ' s ads were also run 8 on Winamp, AOL's music software player, another service that did not target 9 PurchasePro ' s business clientele . Of course, the success of the advertising was o f 10 little interest to AOL or PurchasePro . Each company was more interested in 11 boosting its ad revenue. 12 81 . Consequently, there was no reasonable justification for the swap of 13 advertising, since neither party received any material benefit from the transaction . 1.4 This swap was designed solely for the purpose of generating sham revenue to 15 artificially inflate the revenues and financial results of both companies . 16 6. The Statement Of Work Between AOL And PurchasePr o 1.7 82 . Near the end of the first quarter 2001, PurchasePro was far fro m 1 8 reaching its projected and publicly forecast revenue goals . Therefore, defendant 19 Johnson traveled to AOL headquarters in New York, New York, and threatened to 20 once again withhold payments for commissions that AOL had "earned" for the sale 21 of PurchasePro software if AOL did not live up to its agreement to help PurchasePro 22 reach its revenue forecasts through the coercive round trip transactions as promised, 23 and through the payment of nearly $5 million to PurchasePro in promotional 24 expenses for AOL giving 100,000 of its subscribers a free one month subscription 25 to the PurchasePro global marketplace . 26 83 . In response, the parties further agreed to enter into a fraudulent 27 "Statement of \-Vork" so that PurchasePro could reach its goals . Defendant Anderson 28 has admitted under oath that to generate the necessary revenues, "Anderson an d

30 I certain of his c-o-conspirators," at PurchasePro and AOL, "devised a scheme to I fraudulently recognize approximately $3 .65 million in additional revenue for I PurchasePro ." Pursuant to the scheme, a Statement of Work was entered int o between PurchasePro and AOL wherein AOL agreed to pay PurchasePro approximately $3 .65 million for the integration of auction functionality into AOL's 6 Internet marketplace for small businesses . Moreover, Pro-After, PurchasePro's 7 debtor in posse ;sion, has also determined that this Statement of Work was negotiated 8 by defendant Johnson in New York, during the week of April 9, 2001, but that the 9 document was backdated to February 5, 2001, so that revenue could be recognized 1 0 in PurchasePro's first quarter of 2001 . 84 . Knowing that no work had been performed under the Statement of 12 Work, which made it fraudulent to recognize any revenue therefrom, Anderson has 13 also admitted that he and "other co-conspirators within PurchasePro caused th e 14 $3,65 million associated with the Statement of Work to be improperly recorded as 15 revenue for PurchasePro in the first quarter of 2001 and to be submitted to 16 PurchasePro's ~juditors as revenue, without informing PurchasePro's auditors that 17 no work or virtually no work had been performed under the contract," Importantly, 18 such fraudulert transactions would have necessarily been approved by the 19 PurchasePro .D( fendants, and specifically defendants Johnson, Miller, and McGhee, 20 Anderson's immediate supervisor . Furthermore, defendant Chiles, as a member of 21 the Audit and Compensation Committees, would have had the responsibility of 22 confirming such a material amount of revenue which implicates his knowledge o f 23 such a fraudulent transaction as well . 24 B. False And Misleading Revenue Recognition 25 On Round Trip Transactions In The Sale O f 26 PurchasePro ' s Marketplace Software License s 27 85 . By June of2000, the PurchasePro Defendants realized that they needed 28 to change the Company's business model in order to maintain the illusion of revenu e

31 growth . Consequently, they shifted PurchasePro's focus from its operation of 2 "Global Marki tplaces," which allowed the Company to recognize incremental 3 revenue over time, to the licensing of software . In this manner, according to internal 4 e-mails, the PurchasePro Defendants "discovered new opportunities for revenue 5 recognition" w ;-iereby they could immediately recognize "up-front" revenue upon the 6, alleged sale of a particular license . 7 86 . However, defendant Anderson has revealed under oath that PurchasePro 8 experienced significant difficulties in selling its software and/or marketplace licenses 9 since third party customers were unlikely to make their purchases based solely on 10 the value of the license . Therefore, Defendants devised a scheme for round trip 11 transactions wiereby PurchasePro and/or AOL would essentially buy revenue by 12 entering into secret side agreements with third parties . The agreements provided that 13 if the third party would buy a marketplace license, PurchasePro and/or AOL would 14 invest a similar or greater amount in the third party, or would buy goods and services 15 from the third /party in the same or greater amount. Thus, through these secret side 16 agreements, PurchasePro and/or AOL essentially sustained the Company by buying 17 revenue . 18 87 . Furthermore, defendant Anderson has stated that these side agreements 19 and round trip transactions were never disclosed to PurchasePro's auditors . In fact, 20 Defendants took active steps to conceal these secret agreements from the Company's 21 auditors . Importantly, since the Company did not have an extensive staff of senior 22 management, such secret side agreements necessarily would have required the 23 knowledge, approval and/or acquiescence, at a minimum, of Anderson's direct 24 supervisor(s), i e., the remaining PurchasePro Defendants . Moreover, not only did 25 Defendants mi:lead the investing public and the Company's auditors by overstating 26 PurchasePro's revenues with regard to the following transactions, but as set forth 27 below, they issued false and misleading press releases which claimed that the 28 Company demonstrated widespread acceptance of the PurchasePro platform an d

32 AOL's Netbusness Marketplace for B2B transactions . 2 1 . Third Quarter 2000 Round Trip Transactions 3 a. The I-Storm Transaction 4 88 . Pro-After, PurchasePro's debtor in possession, has determined that in 5 June 2000, dependant Carton, acting on behalf of PurchasePro, entered into an 6 agreement with I-Storm, a start-up company with a history of losses since its 7 inception. Through this agreement, PurchasePro invested $1,000,000 in the 8 fledgling company in exchange for an agreement that I-Storm would purchase a 9 marketplace software license from PurchasePro for $720,000 in September 2000 . 10 At the time that this agreement was entered into, the PurchasePro Defendants knew 11 that I-Storm would have been unwilling and unable to buy the PurchasePro 12 marketplace software license absent the side agreement . 13 b . The LawCommerce Transactio n 14 89 . Pro-After has determined that in September 2000, defendant Anderson , 15 acting on behalf of PurchasePro, entered into a secret side agreement with 16 LawCommerce, a start up Internet legal research firm . The agreement provided that 17 PurchasePro would buy a $1 million convertible note from LawCommerce, in 1s exchange for LawCommerce's agreement to buy a PurchasePro marketplace 19 software license for $510,000 . At the time that this agreement was entered into, the 20 PurchasePro Defendants knew that LawCommerce would have been unwilling an d 21 unable to buy the PurchasePro marketplace software license absent the sid e 22 agreement . 23 c . The Computer Associates Transactio n 24 90 . Pi o-After has determined that towards the end of the third quarter 2000, 25 PurchasePro entered into an agreement with Computer Associates whereb y 26 Computer Associates agreed to buy a marketplace software license from 27 PurchasePro fcr $2,000,000 in exchange for $6,400,000 in Computer Associates 28 software . Nevertheless, PurchasePro fraudulently recognized $2,000,000 in revenu e

33 1 based upon this transaction . At the time that this agreement was entered into, the 2 PurchasePro Defendants knew that Computer Associates would have been unwilling 3 to buy the PurchasePro marketplace software license absent the side agreement . 4 d. The Working Woman Transaction 5 91 . Pro-After has determined that during the third quarter of 2000, 6 PurchasePro entered into an agreement with Working Woman whereby Working 7 Woman purchased a marketplace software license from PurchasePro for $400,000 . 8 However, this purchase was conditioned upon a secret side agreement whereby 9 PurchasePro agreed to invest $3,000,000 in Working Woman resulting in ownership 10 of 7% of the outstanding shares of Working Woman. At the time of the 11 "investment," Working Woman was forecasting a net loss for 2001 . At the time that 12 this agreement was entered into, the PurchasePro Defendants knew that Working 13 Woman would-have been unwilling and unable to buy the PurchasePro marketplac e 14 software license absent the side agreement . 1.5 e . The InsureZone Transaction (Part 1) 16 92 . In;ureZone entered into a Preferred Supplier Agreement with 17 PurchasePro on August 25, 2000, which was executed by defendant Anderson . 18 Additionally, Dale Boeth, Vice president of strategic development at PurchasePro, 19 outlined the engagement model between PurchasePro and InsureZone in March of 20 2000 .3 Pursuant to this agreement, InsureZone agreed to pay PPRO $100,00 0 21 annually for th right to be a preferred supplier preferred supplier of insurance 22 products and services on the PurchasePro global marketplace . Under the preferred 23 supplier agreement, InsureZone would receive additional exposure in PurchasePro's 24 global marketp'.ace and would be the Company's preferred supplier of insurance 25 products . IntetnaI e-mails, both within InsureZone and PurchasePro, reveal that 26

27 Both Dale Boeth and defendant Anderson worked together as 28 executives at Sprint. In fact they negotiated the warrant arrangement between PurchasePro and Sprint while working as executives for Sprint .

34 PurchasePro was unable to ever modify its Internet platform to make the links to 2 InsureZone's marketplace functional . Moreover, PurchasePro failed to : (i) designate 31' InsureZone as a default preferred supplier or products and services or of any other 4 future marketplaces ; (ii) promote InsureZone pursuant to the terms of the Preferred 5 Supplier Agreement; (iii) provide home page banner rotation ; (iv) promote 6 InsureZone in connection with the banner ad-on category page, preferred listing in 7 category, and placing InsureZone's logo on PurchasePro's partners page; (v) include 8 lnsureZone in all sales and marketing materials that promote preferred suppliers ; (vi) 9 enable the XML, punchout from PurchasePro networks to InsureZone's site ; and (vii) 10 provide up to 24 hours of telephone consulting services . In fact PPRO did not 11 perform, and had no intentions of performing, the obligations under the terms and 12 conditions of the Preferred Supplier Agreement . As a result, InsureZone made the 13 first two monthly payments, of $8,333 .33, and refused to make further payments 14 until the platform was made operational . 15 93 . Thus, it is apparent that this was a ploy to improperly and prematurel y 16 generate revenue without making good on its alleged technology . For example, in 17 a letter from Bob McCintyre ("McCintyre" ), Project Manager of PurchasePro, to 18 Mr. James Rusty Reid ("Reid"), dated September 27, 2000, regarding the 19 acceptance of the of the preferred supplier designation, McCintyre urged Reid to 20 sign the letter in order for PurchasePro's auditors to recognize a portion of the 21 revenues generated under the Preferred Supplier Agreement for the then current 22 quarter. On the very same day McCintyre requested Reid to sign the letter, in an e- 23 mail from Scott McClure 4 to David Newton of InsureZone, cc'd to Rusty Reid o f 24 25 26 Scott PalcClure, Director of Business Development was the principal negotiator of the Preferred Supplier Agreement . David Newton of InsureZone 27 also negotiated the terms of supplier agreement on behalf of InsureZone . 28 McClure left Purchasepro in July of 2002 to work for Z3 Marketing, a subsidiary of NEXX, a company run by defendants Johnson and Carton .

35 1 InsureZone on September 27, 2000, McClure notes that : 2 A ain I want to emphasize that the le tter is not tied to any future de1ivera)les on our side. It is for our auditors and allows PPRO to 3 recognize a portion of the revenue from our agreement this quarter . 4 However as of `ieptember 27, 2000, PurchasePro failed to fulfill its obligations unde r 5 I the Preferred Supplier Agreement. 6 94 . The improper or "roundtrip" transactions identified above constitute d 7 a material portion of PurchasePro's revenues in the third quarter 2000 . PurchasePro 8 reported total revenue of $17 .3 million in the third quarter of 2000. The total 9 revenue recognized by the Company with regard to the I-Storm, LawCommerce, 10 Computer Associates and Working Woman transactions alone was $3 .63 million . 11 Therefore, these round trip transactions constituted 21 % of the Company's total 1 2 revenues forth :,- quarter . Moreover, during the third quarter of 2000, PurchasePro 13 reported a net loss of $4 .7 million, but incurred costs and/or expenses of $11 .3 14 million to "purchase" this revenue, representing nearly three times the Company's 15 total net loss fcr the quarter . 16 2 . Fourth Quarter 2000 Round Trip Transaction s 17 a. The Broad Vision Transactio n 1 8 95. Pro-After has determined that towards the end of the fourth quarte r 19 2000, Purchas.Pro entered into an agreement with BroadVision whereby 20 BroadVision agreed to buy a marketplace software license from PurchasePro for 2 1 $5,000,000 in e -,change for PurchasePro's purchase of $11,200,000 in BroadVisio n 22 software which was unneeded. Nevertheless, PurchasePro recognized $5,000,000 23 in revenue based upon the transaction . At the time that this agreement was entered 24 into, the Purcha:;ePro Defendants knew that Broadvision would have been unwilling 25 to buy the PurciiasePro marketplace software license absent the side agreement . 26 b . The Thread.com Transaction 27 96. Defendant Anderson has admitted under oath that "at the direction o f 28 a senior officer ofPurchasePro," he personally participated in negotiations whereby

36 The Thread .comn agreed to purchase a marketplace license for $720,000 in exchange 2 for a secret sid:.- agreement whereby PurchasePro agreed to invest $250,000 in The 3 Thread .com's :text round of financing . At the time that the secret side agreement 4 was negotiates°, The Thread .com was unable to obtain financing from any other 5 source . Anderson further admitted that this secret side agreement was concealed 6 from PurchasePro's auditors, even when The Thread .com failed to pay the full 7 amount due under the license . The PurchasePro Defendants knew at the time that 8 the secret side agreement was entered into that The Thread .com would have been 9 unwilling and unable to buy the PurchasePro marketplace software license absent the 10 side agreement . 11 c. The ProfatScape. com Transaction 12 97 . D ;-fendant Anderson has admitted under oath that in PurchasePro' s 1 3 fourth quarter of 2000, ProfitScape .com agreed to buy two marketplace licenses for 14 $1,100,000 ea--h. Anderson further admitted that he knew at the time of the 15 transaction that ProfitScape .com only agreed to purchase the second marketplace 16 license in exc':~ange for a secret side agreement whereby PurchasePro would 17 simultaneously loan $1 million to ProfitScape.com. Not only was this secret side 18 agreement not disclosed to the Company's auditors, but Anderson has admitted that 19 senior officers ,3f PurchasePro "had made financial commitments to an outside party 20 in order to get t'iat outside party to substitute for PurchasePro" under the note for the 21 $1 million loan "so that PurchasePro's auditors would approve of PurchasePro's 22 revenue recognition from its marketplace license sales to [ProfitScape .com] ." Such 23 a secret side a i eement and the negotiation of a substitute payee under the $1 million 24 loan could not lave been negotiated without, at a minimum, the knowledge, approval 25 and/or acquiescence of the PurchasePro Defendants . At the time that this agreement 26 was entered in':o, the PurchasePro Defendants knew that ProfitScape,com would 27 have been unwilling and unable to buy the PurchasePro marketplace software 28 licenses at issue absent the side agreement .

37 1 d. The V-Twin Holdings Transaction 2 98 . Defendant Anderson has admitted that in PurchasePro's fourth quarte r 3 of 2000, he negotiated an agreement with V-Twin Holdings, Inc ., whereby V-Twin 4 agreed to buy two PurchasePro marketplace licences for $1,100,000 in exchange for 5 a secret side agreement by a PurchasePro senior officer to invest in V-Twin . At the 6 time Anderson negotiated the agreements with V-Twin he knew that it was a 7 relatively new venture that had always operated at a substantial loss and that it would 8 not be able to pay for the marketplace license absent the investment by Anderson's 9 co-conspirator. In addition, at the time that this agreement was entered into, the 10 PurchasePro Defendants knew that V-Twin would have been unwilling and unable 11 to buy the Purc,hasePro marketplace software licenses absent the side agreement . 12 e. The Woosh! Transactio n 13 99 . Pro-After has determined that in December. 2000, defendants Anderson 14 and Johnson entered into an agreement with a company called Woosh!, whereby 15 Woosh i agreed to purchase a marketplace license from PurchasePro for $900,000 in 16 exchange for a secret side agreement wherein Johnson and Anderson agreed that 17 PurchasePro would invest $1 million in series C convertible notes issued by Woosh!, 18 constituting a 20% interest in the company . At the time that this agreement was 19 entered into, the PurchasePro Defendants knew that Woosh! would have been 20 unwilling and unable to buy the PurchasePro marketplace software license absent the 21 side agreement . 22 100 . The "roundtrip" transactions identified above constituted a material 23 portion of Puri.hasePro's total revenues in the fourth quarter 2000 . PurchasePro 24 reported total '-evenue of $33 .6 million in the fourth quarter of 2000 . The total 25 revenue recognized by the Company with regard to the BroadVision, The 26 Thread .com, ProfitScape .com, V-Twin Holdings, and Woosh! transactions was 27 $8 .35 million . Therefore, these round trip transactions constituted 25% of the 28 Company's total revenues for the quarter . Moreover, when combined with the $5 . 5

38 1 million in revenue recognized from the fraudulently recorded AOL business referrals 2 used to allow AOL to "earn" its $30 million in warrants , set forth above, thes e 3 f combined share transactions resulted in $13 .85 million, or 41% of PurchasePro' s 4 total revenue f or fourth quarter 2000. 5 3 . First Quarter 2001 Round Trip Transaction s 6 101 . Pursuant to the agreements between Defendants , as noted above, AO L 7 promised to assist PurchasePro in reaching its forecasted revenue projections . As 8 such, AOL ag.•eed to enter into secret agreements with certain of its suppliers, 9 partners and customers whereby AOL agreed that, in exchange for the purchase of 10 a PurchasePro marketplace or software license, AOL would spend an equal or 11 greater amount on goods and services with the supplier, partner or customer. AOL 12 also informed t'iese suppliers, partners or customers that they could only do business 13 with AOL if they purchased a software or marketplace license from PurchasePro, 14 even though many of such suppliers, partners or customers had no use whatsoever 15 for the Purchas=,Pro product or services . Thus, during the first quarter of 2001, AOL 16 played a primay role in PurchasePro's fraudulent round trip transactions . 17 a. The Chinadotcorn Transactio n 18 102 . Wring the Class Period, AOL was a shareholder ofChinadotcom Corp . 19 ("Chinadotcorr") . During 2001, Chinadotcom paid advertising fees totaling $3 .5 20 million to AO-_ for Internet advertising services . In the first quarter of 2001, 21 Chinadotcom was forced to buy a PurchasePro marketplace software license for 22 $5,000,000 . Chinadotcom also paid AOL directly for computer software from 23 PurchasePro . In exchange, AOL agreed to continue doing business with 24 Chinadotcom and agreed to buy an equal or greater amount of goods and services 25 from Chinadotuom. A former sales representative of PurchasePro who was in a 26 position to ha.,re first-hand knowledge of these transactions, has stated that 27 Chinadotcom n±;ver wanted the software and that the software was never operational, 28 but that Chinadijtcom only bought the software due to the secret side agreement with

39 1 AOL. Chinadotcom wrote off virtually its entire purchase of the marketplace 2 software licenie in the first quarter of 2002 since it was never operational . 3 Chinadotcom took this impairment charge a year later as a result of a re-assessment 4 and re-evaluation of the software . Defendants knew, at the time that the secret side 5 agreement was'entered into, that Chinadotcom would have been unwilling to buy the 6 PurchasePro marketplace software license absent the side agreement . 7 b. The Bigstep, Inc Transactio n 8 103 . During the first quarter 2001, Defendants also secured an agreemen t 9 with Bigstep, Inc ., ("Bigstep") whereby Bigstep agreed to buy a PurchasePro 10 marketplace license for $1,100,000 in exchange for a secret side agreement with 11 PurchasePro and AOL to buy $1,100,000 in goods and services . Defendants knew 12 at the time that'the secret side agreement was entered into that Bigstep would have 13 been unwilling and unable to buy the PurchasePro marketplace software license 14 absent the side agreement. 15 c. The Future Media Products Transaction 16 104. Pro-After has determined that during the first quarter 2001, AOL 17 strong-armed Future Media Products, a major supplier to AOL, into buying a 18 PurchasePro marketplace software license for $1,000,000 by an agreement dated 19 March 30, 2001, in exchange for a secret side agreement that AOL would buy 20 additional goods and services from Future media products to offset the expenditure . 21 To justify recognizing the revenue, Defendants caused PurchasePro to ship a non- 22 functioning "skin" without modification, to Future Media Products on March 31, 23 2001 . Defendants knew at the time the secret side agreement was entered into that 24 Future Media Products would have been unwilling to buy the PurchasePro 25 marketplace software license absent the side agreement . Ultimately, Future Media 26 Products refusf .d to pay for the marketplace software license, but Defendants caused 27 PurchasePro to recognize the revenue from the transaction and continued to carry the 28 purchase price on its accounts receivable . Pro-After has filed suit against Future

40 1 Media Products in an attempt to collect this amount . 2 d. The InsureZone Transaction (Part 2) 3 105 . Towards the end of the first quarter 2001, after InsureZone had withhel d 4 payments for approximately 4 months, Defendants recognized this as an opportunity 5 to convert the preferred supplier relationship into a marketplace software license so 6 they could immediately recognize additional revenue . Defendants convinced 7 InsureZone to purchase a marketplace software license by persuading them that this 8 would allow InsureZone to avail itself of PurchasePro ' s strategic alliance with AOL, 9 through InsureZone ' s Vertical Foundation Agreement with AOL . Defendant 10 Anderson adm"tted under oath, that after discussing the matter with one or more 11 senior officers at PurchasePro, PurchasePro secretly converted InsureZone's existing 12 contractual obligation to pay PurchasePro $ 180,000 pursuant to the preferred 13 supplier agreement that was entered into on August 25, 2000 (InsureZone Part 1) 14 into the price for a marketplace license . 15 106 . PurchasePro' s sales representative McClure, with the knowledge an d 16 approval of PutchasePro's senior officers, i.e., the PurchasePro Defendants, orally 17 informed InsurcZone that they would not be required to make any further payments 18 under the Preferred Supplier Agreement, but could retain all of the benefits through 19 a separate Vertical Foundation Agreement with AOL. Therefore, on March 30, 20 2001, Purchase P'ro and InsureZone signed an agreement whereby InsureZone would 21 pay $180,000, the same amount as the balance remaining on the Preferred Supplier 22 Agreement, for a marketplace software license . Defendant Anderson admitted under 23 oath that, in effect, PurchasePro gave away the marketplace license to InsureZone 24 for $180,000, the amount that InsureZone already owed PurchasePro, so that the 25 $180,000 would falsely appear to be a new marketplace license sale. 26 107 . Morever, when told to do so by a co-conspirator within PurchasePro , 2 7 Anderson signed a PurchasePro internal confirmation letter backdated by Anderso n 28 to March 30, 2C01, the last day of the first quarter . In that letter, Anderson admit s

41 that he lied to, and otherwise deceived, PurchasePro's auditors when he stated that 2 PurchasePro had not made any other unidentified or undisclosed oral agreements, 3 written obligati ons to deliver future services to InsureZone that were related to the 4 sale of the marketplace license . Regardless, the software that was shipped to 5 InsureZone w _as a non-operational skin that was never made functional, and 6 InsureZone never made any further payments under the agreement . 7 108 . However, as revealed by internal e-mails dated March 30, 2001 , 8 between Todd Lehtonen, PurchasePro's general counsel, McClure, Miller and 9 Anderson., the marketplace software license agreement did not specify that the 10 remaining payments were no longer due and owing under the Preferred Supplier 11 Agreement. Consequently, even though the contract had already been signed so 12 PurchasePro could recognize the revenue in the first quarter of 2001, throughout 1 3 early April, and after the close of the first quarter, Anderson, Miller and McClure 14 continued to negotiate with InsureZone regarding additional language to be included 15 in an addendum to extinguish InsureZone's duty to pay the remaining balance under 16 the Preferred Supplier Agreement. 17 109 . For example, in an e-mail from Lehtonen to Anderson and McClure , 18 dated March 30, 2001, concerns are expressed about the emphasis that PurchasePr o 19 placed on being able to recognize the revenue from such secret end of the quarte r 20 transactions and the manner in which Defendants reviewed and structured the deals : 2 1 Given Scott Miller's concerns . . letting PPRO and InsureZone 22 terminat ;~ the Preferred Supplier deal may be problematic . Its sic] one thing if ill we risk is not being able to recognize $180k . low I'm 23 concernf,d we might be deemed to have given away a Marketplace License Agreement for 0$ which might have more wide ranging 24 negative accounting impact. 25 110 . In subsequent e-mails between the same parties dated April 9 and 11 , 26 2001, it becomes clear that PurchasePro still attempted to insert the agreement to 27 extinguish InsureZone's obligations under the Preferred Supplier Agreement into an 28 addendum to InsureZone's Vertical Foundation Agreement with AOL . Yet despite

42 1 the execution of the marketplace software license agreement, PurchasePro failed to 2 ever provide InsureZone with either operable software or the modifications required 3 to make InsureZone's preferred supplier arrangement operational . Consequently, 4 InsureZone ref used to make any further payments to PurchasePro under either the 5 Preferred Supplier Agreement or the marketplace license agreement . Nevertheless, 6 Defendants recognized the full amount of the marketplace license agreement as 7 revenue for the first quarter 2001 and continued to carry the balance due under th e 8 Preferred Supplier Agreement on the Company's accounts receivable . In fact Pro- 9 After, as debtor in possession for PurchasePro , has recently filed suit against 10 InsureZone seeking payment of the balance due under both the Preferred Supplier 11 Agreement, and the marketplace software license agreement, even though 12 PurchasePro failed to fulfill its obligations to make either the software or the Internet 13 platform for In ;ureZone's preferred supplier status functional , 14 e. The Homestore.com Transactio n 15 111 . During the first quarter 2001, AOL also strong-armed Homestore .com 16 into purchasing for $1,000,000 from PurchasePro a marketplace software license that 17 was not operational, not wanted by Homestore .com, and was never made functional . 18 In exchange, AOL entered into a secret side agreement with Homestore .com in 19 which AOL promised that it would give Homestore .com the same or a greater 20 amount in advertising and placement on its website . The PurchasePro software 21 provided no benefit to Homestore.com and was never used by the company . 22 Defendants knew at the time the secret side agreement was entered into tha t 23 Homestore.com would have been unwilling to buy the PurchasePro marketplac e 24 software licens :, absent the side agreement . 25 112 . By September 2002, the SEC and the DOJ had commenced 26 investigations into the accounting irregularities posed by this round trip transaction . 27 These investigations, in part, led to three Homestore .com executives pleading guilty 28 to charges of securities fraud .

43 f. The BizPro Link.com Transactions 2 113 . Based upon information provided by BizProLink.com, Inc ., and its 3 successor in interest, BizProLink, LLC (together "BizProLink"), in March 2001, 4 AOL executives contacted BizProLink seeking to establish a "global partnership" 5 whereby BizProLink would create industry tailored small business content for 6 AOL's Netbusiness venture . AOL entered into this Netbusiness Integration 7 Agreement with BizProLink on April 11, 2001, whereby BizProLink would provide 8 these services and receive the right to place advertisements and banners on the AOL 9 network. However, in conjunction with BizProLink's agreement with AOL, it was 10 required to enter into a preferred supplier agreement with PurchasePro . Specifically, 11 BizProLink was informed by AOL Senior Account Executive Glenn Caruso that "in 12 order to enter into this relationship with AOL, BizProLink must sign a contract with 13 PurchasePro ." This is confirmed by an internal e-mail from G . Caruso to Steve 14 Sponder, President and CEO of BizProLink, on April 10, 2001, 3 :13 PM, inquiring 15 about the payment status . Glenn Caruso asks : 16 "Just wanted to confirm that you've wired the $130k for the Netbusiness agreement to our American Online bank account (you're 17 rsicl S l Ok hold check applies to the $140k initial payment for Netbusiness). 18 And, I' m assuming, a check went out with the signed PurchasePro 19 agreement ? 20 Please confirm, Thanks, Glen . 21 114. Moreover, the PurchasePro marketplace software license agreemen t 22 entered into between Robert Layne, SVP Sales and Strategic Development of 23 PurchasePro, and Steve Sponder, President and CEO of BizProLink, on April 9, 24 2001, was subsequently sent to Colburn, President of Business Affairs and 25 Development at AOL to confirm this request. Thereafter, on April 11, 2001, a check 26 in the amount of $220,000 for a preferred supplier and marketplace software licens e 27 agreement was sent by Kevin Goch, EVP Operations of BizProLink, to Sheila Stuey, 28 who was in the Accounts Receivable Department at PurchasePro . Based solely upo n

44 1 the secret side agreements, including promises of future business and advertising on 2 the AOL network, BizProLink entered into a preferred supplier agreement and a 3 marketplace software license with Defendants, paying PurchasePro $220,000 in th e 4 11 process . 5 115 . In reality, the PurchasePro software provided no benefit to BizProLin k 6 11 and was never .used by the company. Defendants knew at the time the secret sid e 7 agreement was entered into that BizProLink would have been unwilling to procure 8 the software license from PurchasePro absent the side agreement. Based upon Rule 9 26 Statements filed by BizProLink and AOL in pending litigation between the 10 parties, defendants Miller, Anderson and McGhee, at a minimum, knew of th e 11 relationship between the parties and the terms of the secret side agreement. 12 116 . The "roundtrip " transactions identi fied above constituted a material 13 portion of PurchasePro's total revenue in the first quarter of 2001 . The total revenue 14 recognized by the Company with regard to the Chinadotcom , Bigstep, Future Media 15 Products, Homestore. com, InsureZone and BizProLink transactions was $8 . 5 16 million, which was ultimately a significant and material amount of the Company's 17 first quarter revenues . 18 C. False And Misleading Revenue Recognition 19 Through The Overstatement Of Subscription Revenue s 20 117 . PurchasePro's subscriber revenues consisted of recurring payments 21 made by subscribers to access its supposed Global Marketplace . During the Class 22 Period, these fees varied from $39 to $99 dollars per month based upon the 23 individual contract. It was common for "subscribers" to enroll in the service through 24 a promotional reduced enrollment fee and be billed thereafter on a monthly basis . 25 Promotional enrollments usually varied from a period of three to six months, but in 26 some instances would extend to one year . The terms of the enrollment required the 27 subscriber to commit to payment for the entire promotional period in advance, 28 whether it was three months or one year. According to former employees ,

45 1 PurchasePro would then recognize all of the revenue from the promotional period 2 upon receipt as opposed to properly allocating the revenue over the period of service 3 in accordance with GAAP. 4 118. It was a common occurrence, according to former employees, for a 5 majority of the customers to enroll through a promotional offer, such as those 6 purportedly purchased by AOL to assure AOL's ability to recognize the maximum 7 amount of revenue under the Warrant Agreement, but to never access or use the 8 service and to never pay any additional monthly subscriber fees once the 9 promotional periods expired. Nevertheless, PurchasePro maintained such non- 1 0 paying customers on their roster of members and continued to record their monthly subscription revenues and related accounts receivable . In fact, some of the most 12 prominent customers that the Company boasted as using their marketplace -- 13 including the Phoenix Suns, the Arizona Diamondbacks, Carnival Cruise Lines, 14 Bank One Ballpark, America West Arena and ILX Resorts -- publicly admitted that 15 they never "actually purchased anything" because executives were not convinced it 16 would recoup the cost of membership . 17 119 . Through these inflated membership numbers, at various times 18 throughout the Class Period, defendant Johnson publicly boasted that PurchasePro's 19 number of paying subscribers was growing . However, according to former 20 employees of the Company in the finance and IT departments, the actual number of 21 "true users" on the PurchasePro system varied from 1%-9% of the overall numbers 22 being reported to the investing community . The remainder of PurchasePro's 23 "subscribers" that were maintained on the Company's roster were non-paying and 24 non-participating customers that, as stated by one company, "were just kicking the 25 tires ." These non-users were retained on the Company's roster after they ceased 26 making payments, materially adding to the reported amounts of the Company's 27 accounts receivable . 28 120. The number of non-users carried on the accounts receivable was furthe r

46 1 exacerbated when PurchasePro entered into "joint development " deals with AOL. 2 There was a glitch in the software programming that linked AOL subscribers to the 3 registration forms for PurchasePro such that each time an AOL subscriber began to 4 register for the PurchasePro Global Marketplace, whether or not the registration 5 procedure was completed, a new account was established in PurchasePro's account s 6 f receivable . Former data entry personnel estimate that this glitch alone wa s 7 responsible for creating over 100,000 non-paying accounts for AOL subscribers who 8 did not even know they had accessed the PurchasePro system . Thus, several of the 9 non-paying AOL subscribers had multiple accounts, none of which were ever paid 10 or used . According to former data entry personnel, this ultimately led to the creation 11 of over 500,000 accounts, none of which were paying. 12 121 . Furthermore, according to former employees, PurchasePro never 1 3 I conducted credit checks on any new customers during the Class Period . Moreover, 14 despite the fact that the Company's accounts receivable skyrocketed during the Class 15 Period, PurchasePro did not have adequate collection procedures in place to collect 16 these receivables . Instead, the Company hired one contract employee to handle 17 collection of all outstanding accounts receivable . Thus, throughout the Class Period, 18 the Company had no reasonable expectation that it would actually be able to collec t 19 these fees . Nevertheless, the Company continued to record these subscriptio n 20 transactions as receivables and related revenue throughout the Class Period . 21 122. These factors, which include continued non-payment of monthl y 22 subscription revenue, lack of any assessment of customer creditworthiness, lack of 23 adequate collection and data processing departments and erroneous processing of 24 fictitious customer accounts clearly resulted in PurchasePro improperly recognizing 25 significant revenue without persuasive evidence of an arrangement and without 26 adequate assessment of creditworthiness . See ARB 43, Chapter IA, and Accounting 27 Principles Board ("APB") 10, ¶12 . 28 123 . Defendants, and in particular the PurchasePro Defendants, were aware

47 1 of these operating issues, the fact that many of PurchasePro's monthly subscribers 2 were not paying and that the Company's customer database was inaccurate, but they 3 still chose to materially overstate recorded subscription revenues in order to support 4 their claims of continued revenue growth . They did so even though they knew that 5 recorded revenues and receivables were not fairly presented in accordance wit h 6 II GAAP . 7 D. Understatement Of Required Allowance For Doubtful Account s 8 124. As discussed herein, PurchasePro did not perform any form of credit 9 approval during the Class Period and had insufficient personnel staffing to follow-up 10 on collections. Further, the Company's collections significantly trailed the amount 11 of revenue being recorded which should have caused great concern among the 12 PurchasePro Defendants given the significant amount of supposed monthly 13 subscription revenue that the Company was reporting . In addition, accounts 14 receivable for PurchasePro at the end of fiscal year 1999 was approximately 15 $1,950,000, compared to over $23,000,000 for the end of fiscal year 2000 . At the 16 same time, the reserve for such amounts for the end of fiscal 2000 wa s 17 approximately $2,500,000 . Since the receivables of the Company were not truly 18 collectible, the reserve for such amounts was materially understated and improper . 19 125 . The Company's receivables were increasing proportionately more then 20 its revenues . The Company, as a result of these collection issues, should have 21 further increased its allowance for doubtful accounts receivable . The Company's 22 collections, as a percentage of its revenues on a quarterly basis, were materially less 23 than 100% throughout the Class Period. 24 126 . Under GAAP, the Company is required to record timely reserves to 25 adjust the carrying amount of its accounts receivable to the amount expected to be 26 collected. See Financial Accounting Standards Board ("FASB") 6, ¶34, and FASB 27 5, ¶¶3 and 8 . An estimated loss should be accrued by a charge to income, if both of 28 the following conditions are met:

48 1 a . Information available prior to issuance of the financial 2 statements indicates that it is probable that an asset had been 3 impaired at the date of the financial statements . 4 b . The amount of loss can be reasonably estimated . 5 127. The PurchasePro Defendants , were aware of PurchasePro ' s accounts 6 receivable/collection issues and failed to timely and accurately provide for a reserve 7 for doubtful accounts . This resulted in material understatements of the Company's 8 general and administrative expenses and its net losses during the Class Period . FASB 9 No. 5, ¶ 22 . 10 E. False And Misleadin Revenue 11 Recognition Through Back Dating Of Key Contracts 12 128 . Throughout the Class Period, PurchasePro improperly recognized 13 recorded revenues from contractual agreements that had not been fully executed . In 14 fact, as stated above, and according to former employees of the Company, 15 PurchasePro recognized revenue from contracts that were fraudulently back-dated 16 so that the revenue from those contracts could be immediately recognized . 17 129 . It was PurchasePro's customary business practice to reflect the terms 18 of its arrangements providing for the sale of its marketplace software licenses an d 19 related services in written contracts. GAAP is unequivocal in requiring that before 20 any revenue can be recognized from such arrangements, "evidence of the 21 arrangement is provided only by a contract signed by both parties ." SOP 97-2 . 22 130 . A former key financial employee has said that at the end of eac h 23 quarter, management would analyze the recorded revenue, versus the publically 24 projected revenue, and for each quarter the Company would be short of its financial 25 goal. Company management would discuss pending large contracts that may have 26 existed at the end of the quarter. The former employee was then instructed by 27 PurchasePro management, and in particular defendant Miller, to "go find the 28 revenue" necessary to make the revenue goal for the quarter . This former employee

49 1 would then contact the sales people involved in pending large contract deals . If 2 signatures were not available until after the quarter closed, the date on the contrac t 3 11 was changed by the sales person involved to falsely reflect that the contract was 4 executed in the previous quarter . 5 131 . This has been confirmed by defendant Anderson, who admitted under 6 oath that he signed a PurchasePro Internal Confirmation Letter backdated by 7 Anderson to March 30, 2001, the last day of the first quarter . In 'the letter, Anderson 8 admitted that he lied to and otherwise deceived PurchasePro's auditors when h e 9 stated that PurchasePro had not made any other unidentified or undisclosed oral 10 agreements, written agreements or obligations to deliver future services to 11 InsureZone that were related to the sale of the marketplace software license . 12 132 . This former employee stated that these contracts were for amounts 13 ranging from $50,000 to millions of dollars . The contracts typically were to engage 14 PurchasePro to build marketplaces for the customer involved. Certain former 15 employees have said that all of the revenue from these transactions was recognized 16 immediately even though actual work on these marketplaces did not start for two to 17 three months later, if ever. 18 133 . SOP 97-2, ¶74, mandates that companies use "contract accounting" if 19 the sale involves "an arrangement to deliver software or a software system either 20 alone or together with other products or services, which requires significant 21 production, modification or customization of software ." PurchasePro's transaction s 22 met this criteria . In applying contract accounting, PurchasePro was required to use 23 either the percentage-of-completion method or the completed contract method . See, 24 SOP 97-2, ¶¶74-75 . As long as the Company had "reasonably dependable" cost 25 estimates, it could use the percentage-of-completion method. However, this would 26 have required PurchasePro to defer the majority of revenue to future periods on 27 properly executed contracts . These contracts were not even executed prior to the 28 quarter end, so therefore no revenue should have been recorded in connection wit h

50 iI these contracts . 2 134 . Thus, Defendants , and particularly the PurchasePro Defendants , 3 knowingly violated GAAP by recognizing revenues from software licensing 4 arrangements prior to their bi-lateral execution . The Company also recognized all 5 respective revenues from these un-executed contracts even though substantially all 6 work associated with delivery of a working product was not to be performed until 7 several months later, thereby requiring deferral of the majority of the revenue 8 associated with a properly executed contract . As a result, not only were 9 PurchasePro's revenues inflated, and net losses materially understated, but the 10 Company's representations of conformance with SOP 97-2 and GAAP were false 11 and misleading . 12 F. False And-Misleading Revenue 13 Recognition On Future Maintenance And Hosti n 14 135 . PurchasePro also charged recurring maintenance and hosting fees to 15 third party licensees. During the Class Period, defendant Johnson claimed and 16 represented to investors that such hosting and maintenance fees, over the life of th e 17 contract, would approximate 50% of the cost of the license in recurring maintenance 18 and hosting revenue . 19 136. These maintenance and hosting fees, however, did not commence until 20 the program was fully functional and the third party marketplace was operational . 21 Therefore, such revenues would not commence for a period of six weeks to eighteen 22 months from the actual signing of the contract. 23 137. Moreover, as set forth above, during the Class Period, PurchasePro and 24 AOL entered into round trip transactions with various third parties where the 25 PurchasePro marketplace software licenses were only purchased due to secret side 26 agreements of promised investments by or sales of goods and services to 27 PurchasePro, PurchasePro senior officers or AOL . According to former PurchasePro 28 employees, the customers themselves and the admitted testimony of defendan t

