UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MASSACHUSETTS

X

IN RE : RAYTHEON COMPANY Civil Action No . 99-12142 (PBS)SECURITIES LITIGATION

THIS DOCUMENT RELATES TO :

ALL ACTIONSX

SECOND CONSOLIDATED AND AMENDED CLASS ACTION COMPLAIN T

Pursuant to the Court 's scheduling orders dated December 17, 2001, July 29, 2002 and

December 18, 2002 , Lead Plaintiff, the New York State Common Retirement Fund ("NYSCRF "

or the "Lead Plaintiff'), by its attorneys, for its Second Consolidated and Amended Class Actio n

Complaint (the "Complaint"), makes the following allegations based upon all of the facts se t

forth below which were obtained through a detailed investigation made by and through Lead

Counsel . Lead Counsel's investigation has included, among other things, a review of. (i) the

public filings of Raytheon Company ("Raytheon" or the "Company") with the United State s

Securities and Exchange Commission (the "SEC") ; ( ii) press releases and other public statement s

issued by defendants ; (iii) published reports and news articles regarding the Company ; (iv)

documents obtained from defendants and others in discovery; (v) documents obtained from the

United States Government pursuant to various Freedom of Information Act ("FOIA") requests ;

(vi) contemporaneous non-public documents obtained through Lead Counsel's investigation ; and

(vii) interviews and depositions of current and former Raytheon employees and other percipient

witnesses. ~-

NATURE OF THE ACTION

1 . This is a securities fraud class action brought on behalf of a certified class of

persons and entities, other than defendants and certain related parties (the "Class"), who

purchased the class A and/or class B common stock of defendant Raytheon between October 7,

1998, and October 12, 1999 (the "Class Period"), seeking to pursue remedies under the Securities

Exchange Act of 1934 (the "Exchange Act") . The Complaint alleges a fraudulent scheme and

deceptive course of action that injured purchasers of Raytheon common stock throughout the

Class Period .

2 . As set forth herein in detail, throughout the Class Period, defendants issued or

caused to be issued materially false and misleading statements and omissions which deceived the

investing pub lic as to the Company's financial performance and position, by means of, inter alia,

accounting irregularities and violations of Generally Accepted Accounting Principles ("GAAP")

which masked incurred and expected material losses in Raytheon 's RE&C and RSC divisions

amounting to several hundred millions of dollars which should have been written down o r

reserved for under GAAP, but were not . In addition , throughout the Class Period , the Raytheon

Defendants failed to disclose that the Company's performance on the P-3 Orion Sustained

Readiness Program fixed-price contract was materially behind schedule and over-budget . When

the Company finally began to disclose the true , adverse information at the end of the Clas s

Period, the price of Raytheon common stock immediately declined by approximately 50% in less

than one hour of trading on the New York Stock Exchange . In total, by the end of the Class

Period, the market price of Raytheon stock declined by approximately 70% from its Class Period

high in July 1999, less than three months earlier .

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As a result of defendants' fraudulent scheme and this precipitous decline in the

market value of Raytheon common stock, Lead Plaintiff and other class members who purchased

Raytheon common stock during the Class Period have suffered several billions of dollars o f

losses . All defendants are charged with having knowingly or recklessly directly participated i n

the fraudulent acts and misconduct for which damages are sought against each of them . All of

the individual defendants are also charged with liability as controlling persons of Raytheon .

4. As set fo rth herein, PricewaterhouseCoopers LLP ("PwC") turned a blind eye t o

Raytheon's systemic and pervasive violations of GAAP and issued an unqualified audit opinio n

on Raytheon's 1998 financial statements, even though PwC knew or recklessly disregarded that

the Company 's financial statements were not in accordance with GAAP . The strong inference of

PwC's scienter, as set forth below, is primarily based on the following facts (which are mor e

specifically delineated herein) :

a . PwC was aware of the RE&C Actionable Asset Memos (described below) andrequested the "latest Actionable Assets review" in connection with its 1998 audit ;

b. Prior to the issuance of its "clean " audit opinion for 1998, PwC identified RE&C"as [the ] most significant risk facing [ the] company for [the] past several years,"in part icular, RE&C's "very aggressive approach . . . in regard to claims" and thatthere was "significant deterioration in 1998" at RE&C ;

c. PwC participated in a special review of RE&C's accounting policies at the start ofthe Class Period with the Raytheon Defendants which concluded that "RE&C'saccounting practices were less conservative than the industry standard" and thatchanges were required, including that RE&C would no longer recognizeunapproved change orders and claims as revenue . Nonetheless, PwC was awarethat Raytheon failed to write-down more than $100 million of unapproved changeorders and claims at the start of the Class Period and before the issuance of its1998 audit opinion, where collectibility was not probable and could not bereasonably estimated ;