51 1 Anderson, many of these third parties were unaware of the purpose and function of 2 the license and as such never implemented the software . This resulted in no 3 maintenance or hosting revenue whatsoever for PurchasePro . 4 138 . Asa result of these factors, PurchasePro was never able to generate the 5 recurring maintenance and hosting revenue that it represented would naturally follow 6 the execution of the marketplace software license. 7 G. False And Misleading Revenue 8 Recognition On Marketplace Software 9 Licenses For Non -Functional Softwar e 10 139. According to SOP 97-2, ¶7, for software arrangements, in addition to 11 the delivery of software or a software system, which require significant production, 12 modification or customization of software, the entire arrangement should be 13 accounted for in conformity with Accounting Research Bulletin ("ARB") No . 45, 14 Long-Term Construction-Type Contracts and SOP 81-1, Accounting for 15 Performance of Construction-Type and Certain Production-Type Contracts, The 16 proper accounting for these types of contracts is one of two generally accepted 17 accounting methods : the percentage of completion method or the completed contract 18 method, which would require full deferral of revenue and profit until the contract i s 19 completed. 20 140. According to SOP 81-1, ¶23, the percentage of completion method is 21 preferable as an accounting policy in circumstances in which reasonably dependable 22 estimates can be made and in which all of the following conditions exist : 23 1 . Contracts executed by the parties normally include provisions 24 that clearly specify the enforceable rights regarding goods or 25 services to be provided and received by the parties, the 26 consideration to be exchanged and the manner and terms of 27 settlement ; 28 2 . The buyer can be expected to satisfy his obligations under th e

52 1 contract; and 2 3 . The contractor can be expected to perform his contractual 3 obligation . 4 141 . According to reports received. from several key financial an d 5 operational former employees of PurchasePro, a high percentage of these 6 transactions ( 60-80%) for the delivery of software licenses and marketplace designs 7 were done at the end of the quarter when little time and effort was expended on the 8 customization of the product . These transactions were for anywhere from $50,000 9 to millions of dollars and , according to former employees, substantially all revenue 1 0 was improperly recognized "up front," i.e., at the time of the delivery of the non- working and non-customized product . Proper revenue recognition under GAAP 12 would require the respective revenue from these transactions to be recorded in 13 accordance with the time, effort and cost that was involved with getting the product 14 to work, most of which would occur later at the time of customization . 1 5 142 . To conceal the fact that this software was not yet operational , plaintiffs' 16 investigation, together with testimony provided by former employees, has revealed 17 that Defendants utilized a scheme which included sham transactions whereby 1 8 PurchasePro would ship a non-functioning "skin" to the customer . In many 19 instances, such as the round trip transactions identified above, the customer was only 20 purchasing the marketplace software license to obtain investments or additional sales 21 in exchange and no further work was ever performed and the software was neve r 22 made operational . 23 143 . As such, PurchasePro knowingly violated GAAP by recognizing all of 24 the revenue up front on these licensing revenue transactions in order to meet or 25 exceed Wall Street expectations and maintain the illusion of consistent revenue 26 growth and a reduction of its net loss. 27 144 . As a result, not only were PurchasePro's revenues materially inflated 28 during the Class Period, but PurchasePro's representation of conformance with SO P

53 1 97-2 and GAAP were false and misleading . Thus, the financial results detaile d 2 below, that were issued by the Company during the Class Period, were materially 3 false and misleading when disseminated due to Defendants' fraudulent activities . 4 V. INFORMATION PROVIDED BY FORME R 5 EMPLOYEES OF PURCHASEPRO 6 145 . During the course of plaintiffs' investigation, numerous former 7 f employees of the Company have been contacted and interviewed . Plaintiffs also 8 further corroborated the information provided by these employees through the 9 evaluation of discovery in third party actions to which these former employees were 10 not parties, including the review of deposition transcripts of certain of these forme r 11 employees. The former employees listed below held managerial and executive 12 positions in accounting, operations, finance, business development, corporate 13 development, data entry, accounts receivable and contract administration during the 14 Class Period. For the purpose of reference, the following allegations are a 15 compilation of the information provided by these former employees of the Company. 16 These individuals had first-hand knowledge of PurchasePro's true state of affairs , 17 prior to, during and after the Class Period . 18 146 . Former Employee 1 ("Employee I") was employed by PurchasePr o 19 from September 1997, until August 1999, as an Accounting Manager and was 20 responsible for Accounts Payable and Accounts Receivable . Employee 1 was hired 21 by and reported to Brian Cole originally, and then later to defendant Miller . 22 Employee I also confirmed that Brian Cole and defendant Miller both reported 23 directly to defendant Johnson. The information provided by Employee 1 . is 24 important because it provides some background as to the Company's state of affairs 25 just prior to the beginning of the Class Period s 26 (a) When Employee I joined the Company, Brian Cole was the onl y 27 28 ' For the purpose of this complaint, all former employees of the Company will be referred to in the masculine, regardless of their true gender . 54 1 person in accounting. Employee I described the accounting department and 2 financial software that was used by the Company . PurchasePro was using Excel 3 spreadsheets for all accounting records . Later, the system was converted to MAS 90 . 4 11 After that, and prior to the Class Period, records were moved from MAS 90 to Oracl e 5 fj Financials and after that, to Erogo software . 6 (b) Employee 1 stated that prior to the Class Period, PurchasePr o 7 improperly reported revenue by booking the prepaid portion of new contracts 8 immediately, rather than allocating the revenue over the number of months that th e 9 service was actually provided. Further, Employee I said that the terms and 1 0 conditions in sales contracts were so inconsistent that it made bookkeeping not only incredibly difficult, but prone to error. Moreover, virtually no effort was put into 12 collections and PurchasePro management, including defendant Miller, refused to let 13 this former employee write off bad debts which caused accounts receivable to grow 14 dramatically . 15 (c) On the issue of "customer creditworthiness," Employee 1 said tha t 16 the creditworthiness of customers was not confirmed prior to the Class Period . 17 Employee I stated that when a copy of a contract was received, it was immediately 18 entered into the system for billing purposes . A contract would typically list the 19 billing information, the method of payment, the name of the software package that 20 was being purchased, what it included, the price on a monthly basis, and any other 21 terms and conditions . This former employee stated that packages over $9 9 22 sometimes went to defendant Johnson, or defendant Carton, for approval . This 23 former employee had been directed to assume that all contracts were "okay" and to 24 immediately book them as revenue. In other words, because upper management 25 wanted people using the system, PurchasePro would "pretty much" let anyone use 26 the software if they would sign a contract, regardless of their creditworthiness . This 27 information i~ important because throughout the Class Period, defendants ha d 28 unequivocally stated that the credit of all customers was not only checked, but

55 1 approved by the Company's auditors . 2 (d) Employee l also stated that PurchasePro' s "accounting controls " 3 were seriously deficient during this time frame . In fact, Employee I expressed great 4 frustration with the lack of accounting controls at PurchasePro prior to the Class 5 Period. For example, Employee 1 said that one of the major "rules" in Company 6 contracts was that the client had to pay the first three months in advance and that 7 many times that "rule" was waived . In other words, even though this requirement 8 was not stricken from the contract, the salesperson would get the client to sign the 9 contract and at the same time, not make them pay the balance due . Employee 1 said 10 that this type o verbal agreement (the true nature of the deal) was repeatedly being 11 made with clients and superseded written agreements . Employee I felt that the 12 waiver of such fees in itself would lead to the artificial inflation of revenue since th e 13 contracts were not modified accordingly. The lack of Company accounting controls 14 is not only one of plaintiffs' primary allegations, it was the subject of an 15 investigation by the SEC . Further, the investigation resulted in the Company being 16 enjoined from violating the Exchange Act. Thus, not only is this information highly 17 relevant, it directly supports plaintiffs' allegations . 18 (e) Employee 1 also described the booking of revenue at the Company 19 during his tenure . When an advance payment on a contract was made, the entire 20 amount of the payment would be booked as one-time revenue, whether the payment 21 was for three months or for one year, depending on a particular deal . Any other part 22 of the revenue that was part of the contract was considered recurring and was 23 accounted for on a monthly basis . For example, Employee I said that one off-site 24 sales representative, Barbara Cohen, was selling one year contracts for 25 approximately .$2,000 each to buyers. All of these contracts were booked as one- 26 time revenue and no accruals were done . This would make the Company's 27 financials look very good when a great number of these contracts were sold in one 28 month.

56 1 (f) Employee 1 also indicated that growth in "accounts receivable" wa s 2 misleading because it did not represent a strong demand for PurchasePro's products, 3 but rather, the lack of payment by its customers . Employee 1 explained that 4 PurchasePro marketed to both buyers (which included large and small retail 5 businesses) and sellers (such as Gateway and AOL) . However, Employee 1 said that 6 the focus of PurchasePro's business was on sellers . By way of example, many of 7 PurchasePro's customers were in the hospitality industry . So a buyer might get on 8 the "system" and enter information indicating a need for towels . The software woul d 9 search for all sellers of towels and would send a request for a bid to each of them. 1 0 Because the Company's software was promoting sales to both large businesses, as well as smaller. companies, the bigger companies were competing head to head with 12 the smaller ones. As such, Employee I stated that many of the smaller businesses 13 would give up and not pay their PurchasePro invoices because they had not won any 14 bids. However, Employee 1 said that while this would cause the size of account s 15 receivable to increase, it was not representative of the true number of paying 16 customers . Further, since PurchasePro did not have anyone that was actively 17 pursuing collections, these receivables were not being written off. In fact, just 18 months before the beginning of the Class Period, Employee 1 requested permission 19 from management, specifically defendant Miller, to write-off these uncollectible 20 receivables . However, Employee 1 said that these requests were refused . Moreover, 21 Employee 1 was not even allowed to place a hold on delinquent accounts which 22 would have prevented these customers from using PurchasePro software . 23 (g) Internal Company documentation confirms the misconduct allege d 24 by this formes' employee and other farmer employees contacted by plaintiffs . 25 Further, the documentation shows that the misconduct continued throughout the 26 Class Period. Specifically, in an e-mail written on September 27, 2000, from Joe 27 Macy to Tracy Teague entitled "Duplicate Accounts are an Increasing Problem," 28 Macy notes that :

57 1 Multiple accounts for a single Supplier company are quickly becoming a serious problem. In many cases, the problem is unwanted duplicate 2 accounts which we have no way to prevent, track, or eliminate at present. . . 3 4 Where multiple accounts for a single Supplier company are desired, we 5 need to enable means of account identification beyond what we currently possess . For example : we have at least 67 accounts for Sysco 6 Food Service currently in the system (and there are many more to come as we move ahead in our project and interface with them) . 7 Additionally, in an e-mail written on September 1, 2000, from Jeannie Caruso 8 to Randy Gabe and defendant Miller, entitled "Trial Accounts on PPRO," Carus o 9 notes : 10 Randy ~ Scott - Please let me know as well what your thoughts are on 11 this. We probably need to define what are the best steps to take in the interim, and what is the long term solution . Pulling these accounts off 12 will of course affect the numbers of users we have reported to have to the public, but the fact remains, we can never track the use of users or 13 true revenue generated per user with the information collected currently in our databases.. . 14 147 . This foregoing information shows how PurchasePro was being ru n 15 before and during the Class Period . Moreover, this has been confirmed by 16 PurchasePro ' s former accountants, Andersen, LLP. In a management letter dated 17 May 30, 20006 (two months after the start of the Class Period), and addressed to the 18 "Management . nd the Board of Directors ofPurchasePro. com, Inc.," Andersen, LLP 19 stated, in part, that (i) the Company does not have written policies and procedures 20 for most accounting practices ; (ii) sales personnel or senior management have 21 historically negotiated contracts without adequately involving the finance and 22 accounting functions to ensure that any potential accounting issues are reviewed and 23 resolved before the contract is finalized; and (iii) management changed its reserve 24 methodology several times during 1999 which leads to the loss of integrity in th e 25 26

27 b While the letter referred to fiscal 1999, the fact that the letter was dated 28 May 30, 2000, suggests that none of these problems had been corrected by that date. See plaintiffs' Request for Judicial Notice, Exhibit A . 58 l system. Unfortunately for the investing community, things only changed for th e 2 worse in the upcoming months . 3 148 . Former Employee 2 ("Employee 2") was employed by PurchasePro 4 from November 1999 until October 2001 . During his entire tenure, he worked in th e 5 finance department and was responsible for making revenue and expense 6 projections. Fe was also responsible for making credit recommendations to the 7 credit committee. Employee 2 primarily reported to defendant Miller during the 8 Class Period. He provided plaintiffs with important information concerning ho w 9 Company revenue was recognized and by whom . 10 (a) Employee 2 stated that throughout the Class Period, projections of 11 both expenses and revenues were generated for upper management's review . 12 Further, the model of revenue projections was based on the following sources of 13 information which included : (i) deals in progress (provided by the sales team) ; (ii) 14 "additional" sales information provided directly by the CEO, defendant Johnson ; 15 (iii) information on existing contracts ; and (iv) information from the existing 16 customer base . 17 (b) In addition to the foregoing, Employee 2 said that revenue was 18 derived from the following sources : (i) selling licenses for Company software so that 19 customers could set up a marketplace (non-recurring revenue) ; (ii) hosting and 20 maintenance fees for the licenses (recurring revenue) ; (iii) Internet advertising 21 revenue from "banners" or "pop-ups" on PurchasePro's own marketplace (recurring 22 revenue); and (b.v) subscription revenues (derived from PurchasePro's use of its own 23 marketplace"" . Each marketplace would have its own subscribers . Each subscriber 24 would be a business that would pay a fee between $19-$100 per month . In theory, 25 by logging into a marketplace, an individual or business would have access to 26 millions of new customers (recurring revenue) . Employee 2 also noted that if a 27 company was not creditworthy, it was usually pretty obvious. 28 (c) According to Employee 2, defendant Johnson was very activel y

59 1 involved with sales, and the controller of the Company played a part in the 2 classification of revenues . This is important because it confirms Johnson's 3 knowledge of the Company's true financial condition, including revenue 4 11 recognition, throughout the Class Period . 5 (d) Employee 2 also explained that "license" revenue and revenue s 6 i from the "sale of several marketplaces" were considered to be one and the same . 7 Employee 2 further confirmed that PurchasePro sells "marketplace software" and 8 that each time it sells a marketplace, that is equivalent to selling a license to run th e 9 PurchasePro Software . 10 149 . Former Employee 3 ("Employee 3) was employed by PurchasePro 11 from November 1999, until April 2002 as Director of Business Development . He 12 was primarily responsible for getting large customers that would potentially add a 13 significant number of new users of PurchasePro ' s system. He reported to Jim 14 Scholes ("Scholes" - VP of Business Development) who reported to defendant 15 Anderson (VP of Strategic Development) who in turn reported to defendant Johnson . 16 The information provided by this employee confirms that PurchasePro had a trac k 17 record of misrepresenting the true number of paying customers to the public, and the 18 lack of demand and effectiveness of PurchasePro's product, both during and after the 19 end of the Class Period . 20 (a) Employee 3 stated that in July of 2001, he met with a senio r 21 financial analyst for PurchasePro, Dave Clark ("Clark") . During that conversation, 22 Employee 3 noted to Clark that, during analyst conference calls, Employee 3 had 23 heard defendant Johnson state that the Company had 350,000 customers . Moreover, 24 when Employee 3 inquired of Clark why PurchasePro did not have more cash if the 25 Company had so many customers, the response by Clark was that "a lot of the 26 information that PurchasePro told the public was not true ." Clark also stated that the 27 Company might only have 20,000 paying customers (this is months after the end of 28 the Class Period) and that many of PurchasePro's transactions were nothing mor e

60 1 II then handshake deals which didn't involve cash . 2 (b) Employee 3 also stated that as pa rt of the PurchasePro training 3 program for the AOL sales force, he witnessed other employees of PurchasePro lying 4 to AOL salespeople in January 2001 (during the Class Period) when PurchasePro's 5 sales people set expectations regarding the speed of PurchasePro's sales . 6 Specifically, Employee 3 said that PurchasePro lied to AOL employees by stating 7 that each salesperson would be able to close two large deals a quarter worth between 8 $250,000 to $1,000,000 each. Employee 3 knew this to be untrue , but refrained from 9 saying anything at the time for fear of losing his job. After working for several 10 months with the AOL sales team , Employee 3 ultimately admitted to AOL 11 employees that it had taken him approximately 18 months to sell just one 12 PurchasePro license . This information supports the lack of desirability for 13 PurchasePro's products and the need to enter into the side agreements set fo rth 14 herein in order to sell marketplace software licenses . 15 (c) Employee 3 also stated that, along with other salespeople, they 16 knew that PurehasePro was selling what they call ed "vaporware" (non-functional 17 software ) to tht- business community . Employee 3 was directed by superiors, such 18 as Scholes, to promise customers anything to make them sign a contract . Employee 19 3 said that customers were told that they would get new features which they had 20 requested within 30 days , even though it was known that the features would never 21 be delivered . One example of a promised feature that was made to every customer 22 was the ability of a marketplace owner to collect a percentage of each sale that was 23 sold through the use of their "marketplace" (software they bought from 24 PurchasePro). However, Employee 3 said that the Company didn't have a method 25 for tracking the transactions which would be required to calculate percentages that 26 were due . In fact , even as late as March of 2001, Employee 3 said that when an 27 individual named Sushil Garg of Erogo was brought in and placed in charge of the 28 entire PurchasePro product to implement this feature , it still didn 't work.

V 61 1 (d) Employee 3 further stated that the way the Company 's sales people 2 were told to sell the product was unethical because PurchasePro didn't have the 3 technology it was trying to sell, Employee 3 said that he almost had a sense of relief 4 when customers like Allstate Insurance saw through the Company pitch and told 5 PurchasePro's salespeople to come back when the features they wanted were 6 actually available. 7 (e) As for defendant Johnson's sales involvement, Employee 3 state d 8 I that Johnson closed most of the large deals and that no deals were made without hi s 9 being involved. This confirms what other employees have stated which supports 10 Johnson's knowledge of PurchasePro's true financial condition . (f) Finally, Employee 3 stated that defendant Johnson told Compan y 12 employees that anyone selling their PurchasePro stock options was committing an 13 act of disloyalty and that they were "leaving money on the table ." In light of all the 14 foregoing, Employee 3 left the Company because he felt that Johnson had no 15 business sense or business ethics. 16 150 . Former Employee 4 ("Employee 4") was employed by PurchasePr o 1 7 as Vice President of Corporate Development from February 2000 until October 1$ 2000 . His primary responsibilities included eliminating those portions of 19 PurchasePro that did not make money and structuring new deals with potential 20 customers . He reported directly to defendant Johnson . As with the other 21 information provided in this section, Employee 4's revelations are very important 22 because they directly support plaintiffs' allegations . For example, Employee 4 23 revealed that Johnson wrongfully provided information to analysts, misled analysts, 24 was personally, motivated to increase PurchasePro's stock price and that Johnson 25 "very aggressively" recognized revenue which included making nonsensical deals, 26 including the AOL deal, to achieve his goals . 27 (a) Employee 4 stated that on many occasions prior to, and after, 28 joining PurchasePro, Employee 4 heard Johnson provide financial information t o

62 1 analysts that was not publicly available, in violation of SEC regulations . For 2 example, during the Class Period, Employee 4 heard Johnson tell analysts about 3 "large deals" that were about to close, including the Stratton and Warren acquisition . 4 Employee 4 was surprised by Johnson's behavior because analysts were only 5 supposed to receive publicly available information . Employee 4 confronted Johnson 6 about the inappropriateness of these disclosures and the two of them had many 7 heated discussions on this topic. This information is relevant because, according to 8 Employee 4, Johnson made these disclosures in order to win favor with analysts s o 9 that more of them would cover PurchasePro . 10 (b) Employee 4 also remembered hearing Johnson state the number o f 11 PurchasePro "users," and while Employee 4 did not know the exact number of 12 paying users, Employee 4 knew that it was much smaller than defendant Johnso n 13 had stated. As such, Employee 4 confirmed what other employees have stated, that 14 Johnson's statements were misleading to analysts and to the public . 15 (c) Employee 4 also stated that in the middle of 2000, under Johnson' s 16 direction, PurchasePro created a new way of recognizing revenue . Employee 4 said 17 that a salesperson would make a deal, and enter into a contract, and a softwar e 18 engineer would quickly put together a "skin" of software that would "appear" to be 19 functional . This "skin" would be put together by PurchasePro developers in about 20 5 hours and delivered to the customer . Once this software was available, Employee 21 4 said that accounting would recognize all the revenue from the deal . In other 22 words, the real product that would meet the customer's expectations was not 23 complete and it would take anywhere from weeks to months to finish, if ever . Not 24 only did Employee 4 characterize this as "very aggressive" revenue recognition, he 25 argued with Johnson on this issue repeatedly . Employee 4 stated that between 60% 26 and 80% of all. sales were completed at the end of the quarter under this scenario . 27 (c) Employee 4 also said that the way Johnson was putting deals 28 together didn't make any sense . Employee 4 told Johnson this and explained to him

63 1 why it was wrong. Employee 4 said he was eventually fired because of disagreement 2 with Johnson on this point . As for which deals did not make sense , Employee 4 3 referred to the "warrant swaps" with companies such as Gateway, Computer 4 Associates and AOL, and also stated that PurchasePro and AOL "sold" custome r 5 I lists to one another . 6 (e) Finally, Employee 4 stated that Johnson was trying to achieve 7 growth that paralleled that of Ariba and CommerceOne . This goes directly to 8 Johnson's state of mind, i .e., scienter. Employee 4 said that in order to achieve suc h 9 high growth, PurchasePro needed to receive a larger portion of revenue up front (at 10 the time of delivery) . Employee 4 stated that PurchasePro sold all it could sell in the 11 way of subscriptions . Then, when the Company couldn't get the growth Johnso n 12 wanted (in the middle of year 2000), a different model was used wherein the 13 Company would sell software to outside companies that would then sell 14 subscriptions . This temporarily achieved the growth desired. However, when that 15 didn't work anymore, Johnson started pulling "tricks" that included the warrant- 16 swapping and "aggressive" recognition of revenues -- which included the use o f 17 skins. 18 (f) Finally, Employee 4 said that keeping a high stock price was 19 important to Johnson because he had borrowed money against his stock options and 20 bought more PurchasePro stock . This confirms numerous articles which have bee n 21 discovered by plaintiffs and are discussed in more detail below . Moreover, 22 Employee 4 stated that other executives in the Company had purchased expensive 23 houses by borrowing against their options as well . Hence, Employee 4 said that if 24 the stock price fell, options would significantly lose value and their loans would 25 have been called by their lenders . This goes directly to PurchasePro Defendants ' 26 scienter and helps to explain why they would have engaged in such fraud . 27 151 . Former Employee 5 ("Employee 5") was employed by PurchasePro 28 from June of 1099 until May of 2001 . Employee 5 was initially a Financial Analys t

64 1 at the Company and was then promoted to Assistant Controller. Thereafter, in 2 October 2000, Employee 5 was moved to special projects in customer support and 3 had the title of Applications Analyst until the end of his tenure . During the entire 4 time that this former employee worked in the finance department, he reported to Je ff 5 Ramsey ("Ramsey") who reported to defendant Miller. The information provided 6 by him is very important because it offers exceptional evidence of fraud . Employee 7 5 said that during the Class Period., PurchasePro repeatedly and falsely recognized 8 revenue that belonged in later quarters so that management could "make their 9 numbers" for the current quarter. Moreover, the Company recorded revenues when 10 in fact, no money had been received. Employee 5 also confirmed what other former 11 employees ha""e disclosed, that PurchasePro did not perform credit checks o n 12 customers, even when a large contract was involved . 13 (a) Employee 5 directly dealt with defendants, specifically defendan t 14 Miller. Employee 5 stated that each quarter, upper management had a revenue goal 15 they had to reach . Employee 5 would prepare a financial report a few days before 16 the end of each quarter. Each quarter the report showed that management had not 17 met its goal . T .iere would then be a meeting that included, among others, Employee 18 5, Ramsey, and defendant Miller . Ramsey and Miller would discuss pending large 19 contracts that were about to close. They then instructed Employee 5 to "go find the 20 revenue" necessary to obtain management's goals . In order to "fi nd revenue," 21 Employee 5 would contact each salesperson who was involved in large contract 22 deals describe.] by Ramsey and defendant Miller, and the exact status of the dea l 23 would be obtained. In some cases, if signatures would not be available until after th e 24 quarter closed, Employee 5 said the date on the contract would be back-dated by the 25 salesperson tc falsely reflect the contract closing in the earlier quarter so that 26 PurchasePro c,)uld book the revenue immediately. For each of these large pending 27 deals, PurchasePro would immediately recognize all of the revenue from the deal . 28 Employee 5 stated that many of these large contracts were written for $50,000 t o

65 1. millions of dollars, and were allegedly paid so that PurchasePro would build 2 websites for the company that signed the contract . Employee 5 further stated that 3 PurchasePro would receive some payment up front, while the actual work done by 4 the Company for these websites would not start for at least two to three months . 5 (b) Employee 5 also stated that PurchasePro and AOL had a deal 6 i whereby each would place a "value" on their customer lists . They would then 7 exchange lists. Employee 5 stated that PurchasePro would then book the "value" o f 8 the AOL list(s) as revenue. Importantly, Employee 5 knew at the time that no real 9 revenue was being earned, but he recorded the transactions as instructed. 10 (c) On the issue of "creditworthiness," Employee 5 confirmed wha t 11 other former employees have revealed, that no credit checks were made during th e 12 Class Period. 13 152 . Former Employee 6 ("Employee 6") was employed by PurchasePr o 14 as a Data Entry Manager from August 1997 until July 2002. Employee 6's primary 15 responsibilities included managing the entering of customer lists and sales leads into 16 the Company's databases . At one time, this former employee had as many as 15 17 temporary employees and 12 regular employees reporting to him . Furthermore, 18 Employee 6 reported to, among others, defendant Moskal, Richard Applebaum, 19 Mark McNally, Gary Bennett, Stephen Dawahare, Jeannie Caruso, Dave Rives, and 20 Matt Sorenson. Employee 6 confirmed what other employees have stated, that on 21 multiple occasions, PurchasePro -- through Johnson -- made false public statements 22 regarding the number ofPurchasePro's paying customers . Employee 6 also said that 23 documents were made public (and were never corrected) containing the same false 24 statements regarding the number of PurchasePro's paying customers . This type of 25 information goes directly to the demand for the Company's products and the 26 financial outlook of the Company at the time these representations were made . 27 (a) When Employee 6 was asked about statements that Johnson made 28 during year 2000, regarding the number of "paying customers" in the Company' s

66 1 database, Employee 6 (who handled all of the customer lists) indicated that reports 2 would go out all the time which stated that all of the people in the system were 3 paying customers . Employee 6 said that this "flat out, was not true ." 4 (b) Internal documentation confirms the misconduct alleged by thi s 5 former employee. For example, in an e-mail written by Tracy Teague, Managing 6 Director of Information Systems, to Ralph Ray, Leah Thomas and Justin Carlson, 7 on July 24, 2000, Teague noted his concerns about the free 30 day trial accounts 8 being counted or given to the street as paying customers in the system . Accordingly, 9 in an e-mail he notes that : 10 We currently have 19,535 desktops on the production system. The biggest problem I have with this is that they do not pay, for any of their 11 ac ivity . . . Our only way to control both of these issues is to move them to a demo environment where they can play all they want - but do not 12 have the potential for damaging our data integrity . . . . 13 (c) Moreover, in a series of e-mail exchanges between August 9 and 10 , 14 2000, between John Devlin, Justin Carlson, Leah Thomas, Ramsey, Bryan Gage an d 15 Jason Sadow, entitled "Trial accounts vs Closed accounts," John Devlin noted : 16 We still have TRIAL accounts in production. These accounts have no 17 payment or promise of payment in their foreseeable future to PurchasePro. We need to Close those trial accounts where we have T 18 & C's that have a payment stream promised (besides ZERO). All other Trial accounts needto stay on production and stay on TRIAL status 19 until they can be contacted for conversion in a methodical fashion . These TAL accounts still need to have the ability to create 20 transactions on our network , We report number of accounts on our network and that number has included "TRIAL" accounts. If we 21 change that method our accounts will go from approximately 25k to 10k...... TOTALLY UNACCEPTABLE . In our cleanup of TRIAL 22 accounts , if they are in the CLOSED status they will show our cancellation rates to skyrocket merely as a byproduct of maintenance . 23 ALSO UNACCEPTABLE . 24 [In a response by Leah Thomas, she noted :] 25 YOU ARE CORRECT>>>JR JOHNSON has put the numbers out there and we cant take the large number of trial accounts off at this point . 26 We are widdling away of them by closing them as contracts come in . 27 (d) Employee 6 also saw documents on several occasions that wer e 28 about to be released to the public that included the number of "paying" customers .

67 1 On these occasyons, Employee 6 went directly to defendant Benyo, who was Senior 2 Vice President of Marketing, and told Benyo that the statements were not true 3 because the number of paying customers was not that big . However, Benyo refused 4 to change the documents to show the correct numbers . 5 (e E According to Employee 6, the correct way to calculate the number 6 of paying customers was to only look at the accounts in which a signed contract was 7 in place and where the status was "billable ." Accounts that had a status of "closed," 8 "trial," or "canceled," should not have been counted . Instead of using only the 9 "billable" accounts, the documentation that was produced used the total number of 10 accounts in the: system . For example, Employee 6 said that activities with AOL 11 during and after the Class Period had resulted in over 500,000 accounts being in the

12 system, but no-►e of them were paying accounts, Although AOL had a contract in 13 place with Pun hasePro, and was considered "billable," all of the accounts that were 14 created via ACL were either "closed" or "trial . " 15 (f) In addition, Employee 6 stated that many of AOL's customers were 16 not even aware that they had accounts with PurchasePro . Apparently, the customers 17 had signed up for some type of service provided by AOL and as a result their names 18 were sent over to the Company . Employee 6 said that people would go to AOL or 19 Netscape and would think that they were signing up for small business services, 20 including purchasing services . PurchasePro was the software behind that interface . 21 The customer would provide their information such as company name, contact, 22 address, etc. This information was instantly sent to PurchasePro where a new 23 account would be automatically created . However, Employee 6 said that despite the 24 foregoing, not, e of these "customers" paid PurchasePro for these services and were 25 not even aware; that they were using PurchasePro software . Employee 6 also said 26 that while the plan was to eventually contact these people and convert them to 27 paying customers, that never happened . Employee 6 said that upper management, 28 and defendant'Johnson in particular, was telling the public that all of these account s

68 I were paying cvstomers . 2 (g) Employee 6 also constantly battled with management to remove th e 3 dead accounts from the system . In fact, Employee 6 said that Benyo was "running

4 ~ games" to push the numbers up . Moreover, even after the deal with AOL was dead, 5 defendant Benyo told Employee 6 to keep the dead accounts on the system because 6 it would make the year-end numbers look better for 2001 and 2002. 7 (h) Employee 6 also described Company employee meetings held by 8 PurchasePro wherein defendant Johnson would make comments concerning the 9 number of "paying" customers that were made to the public . Employee 6 said that 10 in conjunction with several other employees, they would all shake their heads in 11 disagreement. According to Employee 6, these types of statements to PurchasePro 12 employees were made on a series of occasions from July 2000 through May 2001 . 13 (i) According to Employee 6, there was also a serious flaw in a certai n 14 software interface which led to the artificial creation of accounts from AOL . Every 15 time information was received via the interface, even if the information was 16 incomplete, the software would automatically create a new account in the 17 PurchasePro system for the new "customer ." Employee 6 stated that it was caused 18 by end-users on the AOL site terminating part of the way through the process to 19 "sign-up" for PurchasePro . However, despite this termination procedure, Employee 20 6 estimated that about 100,000 of the accounts in the PurchasePro system were 21 artificially created as a result of this error. Moreover, Employee 6 stated that upper 22 management was aware of this error, but refused to fix it . The importance of this 23 information is obvious . It supports plaintiffs' allegations that the "partnership" with 24 AOL was little`more then a sham . Further, the warrants being "earned" by AOL for 25 their referral of "customers" was for nothing more then the creation of "artificial 26 revenue." 27 (j) When asked what benefit could be derived from exaggerating th e 28 number of paying customers, Employee 6 stated that it was so PurchasePr o

69 salespeople would be able to convince businesses to join the system . This supports 2 plaintiffs' allegations . By creating artificial demand for the Company's products, 3 it would not only create an air of success in the financial community, it would also 4 inspire others to try the product . However, Employee 6 said this tactic did not 5 always work because certain businesses were quickly discovering that they could not 6 practically use the system . By way of example, Employee 6 said that a business 7 would want to buy some mattresses and it would put out a request to 50 different 8 companies that were in the system and sold mattresses . After a couple of weeks, the 9 customer would have only received 2 proposals . This was because most of th e 10 companies that were in the system didn't even realize they had a PurchasePro 11 account. Employee 6 said that these problems were well known within PurchasePr o 12 and were the subject of many meetings . 13 (k) This account given by Employee 6 is also confirmed by an internal 14 memorandum obtained pursuant to plaintiffs' investigation . In an e-mail dated 15 September 1, 2000, from Leah Thomas to defendant Carton and Randy Gabe, 16 entitled "Trial Accounts on PPRO," Thomas states : 17 I am referring Frances Richards to you regarding 8000 accounts she wants loaded on the system on a trial basis . 18 As you both are aware by doing this we are increasing our number of 19 users, but decreasing our revenue per user . 20 Blair and I have been working very hard to stop this kind of activity out of sales because we already have a high number of users we do not get 21 revenue from because of these diversity initiatives of loading large number of accounts on a trial basis . It is dangerous for us to take them 22 off because our numbers for canceled accounts then rises . 23 (1.) Moreover, in another e-mail from Leah Thomas to Jeannie Caruso , 24 dated September 1, 2000, concerning the same subject, Thomas notes that : "FYI- 25 Tracy Teague suggested that I send her to Chris and Randy for approval on this . I 26 am very uncomfortable with loading that number of trial accounts ." Then in a 27 response from Jeannie Caruso to Randy Gabe and defendant Miller, dated September 28 1, 2000, regarding the same subject matter, she notes that :

70 1 Please let me know what your thoughts are on this . We probably need to define what are the best steps to Take in the interim, and what is the 2 long term solution . Pulling these accounts off will of course affect the numbers of users we have proported to have to the public , but the fact 3 remains, we can never track the use of the users or the true revenue generated per user with the information collected currently in our 4 databases. 5 (ni) Finally, while Employee 6 said that he didn't have any detaile d 6 information regarding how revenues were recognized by accounting , he said that it 7 was a running joke in the accounting department that instead of the Company 8 following "GA-AP" ("Generally Accepted Accounting Principles "), PurchasePro was 9 using "JAAP" ("Junior's Accepted Accounting Principles "). In support of such a 10 statement, Employee 6 said that there were many times when defendant Johnson was 11 told by other executives within the Company that "you can't do this" and he would 1.2 say, "I don't care, do it." 13 153 . Former Employee 7 ("Employee 7") was employed by PurchasePro 14 from September 2000, until January 2001, primarily in Accounts Receivable . His 15 duties included customer service, sending out collection letters, new account data 16 entry, researching customer accounts, updating customer accounts with paymen t 17 information ard assisting with collections . Former Employee 7 was hired b y 18 .Emmeline Plummer and Patty Smith, and his immediate supervisor was Mary 19 O'hara . Through this former employee, plaintiffs were able to confirm that the 20 Company had only one person responsible for all "collections" and that this person 21 was "inundated" with work . This is significant because, as noted above, it created 22 an artificially high level of accounts receivable which was not the result of high 23 demand for PurchasePro's products and services . 24 (a) Employee 7 stated that Sandra Engleheart was in collections and 25 that she was "swamped" with work. Employee 7 also said that when he finished 26 with his own work, he would try and help Engleheart since she was so overloaded . 27 However, even with Employee 7's help, Engleheart could not keep up with 28 collections on PurchasePro's non-paying customers .

71 (b) Thus, growth in the Company' s receivables was not attributable to I high demand for PurchasePro's product, but rather, an unwillingness of its customer s I to pay . 154. Former Employee 8 ("Employee 8") was employed by PurchasePr o from August 1997 until May 2001 . During this time he worked as a Contract 6 Administrator . His primary responsibility was to review contracts and make sure 7 that all of the forms were correctly completed . Employee 8 also reviewed contracts 8 in order to prevent inconsistencies in business arrangements . He initially reported 9 to Kevin Liske, Vice President of Operations, and Mark McNally, Manager of 10 Customer Support, Inside Sales, and Data Warehousing . Later, Employee 8 reported 11 directly to Jeff Ramsey and the majority of his interactions were with the legal 12 department of PurchasePro which consisted of Nick Perrino and Scott Wiegand, 13 among others. Employee 8 revealed that improper classification of revenues was a 14 constant theme at the Company . Further, Employee 8 said that PurchasePro engaged 1 5 in questionable barter transactions that had subjective valuations for the services 16 provided by the Company. Employee 8 also said that PurchasePro improperly 17 continued to show non-paying customers as collectable revenue throughout the Class 18 Period. Consequently, this former employee confirmed what other employees have 1 9 stated, that the size of accounts receivable appeared to be larger than it actually was . 20 (a) Employee 8 stated that PurchasePro had three types of contracts : (i) 21 subscription contracts which cost about $49 per month and were for smaller 22 customers; (ii) "big fish contracts" with customers like AOL, Computer Associates, 23 and Gateway. Employee 8 would work closely with inside sales and national sales 24 on "big fish contracts" to ensure that there were no conflicts . Employee 8 said that 25 the PurchasePro people involved with the AOL transactions included Mark McNally 26 and Chris Hammond ; and (iii) so-called "Barney" contracts, a term coined by 27 PurchasePro employees which referred to barter transactions. By way of example, 28 Employee 8 described a Barney transaction that happened around December 2000 .

72 PurchasePro approached Gateway and told them that PurchasePro would build them 2 a website and valued the website at approximately $500,000 (Employee 8 was no t 3 sure of the exact amount) . Employee 8 stated that the full amount was placed on the 4 books as incoming cash revenue and that Gateway was told that instead of paying 5 $500,000 cash, PurchasePro would accept $500,000 worth of computers . Employee 6 8 remembered .a trailer full of computers showing up at PurchasePro as "payment" 7 for PurchasePro's services. This former employee stated that the Company had 8 approximately a dozen of these types of "Barney" contracts . The obvious problem 9 with such barter transactions is that valuation can be highly subjective and therefore 1 0 misrepresent the true revenue received by the Company . 1.1 (b) Employee 8 further stated that improper classification of revenues 12 was a constant theme at PurchasePro and that defendants Miller and Johnson were 13 among the people at PurchasePro that knew how revenue was recognized . Employee 14 8 said that many employees fought with defendant Johnson on revenue recognitio n 15 issues . Moreover, this former employee said that for three quarters he answered 16 questions posed by the auditors at Andersen, LLP. 17 (c) Employee 8 also participated in meetings with Andersen, LLP 18 personnel, the Company's auditors, and PurchasePro's financial staff regardin g 19 contracts . Employee 8 said that at each of these meetings, there were usually three 20 or four Andersen, LLP auditors, defendant Miller, Jeff Ramsey (risk management), 21 Randy Gabe VP of finance), Donna Lauger (assistant controller) and other 22 PurchasePro financial analysts. Each quarter, Employee 8 overheard comment s 23 about improper classification of revenues . 24 (d) On the issue of "creditworthiness," Employee 8 confirmed that a 25 large number of PurchasePro's customers didn't pay their invoices. Employee 8 26 elaborated by saying that many contracts had been setup so that PurchasePro woul d 27 automatically receive a monthly draft from the customers' business checking 28 account . However, there was an issue because a number of these companies wer e

73 1 "fly by night operations ," and PurchasePro was not able to collect their fees . The 2 remarks of this individual are consistent with statements made by other former 3 PurchasePro employees confirming that PurchasePro would "pretty much" let 4 anyone use the software if they would sign a contract . 5 (e) Employee 8 also explained that many of the smaller contracts wer e 6 written for 3 years, at $49 per month , and that accounting would project the money 7 out for three years . However, Employee 8 said that quite often, after a few months, 8 the smaller customers would not see the value of using PurchasePro software . Thus, 9 they would stop using the software and stop paying their invoices . Nevertheless, 10 Employee 8 stated that accounting would still show this revenue as ongoing even 11 though it was r_ot . 12 (f; While Employee 8 was not directly involved in any of the legal 13 issues surrounding transactions with AOL, he stated that defendant Johnson, in one 14 of the many Company employee meetings that Johnson held, explained that even 15 though Purcha: ePro would eventually pay AOL $3 for each $1 it received, defendant 16 Johnson saw this as a "good deal" because PurchasePro would get instant revenue . 17 Johnson explained to his employees that the warrants were paid over a matter of 18 years, but by then PurchasePro would be well positioned to pay the money. 19 155 . Former Employee 9 ("Employee 9") was employed by PurchasePro 20 from March 1999, until March 2001, as an Assistant Controller, Controller, and 21 finally Risk Manager. His duties included managing Accounts Receivable, 22 Accounts Payable, and Payroll . During his entire employment, he reported to 23 defendant Mi11,r . According to this former employee, during the third and fourth 24 quarters of fiscal year 2000, defendant Johnson repeatedly battled with Andersen, 25 LLP auditors over accounting interpretations on Statement of Position ("SOP") 97-2 . 26 Moreover, PurchasePro improperly booked revenue based on Johnson's 27 interpretations . While Employee 9 feared for his job, and did what he was told, 28 Employee 9 eventually quit because of these issues.

74 1 (a) In the third and fourth quarters of 2000, near the end of eac h 2 quarter, meetings were held in defendant Johnson's office . In attendance were 3 defendants Johnson and Miller and the Andersen, LLP auditors. The purpose of 4 each meeting was to go over revenue numbers and make sure that SOP 97-2 was followed . Defendant Miller told Employee 9 that during each meeting, the auditors would come prepared with a list of transactions that included revenue that the auditor stated should not be recognized in the immediate quarter. In each of the meetings, Johnson took a hard line that all of the revenue should be recognized . Defendant 9 Miller told Employee 9 that during these meetings, Johnson yelled and screamed at 1.0 the auditors and was very intimidating. Miller also told Employee 9 that in most 11 cases, Johnson prevailed because the auditors were careful to state that they weren't 12 signing off on Johnson's approach . According to Employee 9, Miller would come 13 out of these meetings and brief Employee 9 on all that had transpired during each 14 meeting. Employee 9 further stated that defendant Johnson was ultimately able to 15 get rid of this set of auditors and obtain a different set of auditors from Andersen, 16 LLP . While he wasn't sure of the date, Employee 9 believed that the first set of 1 7 Andersen, LLP auditors was replaced after the fourth quarter of 2000 . 1 8 (b) Employee 9 also said that PurchasePro was booking non-existent 19 ~ revenue . As other former employees have stated, AOL and PurchasePro were 20 exchanging "customer lists" and claiming revenue in exchange . Employee 9 was 21 personally aware that PurchasePro's accounting department recorded approximately 22 $4 million in, revenue for such an exchange, revenue that was never actually 23 received . Employee 9 believes that this transaction occurred in the fourth quarter of 24 2000 and also stated that there was a similar non-cash deal with Gateway, but didn't 25 recall the specific details of the Gateway transaction . 26 (C) When asked about the growth of accounts receivable, Employee 9 27 further confirmed that many customers would stop using and paying for PurchasePro 28 software in the first few months when they had no success with the product .

75 I However, PurchasePro continued to bill them because no one was following up to 2 see if customers were using the software . 3 (d) On the issue of "creditworthiness," Employee 9 also confirmed the 4 information provided by other former employees . Specifically, from March 1999 5 until January 2001, PurchasePro did not take any steps to check creditworthiness of 6 any customers . 7 (e) Employee 9 also confirmed that PurchasePro was drastically 8 overstating the number of PurchasePro paying users, which has been reiterated by 9 numerous other employees of the Company . 10 (t) Finally, when asked about "non-cash deals," such as the Barney 11 contracts described by other former employees of the Company, Employee 9 12 confirmed that PurchasePro's agreement with Gateway computers was not a cash 13 deal and provided the following additional details . Employee 9 revealed that 14 Gateway received software which was a marketplace "skin" that had their logo on 15 it. Further, PurchasePro recognized this non-cash revenue as though it were cash 16 and accounted for it as advertising revenue . Employee 9 said that the computers 17 received should have been capitalized because they were fixed assets . 18 156 . Former Employee 1.0 ("Employee 10") was employed by PurchasePro 19 as a Senior Financial Analyst and Budget Manager from May 2000 until November 20 2001 . He was responsible for the budget and variance reporting system, which 21 involved expenses and revenue forecasts . Employee 10 reported to Randy Gabe, 22 Vice President of Finance, who then reported to defendant Miller. As such, he was 23 directly involved in revenue recognition issues . Employee 10 confirmed that 24 Johnson exercised direct, personal control over the revenue forecasting process. 25 This goes directly to Johnson's knowledge of Company affairs during the Class 26 Period. Employee 10 also said that PurchasePro changed. its business model during 27 the Class Period which resulted in a new revenue recognition rule . 28 (a', Employee 10 said that while he was responsible for the entire

76 1 budget, his focus was on Company expenses . This is because Employee 10 received 2 essentially all r--venue information directly from defendant Johnson . Occasionally, 3 Employee 10 would also receive Johnson's forecast numbers from defendant Miller 4 or Randy Gabe. After Johnson left the Company, revenue information came directly 5 from Richard Clemmer, the new CEO . Neither Employee 1.0, nor his immediate 6 supervisor, did anything to change revenue forecasts made by Johnson or Clenuner . 7 Moreover, Employee 10, and his superior, were frustrated by upper management 8 controlling so much of the revenue forecasting and not allowing them to participat e 9 . in that process . 1 0 (b) When asked about the reclassification of $2 .3 million of recurrin g revenue into one-time income, Employee 10 explained that PurchasePro had 12 changed its bu::iness model to being a software supplier . This is important because 13 under a software supplier model, PurchasePro would recognize more revenue up 14 front, instead of over the course of the life of a contract . Employee 10 stated that 1 5 before switching to this model, PurchasePro was supposed to recognize revenue ove r 16 the life of the ceal (e.g., if an agreement was in place for 4 years, each month only 17 1/48 of the rev.mnue would be recognized). Thus, when PurchasePro switched to a 18 software mode l'., all sales would instantly be recognized . 19 (c) Employee 10 also stated that Johnson would project huge quarters 20 and that almost all of the projected revenue would usually be booked in the last week 21 of each quarter . When asked for specifics, Employee 10 stated that 85% to 95% o f 22 all revenue arrived in the last week of each quarter, and most of PurchasePro' s 23 revenue arrived on the last day of the quarter . Further, Employee 10 said that 24 PurchasePro's revenue was primarily derived from large contracts which included 25 AOL, Gateway, and. Computer Associates . This former employee also claimed that 26 PurchasePro was "living and breathing" based on large contracts . Small contracts 27 ($49/month subscriptions) were only generating a few hundred thousand per mont h 28 in revenues .

77 1 157 . Former Employee 11 ("Employee I I") was employed by PurchasePro 2 from 1997, until August 2001, in Management Information Services ("MIS") . He 3 was hired by defendant Carton and was initially responsible for network support , 4 technical support, and building computers . Later, he was given the title of Account 5 Manager and his duties included installing and setting up computers with 6 PurchasePro software for local customers, such as hotels . Employee 11 stated that 7 I a series of reports were produced that showed the number of users on th e 8 PurchasePro system, reports which were ultimately given to the public . Employee 9 11. also provided some technical information by stating that the PurchasePro 10 software used Oracle as a back-end database and an off-the-shelf software 11 application called "Crystal Reports" as a front-end tool to actually create the reports . 12 (a) Employee I 1 said that reports were generated at the end of eac h 13 quarter and distributed to individuals in finance such as Randy Gabe, Vice President 14 of Finance, and to John Devlin, Director of Database Marketing . According to 15 Employee 11, Devlin had the responsibility of ensuring that the numbers showed lb consistent growth based on previous quarters . These reports were also distributed 17 to upper management . All of the reports were archived on the PurchasePro server 18 in the Crystal Reports directory . 19 (b) Employee 11 said that the number of PurchasePro users shown o n 20 the quarterly reports was greatly overstated . The reason for the overstatement was 21 explained as follows . Employee l 1 said that the database being used was "dirty" 22 (i.e., inaccurate), because it contained : (i) duplicates; (ii) test data developed and 23 used by PurchasePro Quality Assurance ; (iii) special demonstration accounts set up 24 by sales people ; and (iv) erroneously entered data. According to Employee 11, at 25 one point, there were over 100,000 accounts that were not valid during his tenure . 26 (c) To the best of his knowledge, the bad data was never removed fro m 27 the database . Employee 11 also confirmed statements made by other former 28 employees that many discussions were held between MIS and accounting about th e

78 I "dirty" database and that staff wanted to "clean up" the database by removing the 2 invalid entries. However, Employee I I was told by his peers that defendant Benyo 3 was not happy because the number of accounts in the database was too low and 4 Benyo had asked if there were other "rules" that could be used to increase the 5 numbers . 6 (d) When asked what "rules" were used to produce the reports , 7 Employee 11 stated that the definitions were handed to him by management, but that 8 the person drafting the definitions was defendant Johnson . Employee 11 said that 9 he used Johnson's definitions to run queries in order to produce the quarterly reports . 1 0 Employee 11 also stated that management did everything it could to keep the number of accounts reported at an artificially high level . As an example, Employee 11 said 12 that management was particularly upset on one occasion when someone in 13 accounting had accidentally charged the credit card of every PurchasePro account . 14 Management had a system whereby customers were sent invoices . However, 15 management's fear was that customers would cancel their subscriptions if they were 16 actually charged for the software and this would consequently lower the number of 17 accounts on the system . 18 (e) It was also an ongoing joke inside the MIS and accounting 19 departments that the Company used the PurchasePro-dot-free model 20 ("Purchase Pro . free") because nearly all of the Company's customers used 21 PurchasePro software for free. 22 (f) Employee 11 also said that many of the deals that PurchasePro 23 closed didn't rake sense because they would cost more in labor than any income 24 that would be received. As an example, Employee 1 I remembered a deal whereby 25 an employee, Mike Ermi, entered into a transaction that required a tremendous 26 amount of development and website support even though it was obvious that 27 PurchasePro would lose money on the transaction . 28 (g) As for whether or not defendant Johnson ever made misleadin g

79 1. statements, Employee 11 stated that the MIS and accounting departments hated it 2 every time Johnson spoke to the employees . This was because Johnson would lie 3 using the numbers in the MIS reports . In particular, Employee 11 said that Johnson 4 would repeatedly use the number which was calculated as the number of "users " 5 (which was overstated), and state or imply that this number represented the number 6 of "paying" customers . Employee 11 also stated that on multiple occasions, people 7 in accounting had stated that Junior was sharing too much information with analysts . 8 158 . Former Employee 12 ("Employee 12") was employed by PurchasePro 9 from April 1999, until June 2001, in the MIS department . His duties included the 10 management of the Goldmine sales contact database as well as creating custom 11 reports from both the Goldmine and the PurchasePro database . For a short time 12 during the Class Period, he also worked on a CRM (Customer Relationshi p 13 Management) software project where he configured the Oracle database . Employee 14 12 stated that the MIS reports were not representative of the actual business that was 15 being performed on the PurchasePro system . 16 (a) Employee 12 stated that, during his employment at PurchasePro, he 17 and Blair Turner produced a series of reports -- which included quarterly reports 18 concerning the number of customer accounts -- based on information in the 19 PurchasePro database . 20 (I) When Employee 12 was asked if PurchasePro reports seemed 21 inconsistent w,.th his understanding of the Company's true financial condition and 22 product demand, Employee 12 said that the criteria that was used to create th e 23 reports was not representative of the actual business being conducted on 24 PurchasePro's system . Employee 12 further explained that requests were made only 25 for reports thai showed the total number of accounts that were on the PurchasePro 26 system . Employee 12 was never asked for the number of actual users on the 27 PurchasePro system. This information is pertinent to plaintiffs' allegations because 28 the number of accounts on PurchasePro's system was significantly larger then the

80 1 actual number of paying users ofthe system . Thus, by using the former number, 2 rather then the latter, the PurchasePro Defendants could portray to the investing 3 community that the paying user base was growing at a rapid rate, when in fact it wa s 4 not . 5 (c) Employee 12 said that if an account had never logged into the 6 system, nor performed a transaction, it should not have been counted as a 7 PurchasePro user. Employee 12 also said that for more than six months, he assisted 8 in the loading of 10,000 to 30,000 accounts onto the PurchasePro database eac h 9 month. These were accounts that were received from AOL. This volume of 10 information was created because any person that possessed an AOL business account 11 was being automatically registered for a PurchasePro account as part of an 12 agreement between PurchasePro,.and AOL. Moreover, these accounts were added 13 to the system -- and counted as active users -- regardless of whether or not th e 14 individual customer knew it had a PurchasePro account or had ever used th e 15 PurchasePro system . 16 (d) Employee 12 also said that the foregoing "customer" information 17 was input, by design, over a series of months so that PurchasePro could show tha t 18 it had a constantly growing user base . According to this former employee, in the 1 9 beginning, the Company needed to look like a successful startup . Employee 12 said 20 that when PurchasePro was going public, one of the key indicators of success in 21 PurchasePro's industry was the number of users on the system . Thus, the goal at that 22 time was to show significant increases in the customer database . However, eve n 23 after PurchaseFro went public, Employee 12 stated that this goal was carried forward 24 throughout the, Class Period . Moreover, when PurchasePro entered into a n 25 agreement with AOL, it was obvious to this former employee that the reason for 26 spreading the new accounts over a series of months was for PurchasePro to appea r 27 to have a constantly growing user base. 28 (e..) Employee 12 stated that he specifically remembered the larg e

81 1 number of AOL accounts because the data entry group could not manage all of the 2 data at once during the first few months . This was because a $250,000 application 3 called Trillium was not up and running . Employee 12 stated that AOL eventually 4 accounted for between 200,000 and 300,000 accounts on the PurchasePro system . 5 (f) When Employee 12 was asked how many people actually used the 6 PurchasePro system , he said that approximately 2% - 9% of all accounts on the 7 system ever logged in or used the PurchasePro system at least one time . Employee 8 12 said that he knew this because he created (without direction) a series of reports . 9 One of these reports showed the number of people that had logged in at least once 10 to the system. Thus, at least 90% of the accounts that were being counted, and 11 reported as system users by the PurchasePro Defendants to the financial community , 12 never used the PurchasePro software . 13 (g) According to Employee 12, PurchasePro was nothing but "smok e 14 and mirrors ." Employee 12 confirmed what other former employees have stated, 15 that it was well known that the database was "dirty ." Employee 12 said that he tried 16 to build into the reports some level of error correction (that reduced the number of 17 accounts reported), but he was "shot down" by management and the reports 18 continued to show over-inflated numbers . 19 (h) Employee 12 also confirmed that the only reason that PurchasePro 20 changed its model of doing business from selling subscriptions to selling software 21 was to immediately recognize revenue . When the change was announced, Employee 22 12 asked Randy Gabe, a former Vice President of Finance, why the change had 23 occurred. It was explained to him that PurchasePro needed to recognize revenue 24 immediately. Further, he was told that the fact that PurchasePro was shipping a CD 25 would not hurt PurchasePro. It didn't matter what was on the CD because the people 26 getting the software would not be able to run the software without building a "multi- 27 million dollar infrastructure" to make it work . Thus, Employee 12 confirmed that 28 customers were buying "software" with "no physical way" of actually running th e

82 1 software that was on the CD . This information is important because it supports 2 statements made by other employees that PurchasePro was shipping "skins" an d 3 I immediately recognizing revenue on products that were non-functional . 4 (i) Employee 12 stated that the information that Johnson was providing 5 to analysts via the conference calls, and to the media, was unfounded . Employee 12 6 said that the statements were misleading and false . With access to inside 7 information for the Company, Employee 1.2 said that PurchasePro ' s business model 8 was not working, PurchasePro was not making money and that it was never goin g 9 to make money . According to this former employee, sales were decreasing , 10 profitability w,~s decreasing, and the number of new users was almost non-existent , 11 while the nurrber of transactions on the PurchasePro system was only mildly 12 increasing. Wren asked how he knew this information, Employee 12 stated that 13 anyone looking at PurchasePro's financial numbers would be able to see this . In 14 addition, he had access to all of the numbers in the PurchasePro system, and he ran 15 his own reports on the system to answer these questions for himsel f 16 (j' Finally, Employee 12 stated that Benyo was one of the people at 17 PurchasePro that would put a positive "spin" on the numbers that were presented t o 18 the public . 19 159 . Former Employee 13 ("Employee 13") was employed by PurchasePro 20 from October 1998, until June 2001, as a PurchasePro Senior Database Analyst. 21 During his entire employment at PurchasePro, Employee 13 worked in the MIS 22 department . H , reported to Blair Turner who reported to Tracy Teague . This former 23 employee said that he was one of a few people that were responsible for all of the 24 Company reporting . His duties included all data analysis, all of the sales reports, and 25 all of the financials for PurchasePro's management . As discussed in more detai l 26 below, Employee 13 described a meeting three or four days before the end of the 27 first quarter in 2001, where defendants Johnson and Carton were asked to decide 28 how the numb,-Ir of "users" on the PurchasePro system should be counted . In that

83 1 I meeting, Employee 13 and his colleague, Blair Turner, were directed by defendan t 2 Johnson to use a report that showed a fraudulently high number of users and level 3 of activity for the PurchasePro system . Employee 13 also said that these fraudulent 4 numbers were released to the public . Employee 13 described why the numbers were 5 wrong, how they were wrong, the motivation that caused the fraudulent numbers to 6 be produced, and the motivation that caused the numbers not be changed after th e 7 fraud was detected. 8 (a) Employee 13 confirmed that many of the accounts on th e 9 PurchasePro system were not actively using the system and should have never been 1 0 counted as users. Employee 13 knew this because he ran reports which showed that most of the "users" had never logged in or used the PurchasePro system . Employee 12 13 stated that only I% of the "accounts" were active users of the system . 13 (b) Employee 13 said that many of the contracts that were signed 14 allowed companies to use the system for six months at no charge . Once a company 15 signed on, accounts would be created for every employee in the company, even if 16 only a handful of employees would have needed or used the system. Thus, if a small 17 business signed up to use the PurchasePro system, and had 30 employees, this would 18 result in the sales team reporting 30 new "users," even though only one or two 19 people might be using the system . 20 (c) Employee 13 also stated that the reports showing the number of 21 users were wrong because some users were counted more than once . Users were 22 classified as buyers or suppliers . However, a number of users were both buyers an d 23 suppliers . Reports were prepared in such a way that the number of buyers was added 24 to the number of suppliers to produce the total number of users . Thus, the users that 25 were both buyers and suppliers were double counted . 26 (d) Employee 13 revealed that as a part of demonstrating th e 27 PurchasePro system to potential clients, sales people would create a "catalog" ( a 28 website showing products), and then create a series of fictitious purchase orders

84 1 ("P.O .'s") and fictitious bids . Employee 13 said that during his tenure, these P .O.'s 2 and bids were not removed from the system. Employee 13's group made efforts to 3 find these false P.O.'s and update their report filters so that the final numbers were 4 closer to accurate . Employee 13 also said that over 30 separate filters were used to try and clean the data. (e) Employee 13 learned directly from PurchasePro sales people tha t they were paid large bonuses based on how many new clients they had in a quarter and how much business the client was doing in the PurchasePro system . Employee 9 13 knew this because sales people would contact him directly, ask for custom 10 reports, and then brag about their bonuses . 11 (f) Employee 13 stated that as a result of producing trend analysis 12 reports, which showed activity per account over time, he learned that in order to 13 maximize the. 'r bonuses, PurchasePro sales people were logging in to their 14 "customers' accounts" and creating fraudulent activity in the way of P .O .'s and bids . 15 Employee 13 spoke directly with the sales people, who apparently denied this 16 activity. However, Employee 13 said that the ability to monitor PurchasePro usage 17 from the back-end was more sophisticated than the sales people were aware . Thus, 18 Employee 13 was able to definitively track down the creation of the false data to 19 individual sales people . Employee 13 said that Mike Ermi and Mike Bump, among 20 others, were the worst offenders . Employee 13 explained that it was fairly easy to 21 see fraudulent transactions . For example, a buyer might normally place a P.O. for 22 pencils for a few hundred dollars . However, Employee 13 uncovered P.O.'s valued 23 between $10,000 to $20,000 for pencils that were supposedly issued by the same 24 buyer. 25 (g) Employee 13 informed the sales people that these transaction s 26 would be filtered out of the final reports . During these conversations , Employee 1 3 27 explained to the sales people that these transactions were obviously fraudulen t 28 because they were so large . Employee 13 stated that rather than stop the creation o f

85 1 false data, the sales people started creating fraudulent P .O .'s ranging from $1,000 2 to $2,000. These were harder to detect. 3 (h) Employee 13 stated that creating this type of false data was easy fo r 4 the sales peopl. since they had been trained on how to use the PurchasePro system 5 and they already had the necessary user identification codes and passwords . Once 6 the false information was in the system, the sales people could then generate a 7 personal report from the system showing how much "business" they had "created" 8 and turn this report into their management chain. Employee 13 believed that 9 management used these individually generated reports to compensate the sales force . 10 (i) Employee 13 stated that the reports that were generated to show the 11 amount of activ ity on the PurchasePro system didn't reflect PurchasePro's true state 12 of affairs . Employee 13 recalled creating special reports to show the overstated 13 activity and that the amount of the overstated activity varied each quarter from 14 $200,000 to $10 million . 15 (j; Employee 13 said that management (which would have included the 16 PurchasePro Defendants) was aware of the fraudulent activity . Employee 1 3 17 recalled that three or four days before the end of the first quarter of 2001, he and 18 Blair Turner were working late to prepare reports for Wall Street . Both of them were 19 having a difficult time coming up with accurate numbers due to the fraudulent dat a 20 in the system. They decided to involve management . They prepared two different 21 reports that showed the number of PurchasePro users and the amount of activity on 22 the system. The first report showed all "users" without filtering out the fraudulent 23 number of users or account activity. They called this the "bloated" report . The 24 second report was filtered and Employee 13 regarded this report as being fairly 25 accurate . Both documents contained lists ofP .O .'s, the responsible sales people, the 26 number of users, and the total dollar value of the activity for each account . They had 27 printed hard copies of both documents and used highlighting to show the accounts 28 and P .O .'s that were fraudulent. Employee 13 and Blair Turner also provided tren d

86 analysis information which showed that the P .O .'s in question were inconsistent with 2 a particular client's history of activity. They also provided supplemental data that 3 proved the P .O.'s in question had been created by PurchasePro salesmen . At 4 approximately 6 :30 p .m., Employee 13 and Blair Turner walked to the management 5 offices . They knocked on defendant Johnson's door and a discussion ensued with 6 defendants Johnson and Carton . They presented all of the reports to defendants 7 Johnson and Carton and explained that the first report was truly inaccurate because 8 of the fraudulent number of users and activity . They also showed examples of the 9 fictitious P.O.'s, including dates and times . Johnson directed them to use the first 10 report, the "bloated" report, which was artificially inflated . Johnson flatly stated that 11 he didn't care if the data was incorrect, that all he cared about was the bottom line 12 and that he wanted to present the larger numbers to Wall Street . Employee 13 stated 13 that the difference in activity for this particular quarter was $4 million . Employee 1.4 13 and Blair Turner returned to their offices and completed their work some time 15 between 9 :30 and 10 :00 p.m. that evening. 16 (k) When asked why Mike Ermi had been demoted, Employee 13 sai d 17 that Ermi reported directly to Johnson and that Johnson demoted Ermi when he 18 became too aggressive and greedy and had sought too much money for himself in 19 the way of bonuses . Employee 13 also said that it was a running joke between his 20 group and accounting that PurchasePro was not making any money . Employee 13 21 stated that without the big hotels, PurchasePro would have had to close down . 22 VI . DEFENDANTS' FALSE AND MISLEADING STATEMENT S 23 160 . Throughout the Class Period, Defendants made numerous statement s 24 concerning the financial strength of the Company, as well as the effectiveness of the 25 PurchasePro business model . However, these statements were not only false and 26 misleading, they were designed to artificially inflate the value of PurchasePro's 27 securities for their own personal benefit. Moreover, it is now evident that only 28 through Defendants' scheme were they able to maintain investor interest in the

87 1 Company . If Defendants had honestly represented PurchasePro's business from the 2 outset, the Company would have ceased to exist as a going concern long ago . In 3 fact, not long after the true financial condition of the Company was revealed, 4 PurchasePro filed for bankruptcy on or about September 11, 2002, just three years 5 after the Company went public . 6 161 . In light of the magnitude of the sham and round trip transactions se t 7 forth above, and the information provided by former employees, it is implausible 8 that Defendants were not aware of the true financial condition of the Company . As 9 high ranking officers and directors of PurchasePro and AOL, they undoubtedly had 10 knowledge of these facts while the following statements were being made to the 11 investing community . Moreover, a number of employees have described many 12 instances where PurchasePro Defendants were directly confronted with the problems 13 described above . However, these problems were never disclosed to the investing 14 community. 15 162 . Thus, in light ofthe true state of affairs of PurchasePro during the Clas s 16 Period as alleged herein, the falseness of Defendants' following representations i s 17 quite apparent . 18 163 . Beginning on March 23, 2000, the first day of the Class Period, the 19 Company issued a press release announcing that PurchasePro expected to exceed 20 previously-stated financial expectations for the quarter . The March 23, 2000 press 21 release quoted defendant Johnson as follows : 22 PurchasePro.com Anticipates Record First Quarter 23 LAS VEGAS (March 23, 2000) -- PurchasePro .com, a leader in browser-based business-to-business electronic commerce, today 24 announced that it believes its results for the quarter ended March 3I, 2000, will exceed published expectations . 25 "We're looking at a record quarter," said Charles E . Johnson Jr ., 26 Chairman and CEO of PurchasePro .com. "Our revenues are tracking significantly ahead of Wall Street's forecasts, with a high recurring 27 component and very high gross profit margins . Further, we have an extremely healthy balance sheet with more than $140 mullion in cash 28 on hand and no long term debt .'

88 PurchasePro.com's browser-based solution has gained broad acce tance by companies of all sizes. The company has more than. 2 20,000 members on its public and private networks and powers more than 100 private marketplaces . 3 "Our strategy of partnering with leaders in a variety of vertical and 4 horizontal communities, combined with our geographical reach, will enable us to reach the desktops of the critical mass of businesses and 5 enhance our leadership position in business-to-business e-commerce," said Johnson. 6 164 . Johnson' s statements, including those concerning "revenue" and a 7 "healthy balance sheet," were far from true. As numerous former employees have 8 indicated, Purc hasePro was a financial mess . Accounts receivable were greatly 9 overstated because of non-paying customers . Collections were virtually non- 10 existent. Moreover, the majority ofPurchasePro's accounts (as many as 99%) were 11 either fraudulently created by PurchasePro salespeople, accounts of non-paying 12 customers or ac.counts created without customer knowledge . Thus, there was not a 13 great demand for PurchasePro's product as Johnson depicted . 14 165 . For these same reasons, the statements by Johnson in the following 15 article, disseminated on or about April 11, 2000, were similarly false and misleading . 16 Contrary to Johnson's statements, PurchasePro was not enjoying the substantial 17 growth which was being presented to the public . The article quoted Johnson, stating 18 in pertinent part: 19 PurchasePro.com Adds Record Number of New Businesses to Its 20 Univers'.l Exchange -- New Customers to Pay Transaction and Network Access fees 122 Percent Quarter-over-Quarter Growth 21 PurchascPro.com (Nasdaq: PPRO), a leader in browser-based, business- 22 to-business electronic commerce, today announced strong quarter-over- quarter customer growth for its universal exchange . 23 "The 122 percent quarter-over-quarter growth we experienced in the 24 first quarter reinforces the growth potential of our business model," said Charles E. Johnson, Jr., Chairman and CEO of PurchasePro .com. 25 "The fact that more than 25 percent of this record growth occurred through online registration accelerates our business plan of gaining a 26 critical mass of businesses across all industries . " 27

28 The recurring revenue streams, combined with 90 percent gross profit margins and Tess than one percent attrition rate , create long term profi t

89 opportunities, according to Johnson . 2 "Our business model of leveragin g both off-line and online channel 3 partners in the leading universal exchange enables PurchasePro .com to capitalize on both the new and old economies ," said Johnson . 4 PurchasePro .com will formally announce its complete first quarter 5 results after market close on Wednesda Ap ril 19, 2000. The call-in number for that announcement will be 800/266-2145 . 6 166. In addition to Johnson's other statements, the "less then one percen t 7 attrition rate" claimed by Johnson was particularly misleading . PurchasePro's 8 alleged attrition rate was not so low because the Company's customers were satisfied 9 with the business model . On the contrary, the PurchasePro Defendants refused to 10 write-off the Company's bad debt, i.e., non-paying customers. These "users" were 11 staying on the books so that the PurchasePro Defendants, including Johnson, could 12 portray the Company as strong and growing, quarter over quarter 13 167 . Thereafter, on April 18, 2000, PurchasePro issued another press releas e 14 announcing PurchasePro's "record" and better-than-expected financial results for the 15 first quarter of 2000. The April 18, 2000 press release stated : 16 PurchasePro.com, Inc. Reports Record Financial Results for the First 17 Quarter of 2000 18 Revenues Increase 71 Percent Over Most Recent Quarter; Gross Profit Margins Grow to 93 Percent 19 LAS VEGAS (April 18, 2000) -- PurchasePro.com, Inc. (Nasdaq: 20 PPRO) a business -to-business e-commerce solutions leader, today announced financial results for the first quarter ended March 31, 2000 . 21 Purchase Pro.com reported record revenues of $4 .5 million for the first 22 quarter of 2000 with gross p rofit margin of 93% a 575% increase over revenues of $6'14,00(J for the first Quarter of 19 9, and an increase of 23 71 % over revenues of $2 .7 million for the fourth quarter of 1999 . The net loss for the quarter , excluding charges for stock-based 24 compensation, was $8 .3 million, or $0 .28 per diluted share, compared to a net loss of $6 .1 million, or $0 .22 per diluted share for the fou rth 25 quarter )f 1999 . 26 "Our oi:.tstanding financial results illustrate that our network and marketplace exchanges are reaching critical mass and gaining traction," 27 said Charles E. Johnson, Jr., chairman and chief executive officer of PurchasePro.com. "We successfully completed a secondary offering 28 during the quarter and from a balance sheet perspective, Purchas°Pro. com is extremely strong with more than $136 million in

90 cash and cash equivalents. . Our growth strategy is to partner with the dominant players in a vaety or ve rtical and horizon al sectors and 2 align our interests with our partners by reaching out to their customers no competing with their suppliers . Our current reach of over 21,006 3 companies participating in over 150 public and private marketplaces shows the broad acceptance of our solution and technology platform ." 4 "Our business model is clicking on all cylinders `we are generatin g 5 recurring revenue, we increased our already healthy gross profit margins while reducing our attrition rate to approximately one percent, 6 and we increased customer growth nearly 120 percent quarter-over-q uarter. It is important to note that all of our growth was 7 organic, and that approximately 25 percent of our new business for the quarter came through online registration, without the use of a sales call, 8 illustrating the vibrant, viral nature of our solution ," concluded Mr. Johnson 9 10 "With direct expe rtise in strategic planning, operations , equity 11 managefnent, mergers and acquisitions , marketing and purchasing, our expanded team is integral to charting the company's. future growth 12 plans through entry into new vertical markets, expansion of strategic partnerships and alliances, creation of new strategic initiatives and 13 growth of sits increasingly diversified customer base ," concluded Mr. Johnson . 14 168 . As with the foregoing statements concerning PurchasePro ' s user base, 15 and the financial growth and stability of the Company, Johnson's statements 16 contained in this press release were also false and misleading . Moreover, as with the 17 Company's SEC filings listed below, and contrary to Defendants' overal l 18 representations, the financial condition of the Company was not being fairly 19 represented to the public . As discussed in great detail above, Defendants wer e 20 manipulating every revenue stream of the Company so that PurchasePro could report 21 record quarter over quarter growth in violation of GAAP . See §§IV-V. 22 169. On the same day, the following press release was disseminated which 23 noted that defendants Johnson and Carton would be forgoing any compensation until 24 PurchasePro w,-is profitable . The article stated: 25 PurchasePro .com (PPRO. Nasdaq) Chairman and CEO Charles Johnson 26 Jr. said Tuesday that neither he nor COO Christopher Carton would take cash or stock compensation until the company becomes profitable 27 on an earnings-per-share basis . 28 After Tuesday' s close, the company repo rted a first-quarter earnings loss of 28 cents a share , a penny better than the seven -analyst First 91 1 Call/Thomson Financial estimate and up from a 22-cent loss in the fourth quarter of 1999 . 2 "We are committed to the profitability of this compan y long-term and 3 we are committed to what we are doing ," Johnson said . 4 5 "We've taken a very positive twist on this , and we think it's the best opportunity for us to differentiate ourselves from the software 6 companies that are alluding that they are true B2B, Internet-based companies," Johnson said . We feel that the terms `market lace' and 7 `exchange technology ' have been overused and misunderstood . We consider a marketplace to be a self-contained group of businesses, 8 defined by whomever the marketplace owner is . 9 Companies that provide exchange software, on the other hand, generally encourage their customers to bring other buyers and sellers 10 into the network, something B2B insiders consider a "viral" -- and hence very profitable -- strategy. 11 Chris Vroom, an analyst for Credit Suisse First Boston who rates 12 PurchasePro .com a strong buy, said Johnson ' s decision not to et paid is good news from an investment standpoint . But he acknowledged the 13 market's attraction to software providers versus browser-based enablers . First Boston recently underwrote a secondary offering for 14 PurchasePro meaning that it likely would profit from any rise in Purchase.Pro3s stock. 15 "Certainly, from a valuation standpoint, the companies that have 16 developed software solutions are being more richly valued in the market. That re fl ects that they've been around a lttle lon ger and 17 they 're well known through their affiliations with these large industri al consortiums," Vroom said. "But over time, the market will recognize 18 that this is a huge business opportunity, and a viable solution that comes at a much lower price and is easier to train on . Then, investors 19 will recognize its true place in the world . " 20 170 . While it is important to note that PurchasePro could hardly b e 21 considered a true B2B Internet-based company as Johnson suggested, this article is 22 also important because it addresses the scienter of defendants Johnson and Carton . 23 By agreeing not to take compensation until the Company was "profitable," they had 24 even more incentive to reach that perceived goal as quickly as possible and by any 25 means necessary. Moreover, it failed to disclose to investors that defendants 26 Johnson and Carton had already obtained lines of credit through pledges of their 27 PurchasePro stock as collateral . 28 171 . On or about May 15, 2000, the Company filed with the SEC its For m

92 1 I 0-Q for the first quarter of 2000. Signed by defendant Clough, and dated May 12 , 2 1 2000, the Form 10-Q reiterated (and expanded upon) the financial results issued on 3 C April 18, 2000 . Further, the 10-Q stated: 4 The unaudited condensed interim consolidated financial statements of 5 PurchasePro . com, Inc. and its subsidiary, Hospitality Purchasing Systems (collectivel y the "Company") for the three months ended 6 March 31, 1999 and 2000 , included herein, have been prepared by the Company, without audit, pursuant to the rules and regulations of the 7 SEC . Certain information and footnote disclosures normally included in fi nancial statements prepared in accordance with generally accepted 8 accounting principles have been condensed or omi tted pursuant to such rules and regulations relating to interim fnancial statements . In the 9 opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments , consisting 1 0 only of normal recurrin g adjustments, necessary to present fairl the results of the Company s operations and its cash flows for the three months ended March 31, 1999 and 2000. The accompanying unaudited condensed consolidated fi nancial statements are not necessarily 12 indicative of full year results . Certain reclassifications have been made to prior period financial statements to conform with the 2000 13 presentation, which have no effect on previously repo rted net income. 14 172 . Of course, contrary to these representations, PurchasePro's financial 15 statements were not being presented pursuant to the rules and regulations of the 16 SEC, or in accordance with GAAP . In fact, as discussed above, Defendants were 17 manipulating every revenue stream of the Company so that PurchasePro could 18 falsely report record quarter over quarter growth . See HIV-V. 19 173 . Moreover, these representations were false and misleading becaus e 20 PurchasePro was in accounting disarray according to former employees of the 21 Company . This has also been confirmed by PurchasePro's former auditors, 22 Andersen, LLP . In a management letter dated May 30, 2000, which was addressed 23 to the "Management and the Board of Directors of PurchasePro .com, Inc .," i.e., all 24 PurchasePro Defendants, Andersen, LLP stated in part that : (a) the Company does 25 not have written policies and procedures for most accounting practices ; (b) sales 26 personnel or senior management have historically negotiated contracts without 27 adequately involving the finance and accounting functions to ensure that any 28 potential accounting issues are reviewed and resolved before the contract i s

93 1 finalized; and (c) management changed its reserve methodology several times during 2 1999 which leads to the loss of integrity in the system. 3 174 . Amidst these misrepresentations to the investing community, on July 4 11, 2000, at 6 :56 PM, defendant Benyo circulated an internal e-mail to defendant s 5 Clough and Miller, as well as PurchasePro employees Randy Gabe , Anthony 6 Timmons, Ray Carpenter, Barry Joyce and Edward Kim, which contained a sta rtling 7 I revelation concerning a draft press release which was to accompany the 8 announcement . of PurchasePro's second quarter financial results . In this e-mail , 9 Benyo states : 10 Well I wasn't happy with much of what I was seeing in the release so I took a stab. Included in this are my attempts at language around the 11 revenue recognition piece. 12 Brooke and Michelle : Wanted to get with you guys today but ran out of time . We can talk tomorrow . im not concerned about reaction to 13 this, because I believe we have a good story. I do want to be prepared, however. 14 Randy- Looking forward to getting those numbers . 15 John- Working with Randy we have got to get 1/4ly subscribers 16 numbers nailed I'm getting worried . 17 Finally, ::he number of "web" sign-ups needs to be nailed. 18 Please wake comments on the language . I want to get this to Jr. and company ASAP . 19 Chris Benyo 20 Sr. VP, Marketing 21 175 . In addition , in the draft press release that accompanied the e-mail , 22 language was included that candidly discussed the Company's revenue recognition 23 as a result of the change in PurchasePro's business model stating : 24 "During our design and rollout of these new marketplace products we discovered new opportunities for revenue recognition " said Clough . 25 "Customers were already paying us thousands of dolcars up-front to quickly implement marketplaces . With this change we can now 26 recognize some of the revenue up-front rather than over the course of the contract." 27 Clough emphasized that the accounting change does not diminish 28 Purchasf;Pro's emphasis on recurring. revenue . In fact, continuin marketp?ace sales increase substanally the company's base o 94 recurring revenues from hosting, maintenance, subscriber and transaction fees . 2 176 . However, since the majority of PurchasePro's software license sale s 3 were nothing more than sham transactions, and since it was in Defendants' bes t 4 interest not to attract attention to these arrangements, this language was omitted from 5 the actual press release . Instead, misrepresentations simply continued regarding the 6 strength and financial condition of the Company on July 19, 2000, when 7 PurchasePro fcrlnally announced "record financial results" for the second quarter 8 ended June 30, 2000 . In that press release, defendants Johnson and Clough were 9 specifically quoted as follows : 10 PurchasePro .com, Inc . (Nasdaq: PPRO), the leader in browser-based business- to-business e-commerce solutions, today announced record 11 financial results for the second quarter ended June 30, exceeding analyst consensus estimates by eight cents per share . The company 12 posted record revenue of $9 .5 million for the quarter with a gross prat t margin of 93 percent an 846 percent increase over revenues of $1 .0 13 million for the second quarter of 1999 and an increase of $5 .0 million or 109 percent , over revenues of $4, million for the first quarter of 14 2000 . the net loss for the quarter, excluding charges for stock-based compensation, was $7 . 1 million, or $0 .22 per diluted share compared 15 to a net loss of $8 . 3 million, or $0 .28 per diluted share for the first quarter of 2000 . 16 "This quarter we have shown our recurring revenue business model's 17 strength in delivering top line revenue with only moderate expense growth," said Charles E . Johnson, Jr., chairman and chief executive 18 officer of PurchasePro .com. "With our continued high growth, low attrition rates, and excellent cash position of $120 mi llion, we are well 19 positioned to achieve profitability in the second quarter of 2001, significantly earlier than the market ' s expectations ." 20 "We are now the dominant player in the ` exchange to exchange ' space, 21 linkin g all our marketplaces into a universal platform to deliver a critical mass of businesses," he added. "At the same time we are 22 delivering a liquid marketplace where these companies can pa rticipate as both huyersand suppliers, bringing maximum value to both . Much 23 of our growth is attributable to the network effect surrounding bu yers and suppliers . As we move forward, growth will be enhanced by 24 pro rams with key channel partners . As we expand these relationships and cortinue our strategy of partnering with dominant players in a 25 multitude of vertical and horizontal sectors, we, expect to see our current high growth continue into future quarters . " 26 "A port on of the company's healthy revenue growth is attributable to 27 the second quarter release of PurchasePro .com's new suite of private label e-inarketplace solutions ," said James P . Clough, senior executive 28 vice president and chief financial officer of PurchasePro .com. "Our continuing success in selling this suite of solutions will add

95 1 substantially to our recurring revenue mix, with revenue contribution coming from monthly hosting and maintenance, as well as subscriber, 2 transaction and advertising es . " 3 177 . Defendants' statements were false and misleading for the following 4 reasons, in addition to those stated above . PurchasePro was not enjoying a strong 5, recurring revenue model as these defendants suggested . In fact, the recurring 6 revenue model of the Company was so unprofitable that a new method of artificially 7 inflating revenue for the Company had been implemented which was based on the 8 use of "skins ." As described by numerous former employees of the Company, skins 9 were non-functional software that were being shipped to "customers" so that 10 PurchasePro could prematurely and improperly recognize revenue from these 11 transactions in violation of GAAP . See §V. Moreover, as admitted under oath by 1 2 defendant Anderson, PurchasePro's senior officers and management knew that the 13 sale of marketplace software licenses had met with significant resistance . Thus, 14 Defendants were beginning to engage in the round trip and sham transactions 15 described above to generate the appearance of growing revenues through the sale of 16 such licenses. 17 178 . The next day, on July 20, 2000, the following article was released 18 entitled "A Percentage Game: PurchasePro .com Bests Ariba by Focusing on an Area 19 Where There's Not Much Competition ." The article noted : 20 PurchasePro . com (PPRO : Nasdaq) was able to do what Commerce One (CMRC : Nasdaq) couldn 't -- best the second-quarter sequential revenue 21 growth of Ariba (ARBA : Nasdaq). Among B2B stocks this earnings season, that's all that matters . 22 Investors were rewarding it accordingly Thursday, sending the stock up 23 16%, or 7, to 49 %2 . But in some ways it's regaining the midteen percentage loss it suffered Wednesday before its earnings were 24 announced . 25 Wednesday , PurchasePro reported second-quarter revenue of $9 .5 million, an increase of 109% over the previous qua rter to ping Ariba's 26 101% increase. It's a lot less revenue than the S62pmillion that Commerce One handed in on Tuesday , but sequentially Commerce One 27 increased revenue only 79% . And in the B2B game, it's that percentage gain that matters . 28 "PurchasePro's results underscore the opportunity that exists in th e

96 middle market ," says Chris Vroom, a Credit Suisse First Boston analyst who rates PurchasePro a strong buy . (His firm has performed banking 2 services for the company.) "It s a distinct o pportunity from what Ariba and Commerce One are focusing on, and in an area where there's 3 relatively little competition. " PurchasePro, which posted a net loss . of $7 .1 million, or 22 cents a 4 share compared with the consensus estimate of a 30 cents-a-share loss, 5 builds exchanges andprivate market places for comp anies with revenue between $3 million and $20 million annually. Charles Johnson Jr ., 6 PurchasePro's founder and chief executive, says he wants to expand his compan'f's target customers to those with less than $50 million in 7 annual revenue, which includes about a half million U .S. businesses. 8 Ariba and Commerce One, on the other hand, have been targetin g larger, Fortune 500-tie businesses, to build mega-exchanges and 9 procurernent platforms for industries ike autos aerospace and energy . Those deals offer potentially lucrative payoffs down the road and 10 multimillion dollar1icensing fees up front . 11 Purchase-Pro gets its bread and butter from the monthly subscription fees -- on average about $75 -- it charges its customers . Those fees 12 amounted to $7.2 million in the latest quarter. And because those fees are recurring revenue -- PurchasePro has had customer attrition rates of I3 less than 5° -- the company says it is already assured of getting at least $8 million in revenue in the third quarter without signing any new 14 customers. 15 Analyst, had pegged third-quarter estimates at around $10 .5 million though those are sure to rise in the wake of this quarter's results . And 16 PurchasePro now says it'll turn profitable in the second quarter of 200 1, two quarters ahead of expectations . 17 "I feel like the winners in the niches are starting to be defined," 18 Johnson said in an interview. "And in the market, we're staring to Be seen as the middle-market niche player ." 19 20 179 . This article is important because it highlights one of the reasons fo r 2 1 Johnson to engage in the fraud . For Johnson, it was a personal goal not only to 22 compete with, but be bigger then, Ariba and Commerce One . This has been 23 confirmed by former employees of the Company. See §V (statements by Employee 24 4) . 25 180. Ay a result of the foregoing misrepresentations , concerning the financial 26 stability, growth and potential for the Company, the stock closed at $20 .25 per share . 27 Shortly thereafter, Chris Vroom, an analyst with Credit Suisse First Boston -- th e 28 same company that had extended to defendant Johnson a $100 million line of credit

97 1 which was collateralized by his shares in the Company -- rated PurchasePro a 2 "strong buy ." 3 181 . Over the next couple of months, based on several positive 4 announcement's concerning PurchasePro's present and future prospects, th e 5 Company's stock price began to rise . In July alone, there were ten separate press 6 releases by the Company announcing partnerships that were being formed, the 7 addition of new Board of Director appointees, and the opening of a new technology 8 center built to prepare for the "rapid growth" the Company was about to undergo . 9 Simultaneously, PurchasePro announced the launch of its co-developed 10 business-to-bu.yiness destination with AOL. 11 182. Then, on or about August 15, 2000 , the Purchase Pro Defendants caused 12 the Company to file with the SEC PurchasePro's Form 10-Q for the second quarter 13 of 2000 . Signed by defendant Clough, and dated August 14 , 2000, the Form 10-Q 14 reiterated (and expanded upon) the financial results issued on July 19, 2000 . These 15 results, as the Company would later admit when it filed an amended Form 10-Q with 16 restated financial results for the period , were materially incorrect when issued and 17 were materially false and misleading due to the PurchasePro Defendants ' improper 18 recognition of revenue . Moreover, the 10-Q speci fically stated : 19 The una'.1dited condensed interim consolidated financial statements of PurchasePro.com, Inc. and its subsidiary, Hospitality Purchasing 20 Systems- (collectively, the "Company") for the three months and six months ended June -30, 1999 and 2000 included herein, have been 21 prepared by the Company, without audit, pursuant to the rules and regulations of the SEC . Certain information and footnote disclosures 22 normally included in financial statements prepared in accordance with generallaccepted accounting principles have been condensed or 23 omitted pursuant to such rules and regulations relating to inte rim financial statements . In the opinion of management, the accompanying 24 unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments 25 necessary to present fairly the results of the Company's operations and its cash { lows for the three months and six months ended Tune 30, 1999 26 and 2000 . The accompanying unaudited condensed consolidated financial statements are not necessarily indicative of full year results . 27 Certain, reclassi fi cations have been made to prior p eriod financial statements to conform to the 2000 presentation, which have no effect 28 on previously reported revenue or net income .