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d. Prior to the issuance of its 1998 audit opinion, PwC specifically reviewed in detail

the major contracts set forth in the "Write-Offs" section of the August 1998

Actionable Asset Memo, including the PP9, Umatilla, Acme, Jindal, Ratchaburi

and Posven contracts, and uncovered evidence demonstrating that further, material

write-downs were required on all such contracts . Yet, Raytheon did not take the

write-downs and PwC issued its "clean" 1998 audit opinion in the face of all such

"exposures," which it documented and quantified, in the aggregate, at $250

million (before tax) . PwC knew, as evidenced in its workpapers, for example, that

the PP9, Jindal and Ratchaburi project customers were refusing to pay the cost

overruns, change orders and claims, relations with those customers were "poor"

and "strained" and that RE&C had already initiated arbitration proceedings against

some of them making collection uncertain (let alone probable and reliably

estimated as required by GAAP), as set forth below ;

e. Prior to the issuance of its 1998 audit opinion, PwC was aware of Raytheon'simproper practice whereby it utilized means to accelerate its recognition ofrevenues and profits in violation of GAAP, and noted that RE&C had accelerateda total of more than $300 million of revenues in the 1998 year ;

Prior to the issuance of its 1998 audit opinion, PwC was aware of Raytheon's

"improper" practice of recognizing revenues and profits on contracts which had

not been awarded and specifically noted the need for adjustments based on a list

of such contracts which "never materialized" and which Raytheon repeatedly

refused to reverse when requested by PwC and before the issuance of PwC's 1998

audit opinion (PwC thereby acquiescing in that position by issuing its unqualified

opinion) ;

g . PwC was aware of serious problems with RE&C's internal controls, including that

Raytheon had accelerated its recognition of revenues and profits in "inconsistent"

ways and that RE&C had failed to follow its previous procedures concerning the

recognition of revenue on unapproved change orders and claims in certai n

circumstances ;

h . On the P-3 Orion contract, PwC knew that Raytheon recognized a profit in 1998,when it incurred a loss and that the only basis for recognizing the profit wasRaytheon's "hope" for a new, follow-on contract which was never awarded ; and

At all relevant times, PwC's independence was compromised by the fact that ithad been awarded a contract from Raytheon for non-audit services whic h

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promised PwC over $100 million of fees over a four year time period, incomparison to $3-4 million per year for audit work . '

JURISDICTION AND VENU E

5 . The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act, 15 U .S .C. §§ 78j(b) and 78t(a), and Rule I Ob-5 promulgated thereunder by th e

SEC, 17 C .F.R. § 240 .1Ob-5 .

6. This Court has jurisdiction of the subject matter of this action pursuant to 2 8

U.S .C . §§ 1331 and Section 27 of the Exchange Act, as amended, 15 U .S .C . § 78aa .

7. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 2 8

U.S .C. § 1391(b). Throughout the Class Period , Raytheon maintained its corporate headqua rters

in this District , at 141 Spring Street, Lexington , Massachusetts 02421 . In addition, the events ,

acts, omissions and other conduct constituting the alleged violations of law, including th e

preparation, issuance, and dissemination of materially false and misleading information to th e

investing public, occurred in substantial part in this District .

'This Complaint does not seek to raise new claims against the Raytheon Defendants . Its

purpose is to reallege Lead Plaintiffs claims against PwC with additional supporting facts in

accordance with the Court's August 29, 2001 Order and to otherwise conform its pleading against

the Raytheon Defendants to : (i) the Court's August 29, 2001 Order ; and (ii) additional,

supporting evidence gathered in discovery to date which would subserve the presentation of the

merits at trial . Any new facts pleaded against the Raytheon Defendants relate back to Lead

Plaintiff's already sustained allegations against the Raytheon Defendants . For the convenience of

the Court, filed herewith is a black-lined version of this Complaint demonstrating the changes in

comparison to Lead Plaintiffs prior complaint which was sustained as to the RaytheonDefendants on August 29, 2001 . This Complaint is filed under seal pursuant to the

Confidentiality Order entered by the Court on November 20, 2001 as the Complaint quotes and

refers to documents and testimony produced in discovery which were designated by the RaytheonDefendants and/or PwC as "Confidential ."