98 1 183 . Of course, contrary to these representations, PurchasePro's financial 2 statements were not being presented pursuant to the rules and regulations of the 3 SEC, or in accordance with GAAP . In fact, as discussed above , Defendants were 4 manipulating every revenue stream of the Company so that PurchasePro could 5 falsely report record quarter over qua rter growth. See §IV-V. 6 184 . As a result of the foregoing misleading statements , on August 25, 2000, 7 Prudential analyst Tim Getz ("Getz") gave PurchasePro a boost by stating that the 8 stock was undervalued. In the same article, which was based on and repeated 9 information provided by Defendants , specifically Johnson (Employees 4 and 12 1 0 stated that Johnson improperly provided analysts with inside information), Getz stated that he expected the Company to have a strong third-quarter with a 12 "potentially significant upside " from his $ 13 .7 million revenue estimate . He also 13 reiterated his "strong buy" rating on the Company . 14 185 . Moreover, on August 31, 2000, Patrick Walravens ("Walravens"), a 15 Lehman Brothers analyst, also called the Company "woefully undervalued," In fact, 16 Walravens noted that at 14 times earnings, PurchasePro was trading at a significant 17 discount to B213 players Ariba (at 80 times earnings) Commerce One (at 32 times 18 earnings) and Freemarkets (at 25 times earnings) . Moreover, in his report, which 19 was similarly based on and repeated information provided by defendant Johnson, 20 Walravens highlighted that the online marketplace that PurchasePro ha d 21 co-developed with AOL should deliver 4 million new impressions , or visits, a day 22 to PurchasePro' s online marketplace . 23 186 . Thus, these unfounded positive statements had their effect . By 24 September 8, 2000, PurchasePro's stock had been artificially increased to $32 .875 25 which was up '70% from its closing price of $18 .50 on August 15, 2000 . Further, 26 Keith Jensen, Director of Investor Relations at PurchasePro, stated that the Company 27 was "`very comfortable' with Wall Street's expectations for the quarter ending 28 September 30 .'He added that there were only "a couple of week's [sic] left in th e

99 quarter, and were doing very well ." 2 187 . On September 26, 2000, Leah Thomas of PurchasePro attempted to 3 correct a serious problem regarding the number of alleged users disclosed to the 4 street. Specifically, various sales representatives were doing live demonstrations of 5 PurchasePro's product that created transactions that were being reported as valid 6 customers. In m e-mail from Thomas to Tracy Teague, Jeannie Caruso, John Goetz 7 and Blair Turner, cc'd defendant Anderson, Mary Alyce Smith, Denis Campbell, 8 Chris Odom, Jim Jensen, defendant Benyo, John Devlin, Mike Ermi, Richard 9 Appelbaum, Thomas stated : 10 As I said. last night I will move ahead with this when I have received confirmation that Executive Mana gement understands that with this 11 initiative- I can't be responsible for data integrity and someone steps up to the plate to take responsibility for the problems this could cause with 12 our reporting . 13 Chris ,[Benyo] and Jeff [Anderson] please speak with John Goetz and Jeannie Caruso concerning this . I need to have their approval to change 14 our policy regarding demos on production, as they are who I report to ! 15 I also want to see signed document from sales rep before creating. account: for them. What are they agreeing too? Therefore, we can t 16 meet a deadline to create accounts prior to signed letters coming in! Accounts will not be created until the document is returned . In addition 17 the request for the account should go through the help desk as all internal account requests are tracked through helpdesk . The marketing 18 admin can request The account by sending an e-mail to the helpdesk along with a copy of the signed documents, or they must be held 19 responsible for requesting an account that we have not gotten a signed document for. Blair nees to be included in this as he is responsible for 20 the repo , ting end. 21 While rrm.y roup can monitor the creation of additional accounts and violation there, Blair needs to monitor the creation of bids, po's and 22 reel's that are outside what is agreed to . 23 I am including my Directors and VP as they seem to have been left out of this whole process . When I have received the directive from them 24 to move ahead I will be happy to do so . 25 188. A3 a result of this e-mail, Thomas was warned about possibl e 26 repercussions.' On September 26, 2000, John Devlin stated: 27 Leah , 28 As a friend, just want to make sure you know that Jeff Anderson an d

100 1 Chris Benyo (Both Senior VPs ) both gave us direction to make this happen. In other words they get it and understand the risks . Chri s 2 enyo] has been a huge advocate of yours, but y~o~u might want to duck T s one. You have indirectly said that either -Wendy of Chris don't 3 know what they are talkin about . You might get back more than you bargained for! Just a friendly note. Do what you want with the advice . 4 5 189 . On September 29, 2000, in an interview with Allan Gould o f 6 + Line56.com, defendant Johnson continued to misrepresent the Company' s 7 I relationships with its customers and purported partners by describing them as tru e 8 "partnerships ." The following is an extract from that interview: 9 The value of these relationships comes from the value of our product, our product offering. And the ability of us to make money for these 1 0 partners . When we do a deal, we set it up so where our success mirrors their success - so they are truly partnerships, versus a vendor deal, or selling someone an e-commerce solution . 12 190 . Defendant Johnson' s statements on September 29, 2000, were false and 13 misleading because he knew that these relationships were unprofitable warrants-for- 14 revenue and round trip transactions that had nothing to do with the "value of 15 [PurchasePro's] product ." They simply offered the supposed "partner" much more 16 in warrant profits, investments or future business than the partner paid to 17 PurchasePro . 18 191 . On October 8, 2000, the Lexington Herald released an article which 19 highlighted defendant Johnson's background from his youth. The article is 20 interesting because it portrays Johnson as an individual who would do anything to 21 succeed, whether in sports or business . Moreover, the article described Johnson's 22 lavish lifestyle and how PurchasePro came about . The article stated in part : 23 Since he hasn't sold a single share of PurchasePro stock, Johnson's wealth is still all on paper. It could disappear, or double, tomorrow . 24 But that hasn't stopped The mile-a-minute talker from living the flashy life he loves. 25 After PurchasePro went public he put up 2 .5 million shares of his stock 26 as security for a $100 million line of personal credit . He's spent $44 million so far. 27 Johnson now has his own 10-seat 'et, more Armani suits than most 28 people have socks, a fitness room that rivals any Gold's Gym and a

101 backyard swimming pool that overlooks the Las Vegas golf course where Tiger Woods won his second PGA tournament . 2 Last November, he flew several Lexington friends to a multi-million 3 dollar IPO party in Las Vegas. 4 Lexington Catholic High School Athletic Director Danny Haney who attended the party, said that at the bash, Johnson gave away 15 Rolex 5 watches and a vacation to Hawaii, among other favors . 6 ** *

7 Johnson still stays up after most people are snoozing . He sleeps about four hours a night , devoting his long waking hours to Purchase-Pro. He 8 attribute., his never-ending energy to attention deficit hyperactivity disorder. 9 "You might say I get a lot of miles per gallon ," he said. "I was always 10 willing to do what it took to win. " 11 12 By the end of 1997, every PurchasePro executive had poured his life savings into the company, including at least $2.5 million from Johnson. 13 "There was not one red cent that I could get that I have not put into this," Jo-,lnson said. "I sold my video stores . I started selling other 14 businesses . I borrowed against my life insurance . I took every penny that I had." 15 Unlike m-fiany dot-corn startups, PurchasePro wasn't attracting venture 16 capital from Silicon Valley . And who could blame the money men for their disinterest? Everything about this venture was screaming failure . 17 The comp any~'s CEO used to run video stores and fitness centers. He 18 talks with a Kentucky twang and sometimes uses bad grammar. He also takes a daily dose of Dexedrine to heI control attention deficit 19 hyperactivity disorder. And don' t forget that the company's chief operating oficer was a country -club manager before faking on e- 20 commerce.

21 But this odd bunch persevered . While the big shots on the coasts ignored .} ohnson, there were plenty of folks in Kentucky and Las Vegas 22 willing to pony up for PurchasePro . The company raised $6.15 mi ll ion in its first round of financing in June 1998, A year later, it brought in 23 another 5 1 1 .55 million. 24 Even with that support Johnson would sometimes find himself hours away from pa roll with no money in the bank . So he headed for the 25 blackjack tablye. "I did what I had to do and we met payroll," said Johnson "Most people are fearful to task about it, but hey, what a 26 story. 27

28 Business: is like a sport to Johnson, and he knew the company's $5 0

102 million )PO was only the first pitch in a long ball game. "To me the game had just begun , and I still think we 're in the early innings,;' he 2 said. 3 By Friday of the IPO week Johnson was back in Las Vegas pre paring for a meeting with Keith I.rach, CEO of Ariba, considered to be the 4 leading business-to-business e-commerce company . 5 As Dawahare recalled, it did not go smoothly : "Krach looks at Junior and says, `Would you be interested in selling ?' He says `No, but we 6 might be interested in buying you.' The look on Krach s lace was very memoraole . The idea was preposterous, of course , since Ariba had a 7 market cap of about $10 billion at the time, compared to PurchasePro's $700 million. 8 But Johnson didn't care. "We're not here to play second to anyone," 9 he said. "'We plan on winning this game . " 10 192 . Hence, the article highlights an incentive for defendants, and 11 specifically Johnson, to perpetrate their scheme. The PurchasePro Defendants had 12 put everything into the Company, and if it failed, they would lose it all . Thus, this 13 was not like the typical "dot .com" venture which was backed by venture capitalists . 14 This endeavor . consisted primarily of the PurchasePro Defendants' own money, 15 "every red cent." Moreover, the AOL Defendants were inspired to keep PurchasePro 16 afloat so that they could profit from the sham transactions and warrant-for-revenue 17 arrangements as well . 18 193 . As the PurchasePro Defendants were successfully implementing thei r 1 9 scheme, they continued to inundate the market with unfounded statements 20 concerning the Company's financial condition. For example, on October 17, 2000, 21 PurchasePro announced its third quarter results, which also quoted Johnson as 22 follows : 23 PurchascePro Inc. (Nasdaq : PPRO), a leading enabler of business - to-business e-commerce and exchange-to-exchange 24 technolcy~y for companies of all sizes, today announced record financial results of $17.3 million in revenue for the third quarter ended 25 September 30 , 2000 - an increase of $7 .8 million or 82% over the previous quarter. The net loss for the quarter, excluding non-cash 26 charges, was $4 .7 million or $0.07 per diluted. share, an improvement over a net loss of $7 .1 million or $0 .11 per diluted share for the second 27 quarter. 28 "The company' s continuing trend of record financial results further

103 positions PurchasePro as a leading provider of e-commerce solutions," said Charles E . Johnson, Jr., chairman and chief executive officer of 2 PurchasePro ." "As a result of our tremendous business efficiencies, Purchase'Pro's gross margins were above 90 percent for the fourth 3 quarter in a row. " 4 "Because of our recurring revenue model, we will begin the fou rth q uarter with a significant percentage of the revenue generated in the 5 third quarter," said Johnson. "As a result, we are advancing our profitability estimate to the fourth quarter. " 6

7 194 . Unfortunately for the investing community, as with the statement s 8 above, the claims made by defendant Johnson were equally misleading . Among 9 other things, Defendants had commenced the round trip transactions described above 10 to create and maintain the illusion that there was demand for PurchasePro's software . 11 The Company was also a financial disaster with virtually no accounting controls in 12 place. Moreover, salespeople were falsifying customer accounts and activity so they 13 could collect larger bonuses . The number of customers was being greatly overstated 14 and management was refusing to correct the problem . Contracts were also being 15 backdated so that PurchasePro could prematurely recognize revenue . Hence, as 16 stated above, every revenue stream was being artificially inflated in violation o f 17 GAAP. PurchasePro should not have been reporting "record" results and defendant 18 Johnson had no business stating that the Company had exceptional "business 19 efficiencies" when the exact opposite was true . 20 195 . Then, on October 18, 2000 , defendant Johnson was interviewed on 21 CNBC . Through this interview , Johnson continued making unfounded statements 22 to the financial community about PurchasePro . The following is an extract from that 23 interview: 24 MARK HAINES, CNBC ANCHOR, SQUAWK BOX : 25 PurchasePro.com making the connection . The company beat the Street third quarter results . The net loss was $0 . 10 narrower than expected at 26 $0.07 a share, better than last year's $0 .12 loss, but discountin g an increase in the number of shares net loss actually grew to $4 .7 million 27 from last year ' s $3 .7 million. Revenue up a whopping 900 percent at $17 million . PurchasePro helps connect companies on electronic 28 marketplaces . It says it expects to break even next quarter, instead of

104 in 2001, as previously forecast. So, what's going to happen here? The stock down about 40 percent year to date, ends at about $40 .25 on Tuesday . And any moment now we will see - no we ' re not going to see the stock. Okay. Let's go online and get a closer look.

4 HAINES : In fact, you would have had a profit this quarter, would you not, if you hadn't deferred about $5 million in revenue? 5 JOHNSON : We have $5 .3 million that was done through resellers with 6 no future deliverables or no obligation . But we elected to take an extreme conservative view of our accounting and to defer the revenue. 7 HAINES : What is bringing you to profitability somewhat ahead of 8 schedule ? 9 JOHNSON: Well, we' ve tracked well. There is a hue demand . We have huge resellers- Computer Associates , AOL, gateway Sprint, 10 Office ITepot. And our product sits in the middle of the mid-market and there s such a demand on the offline companies and we've 11 managed the business where we have not scaled our employees over the last three quarter while our revenue continues to grow more that 100 12 percent, our expenses are only growing at about 25 percent. 13 HAINES : I would assume these are primarily small businesses you serve since the big businesses tend to get in and do this themselves ? 14 JOHNSON : Well, actually, we go from the small all the way up to the 15 larger market and the ones that do it themselves, they still need a platform where they can place their actual suppliers and their actual 16 customers . So we built a platform where they can take their customers and their suppliers and not only use it for the internal benefit, but they 17 can take their suppliers and customers and link them with everyone else's suppliers and customers . They can monetize as they previously, 18 their database of both buyers and suppliers, that previously they weren 't able to do . 19 LOUIS NAVELLIER : I notice the current ratio about current assets 20 versus liabilities was starting to deteriorate a bit but it is still, you are still very positive. I mean is that going to improve? 21 JOHNSON: Well, the liability you see on the actual balance sheet is a 22 future obligation we have with AOL, which is tied to four million impressions a day, which will obviously be tied to an increasing 23 revenue. So our cash position is well over $100 million . If you add in the $5 .3 million operationally including amortization we were 24 profitable this quarter. So that is not a concern at all . 25 HAINES : And once gaining profitability, will you stay in profitability? 26 JOHNSON: Oh, absolutely . We are scaling very, very fast. As I said before, we built this company from day one to make money. We 27 weren t a traditional dot .com with venture money . The bulk of"money that capitalized the company came from myself and the other 28 shareholders . We went through a secondary and lockup that's been off

105 1 five months and we ' ve had no executive sell the single first share . 2 196 . Defendant Johnson's statements concerning "strong demand" for th e 3 Company's products were obviously false for the reasons already discussed . 4 However, this interview with Johnson is particularly disturbing because he 5 affirmatively represented that the Company was taking an "extremely conservative 6 view of accounting" when nothing could be further from the truth . In fact, on many 7 occasions throughout the Class Period, a number of defendants, including Johnson , 8 Benyo and Miller, were approached by Company employees concerning 9 PurchasePro's accounting deficiencies and improper revenue recognition . However, 10 these defendants affirmatively refused to correct the problems . Moreover, the 11 Company was the target of an SEC investigation which addressed one of these 12 issues, a lack of accounting controls within the Company . This ultimately led to a 13 settlement with the SEC enjoining the Company from violating the Exchange Act . 14 In fact, one employee even stated that PurchasePro was not following GAAP during 15 the Class Period, but rather JAAP, which stood for "Junior ' s Accepted Accounting 16 Principles ." See information provided by Employee 6, §V. 17 197. On the same day, October 18, 2000, the Company disseminated th e 18 following press release which was entitled, "PurchasePro Sees Profit by End of Year 19 After Better 3rd Quarter." The release stated : 20 PurchasePro . com announced a third-quarter net loss that wasn 't nearly as bad as analysts ' pre dictions and said the company will reach 21 profitability by year's end. 22 The Las Vegas-based Internet company with Kentucky roots posted a net loss of $4 . 7 million, or 7 cents per share well below the 17 cents 23 analysts had predicted. PurchasePro lost $~.7 million, or 12 cents a share, in the year-ago quarter. 24 The company had revenues of $17 .34 million for the third quarter, a 25 938 percent increase over revenues of $1 .67 million in the third quarter of 1999 . 26 PurchasePro's revenue increased 82 percent from $9 .5 million in the 27 previous quarter . 28 Chairman and CEO Charles "Junior" Johnson, a Lexington native, sai d

106 1 the company was increasing its pre-earnings estimates for the fourth quarter based on strong sales of marketplace software . 2 "We are overwhelmed with the success of the quarter ," Johnson said on 3 a conference call to analysts . "We are speci fically targeting p rofitability in the fou rth quarter of this year . We have a zero cash 4 burn rate . " 5 Businesses pay PurchasePro a monthly fee of about $75 to list a catalog of products on PurchasePro's Web site . Other PurchasePro members 6 then buy from those electronic catalogs . 7 Johnson said. PurchasePro added 5,311 small and medium-size businesses to its customer base during the quarter, raising the total to 8 more than 30,000 . 9 The company also sold 49 private-label marketplaces during the quarter. Nearly two-thirds of PurchasePro's revenues came from 10 software licensing fees on those private marketplaces. 11 Johnson said transactions on the network durin the third quarter were 12 up 50 percent over the second quarter, with more than 16,000 companies using the system. 13 14 198 . Johnson's statements concerning "strong sales of marketplace software" 15 were false and misleading because revenue and sales were being artificially inflated 16 with the use of "skins" and round trip transactions . The statements concerning the 17 number of users and orders being executed on PurchasePro's system were also false 18 and misleading. As numerous employees have indicated, these numbers were 19 materially overinflated and did not represent the true number of users on the 20 Company's system. In fact, certain former employees from the MIS department 21 calculated that PurchasePro's actual user base was no greater than 1%-9% of the 22 numbers being reported by the Company, and in this instance, defendant Johnson . 23 199 . Further, despite Johnson's prior statements to the public concerning the 24 lack of insider sales at PurchasePro, only days later, on or about October 23, 2000, 25 defendants Chiles and Clough took advantage of the inflated price of PurchasePro's 26 securities. With their insider knowledge that the Company would be "re-releasing" 27 its prior second quarter results later in the week reclassifying Company income, they 28 sold uncharacteristic amounts of their stock . Defendant Chiles sold a fourth of his

107 1 direct shares and almost ten percent of his indirect shares totaling $5 .5 million. 2 Defendant Clough sold $4 .7 million of his direct shares . Plaintiffs are unaware of 3 either defendant selling any quantities of their PurchasePro securities prior to this 4 time . 5 200 . On October 23, 2000, PurchasePro announced that it had agreed t o 6 acquire Stratton Warren Inc . using a combination of cash and PurchasePro's stock . 7 The acquisition was completed on January 17, 2001, for a total price of $14 .5 8 million . Of this amount, approximately $5 .5 million was paid in cash, with the 9 remaining $9 .0 million paid with PurchasePro's artificially-inflated shares . As such, 10 the PurchasePro Defendants were motivated to maintain the Company's stock at an 11 artificially inflated level to facilitate the Stratton Warren Inc . acquisition. 12 201 . Also on the same day, PurchasePro posted a press release entitled , 13 "PurchasePro Posts Answers to FAQs and Details Business and Financial Model on 14 its Website ." Defendants, specifically Johnson and Carton, made statements that 15 were patently false in light of the information provided by numerous insiders of the 16 Company . For example, the release stated : 17 "We believe that postin these items on our Web site will allow all investors to become bet er informed about the viability and growth 18 prospects of PurchasePro," said Christopher P . Carton, president and chief operating officer for PurchasePro . 19 "The company's focus on multiple recurring revenue streams can 20 sometimes seem complicated to the average investor . We have worked to develop explanations to demonstrate to investors and others the 21 strength and long-term profitability of our model . " 22 The site is operational and available immediately . If investors have specific questions , they should send an e-mail to 23 Investor@ PurchasePro.com. The company will continually update this Web site with new questions and answers as they are received . 24 About PurchasePro Inc . - PurchasePro Inc . (Nasdaq : PPRO), is a 25 leading enabler of business -to-business e-commerce for companies of all sizes and powers approximately 200 private -labeled marketplaces 26 encompassing more than 30,000 businesses . With the fastest e- marketplace products in the industry , such as e-Procurement, v- 27 Distributor and e-MarketMaker the company takes private labeled marketplaces operational in 45 days or less. 28

108 We have several types of revenue that makes our model work . You can see these in our financial statements. a) Network Access Fees : This is where you'll see much of the recurring po rtion of our revenue . b) License Fees : As a practical matter, this is the up front fee a marketplace owner pays to control ingress and egress from its marketplace . This fee gives them ownership of their marketplace and provides the catalyst for the creation of recurring revenue . Over the first year, each marketplace owner pays approximately 50% of the cost of the market lace license in recurring revenue in equal monthly installments . c) Advertising : This can take the form of "impressions ' (typical advertising model) slotting (i .e. placement in a particular spot on the network), preferred (ownership of a particular category .) or classifi eds (a place for special pricing for oversfocks and clearances and new product introductions). There' s a great way to understand the long-term recurrin revenue structure that our business model facilitates. Typically, 5(3% of the 1 0 value of a license fee moves into recurring revenue on an ongoing basis . We believe the typical marketplace will retu rn 100-125% in year two in recurring revenue through various fees . This translates into long-term revenue with very little cost basis . 12 In Q3, PurchasePro had $11 .7 million in license revenue . Of this, 50% 13 will move into recurring revenue over future quarters. On average, we forecast participation in marketplaces at about 200 member companies 14 per marketplace, though many Iarger ones will have more . We don't expect to consistently begin receiving revenue from marketplace 15 members for up to three quarters after a marketplace begins operation. Once in operation, we estimate that the average customer will 16 generate$100 per month in recurring revenue fees . These come from a combination of membership, advertising, maintenance and transaction 17 fees . ) 18 19 PurchasePro has focused tirelessly on cost containment and top line revenue growth. Expenses the last two quarters grew approximately 20 25% each quarter including amortization while we averaged nearly 100% revenue growth . We did this while maintaining 90% plus Toss 21 profit margins and less than 1% attrition . At this rate, we believe PurchasePro will be profitable in the fourth quarter of fiscal year 2000 . 22 ** * 23 Why do you use warrants? - First, a warrant is an ag reement that 24 allows someone to buy stock from the company at a pre-determined price. 25 We have issued warrants based on our partner' s ability to create long 26 term recurring revenue and other significant values for PurchasePro . We want our strategic partners to invest in us through performance- 27 based warrants rather than purchasing shares . We believe that a partner that achieves earned equity in our company will enable the relationship 28 to build long term economic benefit for both companies because of the

109 aligned interest. The companies with warrants currently are Office Depot, Sprint Corporation, America Online and Gateway Computer. "We founded PurchasePro with the philosophy that our equity will always have supreme value because the original investors are the founders," said chairman and chief executive officer Charles E . Johnson, Jr. "We purposely avoided bringin in high priced outside venture money so we could protect our equity for all shareholders and employees . We have an overwhelming percentage of the company and can use equity to motivate our partners through earned opportunities that create long-term revenue and value for every shareholder. "Nonetheless , we believe that in the aggre gate,, the total share count and ownership of our shares still remains predominately in the people who either produce revenue directly or indirectly which ultimately results in a larger return to all shareholders ," Johnson continued . "I carefully manage this process because my personal equity stake in the company is by far the largest and I do not want to take any dilution that doesn t 1 0 yield a substantial return that exceeds the cost of the equity dilution ." An example of a performance -based warrant is AOL . They earn one warrant for every $80 in recurrin revenue generated through their 12 marketplace. If AOL can produce 10 million per month in revenue, they will earn the right to receive shares of PurchasePro stock . If you 13 take the amount of revenue the warrant produces , multiplied by a reasonable Wall Street multi le of 35 times earnings , and assume that 14 our gross profit margin is at 93 percent , you can determine the value of the revenue produced to earn the warrant, excluding- the exercise price 15 of the warrant (typically set at market price on the day of issue) . 16 Under our agreement with AOL, they receive $ 50 million dollars over a two-year period . For this, AOL is to deliver 1 .4 billion or more 17 marketing opportunities throughout all AOL prope rties to drive AOL business users to the AOL/Netscape marketplace . In return for the 18 cash, PurchasePro is entitled to the first $ 100 million in collected revenue through the Netscape market-place. For every business entering 19 the marketplace PurchasePro and AOL share ownership of the customer and revenue into perpetuity . 20 AOL and PurchasePro are also jointly develo ping a next generation of 21 e-commerce software . This version will contain proprietary elements from both AOL and PurchasePro . AOL must dedicate programming 22 personnel to the relationship. For all these benefits , PurchasePro believes it would have been required to spend a similar amount 23 irrespective of its relationship with AOL . 24 Other warrants give us value like training for mass users of PurchasePro marketplaces, training development, marketing materials 25 aimed at potential marketplace users and sales incentives for partners. In short, we've used equity as a carrot to motivate large partners to help 26 grow our business at an astounding rate. 2 7 Why have your receivables (DSOs) grown so fast? - Over the past two quarters, PurchasePro has grown at 1109% and 82°/% respectively. Much 28 of the growth has come in the form of license fees for marketplaces .

110 Traditionally, PurchasePro's revenue came in the form of electronically transferred membership fees . With these there was virtually no 2 outstanding collectible. As we've sold higher ticket license fees, receivables were bound to go up with the typical licensee paying their 3 outstanding balance in a net 30 days . These balances will continue to rise in the sort term because license fees are accelerating quarter over 4 quarter. Over time as the recurring portion of revenue kicks in, receivables will level out . In conjunction with our auditors, we strictl 5 evaluate the creditworthiness and ability to pay of all customers . We recognize no revenue from a licensee customer unless our auditors are 6 convinced this revenue is collectible . Additionally, we have set aside a reasonable portion of the receivables for bad debt in our reserves . 7 ** * 8 What falls under deferred revenue and why do you have it? -- In 9 PurchasePro ' s business model , these dollars would typically be booked as revenue. During the quarter, the company began an aggressive 10 reseller program. Thee accounting literature states a company must have historical evidence that it will not take returns on licenses sold . 11 Obviously this history is built over time. It is PurchasePro ' s belief that we wi ll never take a return of a license fee, either now or in the future . 12 During the quarter we delivered marketplaces associated with this revenue with no expectation of future deliverables on the part of the 13 marketplace owners . However, in consultation with our auditors, we elected to defer this revenue until future qua rters . At September 30, 14 2000 we had $5 . 3 million booked as deferred revenue under our reseller program . It will be collected as licenses are place on behalf of 15 PurchasePro . The balance is advertising revenue that will be booked as it is realized . We do not expect this line item to increase because we 16 do not recognize revenue until we have delivered the product and service in its entirety . Our goal is to focus on never ending recurring 17 revenue rather than finite revenue that falls in the deferred category . 18 202 . Defendants statements concerning growth, profitability, customer 19 attrition and the overall financial strength of the Company were false and misleading 20 for the numerous reasons previously discussed . However, the statements concerning 21 the creditworthiness of PurchasePro's customers and its receivables deserv e 22 particular attention. As noted by numerous former employees, the collections 23 department was virtually non-existent at the Company . Further, PurchasePro was 24 not conducting any credit checks on its customers throughout the Class Period. In 25 fact, management was even preventing employees from charging customer accounts 26 for fear that they would cancel their membership . Thus, the growth in receivables 27 for the Company was not due to strong demand. On the contrary, it was due to 28 management's refusal to accurately report the true number of users on th e

111 1 PurchasePro system. 2 203 . This is supported by an internal Company e-mail dated October 24 , 3 2000, which was sent at 1 :39 PM, from Justin Carlson ("Carlson"), a PurchasePro 4 employee, to fellow employees Mary Ellen Ohara, Donna Lauger, Leah Thomas an d 5 I John Devlin . In that e-mail, Carlson notes : 6 Leah is correct , when she stated we will need Inside Sales involvement in getting contracts for those companies that used the Office Depot 7 Web enrollment process six months ago . 8 The Terms and Conditions for the ODP clients stated they would receive 6 months of PurchasePro for free . The six months is up, and 9 now A/R must invoice these clients . Here is where the problem is exposed. The Off ce Depof web enrollment allows accounts to he 10 created before credit cardinformation is entered. The Majorit y, ofthe Of ace Depot web enrollment accounts do not contain credit card 11 information, so therefore A/R can not invoice. 12 A/R now requires a paper contract to be si gned and returned in order for the clients to be successfully invoiced . If the clients do not wish to 13 pass along billing information , their accounts should be de -activated . 14 204 . Interestingly, defendant McGhee previously ran Office Depot's Nort h 15 American operations and was responsible for Office Depot ' s 950 stores and 35,000 16 employees . Moreover, as of November 29, 2000, Office Depot was PurchasePro' s 17 largest customer. 18 205 . Further, while the Company website touted the relationships it ha d 19 created by using the warrants-for-revenue model, the website did not indicate that 20 the AOL Warrant Agreement was in the process of being modified . The new 21 agreement would provide AOL with $3 for every $1 of revenue generated for the 22 Company. As discussed above, these types of relationships, as well as the sham 23 transactions, were far from beneficial for the Company . PurchasePro was simply 24 taking money out of one pocket only to receive it later in another pocket, thereafter 25 claiming it to be "revenue . " 26 206 . Days later, on or about October 27, 2000, the Company re-released its 27 second quarter results . The new results reflected that PurchasePro would be 28 "reclassifying" 82 .3 million, nearly 25% of its total profit for the second quarter, int o

112 1 "other," one-time, income . That money had previously been classified as recurring 2 income . On October 27, 2000, PurchasePro filed with the SEC an amended For m 3 10-Q for the second quarter of 2000, signed by defendant Clough, that contained th e 4 I new and restated results . The 10-Q also stated that : 5 The unaudited condensed interim consolidated financial statements of PurchasePro . com, Inc. and its subsidiary, Hospitality Purchasing 6 Systems (collectively, the "Company") for the three months and six months ended June 30, 1999 and 2000 included herein, have been 7 prepared by the Company,without audit, pursuant to the rules and regulations of the SEC . Certain information and footnote disclosures 8 normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or 9 omitted pursuant to such rules and regulations relating to inte rim financial statements . In the opinion of management , the accompanyin 10 unaudited condensed consolidated financial statements reflect a& adjustments, consisting only of normal recurring adjustments 11 necessary to present fairly the results of the Company's operations and its cash flows for the three months and six months ended June 30, 1999 12 and 2000 . The accompanying unaudited condensed consolidated fi nancial statements are not necessarily indicative of full year results . 13 Certain reclassi fications have been made to prior period financial statements to conform to the 2000 presentation, which have no effect 14 on previously reported revenue or net income . 15 207 . Even through this restatement, the PurchasePro Defendants refused t o 16 disclose the true financial condition of the Company to the investing community . 17 In fact, while the market voiced certain concerns regarding this "reclassification" of 18 income, they continued to assure the investing community that all was well with 19 PurchasePro. This was done in furtherance of their scheme and in an effort to thwart 20 a decline in the value of the Company's securities . 21 208. In the upcoming months, it became more important than ever fo r 22 Defendants to continue perpetrating their fraud, especially when confronted by 23 analysts and financial columnists who were beginning to express doubts about 24 PurchasePro's financial results and accounting . For example, the PurchasePro 25 Defendants countered by saturating the investing community with more unfounded 26 positive news concerning the Company's growth and financial stability . 27 209. For instance, in a pair of articles that appeared in TheStreet.com on 28 November 3, 2000 ( "Doubters Question PurchasePro's Results, as its Stock Pric e

113 1 Dives") and November 8, 2000 (" PurchasePro Pounded Over Deferred Revenue 2 Issue; CEO Unfazed"), analysts stated doubts and concerns about PurchasePro's 3 financial results , its accounting and what appeared to be a slow down in 4 PurchasePro's overall business . Further, the November 3, 2000 article specifically 5 noted that : 6 But concerns over PurchasePro's numbers don't end there. The 7 company beat third quarter estimates by a dime because it didn't record a sales and marketing payment that analysts were looking for. 8 Under a March agreement with AOL for technology development 9 Purchas{ Pro has to ay $20 million over the next two years in equal ~ uarterl -y installments (in total , it has agreed to pay AOL $ 70 million 10 through✓various deals) . But it only paid 9 1 .1 million of the $ 7 .1 million it was expected to pay during the third quarter, a result of a "timing 11 issue," t;ie company says. 12 210 . Nevertheless, these criticisms were actively countered . In fact, 13 defendant Benyo offered the following statements which appeared in the November 14 3rd article : 1.5 Purchase;Pro blames the stock's decline on the overall market and 16 disputes critics' contentions about its recent results . "Business from a revenue perspective and from customer interest is white-hot right now," 17 says Chris Benyo, PurchasePro's marketing chief. 18 19 PurchasePro ' s Benyo says the company is on track . "We've said we would be profitable in Q4, so that means we expect revenues to cover 20 that initial AOL expense,' he says . 21 211 . In addition, defendant Johnson offered the following statements on the 22 deferral of revenue issue which appeared in the November 8th article: 23 "That revenue will get recognized some day because it has to be, and 24 it's the auditor' s determination to decide when that happens," says Johnson, "But we won ' t take returns. As Ion as I'm at PurchasePro, 25 there will be no retu rns. I know that for sure . They [the auditors] may not know that for sure, but I do. Who else do you think can make that 26 decision?" 27 28 And Joh:zson says it ultimately doesn't matter to him whether he ever

114 1 gets to recognize the $2 million in revenue . Certain] , at least, he contends it won't kee his company from making its fourth-quarter 2 revenue projections ofp$30 million to $32 million -- and also turning a profit. 3 "First and foremost, it doesn't matter, it's not going to make or break 4 my quarter " Johnson said . "It's a gnat, in terms of significance . Let's say the deferred revenue stayed the same and I don't recognize any of 5 it . We've still got the cash in the bank and I smoke the quarter, so what difference does it make?" 6 7 Johnson said PurchasePro wasn't doing anything unusual with its 8 numbers . Instead, the company was being conservative in its accounting, he said . 9 "I'm 99% sure that I get to recognize that revenue this quarter, but I'm 10 not courting on it. It's no~t~ goin to make a difference whether we make our numbers or not . We're taking the high road and going with 11 the conservative accounting approach . 12 212. The statements by Benyo and Johnson were calculated to counter an y 13 criticisms being made about PurchasePro . Moreover, they had no basis to make 14 these statements because they knew the Company was doing worse as the Class 1 5 Period commenced and they were not following "conservative accounting . " 16 However, it still was not enough . Another tactic was needed to artificially boost 17 PurchasePro's revenue . As a result, during November 2000, Defendants modifie d 18 the warrant deal between the Company and AOL by reducing the strike price of 19 AOL's warrants to $0 .01 per warrant. In this manner, for every $1 worth of 20 "revenue" generated by AOL for PurchasePro, AOL would receive $3 worth of 21 warrants.

22 213 . A~ the Class Period continued, on November 14, 2000, in an article 23 entitled "PurchasePro Named to the Standard 100 Powered by Epoch Partners" 24 defendant Ben-,,,o misrepresented the member base of PurchasePro, which he kne w 25 to be false, as follows : 26 Inclusion in the Standard 100 is an honor for our company said Chris Benyo, senior vice president of marketing for PurchasePro . We believe 27 our recurring revenue business model , industry leading member base of more than 30,000 businesses and impressive list of strategic pa rtners 28 positions us as one of the most influential companies shaping today' s

115 Internet economy . 2 214. On or about the same day, the Company filed with the SE C 3 PurchasePro's Form 10-Q for the third quarter of 2000 . Signed by defendant 4 Clough, and dated November 13, 2000, the Form 10-Q reiterated and expanded upon 5 the third quarter financial results released on October 17, 2000. Further, the 10-Q 6 11 stated that: 7 The unaudited condensed interim consolidated financial statements of PurchasePro.corn, Inc . and its subsidiary, Hospitality Purchasing 8 Systems. (collectively, the Company) for the three months and nine months ended September 30, 1999 .and 2000, included herein, have 9 been prepared by the Company, without audit , pursuant to the rules and regulations of the SEC . Certain information and footnote disclosures 10 normally included in financial statements prepared in accordance with generaly accepted accounting p ri nciples have been condensed or 11 omitted pursuant to such rules and regulations relating to interim financial statements . In the opinion of management , the accompan in 12 unaudited condensed consolidated financial statements reflect a adjustments, consistin g only of normal recurring adjustments 13 necessary to present fairly the results of the Company ' s operations and its cash flows for the three months and nine months ended September 14 30, 1999 and 2000 . The accompanying unaudited condensed consolidated financial statements are not necessarily indicative of full 15 year results. Certain reclassifications have been made to p rior period financial statements to conform to the 2000 presentation , which have 16 no effect on previously reported revenue or net income. 17 215 . As noted with other 10-Q' s filed by the Company, that were also signed 18 by defendant Clough, and contrary to the foregoing representations, PurchasePro's 19 financial statements were not being presented pursuant to the rules and regulations 20 of the SEC, or in accordance with GAAP. In fact, as discussed above, Defendants 21 were manipulating every revenue stream of the Company so that they could falsely 22 report record quarter over quarter growth . In addition, Defendants had modified the 23 warrant-for-revenue deal with AOL and falsified financial records to fraudulently 24 credit AOL with the referral of $10 .5 million in revenue, as an additional means to 25 artificially inflate the revenue of the Company. See §§1V-V. 26 216 . Days later, on November 20, 2000, an article was released concerning 27 the AOL and PurchasePro relationship . In that article, defendant Benyo further 28 touted the resu`ts from the relationship. Specifically, Benyo stated :

116 1 Some 1 00 , 000 small businesses have already registered to use the service, said Chris Benyo, PurchasePro ' s senior vice president of 2 marketing. Benyo said with the new site, those businesses will be able to significantly add to their presence, tapping PurchasePro capabilities 3 that range from e- procurement to listing online catalogs . 4 217 . 0- course, these statements were also false and misleading . As 5 numerous employees have stated, the majority of "customers" that "registered" with 6 PurchasePro as a result of the Company's relationship with AOL did not even know 7 they had opened a PurchasePro account. Hence, as described in great detail by the 8 former employ°es of PurchasePro, these accounts were not true user accounts and 9 only contributei to artificially inflating the number of "members" of the PurchasePro 10 system. See th:, information provided by Employees 3-6, 9 and 12 in §V above . 11 218 . On November 29, 2000, TheStreet.com published an article discussin g 12 the hiring of defendant McGhee, who had previously run Office Depot's North 13 American operations . When questioned about issues concerning PurchasePro's big 14 rise in the Com pany's accounts receivable, a flattening of its recurring revenue, and 15 $5 .3 million in deferred revenues, McGhee noted that before accepting the job, he 16 spent days with the Company's top executives, grilled the Company's lawyers an d 17 even probed its auditors . Specifically, McGhee stated : 18 The questions I put to the auditors were whether the issues are 19 somethir..g that' s specific to PurchasePro or a challenge within the industry, . . . [the response I got back was that these are industry-type 20 challenges that are in the web industry. They said they don't see an issue wit :.1 PurchasePro or its management team . Obvious~ly when you 21 look at the volume of pronouncements out of the SEC: lately, it's obvious that they 're trying to move the accounting issues along to catch 22 up with what' s happening in the industry . 23 219. Of course, these statements are false and misleading because if McGhe e 24 had conducted the investigation he claims to have made, the problems with 25 PurchasePro would have been apparent . The accounting issues were indeed 26 Company -spec :.fic and not industry-wide . 27 220 . While Defendants were touting the AOL-PurchasePro relationship t o 28 investors, on December 21, 2000, defendant Colburn addressed about 100 employee s

117 1 assembled in the Seriff Auditorium at AOL headquarters in Dulles for the monthly 2 all-hands meeting of his unit. The purpose of the meeting was to hand out the 3 Bammy Awards, a takeoff on television's Emmy Awards . The Bammys were given 4 to the best performers in Colburn's division, a group of aggressive deal maker s 5 skilled in extracting maximum dollars from a prospective client . 6 221 . Bvisiness affairs -- "BA," as it was known at AOL -- was in the middl e 7 of many of the company's biggest and most complicated deals, which helped AOL 8 reach or exceed its financial targets . On this day, Colburn bestowed the Bammy's 9 gold-star plaque on Kent Wakeford ("Wakeford") and Jason Witt ("Witt"), who had 10 put together the amendment to the PurchasePro/AOL Warrant Agreement . 11 According to several people at the meeting, Colburn praised the two men for wha t 12 he called a "science fiction" deal to generate revenue . Wakeford and Witt joined 13 Colburn on sto.ge and accepted the plaque . In his acceptance speech, Wakeford 1 4 thanked someone who was not in attendance -- "Junior," i.e., defendant Johnson. 1 5 The crowd roared with laughter over the tongue-in-cheek remarks . 1 6 222 . Approximately one week later, on or about December 28, 2000, 17 1 defendant Johnson was interviewed by CNBC. Defendant Johnson used this 18 interview as yet another platform to further allay concerns and criticisms o f 19 PurchasePro. The following is an extract from the interview: 20 JOHNSON : Well, I think that we had a great year . We will be cash EPS positive this quarter. I think last year at this time we did $2 .7 21 million for the quarter. We were caught in the whirlwind of the NASDAQ ,and now we will survive the 11ushing out of the dot.coms. 22 We are going to be cash EPS positive. We will do as much revenue this quarter as we' ve done the last three quarters combined . 23 MARIA: You last week announced an alliance with BroadVision . Tell 24 us about that. What does that do for your company ? 25 JOHNSON: Well, our alliance with BroadVision , Computer Associates, Gateway , AOL, they're all similar in the fact that we will be their 26 platform.for their B to B strategy and by doing so it allows us to get to a mass market at a much faster pace and will help us create multiple 27 streams of revenue as well as deliver the personalization of software that BroadVision has and offer our business base a wide range of goods 28 and serv ;ces

118 GEROLD KLAUER : Mr. Johnson this is Gerry Klauer . I'm impressed with what you just said in light ot the fact through the nine months I think you reported revenues of over $30 million and that the fourth quarter you just said would be as much as what you did in the first nine months. Can you tell our viewers how you derive your revenues ? JOHNSON: We derive it from multi ple streams. First is people pay an access fee to access universal network and the way that we've built our solution is we have e-market services where people can market their goods and services to the entire universal network as well as each rivate marketplace that we have . We've really built this business from Fhe ground up . We weren ' t incubated to be a dot . com, So we are ha1 ppy, that this business model is beginning to flush out and we think 0 T will be a coming out party of the winners and losers and we feel we will be on the winning side. KLAUER: Just a quick follow on. Do you get a percentage of the transactions that occur between companies? 1 0 JOHNSON : We are actually etting anywhere from a half percent to a one percent transaction fee . We get access fees . We get license fees . We get about eight or 10 different types of fee structures . So we have 12 no one fee structure that we are dependent upon and because of that our customer base is very bul lish. The demand is very very high and 13 we hear about those soft landings and hard landings and we have yet to see any effect at all on our space at all , 14 MARIA, That all sounds great, Mr. Johnson, but I was just looking at 15 your customer base and you 've got Computer Associates and Sprint and Gateway and Office Depot all of whom have already said that 16 things are slowing down, Are you not feeling that slowdown ? 17 JOHNSON : That ' s actually to our advantage because they ' ve now tried to create new streams of revenue and we are that stream of revenue. 18 We are an alternative source of revenue where they can now take their business customers and monetize them in a different way by linking 19 them in this universal database . Each one of these customers now has a chance not only to buy those articular company' s goods and service, 20 but we enable them to sell Their goods and services to the other custome,- of these companies . So we actually look at that as an 21 opportur.ity and actually it will be a bene fit to us this year, 22 MARIA : All ri ht, what exactly specifically do you need to do to enhance shareholder value? 23 JOHNSON: I think that really we're not ping to have to do much . I 24 think the numbers will speak for themselves . I think that up to this point, al . these stocks were valued on ho p e and hype based on their 25 press releases and we are lookin g forward to `01 because we think at the end c>f the day the companies that make the most mone y will be the 26 winners . And now that we are all be inning to be cash EPS positive, we feel like the numbers will speak for themselve s 27 GEROL] KLAUER: Mr. Johnson, the fourth quarter, I'm still very 28 impressed. Congratulations . Is that any seasonal effect in the fou rth

119 1 quarter? 2 JOHNSON: No it is a ramping effect of our recurring revenue and we are going to do from $ 17 million in Q3 to over $ 30 milion in cash EPS 3 positive, Ifyou. look at each quarter, we have grown anywhere from 80 to 100 percent in revenue while our expenses have onl y grown at 25 4 percent . We have gross mar ins at near 94 percent. I ftpnk it comes down to [how] the market will recognize who the real winners in this 5 space will be and because our to p line was not as great as some of the other players in the s pace, I think we were discounted heavily. But I 6 think now people see now scalable the model is, but more importantly how profitable the model is. 7 MARIA : I'm just readin a report from Lehman Brothers on your 8 compamr and the analyst here is saying that he thinks that the program with AOL is going extremely well but he was looking for revenues 9 from your alliance with AOL to come in the first quarter, but in fact it is kicking in earlier than people expected . Is that correct? 10 JOHNSON : Yes. Our alliance with AOL has actually been it's 11 exceeded even my expectations . AOL has nine million different business users and three million different business and we are the 12 platform and strategy that they are taking to market . And we've had in the Net business registrations near a million businesses already 13 registered. So we feel like the success of this actual program will exceed I think, everyone's expectations . 14 223 . .fohnson s statements , and the image he po rtrayed of the Company 15 throughout this interview , were false and misleading . While Johnson knew abou t 16 everything that was wrong with the Company, and was aware of all the differen t 17 methodologies that were being employed to artificially boost Company revenue, 18 including the 1round trip and sham transactions, he still touted PurchasePro . 19 Throughout thus interview, he claimed that the Company would be a "dot .com 20 winner," that h,.- was bullish on his customer base, that demand was high and that 21 PurchasePro was both scalable and profitable . There was no basis for Johnson to 22 make any of these representations. Furthermore, when directly asked about the 23 effects of the general slowdown in the economy on the Company, Johnson countered 24 that PurchaseR-o was not being affected and that it would ultimately be good for 25 business. In fact, business was far from good and it was only going to get worse . 26 224 . On the next day, December 29, 2000, defendant Johnson wa s 27 interviewed by .CNN. Once again, as with the foregoing interview , Johnson made 28 false and misle,-, ding statements concerning the Company ' s present condition and it s

120 financial outlook. Moreover, he knew that his statements were false and misleading 2 for the reasons stated in the foregoing paragraph. The following is an extract from the interview: 4 CHARLES MOLINEAUX, CNNfn ANCHOR : . . . Do you think that your company is now ready to tu rn around and move into 2001 ? 5 CHARLE S JOHNSON, CEO PURCHASEPRO . COM: We've really 6 been ready the whole year . This quarter will be the first quarter that we're cash EPS positive. So we really feel like that the winners and 7 losers will flush themselves out with the results . 8 [AMANDA] LANG[CNNfn ANCHOR] : What differentiates you from some of 'the other players in the B to B space? The names that come up 9 Ariba, Commerce one. How is Purchaseone [sic] any different? 10 JOHNSON: Most of the other companies targeted going after a few customers that would pay a lot of money . We've gone after a lot of 11 customers that would pay a little bit of money but a gregately our gross margins are near 94 percent and with the scalability ot`our model, our 12 operating margins will approach 50 to 60 percent upon maturation of the modLal. 13 MOLINEAUX : Now a couple of concerns with that model though . 14 Your target is a mid-size company . Usually they are less the leading edge adapters and adopters . Doesn't that put you at risk for a slower 15 pace of adoption? 16 JOHNSON: Well I think that's been a hypothesis that everybody started with but we found in reality that's not the case. We're olng 17 after this market through AOL, through Gateway, through Sgprinf, through Computer Associates and by not having to go through the 18 traditional route these people are very quick to adapt because its their money and any money that they save or any marketing costs that they 1.9 can reduce to increase their sales, they're real quick to adapt . 20 LANG : Tell us about your management team. There are some concerns about th, ;re being some holes in it . Are you out vigorously recruiting. 21 JOHNSON : Holes, I'm actually kind of surprised . We,ust brought in 22 the former president of Office Depot Shawn McGhee . We have senior level ma.na ement from Sprint, Sell South . Our legal comes from 23 Pillsbury' Madison & Sutro, a big law firm . Obviously we'll continue to, as the company grows, to grow our management team but at this 24 point in time we think we have a top tier management team that's second to none and I think its reflective on our results of being cash 25 EPS positive this quarter . 26 MOLINEAUX: We've seen a dramatic change in the business to business world this year. Instead of independent market places and 27 exchang°s being set up, there are a lot of them now being set up by the industries and players with the industries that they are supposed to 28 serve . Where do you fit into that?

121 1 JOHNSON : We actually have a universal platform that allows all the industries and all the individual companies that want to build a market 2 place to build and have complete ,interoptibility (ph) . So instead jot] building individual silo's, we built it where both private and public 3 marketplaces can come together and every business in the marketplace has the ability to both buy and sell which is unique and its kind of 4 unique cause we started our platform from day one that way and because of that we have the greatest amount of liquidity and the 5 greatest amount of scalability because of already instant liquidity for a new market place . 6 7 225 . During this time frame, the PurchasePro Defendants also participate d 8 in a conference call to review the fou rth quarter and year ended December 31, 2000 . 9 1 Once again , thccy used this as a platform to continue touting the financial strength 1 0 and growth of the Company . In fact, during that conference call, defendants Johnson, Benyo and Clough made nume rous misrepresentations regarding the 12 Company. 13 226 . Defendant Clough made the following statements concerning "customer 14 I creditworthines s" and "accounts receivable." During the conference call, Clough 15 stated : 16 it's important to note, the hi h quality of receivables , as demonstrated by our r6cent license sales fo high quality names such as Hone ywell 17 and BroadVision . Our reserve for doubtful accounts is $2 .5 million . We believe we have limited exposure to the dotcom world and our 18 reserves are sufficient to cover any exposure . We do not anticipate any collection issues, noted by the si gnificant decline in DSOs . And we 19 believe that we have prudently added to our reserve . 20 227. These statements were false and misleading . The Company had a great 21 deal of exposure on these matters . PurchasePro's collection department was 2 2 virtually non-existent, which was an issue in and of itself. As noted by numerous 2 3 former employees of the Company, accounts receivable were overinflated . Most of 24 PurchasePro's ('~ustomers had completely abandoned paying the Company for their 25 accounts and many did not even know they had accounts with the Company, which 26 lead to the same. result, non-payment. 2 7 228 . During the same conference call, defendant Benyo made the followin g 28 1 misrepresentati~':)ns . In an effort to facilitate the appearance of an ever growin g

122 customer base to the investment community, Benyo noted : 2 During the fourth quarter, our customers received more than 18,000 purchase orders, 45 percent more than in the third quarter. To give you 3 an idea of how transactions are ram pint we've already done as many purchase orders this quarter as we did the entire fou rth quarter. There 4 were also more than 110 ,000 bids and bid recipients in the fourth qparter. During the quarter we added 100 ,000 business from 5 Netbusiness and more than 10,600 from our other marketplaces . 6 7 I think the other factor to put in there is the 100 000 businesses from the AOL relationship that have really only joined the network and are 8 still going through their adoption curve . So, we see the addition of lots of buyers, lots of suppliers and back-end integration in driving 9 transaction volumes in the near term and the long term . 1 0 229 . These statements were similarly false and misleading because most o f 11 PurchasePro's .ustomer base was non-existent . According to former employees of 12 the Company, the "true" number of paying users of the PurchasePro system 1 3 amounted to little more then 1 %-9% of the numbers being reported by the Company . 14 Further, the accounts being received from AOL were nothing more than a charade 15 at best. 16 230 . Thousands of those accounts were created without the customer' s 17 knowledge anc, did not generate revenue for the Company. Further, Benyo had 18 direct knowled,e throughout the Class Period that the database was "dirty," i.e., the 19 database was materially inflated due to fraud within the Company, accounts created 20 through error, 2nd non-paying accounts . Nevertheless, Benyo instructed employees 21 of PurchasePrc not to clean the database so that he could represent higher number s 22 to the public . 23 231 . Johnson's statements to the investing community during the conference 24 were equally misleading for the reasons stated immediately above . During the 25 conference, Johnson stated: 26 Going forward, we anticipate putting the primary focus on continuin to ramp to our recurring revenue. And we feel like the quality of that 27 revenue and the margins that it creates long term is going, to bring the biggest return to everyone. But, at the same time we have a deep 28 pipeline and demand for these marketplaces , much different than what

123 I think the public markets perceive . 2

3 As far as giving speci fic revenue from specific partners, Ian, each of these partners , know that we're getting into the maturation of these 4 relationships, we are actually limited on what we can say, which is why we've aggregated it. I can tell you that it's signi ficant on a referral 5 basis . Cane thing that's impo rtant to point out is that the revenues that we received were not from AOL, but through AOL and through our 6 direct contact with its business development depa rtment and its external sales force. 7 8 So, a ai n I think it gets back to the model of PurchasePro not 9 depending on any single partner. So, we really want to keep the focus away from individual partners because what p eople need to understand 10 is that it is the partners, it's not the money they re spending with us . 11 232 . Johnson's statements were misleading because Defendants knew at th e 12 time that greater than one-half of the revenues referred to by Johnson had com e 13 directly from AOL . Defendants, including Johnson, also knew that they ha d 14 fraudulently falsified PurchasePro's accounting records to make it appear that the 15 revenues came from third parties referred to the Company by AOL. In reality, 16 PurchasePro had become totally dependent on falsified revenues de rived from its 17 agreements wig h AOL and the other companies listed above in order to sustain an 18 appearance of :revenue growth . 19 233 . Ina release entitled "PurchasePro to Expand Time Warner Relationshi p 20 with Multi-Million Dollar Advertising and Promotional Agreement," on or about 21 January 31, 200 1, defendant McGhee also touted the Company's relationship with 22 AOL . While the release stated that the agreement with AOL represented an 23 expansion of ,he strategic alliance between PurchasePro and AOL, defendant 24 McGhee also s-)ecifically stated : 25 As we began to look to national branding and sales campaigns for our marketp ace solutions, we knew we wanted a pa rtner that both 26 understood our business priorities and could help us market across a wide variety of platforms and media. Our plan is to bring 27 industry leading e-commerce marketplace solutions to even more business 's across the world. Our strategic relationship with AOL Time 28 Warner provides a marketing reach that is unduplicated and provide s

124 1 us with a valued partner to help drive our growth . 2 234. A:; noted with similar statements made by Johnson and Benyo, 3 immediately above, these statements concerning the "strategic relationship" with 4 AOL were false and misleading . But for the Warrant Agreement and PurchasePro's 5 agreement to falsify its accounting records to enable AOL to recognize the maximum 6 amount of warrant revenue therefrom, it is unlikely that AOL would have ever 7 entered into any agreements with the Company or to "encourage" customers, 8 subscribers and vendors to enter into any business relationship with PurchasePro. 9 235 . Not long thereafter, the February 5, 2001 edition of Barron 's (released 10 several days before February 5, 2001) published an article on PurchasePro which 11 highlighted certain concerns regarding the Company's accounting. The following 12 is an extract from the article : 13 Factors more specific to PurchasePro are definitely worth ponderin , too . Among them: Its liberal accounting procedures and the lack of a 14 chief financial officer; its inexperienced management team full of buddies; its inability to retain some hi gh-profile artnerships , including 15 those with troubled retailer Office De of andpSprint ; and its heavy reliance on a single source, Hilton Hotels, for transaction revenues . A 16 big question remains as to whether the small and mid-size companies PurchasePro is targeting stand to reap the kind of benefits from B2B 17 exchanges that win induce them to stay on as subscribers . 18 Notewor'-hy, too: Top PurchasePro officials often make a point in presentations to investors and to the media that they have not sold any 19 of their sgares. What they don't disclose in their discussions , but have acknowledged privately to investors, is they ' ve borrowed against their 20 shares , t}:e nexbest thing to selling shares since the stock is pledged as collateral . Johnson, for one, secured a $100 million personal loan . 21 Also insider selling has picked up of late . 22

23 "They need a CFO ," says Chris McHugh, of Turner Investments Partners , who bought PurchasePro shares at the 16-17 level for his 24 small-cap and 13213-funds . 25 Indeed, s :)me accounting issues have cropped up . In the third quarter the company refiled its second-quarter results to reclassify $2 .3~ 26 million of revenues. Also in the third quarter, CEO Johnson signaled to the Street that revenues would be in the $22 million range ; the-Iigure 27 came in at $17 million and Johnson admitted to investors $ 5 million had not been sold through yet to end users and he was advised to defer 28 the revenue . In addition, accounts receivable spiked up dramatically in

125 1 the third. quarter - to $22 .6 million from $1 .73 million - and the provision for "doubtful" (or uncollectible) accounts bulged by nearl y 2 2 million, versus $351 000 a year earlier . Days sales outstanding or DSOs, jumped to 123 Lays in the third quarter . Company officials 3 routinelly characterize PurchasePro as having turned cash flow-positive in the third quarter, but then explained this is only possible if orders 4 booked through resellers are accounted for immediately . 5 The more common practice is to wait until products or services are sold to the end users before recognizing revenues . "There are issues about 6 control and the business rocess and who is minding the store when it comes to general accounting practices " says a New York hedge-fund 7 manager who was long the stock in the past as a momentum play, but no longer holds a position. 8 In his call to Barron' s, Johnson said that the CFO post is the only one 9 he's filled with employees age 50 or older, something that helped satisfy investment bankers . One, Richard St. Peter-whose eight- ear 10 stint as former CFO of Petco Animal Sup plies ended in 1998, aftYer a series of earnings shortfalls - lasted less than a year. Johnson, who 11 noted St: Peter did real real well in one year ," leaving with 50 000 vested PurchasePro stock o ptions; says that the former CFO was told 12 school" n his approach and didn t have confidence in PurchasePro's business model. 13 14 236 . Among other things, the Barron's article highlighted how defendant 15 Johnson was pi ofiting from this scheme to artificially inflate the Company's stock 16 price by using the inflated stock as collateral for a $100 million personal loan . 17 Johnson's use cof stock as collateral provided him with further motive to maintain th e 18 Company's stock price at its artificially inflated level. 19 237 . The Barron's article also quoted defendant Johnson as stating that : 20 "We're on the cutting edge of everything. We're on the cutting edge of technology, 21 the cutting edge of accounting ." By the end of the Class Period it became clear wha t 22 defendant Johnson meant by "cutting edge accounting" and it was not within the 23 boundaries of "GAAP," but rather of "JAAP," as described by former employees of 24 the Company. 25 238 . Ori February 4, 2001, in an effort to maintain Defendants ' scheme, the 26 Company issued a press release rebutting the Barron 's article entitled, "PurchasePro 27 Responds to Misleading Barron's Article." The relevant portion of that releas e 28 specifically qunted defendant Johnson as follows :

126 PurchasrPro today said that an article published in Barron's February 5, 2001, edition that discussed the company was riddled with 2 inaccuracies and innuendo . 3 The company said that althou gh it is reluctant to give credence to the article with a response, it feels that its shareholders and analysts should 4 be assured that statements made in the article are without factual basis . 5 The company said, "Barron ' s continues to publish inaccurate, unverifif d information about PurchasePro . These references began 6 almost a year ago when the publication stated the company would be out of ca,'th in three quarters. PurchasePro, at the end of the most recent 7 quarter, had in excess of a hundred million dollars in cash and cash equivalents. " 8 Charles E . Johnson Jr., chairman and chief executive officer of 9 PurchasePro , pointed out that the article is "rife with inaccuracies ." According to Johnson, "Writing an article of this magnitude without 1 0 confirming the facts with the company violates a basic tenet of reporting. Had the author simply called company representatives, identified herself, and asked to check facts, she m~ ht have had the opporturity to write a fresh, credible and powertul story about a 12 company that holds a signi ficant leadership position in e-commerce . We were eager for an interview with Barron ' s but wanted to wait until 13 after our fourth quarter earnings announcements to do so . " 14 In terms of inaccuracies, Johnson specifically cited the following : 15 * PurchasePro's financial statements are prepared in accordance with enerall' accepted accounting principles . The company discloses its 16 financial condition in all material respects . 17 * PurchasePro has a chief financial officer. The company's CFO is James P Clough . He has held the position since April18 2000 . 18 Clough ii a former partner in the law firm Pillsbury Madison & Sutro LLP and is the second to serve as CFO since before the company went 19 Public in September 1999 . Additionally, the company has had a single Chief Accounting Officer Scott Miller, a former A rthur Andersen 20 CPA, for the past three and a half years . 21 Barron ' s asserts that the company has an "inexperienced management team ." 't. his is not borne out by the facts . Johnson believes fhat the 22 company has created a top-tier management team . Additionally Johnson, President Chris Carton, and Executive Vice President Geoff' 23 Layne an each five-year veterans of an industry that is only five years old. Each has strong management experience and is recognized as a 24 pioneer la e-commerce. Together with the senior management team, PurchasePro is positioned to continue its rapid growth . 25 26 Other inF ccuracies in the Barron's profile include, but are not limited 27 to, the fo :lowing: 28 * Entrepreneur Steve Wynn did not pay off any notes for Johnson or

127 PurchasePro . His total capital contribution to the company was insi nifcant, comprisin $50,000 . His equity position was repurchased in tl e first quarter of 1998 . * PurchtisePro has not changed its business model . The company's focus has always been on developing multiple streams of recurring revenue .. The addition of license revenue is a revenue stream the company is able to charge as a result of the instant liquidity in its interoperable platform. is new fee triggers an additional recurrin revenue :stream "hosting and maintenance that equals almost 50% of the initial license fee on an annual basis. Other fees including subscription, transaction and commerce services are expected to increase, in value due to the evolution of the model . Average license revenue -ias increased every quarter, contrary to the repo rter's assertion of competitive pricing pressure . * In terms of metrics, usage on the PurchasePro global marketplace grew 52% last quarter. The company expects that growth will continue 1 0 fo accelerate . * The company has no "handshake" deals and its a reements with its major partners are available for review at the Securities and Exchan &e 12 Commission ' s website at http :/www .sec.gov. Relationships with such partners remain strong . As is normal in the business cycle , certain 13 agreeme.its with partners have expired. This expiration does not mean comp anies have left the network or have ceased to do business with 14 Purchase.Pro . Office Depot for example, recently mailed more than 300,000'catalogs prominently featuring the PurchasePro e-commerce 15 solution . The company ' s relationship with Sprint is ongoing .

16 * Additii►nally, Barron's failed to mention that the company has signed other si gnificant- partners including Gateway, Honeywell, Computer 17 Associates, and kJroadVision. 18 * AOL was not given four million warrants . AOL does have the opportunity to earn warrants as it meets certain revenue objectives . 19 Additionally, PurchasePro and AOL have a revenue sharing agreement on monies received as a result of the partnership . 20 * Johnson did secure a line of credit using his PurchasePro stock as 21 collateral . This amount used on the line of credit does not approach $100 mil lion . In fact, Johnson has used more than $20 million from the 22 credit lime to acquire additional PurchasePro shares . Additionally, Johnson and several senior members of the management team continue 23 to take no salary or other form of compensation~rom the company . 24 * Many of the non-financial metrics in the article have never been released by PurchasePro and are grossly inaccurate . PurchasePro does 25 not release transaction metrics on a marketplace -by-marketplace basis because ,-Iach is individually owned. 26 * PurchasePro is a browser-based software application . It is not a mere 27 website , or simply an electronic "yellow pages" as described in the Barron ' s article. The product suite is the first to be fully browser-based 28 and wireess in the 132B sector. This product enables companies of al l

1.28 sizes to eliminate the need to integrate, update, and incur 1arAe implementation costs when becoming a member of the company s 2 global marketplace . "Overall," Johnson pointed out, "Barron ' s apparent misunderstanding of Purc'~iasePro's business model and strategy is evident by the 4 depiction of the company 's partnerships. PurchasePro ' s model is to overlap business databases through numerous partnerships . 5 Purchasr,Pro recognized early that partnerships and relationships will vary in :heir success rates. Speed to market is key . We created a 6 strategy that wouldn 't force the company to depend on any relationship for its success . " 7 Johnson concluded by saying, "A final egregious error in the article is 8 . relative . o the mention or a supposed "Superbowl" party. If Barron's would hive made its diligence calls, they would have learned that on 9 January twenty- sixth, PurchasePro had an employee appreciation gathering; to reward its employees for their continued loyalty and 10 support. 11 "In cone usion I think every PurchasePro marketplace owner, member and investor should take a personal affront to Barron ' s depiction of 12 PurchasePro in this article. Their style discredits the thousands of members; our global marketplace who have made our solution pa rt of 13 their day-to-day operations, as well as our strategic partners who have chosen t s as their e-commerce platform and B2B strategy . 14 "Although the company will not comment on financial results prior to 15 its earnir gs on February 12, Johnson invites Barron's readers to review the investor relations page of the company ' s website 16 www.Durchasepro.com including the "ereq_uently Ask Questions" pertaining to most o arron 's comments on the company 's business 17 and financial practices . 18 Johnson invited Barron's readers to access the company's earnings webcast .nd press release during the week of February 12 for a detailed 19 analysis Df its financial results and business prospects . Details relating to this cE1l are forthcoming . 20

21 239. The aggressive rebuttal of February 4, 2001 , was not only false an d 22 misleading on its face, but compounded and reinforced Defendants' other false an d 23 misleading Cla ;s Period statements. In fact, by this time, all Defendants were aware 24 that demand fo : PurchasePro's products and services was virtually non-existent and 25 totally dependant upon the secret side agreements with the very customers listed by 26 Johnson in Purc.hasePro's rebuttal. Defendants also knew that because the Company 27 was using warrants to manipulate its revenue, and that the "accounts" being created 28 by AOL were )ittle more then an outright fabrication, the Company's "revenues "

129 1 were not indicative of underlying demand for the Company's products and services . 2 On the contrary, the Company's records were being intentionally falsified in order 3 to represent financial growth to the investing community . Thus, Defendants' 4 arrogant attempt to hide the truth from the investing community in this manner is 5 perhaps the most egregious example of Defendants' fraud throughout the Class 6 Period . 7 240. Then, on or about February 12,200 1, the Company announced "record " 8 year end results for PurchasePro . In this press release, defendant Johnson, as in 9 numerous other: releases, continued to make false and misleading statements to the 10 investing community concerning PurchasePro's financial condition . The press 11 release stated i;i pertinent part: 12 PurchasePro .com Inc . (Nasdaq: PPRO), a leading enabler of business-,.to-business e-commerce solutions for companies of all sizes, 13 today re ported operating positive cash earnings per share of $0 .11 or $7 .6 minion of cash earnings, exclusive of non-cash charges and a 14 one-time gain . 15 The com3any reported revenue of $33 .6 million for the fourth quarter ended Dfcember 31, 2000 . Additionally during the fourth quarter the 16 company posted a one-time net gain of $0 .04 per share from the sale of an investment. The company's cash flow for the quarter was $10 .3 17 million . 18 PurchasePro' s revenues for the fourth quarter rose 94 percent from the $17 .3 million posted in the precedin quarter and increased 1,160 19 percent U) a record $33 .6 million, from $2 .7 million a year ago. For the l=ull year, PurchasePro recorded revenues of $65 . 0 million, an increase 20 of 953 percent versus last year's revenues . 21 The company also reported that it has significantly narrowed its total cash loss to $12 .6 million, or $0 .20 per basic share for the year ended 22 December 31, 2000, from a cash loss of $0 .45 per basic share a year earlier. 23 Including all charges, the company repo rted a total net loss p er share of 24 $0.55 for the quarter compared to a ne loss per share of $1 .03 last year. For the year, the total net loss per share was $1 . 15 versus $2 .44 last 25 year. 26 Charles E . Johnson Jr., chairman and chief executive officer, said, "We think our fourth quarter results confirm the strength of our business 27 model and validate without quali fi cation, our revenue model . This is further evidence of the leadership PurchasePro has established in the 28 e-comme -ce industry."

130 "Critical to the growth ofPurchasePro is member adoption ," continued Johnson . "Adoption by new members has continued to increase and we 2 expect that growth to be of even greater magnitude in the future . Simultaneously , the company 's purchase order volume rose by nearly 3 fifty percent during the fourth quarter . Posting record revenue while effectively managing company expenses enabled PurchasePro to 4 recognize cash earnings per share of eleven cents , significantly exceedirn.g consensus analyst estimates ." 5 6 241 . In this release, without any basis for his statements, Johnson continue d 7 to tout the PurchasePro "business" and "revenue" model, and the alleged increase 8 in adoption by new members . For all the reasons stated above, Johnson knew that 9 these statements were false, but continued to deceive the investing community 10 without regard for shareholder's investment in the Company . 11 242 . Yet despite the numerous false representations being made concerning 12 PurchasePro, some criticism of the Company continued in an article entitled "At 13 PurchasePro, Wondering What's Beyond the Numbers ." That article again 14 challenged the Company, and defendant Johnson, noting in part: 15 Purchasf :Pro's stock fell 42% last week after three pieces of bad news : 16 A critical article in Barron ' s questioned management's experience and the company 's accounting practices ' the company' s underwriter 17 downgraded the stock over concerns about growth; and the compan and its top executive [Johnson] were named in a racketeering lawsui ~ 18 For its part, PurchasePro issued press releases refuting the article and 19 the claims in the lawsuit. But the company ' s denials shed little light on CEO Charles Johnson Jr.' s relationship with the failed businessman and 20 convicted money-launderer Russell Pike, who is now suing; him and the company from the confines of a federal prison camp near Area 51 in the 21 Nevada desert . As PurchasePro holds an earnin gs conference call Monday afternoon, investors and analysts are, likely to be asking 22 whether Johnson's role in a failed business venture with Pike wen beyond that of investor and, if so, whether he should havet 23 acknowledged it . The stock was rallying Monday, rising $1 .69, or 12%, to '066 .19. 24 The Dispute - The lawsuit filed by the Las Vegas law firms of 25 Campbe'l & Williams and llarrison Kemp & Jones Feb . 6 in Clark County District Court, alleges that Johnson and PurchasePro co- 26 founder Ranel Erickson stole All Creative Technologies' business plan before launching PurchasePro in 1996 . Pike is Tisted as the only 27 co orate offi cer for All Creative . During that same period, Pike filed for-Chapter 7 personal bankruptcy , according to court records . Johnson 28 said he invested in All Creative. A news report pegged that investment

131 at $250,000 . But beyond saying that Pike ' s lawsuit is without merit and that the company will defenditself vigorously , PurchasePro, which said Johnson lost his investment in Pikes company , wouldn't outline Johnson's relationship with Pike or that relationship ' s genesis. All Creative which is still incorporated but apparently is not active, 4 published fti-ROM guides to hotel-industry vendors and their products, according to a 1995 press release . PurchasePro, which got its 5 start serving the hotel and casino industry in Las Vegas, has been described as an "electronic yellow pages " for buyers and suppliers on 6 the Internet. 7 Johnson wouldn't comment for this story, other than to reiterate the company ' s line that the lawsuit is baseless. But in an interview 8 PurchasEePro ' s attorneys disputed the claim that PurchasePro stole All Creative's business plan . 9 "One thing we can say is that PurchasePro was not the idea of Russell 10 Pike," said Brya~n Williams, a partner at Las Vegas-based Sklar Warren Conway .. & Williams. ut according to Johnson 's hometown 11 newspaper, the Lexington (K,) Herald-Leader, Johnson said during an interview last August that Ail Creative 's "concept and the idea it was 12 based upon was still very interesting to me . I guess it' s an example of turning 1amons into lemonade ." 13 14 Pike went to prison after pleading guilty in fall 1998 to charges of 15 money aundering at another company he ran, Advanced" Cart Technology, which made casino floor carts . It is not clear whether 16 there wai a connection between Advanced Cart Technology and All Creative Technologies beyond Pike's involvement with each . The 17 indictment and plea agreement for that case said Pike inflated the firm's accounts receivable, or money owed to the firm by its customers to use 18 as collateral for more than $2 million in loans from PriMerit bank . The indictment alleged Pike intended to use that money for gambling 19 activities . 20 243. Nevertheless, on February 27, 2001 , defendant Moskal confirmed 21 PurchasePro's growth to the investing community . In an article entitled 22 "PurchasePro Adds Thousands of Hotel Prope rties to Its Hospitality Marketplace ; 23 PurchasePro's P'roPurchasing Hospitality Marketplace Offers Increased Liquidity," 24 defendant Mosr:al stated: 25 "The addition of ten industry -leading hotel entities to the ProPurchasing hospitality marketplace is further proof ofPurchas ePro 'S 26 strong position as a premier marketplace enabler ," said Richard Moskal , senior vice president of hospitality for PurchasePro . "We've 27 proven that our solution works to power the procurement needs of hotels and hospitality establishments." 28

132 244. Of course, contrary to Moskal's representations, PurchasePro wa s 2 anything but a "premier marketplace enabler ." Most of PurchasePro's customers 3 were not using' the system and as many as 99% of its members weren't paying for 4 their "service ." PurchasePro was little more then a shell of a company, which wa s 5 sustained only by fraud and would ultimately end up in bankruptcy . 6 245 . Just over one week later, on March 6, 2001, the Company announced 7 that it had agreed to acquire BayBuilder, and would pay for this acquisition usin g 8 cash and PurchasePro stock. 9 246. The very next day, on or about March 7, 2001, a press release wa s 1 0 disseminated which reaffirmed the supposed financial solidity of the Company : Responding to numerous investor and media inquiries following the announcement of its acquisition of BayBuilder, PurchasePro today 12 announced that the company is confident and on track to achieve the objectives stated in its current financial guidance . 13 PurchasePro said it expects basic cash earnings per share for fiscal year 14 2001 to 'be in excess of $0 .65, or $0 .59 diluted. 15 The company again stated that for the fiscal year' 2001 it anticipates revenue -will grow approximately 250 percent to more than 225 16 million, bompared with $65 million in 2(100. PurchasePro also said it believes that gross margin will .be in excess of 90 percent for the year 17 and that casli operating margins excluding non-cash charges, will continue to increase to as hi h as ~6 percent in the fourth quarter from 18 more than 24 percent in thelirst qua rter. 19 PurchasePro expects first quarter revenue of more than $42 million, a 25 percent quarter-over-quarter increase. Basic cash earnings per share 20 are anticipated to be in excess of $0 .10 per share. With the inclusion of the anticipated impact of the diluted share count, which comprises 21 a portior. of outstanding stock options and warrants , estimated diluted cash earnings per share are calculated to be in excess of $0.09 per share 22 for the f rst quarter and $0.59 for the fi scal year 2001 . 23 247 . The aforementioned March 7, 2001 press release was issued at 2 4 defendant Johnlson' s insistence over the opposition of PurchasePro's in-hous e 25 counsel . This press release provided a grossly inflated revenue projection of $4 2 26 million for th€- first quarter of 2001, and resulted in PurchasePro's stock price 27 soaring by 14° o. 28 248 . During this time, defendants Johnson and Moskal sold 1,450,000 an d

133 1 50,000 shares of their stock, respectively, for prices as high as $11 .70 per share. 2 Defendant Johnson pocketed $15 .9 million and defendant Moskal reaped $584,000 3 in ill-gotten gains . In total, between March 6, 2001, and March 9, 2001, these 4 defendants unloaded 1 .5 million of their shares of PurchasePro stock for over $1 6 5 million in illegal insider proceeds . 6 249 . Days later, on March 12, 2001, the Company issued a press release 7 entitled, "PurchasePro Chairman Announces Stock Sale Plan ; Company Announces 8 First Founder Stock Sale Since Company IPO 18 Months Ago ." The press release 9 stated in part : 10 Purchase.Pro Inc., a leading enabler of business-to-business e- 11 commerce solutions for companies of all sizes, today announced that its founder, chairman and chief executive officer Charles E . Johnson 12 Jr., has adopted a plan to begin selling shares under rule 10b5-1 . 13 Under this plan he will gradually liquidate a portion of his holdings in the company. 14 The plan sets forth a predetermined amount of shares to be sold daily . 15 Rule 1015-1 permits an implementation of a written plan for stock selling at times when insiders are not in possession of material non- 16 public information and allows them to sell shares on a regular basis, regardle ;s of any subsequent non-public information they receive or the 17 price of *he stock at the time of the sale . 18 Johnson adopts the plan 18 months after the company's IPO and more than a year after the company completed its secondary offering . He had 19 committed that he would not sell any shares until the compan y reached profitability. The company posted cash earnings per share in the fourth 20 quarter of 2000 . Johnson has not received any cash compensation in the form of salary or bonus for over a year and has not received any 21 option giants since the company went public . 22 250 . Defendant Johnson had in fact sold $15.9 million worth of his 23 PurchasePro shares just days prior to this disclosure in order to pay down his line of 24 credit with CS :: irst Boston and maintain the margin requirements, or loan-to-value 25 ratio, under thE.t line of credit. 26 251 . In.-erestingly, on or about the same day, an article in the Lexington 27 Herald Leader revealed that Carton had "also pledged his PurchasePro stock a s 28 security on an $8 million loan when the Company went public." As with Johnson ,

134 this offered Carton the incentive to engage in the fraud described herein . 2 252 . Thereafter, on or about March 22, 2001, the following article was 3 released entitled "PurchasePro Stock is Downgraded for Second Time in Tw o 4 11 Months." In this article, a hint of the financial difficulties at PurchasePro began to 5 emerge. The article noted in pertinent part : 6 The financial firm that brought PurchasePro .com to Wall Street 7 downgraded the stock yesterday for the second time in two months . Prudential Securities , which underwrote PurchasePro 's September 1999 8 initial public offering lowered its rating on the shares to hold from accumulate, sending he stock to a new a-11-time low. 9 Shares of Las Vegas-based PurchasePro (PPRO : Nasdaq) closed at 10 $5 .97, aster dropping $ 1 .56 or 20.75 percent. The stock is down 90 p~rcent from a year ago, compared with a 61 percent drop in the 11 Nasdaq stock market . 12 Analyst Fim Getz said he is concerned PurchasePro is not converting enough registered users of its electronic marketplaces into paying 13 customer: s. 14 Although PurchasePro has signed up more than 100,000 businesses through its partnership with AL's Netscape Netbusiness po rtal, Getz 15 thinks "conversion of these registered users to paying customers was far below expected minimal thresholds . " 16 He bases' that conclusion on conversations with about one third of the 17 companies that use the Netbusiness portal to recruit customers, just as PurclzascPro does . 18 ** * 19 Getz, who had a strong buy rating on PurchasePro until early February, 20 lowered its price target for PurchasePro from $25 to $10 . He said the stock wi~l likely trade between $6 and $ 11 until more PurchasePro 21 customers start paying for the service and the economy turns upward. 22 253 . Then, on March 28, 2001, defendants Benyo and Johnson made the 23 following statements to counter claims that B2B companies have been under the gun 24 in the slowing economy . The article stated in part : 25 Business -to-business companies have been under the gun lately, as anal ysts remain skeptical of their ability to bring in _profits in a 26 tightenin ; economy. But Chris Benyo, vice president at 1urchasePro, prefers to take a different view . With the economy slowing, he said, 27 businesses are becoming interested in how they can save money. Since PurchasePro's solutions can be u~p and running in five or six weeks, 28 they won't necessarily turn away from them in a downturn, Benyo said.