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8. In connection with the acts alleged in this complaint, defendants, directly and

indirectly, used the means and instrumentalities of interstate commerce, including, but no t

limited to, the United States mails, interstate telephone communications and the facilities of

national securities exchanges , including the New York Stock Exchange .

THE PARTIES

Lead Plaintiff

9. Lead Plaintiff, NYSCRF, as established by Article 9 of the New York Retiremen t

and Social Security Law, holds and invests the assets of the New York State and Local

Employees' Retirement System and the New York State and Local Police and Fire Retiremen t

System . NYSCRF is the second largest public pension fund in the nation . As of March 31 ,

2002, NYSCRF had approximately 950,000 active members, retirees and other beneficiaries an d

held over $112 billion in assets . NYSCRF purchased more than 910,000 shares of Raytheo n

Class B common stock and more than 98,000 shares of Raytheon Class A common stock durin g

the Class Period for over $61 million , and was damaged thereby . A schedule of NYSCRF's

transactions in Raytheon common stock during the Class Period is attached hereto as Schedule A .

Additional Plaintiffs

10 . The persons and entities listed on Schedule B attached hereto are additiona l

plaintiffs in this action who purchased Raytheon common stock during the Class Period .

The Raytheon Defendants

1 I . a. Defendant Raytheon Company is organized under the laws of the State o f

Delaware and maintains its principal executive offices at 141 Spring Street, Lexington ,

Massachusetts 02421 . At all relevant times, Raytheon provided products and services in th e

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areas of defense and commercial electronics, business and special mission aircraft and

engineering and construction . During the Class Period, Raytheon was organized into the

following business segments :

(1) Raytheon Systems Company ("RSC"), which was the result of th e

combination and consolidation of the former defense operations of Hughes Electronics

Corporation ("Hughes"), the former defense assets of Texas Instruments, Inc . ("TI"), Raytheon E-

Systems and Raytheon Electronic Systems . In 1997, Raytheon spent a total of $12 .45 billion to

acquire the former defense operations of Hughes and TI and formed RSC, the third largest U .S .

defense contractor . During the relevant time period, RSC was engaged in the design,

manufacture and service of advanced electronic devices, equipment and systems for bot h

government and commercial customers . After the end of the Class Period, Raytheon announced

that it had eliminated its RSC division as part of a reorganization of its defense and government

electronics businesses in order to provide for "faster information flow," "more clearly defined

and aligned roles and responsibilities," and "more direct lines of accountability ; "

(2) Raytheon Aircraft Company ("RAC"), which, during the relevan t

time period, manufactured, marketed and supported aircraft for commercial, regional airline and

military aircraft markets ; and

(3) Raytheon Engineers & Constructors ("RE&C"), which, during the

relevant time period, was described as one of the largest engineering and construction firms in

the United States, engaged in the design, construction and maintenance of facilities and plants

operated by a large range of customers, including independent power producers, utilities ,

petroleum companies, pulp and paper companies, industrial concerns and governments . As set

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forth below, because of its material contract performance problems, RE&C was ultimately

treated as a "discontinued operation" by the Company after the end of the Class Period an d

disposed of at a substantial loss .

b . At all relevant times , the financial results of these various busines s

segments were reported by the Company on a consolidated basis .

c . As of February 27, 2000, the Company had 337,647,682 shares o f

common stock outstanding, consisting of 100,778,310 shares of Class A common stock an d

236,869,372 shares of Class B common stock .

12. Defendant Dennis J . Picard ("Picard") served as the Chairman of the Board, Chie f

Executive Officer and President of the Company from March 1, 1991, until December 1, 1998,

when he retired as Chief Executive Officer and President of the Company . From December 1,

1998, until July 31, 1999, defendant Picard continued to serve as Raytheon's Chairman of the

Board. Thereafter, he remained a director of the Company .

13 . Defendant Daniel P. Burnham ("Burnham"), from July 1998, when he joined th e

Company, until December 1998, served as the President and Chief Operating Officer of the

Company . Defendant Burnham has served as the President and Chief Executive Officer of the

Company since December 1, 1998, and as Chairman of the Board since August 1, 1999 .