135 The marketplaces can create additional revenue sources going forward, Johnson said. And recurring revenue sources that are important to 2 every business, especiall y during tough economic times . Beny o said having the 200 additional AOL salespeople behind the PurchasePro products will greatly expand the company s reach. Right 4 now, PurchasePro employees about 50 sales represenatives , he said . 5 254 . Also on March 28, 2001, Defendants caused PurchasePro and AOL to 6 issue a joint press release heralding the effects of the three corner or round trip 7 transactions more fully described in the preceding paragraphs by stating : 8 AOL and PurchasePro have also joined with a broad range of industry 9 leaders to create unique vertical marketplaces. Announced agreements include BroadVision, Inc . (www.broadvision.com), a leading supplier 1 0 of personalized e-business applications ; TheThread (www.trhethread.com), a leading provider of collaborative supply chain management and e-purchasing solutions for the fashion industry ; Plant America (www.plantamerica.com), a key resource for the lawn and 12 landscape indusfry, Viva Magnetics Limited (www . viva.com .hk) the world's largest CD-Rom replicator, also offering specialty 'CD 13 packaging services; eFruit (www.efruitinternational.com), the global electronic marketplace for buyers and sellers of agricultural 14 commodities; and' ProfitScape (www .profitscape.com), a major provider of an automated payment solution -- eNLT30(tm) - which 15 facilitates business -to-business online transactions through financial institutions such as GMAC B2B Credit . 16 By joining with leaders in their respective ve rtical, fields, the 17 Netbusmess Marketplace provides the opportunity for small to medium sized companies to create specialized industry - specific marketplaces, 18 providing a convenient one-stop location for buyers and sellers to conduct business online . 19 In addition , AOL and PurchasePro announced today that current 20 Netbusiiiess partnerBigstep.com (www.bigstep.com), an online service center providing small businesses easy-to-use tools and services to 21 grow and succeed on the Web, signed a separate Marketplace agreement to provide increased functionality to the Netbusiness 22 Marketplace . 23 255 . A,, the time that this press release was issued the AOL/PurchasePro 24 Netbusiness Marketplace was not yet functional and Defendants knew tha t 25 BroadVision, The Thread.com, ProfitScape .com, and BigStep .com, only purchased 26 marketplace software licenses from the Company in order to avail themselves of the 27 secret side agreements with AOL and PurchasePro, as is more fully described above . 28 256 . In another joint press release on the same day, Defendants further

136 boasted of the supposed benefits concerning the Homestore .com transaction which 2 in part led to the conviction of three Homestore.com executives for securities fraud 3 due to revenue recognition irregularities. In that article, Defendants stated in 4 pertinent part : 5 America Online, Inc . and PurchasePro (Nasdaq: PPRO), a leading enabler of business-to-business e-commerce solutions for companies 6 of all sizes today announced 16 new strategic agreements , including deals wish 1ewlett-Packard Com p~any , Homestore.com and Spherion 7 Corporation to accelerate fforts, their T32B and e-commerce ande jointly-develop the Netscape Netbusiness Marketplace . The 8 Netbusir.,ess Marketplace is a one -stop global e-commerce network of hundreds of communities and marketplaces that allows small , medium 9 and large businesses to buy, sell and interact online . 10 257 . In this release defendant Johnson went on to claim that these serie s 11 transactions supposedly provided substantial benefits, claiming : 12 Charles E . Johnson Jr., chairman and chief executive officer of PurchasePro said, "One of the keys to building a successful business- 13 to-business network is interoperability . PurchasePro's capacity to power businesses of all sizes, and its ability to link hundreds of 14 marketplaces - and millions of business users - in a complete buyside/sellside application, provides partners and members with a 15 broader reach to a wider range of audiences . This `network effect' is a driving force in the success of the Marketplace, and an important 16 catalyst in our expanding relationship with AOL.'~ 17 258. Of course, as stated above, at the time that this press release was issue d 18 Defendants knew that the AOL/PurchasePro Netbusiness Marketplace was not yet 19 functional and tzat Homestore.com only purchased the marketplace software license 20 from PurchasePro to avail themselves of the secret side agreement with AOL as 21 described herei 'i . 22 259 . In light of the foregoing, on or about March 28,200 1, Lehman Brothers 23 Analyst Patrick Walravens noted that : "we believe this announcement only 24 represents a portion of the major deals that AOL and PurchasePro have jointly sold 25 and closed so far. We expect the balance to be announced in the coming weeks . 26 With 200 AOL sales people focusing on this business, we also think the number of 27 new deals will continue to increase. " 28 260 . Th', next day, on March 29, 2001, defendant McGhee touted th e

137 1 Company's fir:ancial condition by making the following statements as part of a n 2 interview with Investor 's Business Daily ("IBD") . Defendant McGhee stated : 3 IBD: Is it frustrating to beat analysts' expectations but watch your stock drop ? 4 McGhee : If we do our job ve well and are able to meet the guidance 5 we've put out to the Street in 2001, then we'll be very successTul in the future. We'll work on the first quarter, then the second and so on . If 6 we can consistently meet what (estimates) we put out each quarter, then the critics ' noise will start to go away. We realize that thebest way to 7 meet the critics in the future is to run consistent numbers and do a very good jot of taking care of our customers. 8 IBD: Cr tics also say PurchasePro doesn't have enough experienced 9 manager s . 10 McGhee : We're always evaluatin our employees , including myself, to figure out how we can improve . The experience of this team has been 11 criticized over and over again . We've still managed to consistently beat the Street' s expectations. As long as we can continue to do that, 12 at some point people wi ll start to understand a couple of things . 13 IBD : Sueh as? 14 McGhee: The fact that we know how to run a business. And that we'll be able to do it profitably. It doesn't take a Harvard MBA or a Stanford 15 grad to the able to do that. 16 IBD : Investors also have questioned the experience of Junior Johnson. 17 McGhee: Junior has been criticized for not being a Silicon Valley individual . He didn't use VCs - he bankrolled the company from day is one . We're based in Las Vegas . We've been successful against all of the odds We've said we'd be profitable in 2001 which is a lot better 19 than a vast majority of the dot-corns out there. We're very proud of that, and we're going to keep working hard to make this an even more 20 successf.il business. 21 261 . These statements by McGhee were false and misleading for the detaile d 22 reasons above . In addition, these statements were false and misleading because days 23 before the end of the first quarter of 2001, Employee 13 specifically described how 24 he approached defendants Johnson and Carton concerning the rampant fraud being 25 committed by PurchasePro salespeople, as well as the dramatic overstatement of 26 "users" being conveyed to the public . Yet despite being presented with direct 27 evidence that the actual user base of PurchasePro was as little as I% of the numbers 28 being reported to the public, the PurchasePro Defendants continued to make th e

138 1 foregoing statements and also filed their 10-K with the SEC, in violation of GAAP, 2 as described below . 3 262 . On or about April 2, 2001, the Company filed with the SEC its For m 4 10-K for fiscal year 2000 . Signed by defendants Johnson, Clough, Miller and 5 Chiles, among others, and dated March 29, 2001, the Form 10-K reiterated (and 6 expanded upon.) the financial results for the fourth quarter and provided full fiscal 7 year results for .the Company. In that filing, a comfort letter by Andersen, LLP was 8 also incorporated which stated : 9 To PurchasePro .com, Inc . : 10 We have, audited the accompanying consolidated balance sheets of 11 PurchasePro.com, Inc . (a Nevada corporation) and subsidiary as of December 31 2000 and the related consolidated statements of 12 operations redeemable convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the two years in the period 13 ended December 31 2000. These financial statements are the responsi ility. of the Company 's management. Our responsibility is to 14 express an opinion on these financial statements based on our audits . 15 We conducted our audits in accordance with auditing standards generally accepted in the United States . Those standards require that 16 we plan'-and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement . An 17 audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements . An audit also 18 includes assessing the accounting principles used and significant estimates made by management as well as evaluating . the overall 19 financial statement presentation . We believe that our auts provide a reasonable basis for our opinion. 20 In our opinion, the financial statements referred to above resent fairly, 21 in all material respects , the financial position of Purchase-Pro .com, Inc . and subsidiary as of December 3 T, 2000, and the results of their 22 operations and their cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting principles 23 generally accepted in the United States . 24 Arthur Andersen LLP - Las Vegas, Nevada - February 1.2, 200 1 25 263 . The Company' s 10-K was false and misleading . As stated in referenc e 26 to the prior 10-Q's which were filed by the Company, and contrary to defendants ' 27 representations, PurchasePro's financial statements were not being presente d 28 pursuant to the'rules and regulations of the SEC, or in accordance with GAAP . As

139 1 II discussed abo re, Defendants were manipulating every revenue stream of th e 2 Company so that they could report record quarter over quarter growth by engaging 3 in sham transactions and warrant-for-revenue arrangements, none of which had bee n 4 11 disclosed to thy, public. 5 264. Moreover, there is every reason to believe that each of these defendants, 6 all high rankin€ ; executive officers, were aware of the misrepresentations in the 10-K 7 concerning the Company's financial condition. Defendant Johnson was an activ e 8 CEO and was i,ivolved in all major deals concerning the Company. Miller, who has 9 pled guilty to oostruction for destroying documents also appears to have knowledge 10 of many of the fraudulent transactions. Defendant Clough served as interim CFO 11 during the Cli-.ss Period, and it is inconceivable that he was unaware of th e 12 Company's true condition . Finally, as a member of the Audit and Compensation 13 Committees, Chiles was responsible for conducting a thorough review of the 14 Company's fin.incials before signing its 10-K. Thus, he either knew that the 10-K 15 was false and misleading, or with conscious or deliberate recklessness represented 16 that the Company was fine when it was not . 17 265 . In addition, the letter by Andersen, LLP should have offered littl e 18 comfort to the investing community. As former employees have stated, ever y 19 quarter, defendant Johnson constantly fought with Andersen, LLP auditors 20 concerning revenue recognition issues. Further, every quarter, Andersen, LLP would 21 acquiesce to Jolnson on most of his demands . Thus, there is no reason to believe 22 that things werf any different with the filing of the Company's 10-K for fiscal year 23 2000 . On the contrary, things were worse then ever . Nevertheless, Defendants did 24 nothing to reveal the true condition of the Company . 25 266. Through this 10-K, Defendants also reported the change in their 26 relationship with AOL : 27 In November 2000, we entered into an amended and restated AOL warrant a reement, amending the March 2000 warrant a reement. For 28 the 3,00000 performance-based warrants that had not been earned as

140 of the date of the amendment the strike price was adjustedadjusted to $0 .01 per share. Ir exchange for the reduced strike price, the revenue for 2 which AOL can vest the performance -based warrants was expanded to include software licenses recognized by us that resulted from referrals from AOL. The formula for vestin g warrants on referral revenue is that for each $ 1 of revenue generated from the referrals du ring a fiscal 4 quarter, AOL is able to earn a number of warrants calculated as three times the revenue recognized divided by the estimated fair value of our 5 commor stock, as defined. The agreement limits the total recognized revenue allowed in the calculationTo $ 10 .0 million in the quarter ended 6 December 31, 2000, $ 15 .0 million in the quarter ending March 31, 2001 and $20 . 0 million in the quarter ending June 30, 2001 . For the 7 quarter .,nded December 31, 2000 AOL earned approximately 1 .8 million warrants under the amended agreement, andin January 2001 . 8 AOL exercised the warrant with respecT to such shares . For the quarter ended March 31 2001, AOL earnedthe remaining 1 .2 million warrants 9 under th,ti amended agreement, and in April 2001, AOL exercised the warrant with respect to such shares . 10 267 . A': the time that Defendants caused these statements to be disclosed , 1 2 Johnson was jr default under the terms of his loan agreements with Bank One and 13 CS First Boston . This was because the trading price had fallen below the minimum 14 price necessan" to maintain the loan-to-value ratio under his loan agreements . In 15 fact, by February 15, 2001, and at all times thereafter, Johnson was in default under 16 the terms of hl'-) loan agreement with Bank One, since the trading price had fallen 17 below the minimum price necessary to maintain the loan-to-value ratio. Between 1 8 April 2, 2001,rnd April 30, 2001, Credit Suisse ended up foreclosing and selling 19 $16 .3 million of Johnson's PurchasePro stock . 20 268 . O:i April 3, 2001, Defendants again caused PurchasePro and AOL to 21 issue a joint pr.,ss release which boasted their relationship by stating : 22 America Online , Inc . and PurchasePro (Nasdaq : PPRO), a leading 23 enabler of business-to-business , e-commerce solutions for com~ p anies of all si. :es today announced agreements with Information Markets 24 Corp . (IMd), InsureZone and Chinadotcom Corp . to establish_ private- labe_l marketplaces that will be interconnected with the Netscape 25 Netbusit ess Marketplace . 26 27 The Ne .business Marketplace, jointly developed by AOL and PurchasePro, is a global e-commerce network linking hundreds of 28 communities and marketplaces to allow small, medium and larg e

141 businesses to buy, sell and interact online. These new agreements dramatically expand the procurement and supplier communities currently participating in the Netbusiness Marketplace, which also encompasses more than 140 , 000 businesses from PurchasePro's extensive network of more than 290 private-label marketplaces . Netbusiness Marketplace also provides the opportunity for small to medium-sized corppanies to create specialized industry - specific marketplace s, providing a convenient one-stop location for buyers and sellers to conduct business online . The announcement also demonstrates the growin momentum of the joint sales, marketing and advanced product development operations recently , implemented by AOL and PurchasePro in support of the Netbusir; ess Marketplace. Fred Singer, SVP of AOL Interactive Services and General Manager of Netscape Netbusiness said, "We are delighted to announce the addition of IMC and InsureZone and Chinadotcom Corp . - all leaders in their 1 0 respective fields - to the ever expanding online trading and information communities available through The Netscape Netbusiness Marketplace . By further expanding the industry-specific and broad-based markets available" to buyers and sellers from companies of all sizes, the 12 effectiveness and relevance of the Netbusiness Marketplace increases exponen tially. We can help small businesses expand their growth 13 opportunities and open entire new distribution and procurement channels for our larger participants . " 14 Chris B'enyo, SVP of Marketing of PurchasePro, said, "The 15 combina : ion ofPurchasePro 's industry-leading e-commerce technology with ACL's vast consumer and small business customer base is a 16 powerfui draw for companies lookin g to create branded e -marketplaces that foster content , community, and commerce for the small to mid- 17 sized bu<: iness market. These new partners illustrate the scalability of our solut'.on to power businesses of all sizes and interconnect hundreds 18 of branded marketplaces ." 19 Today ' s announcement includes agreements with industry leaders to create unique vertical marketplaces , including Information Markets 20 Corp . (w°wvw.infomarkets.com), the leading provider of fee-based online question . .nd answer marketplaces ; Insure/one (www.insurezone.com) 21 a full-ser vice, nationwide "Bricks and clicks" marketplace -- backed by an indept;ndent insurance agency that provides fast, easy access to 22 commercial insurance from highly rated carriers ; and Chinadotcorn Corp . (www. corp . china.com) a leading integrated Internet company 23 offering E;-business solutions, portal ande-marketin g services. The new agreements announced today follow on the heels often other strategic 24 marketplace deals announced last week, including those with Hewlett- Packard Com-pany, BroadVision, Inc . and Spherion Corporation, to 25 accelerat., AOL's and PurchasePro's B2B and e -commerce efforts . 26 269 . Of. course, at the time that this press release was issued , Defendants 27 knew that the majority of agreements referred to were solely the result of fraudulen t 28 agreements . Th ° AOL/PurchasePro Netbusiness Marketplace was not yet functiona l

142 1 and Defendants knew that InsureZone, Chinadotcom and BroadVision only 2 purchased mar'cetplace software licenses from PurchasePro to avail themselves o f 3 the secret side .greements with AOL and PurchasePro more fully described above. 4 For example, as previously discussed, the InsureZone agreement referenced above 5 was false and n'tisleading because the marketplace license bought from PurchasePro 6 for approximately $ 180,000 was in essence , a forgiveness of a $180,000 debt that 7 InsureZone al•eady owed to PurchasePro. In effect, Anderson and others at 8 PurchasePro agreed to reclassify InsureZone's old debt of $180,000 as a ne w 9 marketplace software license purchase, thereby improperly causing PurchasePro to 10 recognize$ 180 000 as revenue in Q 1 2001 . 11 270 . Besides the previously discussed admission of defendant Anderson 12 regarding the f.ilse and misleading nature of the InsureZone announcement, this is 13 fully supporter . by numerous confidential internal e-mail . For example, on March 14 20, 2001, McC lure e-mailed Carolyn Lusk of InsureZone and asked her to "revise 15 the InsureZone contract or license agreement to reflect a $100,00 license an d 16 forward it to Dante Orsini and Jeff Stanley, at AOL, first thing Wednesday 17 Morning ." Hc`wever, as of March 20, 2001 , PurchasePro failed to perform its 18 obligations to InsureZone as set forth in the original Preferred Supplier Agreement 19 in August 2000 . Moreover, on March 30, 2001, the last day of PurchasePro's first 20 quarter, Purcha.sePro's General Counsel, Todd Lehtonen ("Lehtonen"), sent an e- 21 mail to McClure at 2 :58 PM, cc'd to Scott Weigand, defendant Anderson and 22 defendant Miller regarding InsureZone . Lehtonen advised McClure that certain 23 language will l kely suffice to get InsureZone to execute the marketplace software 24 license agreem-Int to replace the preferred supplier agreement effect . This would 25 allow PurchastePro to reclassify InsureZone's old debt of $180,000 as a new 26 marketplace so .tware license purchase and thus allow PurchasePro to recognize this 27 $180,000 as revenue in Q1 2001 . Specifically Lehtonen states : 28

143 Scott [McClure] 2 The following language will likely suffice in order to get InsureZone to execute the1Vlarketp1ace Software License A reement however, I do 3 believe that this construct may well result in rurchasePro not being able to recognize the $180,000 from the Marketplace Software License 4 Agreement . 5 [T]he Preferred Supplier Fees paid to PurchasePro by InsureZone as of March 30 , 2001 under the Preferred Supplier Agreement will fulfill 6 InsureZone ' s payment obli gations for the first 2 years (i.e . the Initial Term) of Preferred Supplier Fees under the Preferred Supplier 7 Agreement (approximately $ 180,000) . However both PurchasePro and InsureZone will mutually agree to terminate tfie Preferred Supplier 8 Agreement if InsureZone ' s rights and benefits under the Preferred Supplier Agreement are substantially delivered to InsureZone under the 9 Vertical Foundation Partner Agreement between AOL and InsureZone . 10 Todd 11 271 . In response to the previous March 30, 2001, e-mail from Lehtonen , 12 defendant Miller responded via e-mail to Lehtonen on March 30, 2001, at 3 :05 PM : 13 I thought the concept on this one was that they would terminate the contract and we would quit providing the preferred supplier agreement. 14 I had not focused on the [fact tat the] discounted price on the marketpace was exactly the same as the marketplace fee . If so, this 15 will look real funny . If we don't discount , and they terminate under the normal terms then I think we can make an argument for recognition. 16 This onc! really pisses me off- i get 9uestions asked of me on two different.' days and they put the two individuals questions together to 17 come up with this solution. thanks for the tip on this. 18 272 . In response to the previous March 30, 2001, e-mail from Lehtonen , 19 defendant Anderson responded via e-mail to Lehtonen on March 30, 2001, at 3 :1 0 20 PM : "How can we change this to avoid accounting problems?" In response to the 21 previous Marci 30, 2001, e-mail from Lehtonen, McClure offered his solution t o 22 avoid the accounting problem . In an e-mail to defendant Anderson, Lehtonen, 23 defendant Miller, cc'd Scott Weigand on March 30, 2001, at 3 :11 PM, McClur e 24 states : 25 I think we got it. Jason Witt' agree[d] to put the ps preferred supplier] language, into his contract, with our permission. T'fils will allow us to 26 27 ' Jason Witt is the star AOL employee whom defendant Colburn bestowed 28 the "Bammy's gold-star plaque" for putting together a complex transaction with PurchasePro.

144 1 terminate the ps [preferred supplier] agreement upon execution of the aol vert_~ cal foundation. Tocdcf was on that call , 1ust after the email 2 below went out . [referring to Anderson 's March 30, 2001, 3 :10 PM, email regarding avoiding accounting problems ] 3

4 273 . In response to the March 30, 2001, e-mail from McClure, defendant 5 Anderson replied, via e-mail on March 30, 2001, 3 :12 PM, "Perfect." McClure told 6 Scott Newton that InsureZone's obligation under the August 2000 supplier 7 agreement would be terminated once InsureZone signed the license agreement . 8 Moreover, McClure told Rusty Reid and David Newton of InsureZone that th e 9 license agreement executed on March 30, 2001, between PurchasePro and 10 InsureZone, would replace the Preferred Supplier Agreement executed in August of 11 2000.

12 274 . Then, on or about April 4, 2001, in reference to Johnson' s bankers 1 3 selling his stoc c to cover his lines of credit, Johnson called PurchasePro's in-house 14 counsel, and asked : "what the f--- are you going to do to stop them from selling?" 15 He then follow -d with threats to quit and sue the Company if PurchasePro did not 16 buy him out of his Credit Suisse problem . Counsel explained that PurchasePro's 17 cash position made it difficult to bail Johnson out, and Johnson responded a s 19 follows: 19 Desperate people do desperate things and I'm desperate . . .if the 20 company don't do the related transaction, they can get sued, remember, I'm the n other-f---ing biggest shareholder you allgot.. . I will bring that 21 s--- dow i. . . . So you etter get-get them on the hone now. . . Because I'm not l;oing to sit here and watch me get obliterated making all the 22 compan all this money, and the company can't help me? Are you kidding? And they'rree ' worried about a suit? They'll get sued . I 23 Guaranty it ! Its me! And I am the largest shareholder . 24 275 . Tl- en, on or about April 19 , 2001, following the PurchasePro Board o f 25 Directors' discovery that Johnson's loan with Credit Suisse had become impaired, 26 and Johnson's repeated requests for a bail-out, defendant Chiles, Collins and 27 O'Brien, acting in their capacity as the Board of Directors, agreed to pay Johnson a 28 "retention bonus" of $2 million and an "expense reimbursement" of $1 million ,

145 1 despite the lack of evidence documenting his expenses . Upon information and 2 belief, Johnson and Miller also instructed PurchasePro to wire Credit Suisse the $3 3 II million . 4 276. On April 23, 2001, PurchasePro completed the acquisition of 5 BayBuilder, paying $8 .5 million in cash and artificially-inflated PurchasePro stock. 6 The consummation of the BayBuilder transaction provided the PurchasePro 7 Defendants with further motivation to maintain the stock price at artificially inflated 8 levels . 9 277 . TI ten, only two days after having closed the BayBuilder acquisition, on 10 or about April 25, 2001, the true financial condition of PurchasePro began t o 11 emerge. 12 VII. PURCHASEPRO 'S TRUE FINANCIAL 13 CONDITION BEGINS TO EMERGE 14 278 . On April 25, 2001, PurchasePro stunned the financial community with 15 a surprise announcement that PurchasePro expected its first quarter results to be 16 below consensus estimates "primarily due to the deferred recognition of certain 17 license revenue;" ( after having very clearly affirmed on March 7, 2000 that the 18 Company would not only meet, but exceed , its financial expectations) . The price of 19 PurchasePro stock fell from the previous day ' s close of $6 .22 to $4 .05, a 35% one 20 day drop on volume of 11 . 6 million shares . 21 279. On the same day, the Company announced that it would be hosting a 22 conference call to discuss PurchasePro's results for its first fiscal quarter of 2001 . 23 However, the conference call was rescheduled at the last minute , without 24 explanation, to occur on the following day, April 26, 2001 . 25 280. On April 26, 2001, the Company disclosed the following : 26 For the 2001 first uarter PurchasePro's revenues totaled $29 .8 million compared with $33 .6 million posted in the fourth quarter of 2000 and, 27 $4.6 milion posted in last year's first quarter . 28 Excludir'g non-cash charges of $16 .7 million for strategic marketin g expense, and amo rtization of equity-based compensation and goodwill,

1.46 Purchas -Pro reported a cash operating loss for the first quarter. Net loss for The 2001 first quarter was $18. 1 million, or $0.26 per share, 2 compan-d to net loss of $36 .8 million, or $0 .55 per share , in The fourth quarter of 2000, and $15 .7 million, or $0.27 per share, in the 3 correspc>nding year earlier quarter. 4 Charles E. Johnson, Jr. chairman and chief executive officer, said, "While we recognize that our results are below expectations, we 5 achieved a number of milestones in the quarter that are broadening our reach, strengthening our network and setting us u p for solid growth into 6 the future. Our focus continues to be on driving transactions, revenues and growth to further our position as a leading business -to-business 7 e-comm,-,rce company . " 8 The company said that the difference between estimates and reported revenue; resulted rfrom deferral of revenues associated with 9 the sale of several' marketplaces . 10 281 . In other words, PurchasePro repo rted financial results for the first 11 quarter showirg a sequential revenue decline from the prior quarter, rather than 12 growth, The Company showed revenues that came in approximately 30% lower than 13 the Company had explicitly led the market to expect, numbers that it reaffirmed 14 during the quarter, and showing a net loss rather than the net profit the Company had 15 explicitly prorr ised. 16 282 . TF:e following report by The Street.com elaborated on the revelation s 17 by the Company and stated in pertinent part, on April 26, 2001 : 18 After pr,--announcing on the day of its scheduled earnings release Wednesday, and then post postponing its results and conference call unti l 19 this morning , PurchasePro-badly missed the consensus estimate . The company; posted a loss of 2 cents per share , compared with analysts' 20 ex ions for a profit, on revenue reduced to $29.8 million because of accou sting concerns . 21 Analysts, expected the compan y would earn 8 cents a share on revenue 22 of $41 million, according to Thomson Financial/First Call . On its conference call with financial analysts, the company. said it saw 23 a total of about $43 million in "contract activity" but that its auditors wouldn't let it recognize all that revenue due to accounting rules . 24 Jim Clough, the company's interim CFO, said that $4 .1 million of the 25 company s deals this quarter fell into the deferred revenue category, while the company didn't recognize another $3 .7 million because "we 26 had insuSfficient facts to determine whether the customer was creditwo-thy." In all, Clough said about $10 million of the company's 27 potential, revenue this quarter was affected by recognition issues . 28 Account., receivable, or the money owed to the company by its customers but not yet collected, shot up to $44 million from $2 3

147 million n the fourth quarter of 2000. Days sales outstandiN41 or the length of time it takes to collect that money jumped to days . Purchasf,Pro said the spike resulted from several large deals that closed toward the end of the quarter and that it had already collected $23 million of its accounts receivable so far in April . The delayed quarterly report and loss comes after PurchasePro reiterated its guidance in March , promising Wall Street that it would make its, numbers despite the rough economy. George Santana, an analyst at Wedbush Morgan Securities who rates Purchasc;Pro a sell, found little to be happy about in the report . "In 2001, you probably shouldn't be selling to or banking a large percentage of your revenue to customers with credit conce rns, Santana said. "A lot of analysts had taken comfo rt that the economy had not significantly impacted their business because they adamantly reiterated their guidance in March , and then here the company is with this 1 0 mayhem: and the delay in releasing their results . Then they miss their numbers, and there 's no guidance going forward." (Santana's firm hasn 't done underwriting for PurchasePro .com) 12 13 Charles Johnson, Jr., the company's CEO, told investors to expect similar "business activity" and gross revenue in the company ' s second 14 quarter, and that PurchasePro would give further guidance in coming weeks. Currently consensus revenue estimates for the second qua rter 15 stand at $47 .4 million. Analysts expect 11 cents per share in ea rnings, accordir-'g to Thompson Financial/First Call . 16 The company also said it was doing away with its controversial practice 17 of issuing warrants to business partners . 18 "That w~3s an early stage strategy," said Johnson . "We will not issue any new;-warrants, and now warrants will be repriced ." 19 In November , PurchasePro repriced to a penny per share 3 million 20 warrants that it had granted to AOL Time Warner. While the company won't mnt any new warrants, Wedbush Morgan's Santana pointed out 21 that AO. gets warrants it was already promised over time, as it helps sell PurchasePro ' s marketplaces . The company said that nearly two- 22 thirds of its revenue during the first quarer came through its partnersmlip with AOL . 23 How quickly AOL can exercise its warrants, however, is based on how 24 much revenue it generates for PurchasePro - the more revenue it refers to the co npany, the faster its warrants are rewarded . Santana estimated 25 that at it< ; current rate , AOL could earn all of its promised warrants by this Jun(,.,. 26 "AOL i ; getting the warrants and exercising them immediately, 27 "Santana says. If you go throw h and exercise all the warrants by June, what's the incentive for AOL to keep pushing PurchasePro's 28 marketplaces after that?"

148 The issues were taking a toll on PurchasePro's stock . After losing 35% Wednesday, it was trading off $1 .27, or 31 .4%, to $2 .78 in recent 2 trading . , 3 The company also introduced its new CFO former Quantum executive Richard Clemmer, on its conference call . He will succeed Clough, who 4 will remain at the company. 5 283 . After the market absorbed these disclosures, the stock was trading in th e 6 $3 range and continued to be artificially inflated during the remainder of the Clas s 7 I Period as Defendants concealed the full extent to which the Company ha d 8 misreported its financial condition in prior quarters . 9 284 . The accounting mayhem that was plainly in existence at the Company 10 was further highlighted on April 27 , 2001, in an interview on CNNfn of Cory 11 Johnson, editor of The Industry Standard. In the interview, Cory Johnson stated a s 1.2 follows: 13 CORY JOHNSON: They don't know where their revenues are coming from. They don't even know what to ca ll revenues . This is a company 14 that's been through at least four CFOs in about four years . The 1ust hired their fifth O . They've been operating with an interim LFO . 15 They come out in March -- the y came out in March 7 and said -- this is all detailed in my sto but they come out and said, We're going to 16 make our guidance . ryWe We don ' t see an economic slowdown. We still expect to earn $42 million in the quarter. 17 This is in March, Bruce . This is well into the quarter. They should 18 know exactly what they're doing. 19 285 . On May 7, 2001, The Industry Standard, published the following articl e 20 about PurchasePro : 21 There is 'an order to Wall Street , an expected procession of events that follow each other as dependably as summer follows spring . And in this 22 year' s ugly climate "pre-announcement season " - during which public companies warn of poor results - is followed weeks later by "earnin gs 23 season. Last week, that order was upset: PurchasePro jumped straight from spring to fall and Wall Street punished the business -to-business 24 exchange as only Na ll Street can. 25 On Wed:;esday morning, the day PurchasePro was to release earnings, the coml)any warned it would badly miss expectations . Then late in the 26 afternoon PurchasePro said it wasn ' t ready to report earnings after all : Another day was needed to get the books organized. That was all the 27 Street needed; the stock was sold off massively . 28 The nex~ morning, before the markets opened, the company revealed the nature of the earnings shortfall in a conference call with investors .

149 Purchase,Pro's CEO, Charles "Junior" Johnson, said that "complex" accounting had drawn the ire of the firm' s outside auditors Arthur 2 Andersen. Wall Street had been expecting revenue of $41 million for the quarter, and PurchasePro threw in eve ry last item to come close to 3 that number. The accountants weren ' t having it and insisted the company defer some revenue into coming qua rters. In the end, 4 PurchasePro came up with just $29 . 8 million in revenue . In two days, Wall Street clipped over half the company' s value, and the stock was 5 down to $3 a share . 6 It was a bi g step down for PurchasePro . Based in Las Vegas, the firm famously boasted of its ability to be bigger than rivals Ariba and 7 Commerce One, despite a management team that knew little about the software business . The blond-haired muscle-bound Johnson ran some 8 video stores and a gym in his native Louisville, Ky ., before launching PurchasePro . 9 Johnson' s swagger is legendary . At Credit Suisse First Boston's 10 technology conference last fall, Johnson wore a gold pinkie ring, gold Rolex and black alligator-skin boots. During{ his presentation, one 11 hedge-fund manager eaned over to me to say , I d short the ,stock if I wasn't a- raid Junior would come over here and kick my ass . 12 Johnson's confidence didn't end with his wardrobe . In the face of the 13 economic slowdown, PurchasePro reaffirmed its earnings guidance in early March, forecasting $42 million in quarterly revenue . The stock 14 soared 14 percent after the announcement. 15 But just ; ive days later, Junior admitted he was going to sell massive quantities of stock . PurchasePro underwriters S First Boston had 16 given him a $ 100 million personal line of credit. Now Johnson said that CS First Boston was forcing him to sell stock to back the loan . 17 Accordir. to InsiderScores.com, Junior sold $15 . 9 million in PurchasePro stock on March 6 and 7 alone . 18 This is the backdrop to the mess over PurchasePro ' s revenues . 19 Anal ysts. say the company is overl y reliant on one customer, Hilton Hotels, and on deals offered via AOL - deals they say, that are not 20 likely to be renewed. Some were done in exchange for PurchasePro warrants. a once-valuable commodity but now vi rtually worthless . 21 More warning signs : Last year, the company refiled certain results 22 because .)f revenue recognition problems . The company had been o~ peratin€ without a chief financial officer after burning through four 23 UFOs in less than five years . (CFO No. 5 signed on last week ) 24 Like Gat :way and Lucent, PurchasePro is suffering less from the slow economy, than from its own missteps . These are not the failures of the 25 new eco tom - these are the failures of weak management, bad decisionss. and shoddy accounting. 26 27 286 . In . an effort to stem the tide of negative news emerging about 28 PurchasePro, on May 8, 2001, Defendants caused a joint press release to be issue d

150 by PurchasePm and AOL heralding the benefits of its agreement with BizProLink : 2 "We are delighted to announce the addition of Travelocity® and BizProliink Network to the expanding online trading and information 3 communities available through the Netscape Netbusiness Marketplace . By further expanding the industry -specific and broad-based markets 4 available to buyers and sellers from companies of all sizes, we have increased the effectiveness and relevance of the Netbusiness 5 Marketplace. " 6 "Today's announcement is the latest example of continuing to drive companies into the Netbusiness Marketplace," said Chris Benyo, SVP 7 Marketing for PurchasePro ©. "The Netbusiness Marketplace has the power to reshape procurement processes , modify business 8 commur_ications between buyer and seller and enhance channel development for businesses, regardless of size . We hope that the 9 Netbusiness Marketplace will continue to &row , evolving into the country's premiere e-cornmerce destination. ' 10

11 Additionally, BizProLink Network (www.bizprolink .com) with its complete range of business services, information and tools will provide 12 extensive vertical industry and community information in the Communities section within the Netbusiness Marketplace providing 13 increased functionality to the Marketplace . 14 287 . O' course, these statements concerning the benefits derived from 15 Defendants' agreement with BizProLink were false and misleading . As noted 16 herein, Defend,ints knew that but for the secret side agreement with BizProLink, that 17 company neve•w would have agreed to the business arrangements discussed above . 18 288 . On May 15, 2001, PurchasePro missed the deadline to file its Form 10- 19 Q for the first quarter, and instead notified the SEC that it would be late in filing its 20 first quarter results . No explanation was given by PurchasePro , voluntarily or when 21 explicitly asked, as to why the Company needed more time to file its financial 22 results, or as to what specific issues were involved . 23 289 . O-1 May 21, 2001, it was announced that after an emergency meeting 24 of the Board of Directors on the night of May 20, 2001, defendant Johnson had "left 25 the company and resigned his position on the board," thus ceasing all active roles in 26 PurchasePro. 27 290. Then, in an article entitled "PurchasePro 's Flashy CEO Resigns," the 28 following was noted :

151 Last week, PurchasePro missed the deadline for filing its first -quarter report with the Securities and Exchange Commission , the second time it has blown SEC deadlines . There have been concerns about the company's accounting policies and whether it can meet rather heady revenue. guidance numbers for the remainder of the year . And a lawsuit claims that Johnson stole the business model for PurchasePro , a charge the company denies . Add all that to a stock chart that shows PurchasePro s shares dropping more than 90% since February . "The las t bit of credibility with PurchasePro was worn away with the way they handled first-quarter earnings," says Wedbush Morgan analyst (Teorge Santana , who has a sell ratm~ on the company . "I feel bad for ~,he people who step into [Johnson s] shoes because I don't know if his company makes it ." Santana ' s firm hasn ' t done banking for PurchasePro . Santana was one of the first Wall Street analysts to raise questions about ,'urchasePro ' s accounting rocedures , especially the 10 controversial practice of trading warrants to buy stock in the company for revenue. He believes Johnson' s abrupt exit could be a signal that 11 new CFO Clemmer and the entire board of directors are conce rned about a possible Securities and Exchange Commission investigation . 12 "The SEC has plenty of time on its hands to review things, and if 13 PurchasePro s practices are put under the microscope , I don t think they stand up too well," he says . 14 Compan:Fes that use stock warrants to sweeten business deals have 15 come under SEC scrutiny ~lately. Nearly two weeks ago, business-to- business auctioneer FreeMarkets was forced to restate more than $10 16 million in revenue after the SEC examined a warrants deal with its biggest customer, Visteon (VC : NYSE) . PurchasePro has a hu ge 17 warrants deal with AOL, which was recently repriced so that the media giant could buy them for a penny a share . 18 SEC accounting probe or no, analysts have little insight into lust how 19 much re,, enue the company expects to~ generate this year. The Past time PurchasePro issued guidance was in March when the company said it 20 expected to post sales of $225 million in 206 1 . Monday's news throws that num)er out the window , but just how bad things get is anyone's 21 guess. 22 23 PurchasePro used to be known as Johnson's company in more ways than one. He not only owned 20% of the company's stock but he filled 24 board seats and executive offices with his cronies including business pals and n one case a first cousin . But the steep 111 in Purc asePro's 25 stock undermined J'ohnson's influence . In the past few months, his ownership stake in the company has dropped to 11 % because he was 26 forced to -sell shares to pay back a previous $100 million loan secured by his PurchasePro stock. 27 "Make no mistake, this was not an orderly transition," says Walravens 28 of Johnsc n's sudden ouster after a Sunday night board meeting . "I just think there were too many lawsuits and oo many mistakes ."

152 1 291 . Then, at 4:00 a .m. on May 22, 2001, the very next day after defendant 2 Johnson resigned, PurchasePro issued a release which announced a further, and even 3 more drastic, revision of its first quarter 2001 financial results . The press release 4 11 noted in part : 5 PurchasePro Revises Reported First Quarter Results 6 LAS VEGAS, May 22, 2001 (PRIMEZONE) - PurchasePro®), (Nasdaq : PPRO - news) today reported revised results for its first 7 quarter ended March 31, 2001 . 8 For the 2001 first quarter PurchasePro's revenues were $17 . 1 million compared with $33 .6 million posted in the fourth quarter of 2000 and 9 $4 .6 million posted in first quarter a year earlier . 10 Excluding non-cash charges of $16 .7 million for strategic marketin g expenses, and amortization of equity-based compensation and 11 goodwil , PurchasePro reported a cash operating loss for the first quarter of $15 .9 million, or $0 .23 per share. 12 The net loss for the first quarter ended March 31, 2001 was $32 .4 13 million or $0 .47 per share, compared with a net loss of $36 .8 million, or $0.5~'per share, in the fourth quarter of 2000, and $15 .7 million, or 1 4 $0 .27 per share, in the corresponding year earlier quarter . 15 292 . In, other words, as opposed to the original revenue guidance of $43 16 million, and e rnings per share of approximately $0 .08 per share, PurchasePro's 1 7 financial results for the first quarter of 2001 looked shockingly different : revenue of 18 $17 .1 million (i.e., 60% less than the revenue previously claimed) and a loss of $0 .47 19 per share. Based on this latest revision to the Company's financial results, 20 PurchasePro stock fell to $2 .58 per share on May 22, 2001 . 21 293 . Unfortunately for the investing community, in ignorance of the advers e 22 facts concerning PurchasePro's business condition during the Class Period relating 23 to the Company's revenues, products and improper accounting practices, which were 24 concealed by Defendants throughout the Class Period, plaintiffs and the other 25 members of the Class purchased their PurchasePro securities at artificially high 26 prices, relying on the statements made and/or the integrity of the market and were 27 damaged there')y . 28 294 . Hid plaintiffs and the other members of the Class known of th e

153 materially adverse information not disclosed by Defendants, they would not have 2 purchased their PurchasePro securities at the artificially inflated prices that they did . 3 VIII. POST CLASS PERIOD NEWS 4 295 . On May 29, 2001, the PurchasePro Defendants caused the Company t o 5 announce yet another set of revised earnings. The following extract from th e 6 Lexington Herald-Leader, of May 30, 2001, detailed those revelations : 7 Like a mirage in the Nevada desert, PurchasePro .com's revenue for the 8 first throe months of the year keeps disappearing . Yesterday, Las Vegas-based PurchasePro revised its first-quarter financial results 9 downward for the second time in a week . 10 The late s t numbers, included in the company ' s long-overdue Form 10- q~uartcrly report to the Securities and Exchange Commission, are 11 slightly :~e1ow results announced in a press release last Tuesday, and dramatic ally lower than the company's original estimates of April 26 . 12 Last week ' s revision came a day after Chairman and CEO Charles 13 "Junior"Johnson a Lexington native, abruptly left the company he had founded in October 199 PurchasePro builds Web sites that let 14 businesses buy and sell goods over the Inte rnet. 15 The company's first-quarter loss of $33 .47 million is 85 percent greater than the 18'08 million it announced in April and its revenue figures 16 dropped 46 percent, from $29 .78 million to $16 .03 million. 17 296. Thereafter, on or about May 31, 2001, Lynn E . Turner, Chief 18 Accountant for the SEC, noted in a speech how the use of warrants to generate 19 revenue can be misleading. In that speech, Ms . Turner stated in part : 20 Compan'_es are increasingly entering into complex strategic alliances, joint ventures, cross licensing and cross ownership agreements . These 21 arrangements often involve two parties , each providing goods or services .o each other, and may also involve the issuance ofquity from 22 one party to the other. These arrangements are commonly documented in mul °.ple agreements that are negotiated and entered into 23 contemporaneously . As such, the agreements are complex, and it may be diffic.jlt, if not impossible to distinguish and reliably measure the 24 fair values of the separate elements of the contracts . 25 A simpl e example of this is a company that issues warrants to a custome;• at the same time the company and customer enter into a 26 supply arrangement for the company ' s goods or services. These arrangements have become common recently . In some instances, the 27 warrants will only become exercisable if the customer makes a ce rtain level ofpurchases. In others, the warrants are fully vested when issued 28 but the customer contractually commits to purchase some amount o1' goods or services from the issuer . The sfaff is concerned when it

154 appears Company A has taken $1 million out of its left pocket only to receive that $1 million back in its right pocket , and wants to record the 2 Si million received in revenue . For example , assume that Company A pays Company X $ 1 million to enter into the purchase and supply 3 arrangement under which Company A agrees to suppl y a product to Company X and Company X agrees to purchase a specified minimum 4 volume of product from Company A. Company A gets the $1 million that it gave Company X back through Company X's guaranteed product purchases. The staff questions how these types of "round-trip" arrangements result in revenue, and whether, in substance, they are 6 sham transactions engineered solely to inflate the revenue line in the income statement. 7 Companies and auditors must carefully evaluate the substance of these 8 arrangements to determine the proper accounting even in instances where the accounting literature does not specifically address the 9 accounting for a transaction . 10 297 . On June 4, 2001, the following article was released entitled "A Risky 1 I B-to-B Bet in v. egas ." The article is noteworthy because it detailed how far-reaching 12 the fraud was revealing that many organizations, which PurchasePro claimed 13 were clients, h_ad never in fact been clients . The following are extracts from that 14 article : 15 Perhaps investors should have thought twice last year when Johnson told other Internet executives that There is a fine line "between an 16 entrepreneur and a pile of manure . " 17 Last Mo.iday Johnson' s luck ran out. He was ousted as PurchasePro's chairman and CEO. After guiding the company throw h a spectacular 18 IPO, he :3pent the last two months selling almost halt of his stock for about $ 2 million. The day after Johnson ' s departure, PurchasePro 19 revised its first-quarter revenues downward nearly 45 percent to $17 .1 million from $29 .8 million. Even worse , the company acknowled ges 20 it will likely have to revise the figures again soon. Its stock has fallen from a h: h of $79 in December 1999 toless than $2 a share last week . 21 At least `i7 class action lawsuits have been filed charging PurchasePro with fraud. 22 23 Now it's clear that corporatepurchasing departments aren't flocking to 24 the Net, and it appears that PurchasePro overstated its business as its losses mounted. 25 The cor_lpany's 1999 annual report, for instance , lists about 50 26 organizations - including the state of Nevada and five casino companies - as users of its network that links corporate buyers with suppliers of 27 goods rangin g from offic~e~~paper to food. But at least a half dozen were Lust kicking the tires . "We never actually purchased anything," says 28 Dave Mitchell, purchasing director for four of the customers on PurchasePro's list : the Phoenix Suns basketball team, the Arizona

155 1 Diamondbacks baseball team and their respective stadiums, America West Arena and Bank One Ballpark . 2 One alleged customer, Carnival Cruise Lines says it tested the system 3 but never used it. Another, Phoenix-based IL 5Z Resorts, decided not to sign on -because executives weren't convinced it would recoup its 4 investment. 5 298 . About two weeks later, on June 19, 2001, The Washington Post 6 published the following article concerning the placement on administrative leave by 7 AOL of one of its executives who worked closely with PurchasePro . The following 8 is an excerpt from the article : 9 An America Online Inc . executive has been placed on administrative leave pending an internal investigation of the Comp any ' s relationship 10 with a corporate partner, according to sources familiar with the matter . 11 Eric Keller a senior vice president of business affairs at the Internet Division of New York- based AOL Time Warner, is on leave for six 12 weeks while the compan looks into matters related to its partnership with financially troubledPurchasePro.com Inc ., sources said. At least 13 one other lower-level AOL employee also was put on administrative leave, they said . "As a policy, we don't comment on employee 14 matters," said Jim Whitney, a spokesman for the Dulles-based online unit which runs the world s largest Internet service . Whitney said that 15 Keifer was unavailable for comment . 16 299 . Ina conference call on August 7, 2001, Rick Clemmer, PurchasePro's 17 new President and Chief Executive Officer, made the telling admission that the 18 Company was :`working [with AOL] to restructure the relationship, so that there's 19 balance in the relationship ." This was a belated admission of PurchasePro' s 20 imbalanced relationship with AOL, an admission that directly contradicted defendant 21 Johnson's Class Period statements where he characterized the relationship with 22 AOL, as well a;, other clients, as "true partnerships ." As is alleged herein, these were 23 not true partnerships, but were instead artificial "relationships" with no genuine 24 benefits accruing to the Company . 25 300. Almost one month later, on October 4, 2001 , an article was released 26 which addressed Johnson's lawsuit against the lender that offered a line of credit 27 against his Pure,hasePro holdings . That article stated : 28 The founder and former CEO of PurchasePro .com has filed a lawsuit against the bank that he borrowed $2.77 million from last year .

156 Lexington native Charles "Junior" Johnson is claiming that he shouldn't have to repay the now-overdue loan from Bank One of Kentucky . The loan, given on Oct. 28, 2000 was secured by 410,000 shares of Las Vegas-based PurchasePro, which the bank sold between June 10 and June 13 for $524,774 .39 . But the loan has been in default since Feb . 15, when shares of PurchasePro closed at $16 .87 on the NASDAQ. If the stock had been sold then, the bank would have collected $6.9 million - enough to repay the debt and leave at least a $4 million surplus for Johnson, the suit says . Johnson claims the bank now owes him the $4 million he would have gotten if the stock was sold Feb. 15, and has asked for punitive damages of more than $ 12 million. 10 301 . Thereafter, on November 29,200 1, the Company announced through an 11 8-K that the Company's auditors had resigned over revenue recognition dispute s 12 I with PurchasePro executives . The 8-K specifically stated : 13 CHANGES IN REGISTRANT ' S CERTIFYING ACCOUNTANT . On 14 November 21, 2001 Arthur Andersen LLP ("Andersen") notified PurchasePro .com, Inc . (the "Company") that Andersen resigned as the 15 Company 's independent certifying accountant, effective immediately . The reports of Andersen with respect to the Company for fiscal years 16 1999 and 2000 contained no adverse opinion or disclaimer of opinion and were not quali fied or modified as to uncertainty , audit scope or 17 application of accounting principles . During fiscal years 1999 and 2000 and the subsequent interim period preceding the resignation of Andersen, 18 there were no disagreements between the Company and Andersen on any matter of accounting principles or practices , financial statement 19 disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Andersen , would have caused Andersen to 20 make reference to the subject matter of the disagreements in its re port on the financial statements for such years , except as follows : During 21 Andersen ' s review of the Company ' s interim financial statements for the three-month period ending September 30, 2000, Andersen expressed 22 disagreerrient with prior members of the Company 's management regarding proposed recognition of revenue derived from reseller 23 a reements between the Company and ce rtain of its business pa rtners . Thisis issue was the subject of discussion between Andersen and the 24 Cornpany ' s Audit Committee and was resolved to Andersen's satisfaction. During fiscal years 1999 and 2000 and the subsequent 25 interim period precedin the resignation of Andersen, there have been no reportable events (as defined by tem 304 of Regulation S-K ,except as 26 follows; Andersen has noted what they considered to be de iciencies in the design and operation of the Company's internal controls . These 27 issues were the subject of discussions between Andersen and the Company 's Audit Committee. Through the implementation of new 28 internal control procedures and recent chan ges in management, the Company believes it has adequately addressed Andersen ' s concerns. The

157 Company has provided Andersen with a copy of this Form 8 -K and has requested that Andersen furnish to the Company a letter addressed to the 2 Securities and Exchan ge Commission stating whether it agrees with the statements presented above . A copy of Andersen ' s response letter, dated 3 November 29, 2001 , is filed as Exhibit 16 .1 to this Form 8-K. 4 302 . In response, Andersen, LLP submitted the following letter to the SE C 5 which stated: 6 Office of the Chief Accountant 7 Securities and Exchange Commission 450 Fifth Street N .W. 8 Washington, Di` 20549 9 November 29, 200 1 10 Dear Sir: 11 We have read the paragraphs of Item 4 included in the Form 8-K dated November 29, 2001 of PurchasePro .com Inc. to be filed with the 12 Securities and Exchange Commission and are in agreement with the statements contained therein . With respect to paragraph 6 of Item 4, we 13 cannot comment on the adequacy pf new internal control procedures and recent changes in management in addressing the deficiencies in the 14 internal confrols which we previously noted . 15 Very truly yours, 16 Is/ Arthur. Andersen LLP 17 303 . On July 19, 2002, the following article was released by The Washington 18 Post entitled, "Unorthodox Partnership Produced Financial Gains ; Deals Allowed 19 AOL, PurchasePro.com to Boost Revenue." The article is relevant because it 20 describes, in great detail, the relationship between AOL and PurchasePro during the 21 Class Period. The article stated : 22 At the he;ght of the Internet boom, when America Online Inc . was king of the heap, it found an unlikely business partner: a former video store 23 operator who had a penchant for blackjack. 24 In the ear'y days of his Las Vegas start-up, Charles E. Johnson Jr. said he would go down to the neon-bathed Strip , put big wads of money on the 25 casino tables and find a way to meet payroll . 26 "Junior," as he liked to be called, played for the big payday. And for a couple of heady years , his company, PurchasePro . corn Inc ., was the 27 archetypz,l dot-com a software venture led bya swashbucklin g executive who took it public during the Internet euphoria of 1999 , struck a big deal 28 with AOL a year later and hit it rich.

158 AOL also profited from the partnership . In one unorthodox arrangement, AOL gave $9 .5 million in cash to PurchasePro for $30 million in stock warrants in the firm, and AOL booked the difference -- $20 .5 million -- as ad and commerce revenue. PurchasePro also bought advertising space from AOL, and it paid AOL commissions for selling PurchasePro software . AOL earned its warrants under a marketing deal that included distributing PurchasePro software . The warrants similar to stock options , gave AOL the right to buy shares in PurchaseEro for a penny each, according to internal company documents . AOL calculated the value of the warrants and booked it as $20 .5 million in advertising and commerce revenue in its December 2000 quarter and another $7 million in the March 2001 period . The $28 million in PurchasePro deals represented just a fraction of AOL's overall revenue . But the partnership illustrates how AOL did business at the peak of the Internet bubble , using its corporate leverage to generate 10 advertising and commerce revenue, a Key growth engine , from a dot-com firm whose fortunes were tied to the online giant . 11 12 It wasn't-- long before such online business-to-business transactions 13 became the hot thing in 2000 . AOL, always on the lookout for new opportunities, struck a deal with Johnson's start-up in March 2000 . 14 AOL used PurchasePro's software to erect a small-business portal on 15 AOL's N ;tscape site to which customers could subscribe for a monthly fee . AOL also earned a commission when it sold PurchasePro's software 16 to other companies, which could create their own online marketplaces to buy and sell goods and services . 17 There was another way AOL made money : It earned $3 in performance 18 warrants for each dollar of revenue it generated for PurchasePro under their marl;cetin partnership . Under the agreement, the warrants gave 19 AOL the right to buy shares in PurchasePro for $63 each . But with dot- com shares in decline, the two companies agreed to revise the deal in 20 December 2000, according to a confidential AOL summary circulated to executives for their signatures . 21 As part of the revised arrangement , PurchasePro agreed to reduce the 22 exercise price for each share of PurchasePro stock an AOL warrant could buy from $63 to a~~~ penny. AOL estimated it would earn $30 million in the 23 quarter ended in IJecemberJ 2000 by exercising the warrants, accordin to internal company documents . AOL would buy PurchasePro stock for a 24 penny pel share and resell them at their market price . 25 The warrants were valuable to AOL because they were treated as ad and commerce revenue . 26 "$30MM [million] of revenue from performance warrants vesting in 27 calendar Q4 [the December quarter] will be treated as advertising revenue," AOL stated in its executive summary of the deal . 28 For PurchasePro, a dot-com on the rise, the AOL partnership helped it t o

159 generate revenue and sell its software service . 2 Many cash-poor dot-corns paid for their online as by iving AOL equity in their high-flying stock . Often such deals legitimized corn panies in the 3 eyes of Wall Street because of AOL's status at the vanguard of the tech boom . 4 But the difference in this deal was that PurchasePro was not using, its 5 stock to buy ads to promote itself on AOL . Instead, AOL was earning warrants from selling PurchasePro software . The revenue was booked as 6 commerce, which is reported in the same income line as advertising sales . AOL said it combines ad and commerce revenue because many of its 7 deals are multifaceted and do not fall neatly in either of those categories . 8 In return for restructuring the agreement, which included reducing the warrants ' exercise price, AOL agreed to give PurchasePro $10 million in 9 revenue, according to AOL's internal documents . 10 PurchasePro got its $ 10 million this way: AOL paid it $4 .9 million to cover the cost of giving 100,000 AOL customers a free month's 11 subscription -- at $49 per user -- to PurchasePro ' s marketplace service, which was co-branded with AOL 's Netscape portal. AOL also agreed to 12 buy $4 .6 million worth of PurchasePro ' s software , which AOL would distribute to some of its business partners . AOL would come up with 13 another $ 500,000 by selling ad space on PurchasePro's online marketplace. 14 The bottom line : AOL essentially paid $9 .5 million for $30 million in 15 warrants, netting $20.5 million. 16 The deal helped AOL boost its income from ad and commerce . Though the category includes the two revenue streams, most Wall Street analysts 17 generalry regard the total as an indicator of how AOL ' s ad business is loing. Such assumptions could be misleading, said Johnson, the former 18 PurchasPro chief executive. 19 "The warrants had nothing to do with ad revenue," Johnson said . "They were directly related to selling our marketplace software to our 20 customers, suppliers and partners. " 21 22 As the months went by, AOL and PurchasePro found other ways to provide each other with quick infusions of revenue , often near the end of 23 a quarter 24 Under one small deal PurchasePro would receive $1 .8 million worth of advertising on the AOL service, according to an internal compan 25 document dated March 21, 2001 . In return AOL would receive $1 . million worth of promotions that mentioned its Netscape brand when 26 PurchasePro ran television ads on CNN and Headline News, which were now partof the merged company, AOL Time Warner Inc . 27 Purchase.Pro got little value from the ads it ran on the AOL service, 28 according to sources and internal AOL documents that lay out where PurchasePro's ads would run .

160 The "carr a e lan" showed that many of the PurchasePro ads would run on AOL's RQinstant -messaging service. Instant messages allow users 2 to converse by text in real time over the Internet. The ICC,service targets a largely teenage and international audience who would have little use for 3 Purchase Pro s business-to-business software . The ads appearing on ICQ's application also had "almost no click through " an AOL source 4 said, meaning that few users actually clicked on the ads to find out more about the product being touted. 5 PurchasePro's ads also were to run on Winamp AOL's music software 6 player, another service that did not tar et PurchasePro's business clientele. A source familiar with PurcnasePro ' s thinking said the 7 company did not care where the ads ran . Each side was more interested in boostirsg its ad revenue, sources for both companies said . 8 Eventually, the partnership between AOL and PurchasePro fell apart. In 9 May 2001 , Johnson stepped down as PurchasePro ' s CEO after the company badly missed its financial targets. In November 2001, Arthur 10 Andersen LLP resigned as PurchasePro s independent auditor after notin what it considered deficiencies in the design and operation o1 11 PurchasePro ' s internal controls . 12 About a month after Johnson left PurchasePro, Eric Keller, an AOL senior vice president, was placed on administrative leave pending an 13 internal investigation of the company's relationship with PurchasePro, sources said . 14 AOL has not publicly disclosed the internal inquiry, Keller's status or his 15 subsequent departure. Keller declined to comment . 16 AOL stopped reselling_ PurchasePro software in the first half of 2001, according to PurchasePro officials. AOL ceased using PurchasePro's 17 technology as the backbone of AOL 's small -business portal around this February, PurchasePro said. 18 19 304. On August 2, 2002, in an article by The Associated Press entitled "AOL 20 Time Warner Shares Drop on Reports of PurchasePro Inquiry," it was furthe r 21 revealed that : 22 AOL Time Warner stock tumbled nearly 7 percent Friday on published 23 report s that the media con glomerate , whose accounting practices already are bein ; investigated by federal regulators, may have used its 24 relationship with a business software company to distort its financial performance . 25 AOL Time Warner fell 71 cents on the New York Stock Exchange to 26 close at $10 . 30 following articles in The Wall Street Journal and The Washington Post on Friday that authorities are looking into whether the 27 company s AOL division booked tens of millions of dollars that it received from selling PurchasePro. com stock warrants as advertising 28 revenue.

161 Stock sales are usually considered gains, not revenue . PurchasePro fell a penny to 32 cents . 2 An AOL spokesman declined to discuss the PurchasePro issue specifically, but said the company is cooperating with the SEC investigation that it had confirmed on July 24 . That disclosure followed 4 a series of Washington Post articles questioning the company's accounting practices. 5 "We have no independent knowledge of any of the companies that have 6 been contacted by the SEC but it is completely in keeping with an investigation tha some would be contacted," said John Buckley, 7 executive vice president of corporate communications at AOL. 8 A source with knowledge of the investigation said that two AOL executives, Myer Berlow and David Colburn, were deposed earlier this 9 summer by SEC investigators looking into PurchasePro' s financial statements . 10 PurchasePro declined to comment Friday, but the company confirmed to 11 the newspapers that it was speaking to the SEC about the AOL transactions . 12 13 305 . On the same day, in an article on Info World Daily News, entitled "SE C 1 4 Scrutinizes AOL's Deal With PurchasePro," the following was noted : 15 The U. S . Securities and Exchan ge Commission (SEC) has broadened its 16 probe of AOL Time Warner 's (AOLTW) financial practices to examine he company's relationship with Las Vegas software company 17 PurchasePro, according to a published report. 1.8 AOLTW is under investigation by both the SEC and the U.S . Department of Justice (DOJ) for alleged financial misdealin g such as improperly 19 booking -revenue from business partners like PurchasePro. AOLTW forged a deal with the business purchasing_ software company 20 in March of 2000 whereby it agreed to help PurchasePro sell its software in return for part of the revenue and warrants for PurchasePro ' s stock . 21 According- to a report in Friday's online edition of the Wall Street 22 Journal cOLTW is being investigated for cashing in $27 mil lion worth of PurchasePro stock and booking it as advertising revenue. 23 No one from AOLTW or PurchasePro was immediately available to 24 comment on the investigation Friday morning . 25 Authorities' investigation into AOLTW 's dealings with PurchasePro is just part of a larger probe into the company' s financial practices, which 26 came into question following repo rts in the Washington Post last month that the company made unusual deals in an effort to prop up its sagging 2,7 AOL Internet unit. The SEC has declined to comment on the investigation. 28

162 306 . The next day, on August 3, 2002, in a Los Angeles Times article entitled 2 11 "Probes Weighing on AOL Shares ; The focus Apparently is $27 Million in Ad 3 11 Revenue from Transactions Between the America Online Unit and Software Firm 4 PurchasePro .com," the article noted in pertinent part: 5 Shares of AOL Time Warner Inc . sank for a third straight day Friday, as concerns about twin federal investigations into the media giant's 6 accounting continued to weigh on the stock . 7 The Securities and Exchange Commission is investi gatingwhether the company' s America Online unit wrongly booked $27 million in 8 advertising revenue in late 2000 and early 2.001 from transactions with software company PurchasePro.com Inc ., the Washington Post and Wall 9 Street Journal reported Friday . 10 Las Vegas-based PurchasePro confirmed that it had been contacted by the SEC, tlge newspapers said . The SEC declined to comment on the case . 11 Shares of AOL Time Warner fell 71 cents, or 6 .5%, to close at $10 .30 on 12 the New York Stock Exchange . 13 AOL Time Warner Chief Executive Richard D . Parsons disclosed the SEC's "fact-finding inquiry" on July 24 . This week, the company 14 confirmed an apparently related criminal investigation by the Justice Department. 15 The probes reportedly were sparked by reports that America Online used 16 unorthodox accounting methods to boost reported ad revenue while its huge merger with Time Warner was pending and it needed to persuade 17 Wall Street that it was still growing strongly . 18 Parsons denied any accounting irre ularities, saying the transactions have twice been approved by audiors Ernst & Young . 19 Purchasel' ro is a former dot-com highflier in the business -to-business 20 sector whose shares closed at 32 cents Friday , down 1 cent in Nasdaq trading. The company used to buy advertising on Ame rica Online and 21 used the Internet giant to sell its software . 22 In one transaction, AOL reportedly paid $9 .5 million for $30 million in Purchase Pro stock warrants, then booked the $20 .5-million difference as 23 advertising and commerce revenue . 24 "AOL Time Warner has announced previously that the SEC is looking into a number of transactions . It should be no surprise that one of the 25 transactions is PurchasePro," AOL spokesman John Buckley toldReuters . 26 307 . Th,:Jn, on or about August 7, 2002, it became apparent that PurchasePro 27 was also being investigated by the SEC . In a Wall Street Journal article entitled 28 "PurchasePro is Subject of Investigation by SEC," the following was disclosed :

163 PurchasePro.com Inc. said it is being investigated by the Securities and Exchange Commission. The inquirybegan last year, said people familiar 2 with the situation . 3 The investigation came to light when The Wall Street Journal reported last week That two AOL Time Warner Inc. executives had' been 4 interviewed by the SEC about AOL' s relationship with the Internet software company. 5 AOL executives said the interviews were related to a prior investigation 6 of PurchasePro and not the more recent inqui ry into AOL's accounting practices .; AOL disclosed last month that its accounting practices are 7 under investigation by the SEC fora series of unconventional adve rtising transactions that occurred in 2000 and 2001 . 8 At the time the article was published, PurchasePro didn ' t reveal the 9 investigation. PurchasePro didn 't disclose the purpose of the investigation, but said it is cooperating fully. The SEC declined to 10 comment; 11 People familiar with the inquiry say it likely focuses on a peri od last year when Pur'chasePro announced disappointing quarterly sales in a news 12 release, then revised those sales downward in an SEC filing. 13 In 4 p.m . Nasdaq Stock Market trading Tuesday, PurchasePro shares fell two cents to 27 cents . 14 15 308 . Wi~:hin a month, on or about September 11, 2002, PurchasePro file d 16 Chapter 11 bankruptcy and announced plans to sell all of its assets to Perfect 17 Commerce for $2 .638 million. 18 309 . On .or about the same day, the Company announced the following : 19 PurchasePro Announces Agreement in Principle to Sell Substantially All its Assets to Perfect Commerce; Files for Reorganization Under Chapter 20 11 as Part of Pact -- PurchasePro (Nasdaq : PPRO) today announced that it has signed a letter of intent pursuant to which it has agreed to sell 21 substantially all its assets to Perfect Commerce, Inc . Perfect Commerce provides Enterpri se Supply Management (ESM) software, services and 22 expertise, including auction and c-sourcing solutions, that enable Global 20U0 companies such as America West Airlines , Bechtel, Hoover 23 Precision :. roducts Peabody Energ (NYSE : BTU), Smut-Stone (Nasdaq: SSCC), Unocal (NYSE : UCL)' and others to increase profits and improve 24 product and service quality. Unlike companies offering only software or serv ices , Perfect Commerce provides a complete solution comprised of 25 software 'systems and the deep expe rtise and services in strategic sourcing , six-sigma procurement processes, and business process 26 management needed to harness the power of Ente ri se Supp1 Management. Perfect Commerce is headquartered in Palo Alto 27 California. 28 As part of the letter of intent, PurchasePro today filed a voluntary petition under Ch tpter 11 of the United States Bankruptcy Code in the Unite d

164 States Bankruptc y Court for the District of Nevada . Pursuant to sections 363 and 365 of the Bankruptcy Code , the sale and the definitive asset 2 purchase agreement will be placed before the Cou rt for its required approval . -PurchasePro said that under its agreement with Perfect 3 Commerce, it has the option , subject to conditions in the letter, of obtaining debtor in possession " financing up to $750 , 000 . Richard L . 4 Clemmer, PurchasePro ' s president and chief executive officer, said, "The cost of doing business as a public company has increased significantly 5 over the past year. After reviewing many of the options available as well as the opportunity presented by Perfect Commerce, PurchasePro 6 concluded that the terms of the acquisition and subsequent filing were necessary to preserve the assets and values of PurchasePro 's business and 7 to protect the interest of the company ." 8 9 In Chapter 11 PurchasePro will continue operating as the "debtor-in- possession." Daily operations will continue as usual with our offices 1 0 remaining open and performing transactions in the ordinary course of businessjust as it did prior to our fi ling.

12 Separately, PurchasePro has reached an agreement in ~princDi le with the 13 Enforcement Division of the SEC . The terms of which the vision .has agreed to recommend to the Commission . The agreement in princi ple 14 concerns the settlement of proposed allegations that have been under investigation since the spring of 2001 . The proposed. agreement call s for 15 PurchasePro, without admitting or denyin the Commission ' s allegations, to consent to the entry of a permanent in unction enjoining it from 16 violations of Sections 13(b)(2)(A) & (B) of the Securities Exchange Act of 1934 ind is subject to approval by the Commission and the United 17 States District Court. There can be no assurance that the proposed agreement will be approved or, if it is not approved, that PurchasePro will 18 succeed n defending or settling any subsequent action that might be brought against it by the Commission . 19 20 310 . On or about September 23, 2003, the SEC and DOJ filed accounting 21 fraud charges in the United States District Court for the Eastern District of Virgini a 22 against defendants Anderson and Miller . Both Anderson and Miller settled the 23 charges without admitting or denying the Commission' s allegations . 24 IX . DEFENDANTS' SCIENTE R 25 A . PurchasePro Defendants' Scienter 2 6 311 . Through their efforts, the PurchasePro Defendants reaped numerou s 27 benefits by engaging in their scheme . These benefits, together with the facts 28 disclosed by numerous former employees of the Company, support a stron g

165 1 inference of conscious or deliberate recklessness on the part of each of thes e 2 II defendants 3 312 . Th? most obvious benefit received was financial gain . As detailed 4 below, defendants Johnson, Moskal, Clough and Chiles realized over $43,000,000 5 in ill-gotten gains from insider trading . 6 313 . Moreover, defendants Johnson and Carton used their stock as collateral 7 for personal loans . Johnson used his stock for a personal line of credit for over 8 $100,000,000 (a line of credit from CS First Boston of $ 100 million and a separate 9 loan from Bank One in the amount $2,769,994 .76) and Carton used his stock for a 10 personal line of credit for $8 million . This money allowed these defendants, and in 11 particular Johnson, to maintain an extremely lavish lifestyle which was otherwise 12 unattainable . Plaintiffs believe that with the opportunity for discovery, it will 13 become appar':nt that other PurchasePro Defendants had used their stock as 14 collateral for similar lines of credit. For example, while not named as a defendant 15 in this action, plaintiffs are aware that another former executive and co-founder of 16 PurchasePro, Robert Geoff Layne, also used his stock as collateral for personal 17 loans . See also §V (information provided by Employee 4) . 18 314 . The artificial inflation of PurchasePro's stock price also allowed 19 PurchasePro to acquire two companies (Stratton Warren and BayBuilder) . 20 PurchasePro used artificially-inflated PurchasePro stock to provide the majority of 21 the $23 million aggregate purchase price for these companies . This is significant 22 because PurchasePro was barely functioning as a going concern . Thus, in order to 23 provide real revenue for the Company, there was motivation to acquire real 24 companies with real products. 25 315 . Further, the general economy was in a state of disarray and high tech 26 companies were failing at a surprising rate . Thus, in order to maintain interest in 27 PurchasePro by the financial community, the PurchasePro Defendants were unde r 28 enormous pressure to create the perception that the Company was strong an d

166 1 growing . In fact, the PurchasePro Defendants had even raised investor expectations 2 by committing,the Company to profitability during the Class Period . This created 3 additional pressure to meet those expectations . Hence, if the PurchasePro 4 Defendants had not engaged in their scheme, the Company would have been doomed 5 to failure . In other words, these defendants did not engage in their scheme for the 6 more common .rewards enjoyed by other business executives, they were fighting t o 7 maintain the very viability of the Company . 8 316 . With these benefits in mind, together with the information provided by 9 former employees of the Company, plaintiffs further note that during the Class 10 Period, each of the PurchasePro Defendants were senior executives and/or directors 11 of PurchasePro and were privy to confidential and proprietary information 12 concerning PurchasePro, its operations' finances, financial condition, products and 13 business prospects, including terms of sales, customer returns, price protection 14 promotions, credit allowances, receivables and customer inventory levels . These 15 defendants also had access to and knew of, or were consciously or deliberately 16 reckless in not knowing of, material adverse non- public information concerning 17 PurchasePro's financial condition. 18 317. Each of the PurchasePro Defendants was also provided with copies of 19 management reports, press releases and SEC filings alleged herein to be misleading 20 prior to, or shortly after their issuance . As such, all of the PurchasePro Defendants 21 had the ability and opportunity to prevent their issuance or cause them to be 22 corrected . As a result, each of the PurchasePro Defendants is responsible for th e 23 accuracy of the public reports and releases detailed herein as "group published" 24 information and is therefore responsible and liable for the representations containe d 25 therein. 26 318 . Furthermore, during the Class Period, the PurchasePro Defendant s 27 directly and indirectly engaged and participated in a continuous course of conduct 28 to misrepresent the results of PurchasePro's operations and to conceal adverse

167 1 material information regarding the finances, financial condition, and results of 2 operations of PurchasePro as specified herein . The PurchasePro Defendants 3 employed devices, schemes, and artifices to defraud, and engaged in acts, practices, 4 and a course of conduct as herein alleged in an effort to increase and maintain an 5 artificially high market price for the common stock of the Company . This included 6 the formulation, making, and/or participation in the making of untrue statements of 7 material facts, and the omission to state material facts necessary in order to make the 8 statements made, in light of the circumstances under which they were made, not 9 misleading, which operated as a fraud and deceit upon plaintiffs and the other 10 members of the Class . 11 319. Under these circumstances, the PurchasePro Defendants are liable , 12 jointly and severally, as direct participants in the wrongs complained of herein . 13 They had a duty to promptly disseminate accurate and truthful information with 14 respect to PurchasePro's products, operations, financial condition and business 15 prospects or to cause and direct that such information be disseminated so that the 16 market price of PurchasePro stock would be based on truthful and accurate 17 information . 18 320. As officers, directors and/or controlling persons of a publicly hel d 19 company whose securities were registered with the SEC under the Exchange Act, 20 traded on the NASDAQ National Market System, and governed by the provisions 21 of the Exchange Act, the PurchasePro Defendants had a duty to promptly 22 disseminate accurate and truthful information with respect to the Company's 23 operations, business, products, markets, management, earnings and business 24 prospects, to correct any previously issued statements from any source that had 25 become untrue, and to disclose any trends that would materially affect earnings and 26 financial operating results of PurchasePro, so that the market price of the Company's 27 publicly traded securities would be based upon truthful and accurate information . 28 321 . Since the beginning of the Class Period, at the latest, the PurchasePro

168 1 Defendants were well aware of the existence of inadequate internal controls and/or 2 with conscious or deliberate recklessness disregarded their obligation to implement 3 adequate controls to ensure that revenues and accounts receivable were properly 4 recorded in compliance with GAAP . These defendants had a responsibility t o 5 maintain sufficient accounting controls to accurately report PurchasePro's financial 6 results . Moreover, the representations made by these defendants in PurchasePro's 7 financial statements and in other financial disclosures to the public were the 8 representations of PurchasePro's management. Contrary to the requirements of 9 GAAP and SEC.' rules, the PurchasePro Defendants failed to implement and maintain 10 an adequate internal accounting control system and engaged in improper accounting lI practices as described herein . 12 322 . By virtue of their positions with PurchasePro and because of th e 13 significant repuAational and monetary benefits they stood to gain from a positive 14 public perception of PurchasePro, and as a result of artificially inflated stock prices, 15 the PurchasePro Defendants also had both the opportunity and motive to commit the 16 acts alleged he -ein . These defendants were aware of PurchasePro's true financial 17 condition and knew, or with conscious or deliberate recklessness disregarded, the 18 limitations of the Company . The air of accomplishment and success created as a 19 result of their material misrepresentations made PurchasePro more attractive to 20 potential investors, and served to maintain its stock price at artificial levels . 21 323 . Each of these defendants had the opportunity to commit and participate 22 in the fraud . The PurchasePro Defendants were senior officers and/or directors of 23 PurchasePro ar+d they controlled press releases, corporate reports, communications 24 with analysts, 15ublic filings, and the reporting of the Company's financials . Thus, 25 these defendants controlled the public dissemination of PurchasePro's false and 26 misleading statements to the investing public as alleged herein which artificially 27 inflated the price of PurchasePro's stock . 28 324 . Each of the PurchasePro Defendants also had the motive to commit, and

169 participate in the fraud, in order to achieve the benefits discussed above . The continued receipt of salary and employment in the Company were significant motives to inflate the Company's stock, as well as the avoidance of bankruptcy which ultimately occurred on or about September 11, 2002 . 325 . Moreover, Anderson admitted, under oath, that he and certain of his co- conspirators within PurchasePro and AOL conspired to falsely inflate the revenue reported by PutchasePro for a multitude of reasons, including, but not limited to, the 8 following : (i) to sustain PurchasePro's outward appearance as a growing and 9 successful Internet software company in late 2000 and early 2001 when Anderson 10 and certain of his co-conspirators knew that PurchasePro's revenue growth, such as 11 it was, resulted in large part from the systematic use of secret side agreements to sell 12 PurchasePro's revenue generating products ; (ii) to meet the revenue estimates for 13 PurchasePro as disseminated by Wall Street to the investing public ; and (iii) to profit 14 personally from the fraud by: (a) exercising options to buy PurchasePro stock if the 15 price rose above the strike price of his options and to sell that same PurchasePro 16 stock at a profit; (b) keeping his job at PurchasePro and continuing to receive salary, 17 which Anderson admits he was able to do through November 2001 ; and (c) 18 preserving the possibility of obtaining profitable stock options in the future . 19 Anderson admitted, on or about April 2001, that he received stock options for about 20 75,000 shares of PurchasePro stock from the Company, which was approved by a 21 senior officer at PurchasePro. 22 326 . Finally, as a small Company with limited outside information and new s 2 3 concerning the Company, it is noteworthy that PurchasePro's stock price wa s 24 particularly sensitive to statements regarding PurchasePro's revenues, business an d 25 profits . 26 1 . PurchasePro Defendants' Insider Loan s 27 327 . Defendants Johnson and Carton used their stock as collateral for loans 28 in the amounts of $100,000,000 and $8,000,000, respectively. Plaintiffs are also

170 1 aware of another executive with the Company, Johnson's long-time business 2 associate Robert Geoff Layne ("Layne"), who also used his stock as collateral fo r 3 I loans during the Class Period . Barron's financial publication has described these 4 types of transactions as the "next best thing to selling shares . " 5 328 . It is apparent that Johnson needed the loan and lines of credit because h e 6 put virtually every penny he had into the stock. According to an article published 7 in the Lexington Herald Leader (Kentucky), on October 8, 2000, "[t]here was not one 8 red cent that I could get that I have not put into this," Johnson said . "I sold my video 9 stores . I started selling other business . I borrowed against my life insurance . I took 1 0 every penny I had." 329. Further exacerbating the problem, and adding to Defendants' motive to 1 2 inflate the stock, was the fact that defendant Johnson and Carton, in mid April o f 13 2000, said that neither would take cash or stock compensation until the Company 14 became profitable on an earning-per-share basis . Thus, according to Johnson and 15 Carton's own statements, their only real source of income from PurchasePro wer e 16 the loans and lines of credit secured by these collateralized agreements . 17 330 . Specifically, Johnson pledged 12 .3 million shares of his PurchasePro 18 common stock holdings to secure a $100 million line of credit from CS First Boston . 19 The terms of this line of credit required Johnson to maintain a 25% loan-to-value 20 ratio between the collateral posted and the amounts drawn under the line of credit . 21 During the Class Period, Johnson had drawn over $40 million for the line of credit. 22 Throughout the Class Period, Johnson was also aware that he "would be in default 23 under the terms of the line of credit each time the trading price of PurchasePro 24 common stock -fell below $13 a share . Consequently, throughout the Class Period , 25 Johnson made the misrepresentations set forth above in order to artificially maintain 26 the trading price above the minimum levels required under the CS First Boston lin e 27 of credit . 28 331 . Johnson and Layne also used their shares of PurchasePro common stoc k

171 1 as collateral to secure loans from Bank One in Kentucky . On or about October 28, 2 2000, Johnson entered into a loan agreement with Bank One, whereby Johnson 3 borrowed $2,7(9,994.76 from Bank One and pledged 410,000 shares ofPurchasePro 4 common stock as collateral . Pursuant to the loan agreement, Johnson was required 5 to maintain a 40% loan-to-value ratio, meaning that Johnson would be in default any 6 time the trading price of PurchasePro common stock fell below $16 .89 per share . 7 Additionally, pursuant to the terms and conditions of the note, defendant Johnson 8 indebted himself to the principal amount of $2,769,994 .76 (the "Loan") together 9 with interest thereon . Interest continues to accrue on the outstanding principal 10 balance due and owing under the Note at a rate of $311 .08 per day. Consequently, 11 throughout the Class Period, Johnson made the misrepresentations set forth above 12 in order to artificially maintain the trading price above the minimum Ievels required 13 under the Bank One loan agreement . 14 332 . When Johnson failed to elevate the stock in excess of the loan-to-valu e 15 ratio necessary to avoid a default of the loan, Bank One informed Johnson he was 16 in default and had to either pledge to Bank One additional property acceptable to the 17 bank or reduce the outstanding principal balance of the note in an amount sufficient .18 to cause such loan-to-value ratio to no longer exceed the default ratio . When 19 defendant Johnson failed to make the required payments to Bank One to cure such 20 default, Bank One exercised its rights against certain collateral for the loan and 21 applied the proceeds of such collateral to the balance of the note . 22 333 . When the proceeds of the sale of collateral for the loan were insufficien t 23 to cover the balance of the sums owed and due to Bank One, Bank One commenced 24 legal action, or or about October 9, 2001, against defendant Johnson for breach of 25 contract, unjus-~ enrichment and breach of implied covenant of good faith and fair 26 dealing . Bank One sought compensatory damages in the amount of $2,093,817 .18, 27 plus accrued interest, late charges, and fees thereon . 28 334 . On January 5, 2004, the Lexington Herald reported that Bank On e