14. Defendant Peter R. D'Angelo ("D'Angelo") served as an Executive Vice President

and the Chief Financial Officer of the Company from April 1997 to April 1999, when he retired

from the Company. From January 1995 to April 1997, defendant D'Angelo served as a Vic e

President, Chief Financial Officer and Controller of the Company .

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15 . Defendant Franklyn A . Caine ("Caine") served as a Senior Vice President an d

Chief Financial Officer of the Company from April 1999 until December 11, 2002, when h e

resigned from the Company approximately two weeks after settling charges filed by the SEC tha t

he had violated the SEC's Fair Disclosure rule, known as Regulation FD, by speaking privately

with individual securities analysts regarding their earnings estimates for Raytheon. Caine was

replaced with Edward S . Pliner ("Pliner"), who, as set forth below, served as the Lead Partner o n

the PwC Raytheon audit engagement team during the Class Period . Pliner first joined Raytheon

as a Vice President and Corporate Controller on March 31, 2000, five months after the end of the

Class Period. Upon Caine's resignation, Pliner was named Senior Vice President and Chie f

Financial Officer of the Company .

16 . Defendant Shay D . Assad ("Assad") served as an Executive Vice President of th e

Company and as the Chairman and Chief Executive Officer of RE&C since December 1998 .

From April 1998 until December 1998, defendant Assad served as a Senior Vice President of the

Company and as the President and Chief Operating Officer of RE&C.

17. Defendant William H . Swanson ("Swanson") served at all relevant times as a n

Executive Vice President of the Company and as the Chairman and Chief Executive Officer of

RSC.

18 . The individual defendants identified in IT 12-17 above are sometimes referred t o

herein collectively as the "Individual Defendants . "

19 . As set forth in detail below, because of their senior executive positions within th e

Company, each of the Individual Defendants had access to the adverse undisclosed informatio n

about Raytheon's financial results and performance and knew or recklessly disregarded that thes e

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adverse facts and omissions rendered the representations made by and about Raytheon and th e

financial statements issued by the Company materially false and misleading at all relevant times .

20 . It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the false and misleading information conveyed in the Company' s

press releases and filings with the SEC are the collective actions of this group of individua l

defendants. Each of these senior officers of Raytheon, as set forth below in detail, by virtue o f

his high-level position with the Company, was directly involved in the day-to-day operations o f

the Company at the highest levels and was privy to the adverse undisclosed information set forth

herein and knew of or recklessly disregarded the material falsity of the Company's publi c

statements during the Class Period . These individuals were each involved in the drafting and

reviewing of the false and misleading statements identified herein and were aware or recklessl y

disregarded that false and misleading statements were being issued regarding the Company an d

either approved, condoned or facilitated these statements, in violation of the federal securities

laws .

21 . Defendant Raytheon and the Individual Defendants are referred to herei n

collectively as the "Raytheon Defendants . "

PricewaterhouseCoopers LL P

22 . Defendant PricewaterhouseCoopers LLP ("PwC") is a firm of certified public

accountants with offices located nationwide . PwC purported to audit Raytheon's financia l

statements at and for the fiscal year ended December 31, 1998, in accordance with Generall y

Accepted Auditing Standards ("GAAS") and issued a materially false and misleading unquali fied

audit opinion that those financial statements were prepared in accordance with GAAP .

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Additionally, PwC consented to the use of its unqualified opinion letter with respect to

Raytheon's 1998 financial statements in Raytheon's 1998 Annual Report and Form IO-K filed b y

the Company with the SEC and otherwise disseminated to the investing public during the Class

Period .

CLASS ACTION ALLEGATION S

23 . Lead Plaintiffbrings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a certified Class, consisting of all persons or entities wh o

purchased Raytheon class A and/or B common stock between October 7, 1998, and October 12 ,

1999, inclusive and who were damaged thereby . Excluded from the Class are defendants, all of

the officers, directors and partners thereof, members of their immediate families and their legal

representatives, heirs, successors or assigns and any entity in which any of the foregoing have o r

had a controlling interest . The Court certified the Class by Order dated March 22, 2002 .

24. The members of the Class are so numerous that joinder of all members is

impracticable . While the exact number of Class members is unknown to Lead Plaintiff at thi s

time and can only be ascertained through appropriate discovery, Lead Plaintiff believes that ther e

are thousands of members of the Class located throughout the United States . As of February 27 ,

2000 , the Company had 337,647,682 shares of common stock outstanding, consisting o f

100,778,310 shares of class A common stock and 236,869,372 shares of class B common stock .

Throughout the Class Period, Raytheon common stock was actively traded on the New York

Stock Exchange. Record owners and other members of the Class have been identified fro m

records maintained by Raytheon and its transfer agents and have been notified of the pendency o f

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this action by mail, using a form of notice similar to that customarily used in securities clas s

actions .

25 . Lead Plaintiffs claims are typical of the claims of the members of the Class as al l

members of the Class were similarly affected by defendants' wrongful conduct in violation o f

federal law that is complained of herein .

26 . Lead Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class action and securities

litigation .

27. Common questions of law and fact exist as to all members of the Class an d

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are :

a. whether the federal securities laws were violated by defendants' acts and

omissions as alleged herein ;

b. whether statements made by defendants to the investing public during th e

Class Period misrepresented and/or omitted material facts about the business, operations and

financial statements of Raytheon ;

c. whether the market price of Raytheon common stock was artificiall y

inflated during the Class Period due to the material misrepresentations and omissions complained

of herein; and

d. to what extent the members of the Class have sustained damages and th e

proper measure of damages .

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28 . A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable . Furthermore, as

the damages suffered by individual class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individuall y

redress the wrongs done to them . There will be no difficulty in the management of this action as

a class action .

SUBSTANTIVE ALLEGATION S

Applicability of the Presumption of Reliance :The Fraud-on-the-Market Doctrin e

29. At all relevant times, the market for Raytheon common stock was an efficient

market for the following reasons, among others :

a. Raytheon common stock met the requirements for listing, and was liste d

and actively traded, on the New York Stock Exchange, a highly efficient market ;

b . As a regulated issuer, Raytheon filed periodic public reports with the SEC ;

c . The trading volume of Raytheon class A common stock during the Clas s

Period averaged over 500,000 shares per day and the trading volume of Raytheon class B

common stock during the Class Period averaged over 1,000,000 shares per day ;

d. Raytheon regularly communicated with public investors via establishe d

market communication mechanisms, including through regular disseminations of press release s

on the national circuits of major newswire services and through other wide-ranging public

disclosures, such as communications with securities analysts ; and

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Raytheon was followed by securities analysts employed by majo r

brokerage firms who wrote reports which were distributed to the sales force and certai n

customers of their respective brokerage firms . These reports were publicly available and entere d

the public marketplace. Among the securities firms that followed the Company during the Class

Period are those identified in this Complaint .

30. As a result, the market for Raytheon common stock promptly digested curren t

information regarding Raytheon from all publicly-available sources, including the materiall y

false and misleading information issued by or for defendants and promptly reflected suc h

information in the market price of Raytheon common stock . Under these circumstances, al l

purchasers of Raytheon common stock during the Class Period suffered similar injury through

their purchase of securities at artificially inflated prices and the presumption of reliance applies .

Undisclosed Adverse Fact s

Impacting Raytheon's Business And

Financial Results During The Class Perio d

31 . This case revolves around defendants' dissemination of materially false an d

misleading statements and omissions throughout the Class Period, causing the market price of

Raytheon securities to be artificially inflated at all relevant times .

32 . As set forth herein in detail, defendants issued materially false and misleading

financial statements during the Class Period which deceived the investing public as to the

Company's financial performance and position, in large part because of accounting irregularitie s

and violations of GAAP which masked incurred and expected material losses in Raytheon' s

RE&C and RSC divisions amounting to several hundred millions of dollars which should hav e

been written down or reserved for under GAAP, but were not . In addition, throughout the Clas s

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Period, the Raytheon Defendants knowingly or recklessly failed to disclose that the Company' s

performance on the P-3 Orion Sustained Readiness Program fixed-price contract, a key

government defense project, was materially behind schedule and over-budget .

RE&C's Accounting Irregularities And Violations Of GAA P

33 . As government defense contracts were being reduced following the end of the

Cold War, the Raytheon Defendants looked to RE&C to produce sizable revenues and profit s

sufficient to maintain the appearance of continuing financial success for the Company. At the

same time, the Raytheon Defendants began describing the Company's purportedly successful

transition to a company that was not solely or primarily concentrated in defense procurement .