172 Kentucky, won a $2.26 million judgment against Johnson in July, As a result of the 2 Judgment, Bank One Kentucky was attempting to garnish Johnson's wages . 3 Moreover, Magistrate Judge James B . Todd ordered Johnson to release his bank 4 records from Red Rock Bank in Las Vegas, and Central Bank & Trust Co . in 5 Lexington, after the court learned that Johnson recently transferred his ownership 6 interest in Nexx, his new multi-level marketing venture co-founded with defendant 7 Carton. 8 335 . Moreover, at various dates between May 4, 2000, and December 12 , 9 2000, Layne entered into loan agreements with Bank One whereby Layne borrowed 10 $3,250,000 from Bank One and pledged 482,142 shares of PurchasePro common 11 stock as collateral . Pursuant to the loan agreement, Layne was required to maintain 12 a 50% loan-to-value ratio, meaning that Layne would be in default any time the 13 trading price of PurchasePro common stock fell below $13 .48 per share. 14 336 . Similarly, in October 1999, defendant Carton obtained an $8,000,00 0 15 line of credit :':rom Prudential Securities Incorporated . As security for the loan, 16 Carton pledgee to Prudential Securities Incorporated 300,000 shares of PurchasePro 17 common stock . At the same time, Prudential Securities Incorporated also provided 18 a line of credit of up to $650,000 to other employees at prevailing interest rates, for 19 which such employees pledged an aggregate of 213,250 shares of Company stock . 20 337 . Therefore, throughout the Class Period, defendants Johnson, Carton, and 2 1 other borrowing PurchasePro employees, recognized that it was necessary to 22 maintain the trading price of PurchasePro common stock at levels sufficient to 23 maintain the loan-to-value ratios . Each of these loan agreements gave the lender the 24 right to sell the pledged shares of PurchasePro stock and provided recourse against 25 the personal assets of the borrower in the event the value of the pledged PurchasePro 26 stock fell behw the minimum loan-to-value ratio set forth in the respective 27 agreements. 28 338 . Throughout the Class Period, the PurchasePro Defendants and Compan y

173 1 employees were also subject to a series of lock-up agreements whereby they had 2 agreed, in conjunction with the initial and secondary offerings, that their holdings 3 . of PurchasePro stock could not be publicly traded . The foregoing loan agreements, 4 many of which were made with underwriters of PurchasePro's public offerings, were 5 entered into so that the borrowers could realize a gain from their holdings o f 6 PurchasePro stock without violating the lock-up agreements, without selling their 7 shares, and without publicly reporting the transactions . 8 2. PurchasePro Defendants ' Insider Trading 9 339 . Certain PurchasePro Defendants took advantage of their scheme t o 10 artificially inflate the Company's stock price by selling large portions of thei r 11 personal stock holdings for huge proceeds as detailed below : 12 Insider Dates/Shares Sold Price Proceeds 13 Johnson 03/06/01 660,000 10.14 6,692,400 03/07/01 790,000 11 .70 9,243,000 14 04/02/01 300,000 6 .60 1,980,000 04/03/01 500,000 4 .34 2,170,000 15 04/04/01 500,000 3 .02 1,510,000 04/05/01 500,000 3 .42 1,710,000 16 04/06/01 500,000 2 .90 1,450,000 04/09/01 500,000 2.65 1,325 ,000 17 04/10/01 330,000 3 .11 1,026,300 04/17/01 500,000 4.71 2,355,000 18 04/27/01 500,000 2 .67 1,335,00 0 04/30/01 500 000 $ 2 .81 1 .405.00 0 19 6,08D,'000 20 Moskal 08/22/00 40,000 9 .51 380,400 03/09/01 50 000 11 .69 584.500 21 ~0 , 22 Clough 10/23/00 150,000 $31 .50 $ 4,725,000 23 Chiles 1.0/23/00 110,000 33 .82 3,730,200 10/23/00 55 000 $33 .85 1 .861 .750 24 165,000 5,581,95 G 25 Total: 6,485, 000 $43,473,550 26 340 . Many, if not all of the sales set forth above for defendant Johnson were 27 accomplished because he was in default under the CS First Boston line of credit an d 28 the Bank One loan agreement . Moreover, Johnson filed suit against Bank One

174 1 alleging that Bank One breached the covenant of good faith and fair dealing by 2 failing to sell the pledged shares of PurchasePro common stock "in a timely and 3 reasonable ma,iner" -- i.e., when the shares were most inflated during the Class 4 II Period . 5 B. Scienter Of AOL Defendants 6 341 . Through their efforts, the AOL Defendants also reaped numerous 7 benefits by engaging in their scheme . These benefits, together with the other facts 8 recited herein, support a finding of strong circumstantial evidence of conscious or 9 deliberate recklessness on the part of each of the AOL Defendants . 10 342 . The AOL Defendants participated in the fraudulent scheme to overstate PurchasePro' s revenues in order to obtain and record additional revenues for AO L 12 and its successor in interest , AOL Time Warner, Inc . The artificial inflation of AOL 13 revenue allows d the company to complete its $112 billion all stock tender offer for 14 Time Warner, Inc . The AOL/Time Warner, Inc . Merger announcement contained 15 a term known as a "material adverse change" in control provision . As a result, AOL 16 and its officers and directors knew that its stock price and business prospects had to 17 be maintained at a high enough level to ensure the consummation of the Merger . 18 343 . Defendants Pittman, Colburn, Keller, and Berlow each received 19 substantial bonuses, stock options and incentive based compensation, based upon 20 AOL reaching its revenue targets . Moreover, when the Merger was completed, each 21 outstanding AOL stock option would be converted into an option to purchase share s 22 of America On-Line/Time Warner, Inc . common stock at an exercise price per share 23 equal to the e>.ercise price per share of AOL common stock subject to the optio n 24 before the conversion. In addition, each outstanding restricted share of AOL 25 common stock would be converted into one restricted share of AOL/Time Warner, 26 Inc. common stock. As a result of the completion of the Merger, substantially all 27 AOL employe,- stock options and shares of restricted stock outstanding on Januar y 28 10, 2000, by their terms, vested and became exercisable or free of restrictions, as th e

175 1 case may be, upon the earliest of either their normal vesting date, the firs t 2 I anniversary of the completion of the Merger or approximately one year after th e 3 Merger. 4 344 . Moreover, on January 24, 2001, Forbes. com, reported the following : 5 As of June 30, 2000, AOL had 356 million options outstanding. Sixty percent was not vested and had a total exercise cost of 5 . 5 illion. 6 That averages $25 .69 per unvested option --less than halt the current $54 value of AOL Time Warner stock . Unvested Time Warner options 7 as of Dec . 31, 1999 were $1 .4 billion, with a merger- adjusted average exercise price around $32 .55 . 8 At current prices, the total realizable profit on accelerated vesting for 9 AOL's 15,1)00 employees , most of whom can participate in option plans, would be $b billion --an average of $400 ,000 each. That's a 10 powerful incentive to take advantage of accelerated vesting . 11 345 . As with the PurchasePro Defendants, the most obvious benefit receive d 12 by these defendants was financial gain . Between July 24, 2000 and August 30, 13 2000, prior to the completion of the Merger and after the onset the secret side 14 agreements, AOL insiders, including defendant Pittman sold approximately 1 .4 15 million shares for proceeds of over $82 million . More specifically, defendant 16 Pittman sold 394,745 shares for proceeds of $21,833,346 .00 . 17 346 . Moreover, between January 1, 2001 and November 30, 2002 , 18 immediately prior to and after the completion of the Merger defendant Pittman and 19 Colburn sold substantial portions of their personal holdings of AOL and AOL/Time 20 Warner, Inc. stock. Specifically, Colburn sold 180,000 shares for proceeds of over 21 $9 million . Pittman during this time period sold 1 .5 million shares for proceeds of 22 over $72 million. The aforementioned sales by the individual AOL Defendants were 23 unusual in timing and amount. 24 347. Moreover, each defendant had the opportunity to commit and 25 participate in the fraud. The individual AOL Defendants were senior officers and/or 26 directors ofAOL and were actively involved in structuring the sham transactions and 27 round trip transactions identified above . Moreover, AOL had a highly elaborate 28 approval process for each of the transactions complained of which gave the AO L

176 Defendants full and complete knowledge of the true nature of the agreements . 2 348 . In addition, each of the AOL Defendants controlled the joint pres s 3 releases with PurchasePro concerning its financial growth and condition which ar e 4 the subject of this action . Thus, these defendants controlled the public dissemination 5 of AOL's false and misleading statements to the investing public as alleged herein 6 which artificially inflated the price of PurchasePro's stock. 7 349 . Finally, each of the AOL Defendants had the motive to commit, an d 8 J participate in, the fraud in order to achieve the benefits discussed above . The 9 continued receipt of salary and employment with AOL, as well as the options 10 received within one year after the consummation of the Tender Offer, provided 11 significant motive to inflate PurchasePro 's stock price for their own benefit . 12 X. VIOLATIONS OF GAAP AND SEC REGULATION S 13 350 . During the Class Period, the Defendants publicly disseminated and/o r 14 filed with the SEC financial statements, earnings releases and financial information 15 which contained materially false and misleading financial information in violatio n 16 of GAAP and SEC Rules and Regulations . GAAP encompasses the rules, 17 conventions and practices recognized and employed in the preparation of financia l 18 statements for the fair presentation of the financial condition, results of operations 19 and cash flows of an enterprise . Financial statements that are filed with the SEC 20 must conform with GAAP and SEC Regulations . 21 351 . During the Class Period, Defendants materially misled the investin g 22 public, thereby inflating the price of PurchasePro securities, by publicly issuing false 23 and misleading statements and omitting to disclose material facts necessary to mak e 24 Defendants' statements, as set forth herein, not false and misleading. Said 25 statements and omissions were materially false and misleading in that they failed to 26 disclose material adverse information and misrepresented the truth about the 27 Company, its financial performance, accounting, reporting and condition, including : 28 a. During the Class Period, the Company reported revenues, incom e

177 and earnings p,,,r share that were materially overstated ; 2 b . The Company's financial statements did not present, in all 3 f material respects, the Company's true financial condition, and did not reflect al l 4 I adjustments which were necessary for a fair statement of the interim and full year 5 I period presented; and 6 c . Interim financial statements reported by the Company were no t 7 presented in conformity with GAAP or principles of fair reporting . 8 352. The SEC requires that publicly-traded companies present their financial 9 statements in accordance with GAAP. 17 C.F.R. §210.4-01(a)(1) . Moreover, 10 financial statements fled with the SEC which are not prepared in accordance with 11 GAAP "will be presumed to be misleading or inaccurate , despite footnote or other 1 2 disclosures, unless the Commission has otherwise provided ." 17 C.F.R. §210.4- 13 01(a)(1) . Although certain defendants stated in PurchasePro ' s financial statements 14 contained in their public filings throughout the Class Period that such statements 15 were prepared in accordance with GAAP, these defendants deviated from GAAP in 16 material and significant ways which violated GAAP, SEC rules and regulations and 17 federal securities laws . 18 353 . Interim financial statements must also comply with GAAP, with the 19 exception that interim financial statements need not include disclosures which would 20 be duplicative Of disclosures accompanying annual financial statements . 17 C.F.R. 21 §210 .10-01 (a). Further, "where material contingencies exist , disclosure of such 22 matters shall b, provided even though a significant change since year end may not 23 have occurred. " 24 354. A .3 set forth in APB Opinion No, 28, "Interim Financial Reporting " 25 (part of GAAP), "[e]ach interim period shall be viewed primarily as an integral part 26 of an annual period . The results for each interim period shall be based on the 27 accounting principles and practices used by an enterprise in the preparation of it s 28 latest annual financial statements unless a change in an accounting practice orpolic y

178 1 has been adopted in the current year ." Additionally, "[r]evenue from products sold 2 or services rendered shall be recognized as earned during an interim period on the 3 same basis as followed for the full year. " 4 355 . Importantly, management is responsible for preparing financial 5 statements that conform with GAAP . As noted by the American Institute of 6 Certified Public Accountants ("AICPA") professional standards [AU § 110.03 7 (1998)] : 8 [Financial statements are management's responsibility . [ lanagement is responsible for adopting sound accountin g policies 9 and for establishing and maintaining internal controls that will,will, among other things , record, process, summarize , and report transactions (as 10 well as events and conditions) consistent with management's assertions embodied in the financial statements . The entity's transactions and the 11 related assets, liabilities and equity are within the direct knowledge and control of management. . . . Thus , the fair presentation of financial 12 statements in conformity with Generally Accepted Accounting Principles is an implicit and integral part of management's 13 responsibility . 14 356 . Pursuant to GAAP, as described by FASB Statement of Concepts No . 15 5 ("Concepts No . 5"), revenue should not be recognized unless and until it is realized 16 or collectible . See Concepts No . 5, ¶1$3-84 . 17 357 . During the Class Period, PurchasePro improperly recognized revenue 18 from the sale of'software licensing which did not conform with ARB 45 and SOP 81- 19 1 . Such revenue should have been recognized on the percentage of completion 20 method. SOP 81-1, ¶23 .

21 358. PurchasePro improperly recognized subscription revenues that were fo r 22 invalid customers or for customers that had stopped paying their monthly 23 subscriptions. ARB 43 Chapter IA and APB 10, ¶12 . 24 359 . Pt rchasePro failed to properly record an appropriate reserve for 25 doubtful accounts in accordance with GAAP on receivables that were not reasonabl y 26 expected to be collected . FASB No. 5, ¶22 . 27 360. Pi rchasePro recognized revenue on backdated contracts that were no t 28 properly executed prior to the respective quarter ended . SOP 81-1 and SOP 97-2 .

179 1 361 . PurchasePro improperly recognized revenue, and improperly accounte d 2 for, non-monetary exchange transactions . APB 29, ¶21 . 3 362 . GAAP also requires the following : 4 a. GAAP requires the restatement of previously issued financial 5 statements for the correction of a material error in the financial statements of a prior 6 period. "Errors in financial statements result from . . . misuse of facts that existed 7 at the time the financial statements were prepared ." APB 20 . The same GAAP 8 standard requires restatement of previously repo rted financial statements if the 9 misuse of facts that existed at the time the financial statements were prepared caused 10 reported net income to be materially misstated ; 11 b . GAAP also required Defendants , and in particular the 12 PurchasePro Defendants , to disclose the existence of known trends , events or 13 uncertainties that would be reasonably expected to have a material unfavorabl e 14 impact on net revenues or income, or that were reasonably likely to result in the 15 Company's liquidity decreasing in a material way, in violation of Item 303 of 16 Regulation S-K under the federal securities laws (17 C .F .R. §229.303). That failure 17 to disclose these facts rendered the statements that were made during the Class 18 Period materially false and misleading ; and 19 c . By failing to file financial statements with the SEC whic h 20 conformed to the requirements of GAAP and SEC rules and regulations, such 21 financial statements were presumptively misleading and inaccurate pursuant to 17 22 C.F .R . §210 .4-01(a)(1) . 23 363 . As a result of its accounting improprieties and known restatements, the 24 Company's reported financial results also violated at least the following provisions 25 of GAAP for which Defendants are responsible : 26 a. The principle that financial reporting should provide information 27 that is useful _o present and potential investors and creditors and other users in 28 making rational investment, credit and similar decisions was violated (FASB

180 Statement of Concepts No . 1, ¶34) ; 2 b . The principle that financial reporting should provide informatio n 3 about the economic resources of an enterprise, the claims to those resources , and the 4 effects of transactions, events and circumstances that change resources and claim s 5 to those resources was violated (FASB Statement of Concepts No, 1, ¶40) ; 6 c. The principle that financial reporting should provide information 7 about an enterprise 's financial performance during a period was violated . Investors 8 and creditors often use information about the past to help in assessing the prospects 9 of an enterprise . Thus, although investment and credit decisions reflect investors' 10 expectations about future enterp rise performance, those expectations are commonly 11 based at least partly on evaluations of past enterprise performance (FASB Statement 12 of Concepts No . 1, ¶42); 13 d. The principle that financial reporting should provide informatio n 14 about how management of an enterprise has discharged its stewardship responsibility 15 to owners (stockholders) for use of enterprise resources entrusted to it was violated . 16 To the extent that management offers securities of the enterprise to the public, it 17 voluntarily accepts wider responsibilities for accountability to prospective investors 18 and to the public in general (FASB Statement of Concepts No . 1, ¶50); 19 e . The principle that financial reporting should be reliable in that i t 20 represents what it purports to represent was violated . That information should be 21 reliable as well as relevant is a notion that is central to accounting (FASB Statement 22 of Concepts No. 2, ¶¶58-59) ; 23 f. The principle of completeness, which means that nothing is left 24 out of the information that may be necessary to ensure that it validly represents 25 underlying events and conditions (FASB Statement of Concepts No . 2, ¶79); and 26 g. The principle that conservatism be used as a prudent reaction t o 27 uncertainty to ty to ensure that uncertainties and risks inherent in business situation s 28 are adequately considered was violated . The best way to avoid injury to investors

181 I is to try to ensure that what is reported represents what it purports to represent 2 (FASB Statement of Concepts No . 2, ¶¶95, 97) . 3 XI . DEFENDANTS FAILED TO ACT IN ACCORDANC E 4 WITH GAAP AND RELATED ACCOUNTING GUIDELINE S 5 364 . During the Class Period, PurchasePro's financial statements were 6 publicly issued and were claimed to be prepared in accordance with GAAP . In fact, 7 PurchasePro's financial statements during the Class Period did not fairly present or 8 report PurchasePro's financial condition, results of operations or changes in financial 9 position, and were not fairly presented in conformity with GAAP because of material 10 deficiencies in PurchasePro's financial reporting, which all Defendants either knew 11 of, or recklessly disregarded. 12 365 . In order to make the Company appear successful, and to otherwise 13 artificially support PurchasePro's stock price, Defendants caused PurchasePro to 14 falsely report its financial results during the Class Period through improper revenue 15 recognition, sham transactions and by understating allowances for uncollectible 16 receivables . For example, Defendants engaged in improper revenue recognition, in 17 contravention of GAAP, by: (i) the premature and improper recognition of revenue 18 that should have been deferred to later periods ; (ii) the improper recognition of 19 revenue from customers when the Company had insufficient facts to determine 20 whether these customers were actually creditworthy; (iii) the improper recognition 21 of revenue when defendants were aware of facts which made collection of accounts 22 receivable doubtful, without the adequate establishment of a reserve for doubtful 23 accounts; and (v) throughout the Class Period, the improper recognition as revenue 24 of payments made to PurchasePro by a number of its customers, through fraudulent 25 transactions, as well as payments for warrants to purchase PurchasePro stock that the 26 Company had granted to customers in order to gain their business. 27 366. Thus, while Defendants publicly represented that the Company had a 28 bright financial future, they failed to disclose that PurchasePro was improperl y

182 recognizing revenue and that millions of dollars in receivables were in jeopardy of 2 never being collected. Defendants were required, yet failed, to disclose these issues 3 to the public and the PurchasePro Defendants failed to book the appropriate reserves 4 pursuant to GAAP to account for such doubtful accounts . 5 367. The undisclosed adverse information concealed by Defendants durin g 6 the Class Period is the type of information which, because of SEC regulations, 7 regulations of national stock exchanges and customary business practice, is expecte d 8 by investors and securities analysts to be disclosed and is known by corporat e 9 officials and their legal and financial advisors to be the type of information which 10 is expected to be and must be disclosed . 11 368. The Company's financial statements during the Class Period whic h 12 were disseminated to the investing public were not presented in accordance with 13 GAAP in that such financial statements failed to disclose that there existed a material 14 overstatement of revenue, as well as the Company's problems associated with its 15 accounts receivable . Defendants allowed PurchasePro to book revenue from its 1 6 customers when they knew that this was not in fact revenue, but compensation i n 1 7 exchange for fraudulent side agreements and for warrants issued . By concealing 18 1 these transgressions, in contravention of GAAP and other accounting guideline s 19 compelling disclosure, Defendants disseminated false and misleading earnings 20 announcements and financial statements and press releases which were not a fai r 21 presentation of PurchasePro ' s financial condition and were presented in violation of 22 GAAP and SEC rules and regulations . 23 XII . CLASS ACTION ALLEGATION S 24 369 . Plaintiffs bring this action as a class action, pursuant to Federal Rules 25 of Civil Procedure 23(a) and (b)(3), on behalf of a class consisting of all persons 26 who purchased or otherwise acquired PurchasePro securities between March 23 , 27 2000, and May 21, 2001, inclusive, and who were damaged thereby (the "Class") . 28 Excluded frorr! the Class are Defendants, the officers and directors of PurchasePr o

183 1 and AOL, the members of their immediate families and entities in which they have 2 a controlling interest. 3 370 . During the Class Period, there were over 66 million shares of 4 PurchasePro common stock outstanding and held by thousands of shareholders . At 5 I all relevant times, PurchasePro common stock was actively traded on the NASDA Q 6 (under the ticker symbol "PPRO"), an open, well-developed and efficient market, 7 during the Class Period. There were numerous analysts following the stock an d 8 numerous market makers trading the stock . Because persons who purchased or 9 otherwise acquired PurchasePro shares during the Class Period number at least in the 10 thousands and are believed to be located throughout the country, j oinder of all such 11 Class members is impracticable. 12 371 . There are questions of law and fact common to all Class members 13 which predominate over any questions affecting only individual Class members, 14 including : 15 (a) Whether the federal securities laws were violated by Defendants' 16 acts as alleged herein ; 17 (b) Whether documents, releases and/or statements disseminated to the 18 investing public and PurchasePro shareholders during the Class Period omitte d 19 and/or misrepresented material facts about the business, financial condition an d 20 accounting practices of the Company ; 21 (c) Whether Defendants made materially misleading statements during 22 the Class Period about the business, financial condition and accounting practices o f 23 the Company ; 24 (d) Whether Defendants acted knowingly or with conscious or 25 deliberate recklessness in making materially false statements and omitting material 26 facts about the business, financial condition and accounting practices of th e 27 Company; 28 (e) Whether the market price of the Company 's securities was

184 1 artificially inflated during the Class Period due to the non-disclosures and/or 2 material misrepresentations complained of herein ; an d 3 (f) Whether the members of the Class have suffered damages and, if so , 4 I what is the proper measure of damages . 5 372 . Plaintiffs' claims are typical of all Class members' claims . Plaintiffs 6 I have selected counsel experienced in class and securities litigation and will fairl y

7 I and adequately protect the interests of the Class . Plaintiffs have no interest s 8 antagonistic to those of the Class. 9 373 . A class action is superior to other available methods for the fair an d 10 efficient adjudication of this controversy. Since the damages suffered by individual 11 Class members may be relatively small, the expense and burden of individual 12 litigation make it virtually impossible for members of the Class to individually seek 13 redress for the wrongful conduct alleged . 14 374 . Plaintiffs know of no difficulty which will be encountered in th e 15 ~ management of this litigation which would preclude its maintenance as a clas s 16 action. 17 XIII. STATUTORY SAFE HARBOR 18 375 . The statutory safe harbor provided for forward -looking statements 19 under certain circumstances does not apply to any of the false statements pleaded in 20 this complaint The statements alleged to be false and misleading herein all relate 21 to then-existing facts and conditions . In addition, to the extent certain of the 22 statements alleged to be false may be characterized as forward-looking, they were 23 not identified as "forward-looking" when made, there was no statement made with 24 respect to any of those representations forming the basis of this complaint that actual 25 results "could differ materially from those projected," and there were no meaningful 26 cautionary statements identifying important factors that could cause actual results 27 to differ materially from those in the purportedly forward-looking statements . 28 Alternatively, to the extent that the statutory safe harbor is intended to apply to an y

185 1 forward-looking statements pled herein, defendants are liable for those false 2 forward-looking statements because at the time each of those forward-looking 3 statements was made, the particular speaker had actual knowledge that the particular 4 forward-looking statement was materially false or misleading, and/or the 5 forward-looking statement was authorized and/or approved by an executive officer 6 ~ of PurchasePro who knew that those statements were false when made . 7 XIV. RELIANCE ALLEGATIONS 8 FRAUD-ON-THE-MARKET DOCTRINE 9 376 . Plaintiffs will rely, in part, upon the presumption of reliance established 10 by the fraud-on-the-market doctrine in that, among other things : 11 (a) PurchasePro common stock met the requirements for listing, and 12 was listed, on the NASDAQ, a highly efficient market ; 13 (b) as a regulated issuer, the Company filed periodic public report s 14 with the SEC; 15 (c) the trading volume of the Company' s stock was substantial , 16 reflecting numerous trades each day ; 17 (d) PurchasePro was followed by securities analysts who were 18 employed by several major brokerage firms and who wrote reports that were 19 distributed to the sales force and certain customers of such firms, and were available 20 to various automated data retrieval services ; 21 (e the misrepresentations and omissions alleged herein were 22 material and would tend to induce a reasonable investor to misjudge the value of 23 PurchasePro common stock; and 24 (f)! plaintiffs and the members of the Class purchased their common 25 stock during the Class Period without knowledge of the omitted or misrepresented 26 facts . 27 377 . Based upon the foregoing, plaintiffs and the other members of the Class 28 are entitled to a presumption of reliance upon the integrity of the market for th e

186 1 purpose of class certification as well as for ultimate proof of their claims on th e 2 j merits . Plaintiffs will also rely, in part , upon the presumption of reliance established 3 by material omissions and upon the actual reliance of the class members. 4' XV. COUNTS 5 Count I 6 Violations of §10 (b) Of The Exchange Ac t 7 And Rule 10b-5 Promulgated Thereunder 8 (Against All Defendants) 9 378. Plaintiffs repeat and reallege each and every allegation contained in the 10 I foregoing paragraphs as if fully set forth herein. 11 379. Al. all relevant times, Defendants , individually and in concert, directl y 12 and indirectly, by the use and means of instrumentalities of interstate commerce 13 and/or of the mails, engaged and participated in a continuous course of conduct 14 whereby they knowingly and/or recklessly made and/or failed to correct public 15 representations which were or had become materially false and misleading regarding 16 PurchasePro's financial results and operations . This continuous course of conduct 17 resulted in Defendants causing PurchasePro and AOL to publish public statements 18 which they knew, or were reckless in not knowing, were materially false and 19 misleading, in order to artificially inflate the market price of PurchasePro stock and 20 which operated as a fraud and deceit upon the members of the Class . 21 380. Defendant PurchasePro is a direct participant in the wrongs complained 2 2 of herein . The PurchasePro Defendants are liable as direct participants in and as 2 3 controlling persons of the wrongs complained of herein . By virtue of their positions 24 of control and authority as officers of PurchasePro, the PurchasePro Defendants were 25 able to and did, directly or indirectly, control the content of the aforesaid statements 26 relating to the Company, and/or the failure to correct those statements in timely 27 fashion once they knew or were reckless in not knowing that those statements were 28 no longer true or accurate . The PurchasePro Defendants and the AOL Defendant s

187 1 also caused or controlled the preparation and/or issuance of public statements and 2 the failure to correct such public statements containing misstatements and omission s 3 I of material facts as alleged herein . 4 381 . Defendants had actual knowledge of the facts making the material 5 statements false and misleading, or acted with reckless disregard for the truth in that 6 they failed to ascertain and to disclose such facts, even though same were available 7 to them. 8 382 . In ignorance of the adverse facts concerning PurchasePro's business 9 operations and earnings, and in reliance on the integrity of the market, plaintiffs and 10 the members of the Class acquired PurchasePro common stock at artificially inflate d 11 prices and were damaged thereby . 12 383 . Had plaintiffs and the members of the Class known of the materially advers e 13 information not disclosed by Defendants, they would not have purchased 14 PurchasePro common stock at all or not at the inflated prices paid . 15 384 . By virtue of the foregoing, Defendants have violated § 10(b) of the 1934 1 6 Act and Rule I Ob-5 promulgated thereunder. 17 Count III 18 Violation Of §20(a) Of The Exchange Act 1.9 (Against The PurchasePro Defendants) 20 385 . Plaintiffs repeat and reallege each and every allegation contained in the 21 foregoing paragraphs as if fully set forth herein . 22 386. This count is asserted against the PurchasePro Defendants and is base d 23 upon §20(a) of the 1934 Act. 24 387. The PurchaseP ro Defendants, by virtue of their office , directorship , 25 stock ownership and specific acts, at the time of the wrongs alleged herein and as set 26 forth in Count 1, were controlling persons of PurchasePro within the meaning of 27 §20(a) of the 1934 Act . The PurchasePro Defendants had the power and influence 28 and exercised the same to cause PurchasePro to engage in the illegal conduct an d

188 1 practices complained of herein by causing the Company to disseminate the false and 2 misleading information referred to above . 3 388 . The PurchasePro Defendants' positions also made them privy to and 4 provided them,with actual knowledge of the material facts concealed from plaintiffs 5 and the Class . , 6 389 . By virtue of the conduct alleged in Count I, the PurchasePro Defendants 7 are liable for the aforesaid wrongful conduct and are liable to plaintiffs and the Class 8 for damages suffered . 9 XVI PRAYER FOR RELIEF 10 WHEREFORE, plaintiffs demand judgment : 11 1 . Detennining that the instant action is a proper class action 1 2 maintainable under Rule 23 of the Federal Rules of Civil Procedure ; 1 3 2 . Awarding compensatory damages and/or rescission as 14 appropriate against Defendants, in favor of plaintiffs and all members of the Class 15 for damages sustained as a result of defendants' wrongdoing; 16 3 . Awarding plaintiffs and members of the Class the costs and 17 disbursements ofthis suit, including reasonable attorneys', accountants' and experts' 1 8 fees; and 19 4 . Awarding such other and further relief as the Court may dee m 20 just and proper . 21 XVII. JURY DEMAND 22 Plaintiffs demand a trial by jury. 23 Dated: April 30, 2004 24 By : A arLIF ng sq~ 25 William . . Stod E C . Adam uck Esq. 26 Albright, Stoddard, Warnick & A1ri ht 27 801 S . Rancho Drive Quail Park, Suite D-4 28 Las Vegas, NV 89106 Liaison Counsel for the Class

189 1 Kevin J. Yourman Vahn Alexander 2 Jennifer R. Liakos WEISS & YOURMAN 3 10940 Wilshire Blvd. 24`'' Floor Los Angeles, CA 90O 4 4 Nadeem Faruq1 5 Shane T. Rowley Antonio Vozzol o 6 FARUQI & 1 ARUQI, LL P 320 East 3 9t Street 7 New York, NY 1001 6 8 Co-Lead Counselfor the Class 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0 2 1 2 2 2 3 24 2 5 26 27 28

190 PROOF OF SERVICE I STATE OF CALIFORNI A ss. : 3 COUNTY OF LOS ANGELES 4 I am employed in the county of Los Angeles, State of California, I am over the age of 18 and not a pa rty to the within action ; my business address is 10940 5 Wilshire Boulevard, 24" Floor, Los Angeles, CA 90024. 6 On April 30, 2004, I served the documents described as follows : 7 SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT 8 PROOF OF SERVIC E 9 by placing a true copy(ies) thereof enclosed in a sealed envelope(s) addressed as folipows : 1 0 SEE ATTACHED SERVICE LIST I served the above document(s) as follows: 12 X BY OVERNIGHT DELIVERY via Federal Express . I am familiar with the 13 practice at my place of business for collection and processing of correspondence for overnight delivery by Federal Express. Such 14 correspondence will be deposited with a facility regularly maintained b y Federal Express for receipt on the same day in the ordinary course of 15 business . Ipplaced the envelope( s) for collection and delivery by Federal Express with delivery fees paid or provided for in accordance with ordinary 16 business practices . 17 X BY MAIL as indicated above . I deposited such envelope(s) in the mail at Los Angeles California. The envelope was mailed with p ostage thereon 18 fully prepaid. I am familiar with the firm 's practice of collection and processing correspondence for mailing Under that practice it would be 19 deposited with U . S . postal service on that same day with postage thereon fully prepaid at Los Angeles , California in the ordinary course of business . I 20 am aware that on motion of the party served, service is presumed invalid if postal cancellation date or postage meter date is more than one day after date 21 of deposit for mailing in an affidavit . 22 I declare that I an employed in the office of a member of the bar of this Court at whose direction the service was made . 23 Executed on April 30, 2004, at Lc 24 25 26 LA DONNA R . MC DUFFIE Type or Print acne 27 28 SERVICE LIST In Re PURCHASEPRO.COM INC . SECURITIES LITIGATION

SERVICE BY OVERNIGHT DELIVERY via Federal Express The Honorable Justin L. Quackenbush Senior United States Distract Judge 73-710 Fred Waring Drive, No . 2-10-A Palm Desert, CA 92260 SERVICE BY MAI L Mark Gardy, Esq. Eduard Korsinsky, Es q, Nancy Kaboolian, Es q BEATIE & OSBORN, LLP ABBEY GARDY & SQUITIERI, LLP 521 Fifth Avenu e 212 East 39th Stree t New York, New York 10175 New York, New York 10016 Attorneys for Hector Velasquez 1 0 Attorneys for Hector Velazquez Greg ory M . Nesp ole Esq. Bruce G. Murphy Esq. WOLF HALDENST IN ADLER LAW OFFICES OF 12 FREEMAN & HERZ LLP BRUCE G. MURPHY 270 Madison Avenue 265 Lyl wds Lane 13 New York, New York 10016 Vero Beach, Florida 32963 AttorneU `or Terry Sherbondy Attorney for Terry Sherbondy 14 andJ Hoggard 15 Marvin L. Frank, Esq Kenneth A. Elan Joseph V . McBride Esq~ LAW OFFICES O F 16 RABIN & PECKEI . LLP KENNETH A. ELAN 275 Madison Avenue 217 Broadway 17 34th Floor Suite 606 New York , New York 10016 New York, New York 10007 18 Attorneys for Stanley Myatt Attorney for Stanley Myatt Michael D. Braun, Esq. Jules Brody Esq . 19 Patrice L . Bishop, Es q~ STULL, STtJLL & BRODY 20 STULL STULL & BRODY 6 East 45th Street 10940 Wilshire Boulevard New York, New York 10017 Suite 230 0 Attorneys for Dash Limited 21 Los Angeles, California 90024 Attorneys for Dash Limite d 22 William S . Lerach, Esq. Alfred G 23 . Yates Jr. Esq . Darren J . Robbins Esq . LAW OFFICES OF MILBERG WEISS ~ BESHAD ALFRED G. YATES, JR. 24 HYNES & LERACH LLP 519 Allegheny Building 600 West Broadway, Suite 1800 429 Forbes Avenu e 25 San Diego, California 92101 Pittsburgh Pennsylvania 15219 Attorneys for Michael Green and Attorney/ r Michael Green and 26 Louis Martin, Jr.' Thomas H. Tallant; Louis Martin, Jr . Leelon Jones and Hans Kapur ; and 27 Samer Maani 28 Christopher A . See er Esq. Jonathan M . Stein Esq . SEEGER WEISS LIP' CAULEYGELLR BWMAN & One William Street COATES LL P New York; New York 10004-2502 2255 Glades Road Attorneys for Michael Green and Suite 421 A Louis Martin, Jr . Boca Raton , Florida 33431 Attorneys for Christopher Colvi n Marc A . Topaz, Esq . Thomas G . Shapiro, Esq . E RIN & BARROWAY LLP SHAPIRO HABER & URMY LL P Three Bala Plaza East Suite 400 75 State Street Bala Cynwyd Pennsylvania 19004 Boston, Massachusetts 0210 9 Attorney for ~'hristopher Colvin Attorneys for Anthony V. Demarco Richard J . Vita P .C . Robert Finkel Esq . LAW OFFICE. 6F' WOLF POPPER LLP RICHARD J . VITA P.C. 845 Third Avenu e 77 Franklin Street, Suite 300 New York, New York 1002 2 1 0 Boston, Massachusetts 02110 Attorneys for Anthony V. Dearco Attorneys for Anthony V. Demarco Betsy C . Manifold Esq Nadeem Faruqi Es 12 WOLF HALDENS'TEIN ADLER FARUQI & FAIR-06-1 FREEMAN & HERZ LL P 320 East 39th Stree t 13 S mphony Towers, Suite 2770 New York, New York 10016 750 i Street Attorneys for Joseph Villari 14 San Diego, California 92101 Attorneys for Joseph Villari 15 Evan J . Smith, Esq . Brian Felgoise, Esq . 16 BRODSKY & SMITH, L .L .C . LAW OFFICES OF Two Bala Plaza Suite 602 BRIAN FELGOISE 17 Bala Cynwyd, Pennsylvania 19004 261 York Road, Suite 423 Attorneys ;or Chris Grater Jenkintown, Pennsylvania 1904 6 18 Attorney for Chris Grater 19 Sandy A . Liebhard Esq . Marc S . Henzel Esc . Michael S . Egan E's~a~ LAW OFFICES OF 20 BERNSTEIN LI~BHARD & MARC S . IHENZEL LIFSHITZ, LLP 273 Montgomery Square Avenue 21 10 East 40th Stree t Suite 202 New York, New York 10016 Bala Cynwyd PA 19004 22 Attorneys for Ezra Birnbaum Attorney for i. 0. Hoggard Joshua M. Lifshitz, Esq. 23 Frederic S . Fox Esq . BULL & LIFSHITZ, I L P KAPLAN, KIBHEIMER & FOX LLP 18 East 41st Street 1 I ` Floor 805 Third Avenue 24 New York, New York 10017 22nd Floor Attorneys f`or Hagop Wanesian 25 New York, New York 10022 Attorneys for Thomas H. Tallant 26 27 28 Laurence D. King~ Esq Sherrie R. Savett, Es 2 KAPLAN , KILSHEIMER & FOX LLP Carole A. Broderick Esq . 555 Montgomery Street Jacob A . Goldberg ~ Lsg 3 Suite 150 1 BERGER & MON FAGUE, P .C . San Francisco CA 94111 1622 Locust Street 4 Attorneys for Thomas H. Tallant Philadelphia, Pennsylvania 19103 Attorn eys for Esteban Munne 5 Steven J. Toll, Esq . Andrew M . Schatz, Esq. Andrew N Friedman, Esq. 6 Jeffrey S . Nobel, Esq . COHEN MILSTEIN , HAUSFELD Patrick A . Klin man Esq~. & TOLL,: P .L .L .C . 7 SCHATZ & NOBEL, P .C . i 100 New York Avenue N .W . 330 Main Street , 2nd Floor Washington, D.C . 20005 8 Hartford, Connecticut 06106-185 1 Attorneys for George Steil Attorneys for Mazen Gharaibeh 9 Stanley M. Grossman, Esq. Patrick V. Dahlstrom Es ~q . Marc 1 Gross Es q ~ POMERANTZ HAUDEK BLOCK 10 POMERANTL HAUDEK BLOCK GROSSMAN & GROSS, LLP GROSSMAN & GROSS, LLP One North LaSalle Stree t 11 100 Park Avenue Suite 22 5 New York, New York 10017 Chicago, Illinois 60602 12 Attorneys for Loretta Lin Attorneys for Loretta Lin 13 Leo W . Desmond Esq. John W . MuI~) e ESg LAW OFFICES OF MUIJE & VAKRICCHIO 14 LEO W. DESMOND 302 East Carson Avenue 2161 Wes : Palm Beach Lake Blvd. Suite 55 0 15 Suite 204 Las Vegas, Nevada 89101 West Palm Beach , Florida 33409 Attorneys for Teachers Retirement 16 Attorneys 'or Samer Maan i System of-Louisiana 17 Daniel J. Albre ts, Esq. DANIEL ALBREGTS LTD . 18 601 S. Tenth Street Suite 202 Las Vegas, Nevada 89101 19 20 21 22 23 24 25 26 27

28 SE RVICE BY OVERNIGHT DELIVERY via Federal Express 2 Kerry L. Early Esq . Suvinder S . Ahluwalia E~sq EARLY SAVAGE SKLAR WARREN CONWAY & 3 7251 W . Lake Mead #550 WILLIAMS LLP Las Vegas, NV 8912 8 221 North Buffalo Drive Suite A 4 Attorneys or Defendant Charles E Las Vegas, Nevada 89145 Johnson, ar. Attorneys for Defendant Purchasepro . com, Inc. 6 Joseph S . Kistler, Esq . Christopher Mc Grath, Esq~ Erika Pike Turner, Es PAUL HASTINGS JANOSKY 7 Gar & WALKER S m GORDON &LVERsq 3579 Valley Center Drive 8 3960 Howard Hughes Pkwy San Diego ,CaliforniCn92130a 9` Floor Attorneysf or Defendants 9 Las Vegas, Nevada 89109 Attorneys for Pro -Aer, Inc., f/k/a 10 Purchase!'ro .com, incn . II David S . Steuer, Esg , WILSON, SONSINT, GOODRICH 12 & ROSATI 650 Page Mill Road 13 Palo Alto, California 94304-1050 Attorneys for Defendant Charles E. 14 Johnson, r. 15 16 17 18 19 20 21 22 23 24 25 26 27 28