34. Through the third quarter of 1995, RE&C was able to satisfy those objectives ,

principally through a lucrative engineering procurement and construction project for a ne w

145,000 barrel-per-day oil refinery in Thailand for the Rayong Refinery Co . (a joint ventur e

between the Petroleum Authority of Thailand and Shell International Petroleum) . The Rayong

contract was a $1 . 4 billion 50-50 joint venture between RE&C and Fluor Daniel , Inc. By mean s

of this joint venture, RE&C had contributed $500-600 million of revenues and $110-120 millio n

after-tax profits to Raytheon's reported financial results over a two-year period .

35 . By the end of the third quarter of 1995, however, construction on the Rayong

project had been substantially completed and RE&C was failing to obtain additional high profi t

margin contracts sufficient to maintain 1994-95 reported levels of financial performance . I n

addition, commercial con tracts entered into by RE&C proved more difficult for the Company t o

execute. RE&C encountered serious difficulties in containing costs and meeting deadlines o n

numerous large construction and engineering projects, many of which were located abroad. In

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the face of such adverse results, the Raytheon Defendants caused RE&C to engage in a numbe r

of financial irregularities that were in violation of GAAP .2 These accounting irregularities, as

more fully particularized in the succeeding paragraphs of this Complaint, consisted primarily of

the following :

Beginning in the third quarter of 1995 and increasingly thereafter, th e

Raytheon Defendants improperly caused RE&C to avoid reporting losse s

on approximately 40 major contracts in process, even though RE&C

management already had quantified, by August 1998, that, in th e

aggregate, approximately $422,000,000 of losses were expected to resul t

from those projects . All of those losses were required by GAAP and the

Company's own accounting guidelines to be recognized in full, but the y

were not . An additional $93,000,000 of write-downs were not reported on

already completed projects based on the existence of pending litigation o r

arbitration , even though the write-downs were required under GAAP ;

b. Prior to the start of the Class Period, the Raytheon Defendants, in violation

of GAAP , caused RE& C to improperly book approximately $83,000,00 0

of revenues on approximately 14 anticipated contracts, even though: (i) the

contracts had not been signed ; (ii) no legally binding commitments had

been made to RE&C ; and ( iii) the contracts never financially closed.

2GAAP are those principles recognized by the accounting profession as the conventions,rules and procedures necessary to de fine accepted accounting practice at a particular time .Regulation S-X (17 CFR 210 .4-01 (a)(1)) states that financial statements filed with the SECwhich are not prepared in compliance with GAAP are presumed to be misleading and inaccurate .

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Thereafter, in violation of GAAP, $26,000,000 of unreimbursed out-of-

pocket costs associated with these anticipated contracts and certain non-

existent "profits" recorded along with the $83,000,000 of revenues booked

on these anticipated contracts were not written -off after RE&C ultimately

failed to obtain the contracts ;

c . By the start of the Class Period, the Raytheon Defendants had cause d

RE&C to prematurely book revenues and profits on a number of contract s

in process by prematurely booking approximately $311,075,000 of cost s

which had not yet been incurred by RE&C on the projects and recognizing

revenues and estimated profits on such prematurely booked costs . All

estimated profits recognized as a result of such accelerations should have

been written-down by the start of the Class Period; and

d. Prior to the start of the Class Period, RE&C management caused it s

project managers to assume unrealistic and unachievable recovery (o r

mitigation) plans on contracts that were experiencing problems, delays an d

cost overruns in order to have the managers understate expected losse s

and/or liquidated damages (despite substantial evidence to the contrary) .

36. These amounts were material on a segment-level as well as Company-wide basis .

In 1998, the Raytheon Defendants reported total RE&C operating income of $101 million ,

excluding non-recurring charges . Raytheon Company's 1998 income before taxes was reporte d

at $1 .467 billion . As set forth herein, at the start of the Class Period, the Raytheon Defendant s

decided to recognize only half of these required write-downs, failing to write-down, in the

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aggregate , in excess of $350 million at RE&C, or at least 20% of Raytheon Company' s

consolidated reported income before taxes, in addition to tens of millions of dollars on the P-3

Orion project .

RE&C's Failure To Recognize Losses On MajorContracts In Process And Certain Completed Contracts

37. RE&C was an engineering and construction business which obtained the majorit y

of its business by bidding on large engineering and construction projects, such as the constructio n

of a major oil-refinery as described above . As RE&C's contracts were typically long-term i n

nature, Raytheon repo rted RE&C's revenues and pro fits under the percentage -of-completion

method of accounting, discussed more fully below, pursuant to which incurred costs were

recorded by the Company as work is performed and cost plus estimated gross margin was

recorded as sales, thereby providing for the recognition of profit throughout the performance o f

the contract .

38 . Keeping project costs within estimated budgets was critical for RE&C because th e

long-term contracts it operated under were typically fixed-price contracts . In other words, i f

RE&C's ultimate project completion costs exceeded its original expectations and project bid ,

absent unusual circumstances, RE&C would incur lower margin or profits, or potentially a loss t o

complete a project .

39 . Following the end of the Cold War, the Raytheon Defendants realized that thei r

efforts to expand RE&C's business internationally resulted in numerous fixed-price contracts

which would result in projected losses . RE&C management estimated and tracked these losses

on a regular, monthly basis . Rather than disclosing these problem contracts in the face o f

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Raytheon's reduced revenue expectations from government defense contracts, the Raytheo n

Defendants determined to conceal these losses for as long as possible, by avoiding require d

write-downs on such problem contracts .

40 . By August 1998, the Raytheon Defendants had caused RE&C, in violation o f

GAAP , to avoid recording approximately $422,000,000 of losses on approximately 40 major

contracts in process, even though RE&C management had already quantified such losse s

expected to result from these projects . As set forth below, RE&C was required under GAAP to

immediately book these losses in full . The quantified losses were reflected in internal RE& C

documents, including Executive Summary Reports (known internally as "ESRs") and Actionable

Assets Profile Memoranda (known internally as "Actionable Assets Memos"), which were

distributed to senior RE&C management and, through internal audit, to defendant D'Angelo, an d

after D'Angelo's retirement as CFO, to defendant Caine . Defendants Picard and Burnham als o

reviewed this specific information on a monthly basis with defendant Assad , the CEO of RE&C .

41 . ESRs were prepared by the RE&C cost engineer on a monthly basis for eac h

RE&C project or contract and reviewed by the project manager before internal distribution .

ESRs were the single most important internal RE&C documents, providing the status of each

RE&C contract in process . The information presented in the ESRs was ostensibly relied upon b y

senior RE&C and Raytheon management as the primary source of project cost, profitability an d

percentage of completion status and the historical cost information presented in the ESRs

corresponded with RE&C's corporate books of accounts . There was no other comparable

document to transmit this critical information to senior management . For each contract, ESRs

documented, inter alia, management's estimated profit to completion (known internally as the

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"ETC fee") and budgeted versus required funding levels . As discussed below, a negative ETC

fee (or loss) contract and/or a contract with required funding levels in excess of contractuall y

agreed to funding levels (where additional funding was not probable to be paid by the customer )

required immediate write-down in accordance with GAAP . The monthly ESRs were distributed

to defendant Assad (CEO of RE&C), Richard Kinsella (CFO of RE&C), Alan Swenson

(Controller of RE&C), Thomas Murphy (head of Raytheon internal audit) and, on a quarterly

basis, to the PwC audit team . Thomas Murphy reported directly to defendant D'Angelo, and afte r

D'Angelo's retirement as CFO, to defendant Caine . Defendants Picard and Burnham also

reviewed the ESRs with defendant Assad at major project meetings, which occurred at least once

every fiscal quarter.

42. The Actionable Assets Memos were prepared on a monthly basis by RE&C' s

Manager of Contract Accounting , Gregory Flick, and distributed to the same RE&C/Raytheon

personnel who received the ESRs .3 Significantly, the August 1998 Actionable Assets Memo

contained a specific grouping of RE&C contracts in process where write-downs were require d

pursuant to the information contained in the ESRs . These contracts were listed in "Group 1" of

the Actionable Assets Memo as "Write -Offs ."4

3As set forth below, PwC also requested and received copies of the Actionable AssetsMemos in connection with its 1998 audit .

``The August 1998 Actionable Assets Memo contained additional groupings of problem

contracts/issues as follows : "Group 2 . . Probable Write-Offs" ; "Group 3 . . LitigationlADR" ;"Group 4 . . Settlement Required" ; "Group 5 . . Win Job" ; "Group 6 . . Intraco" ; "Group 7 . .Settled" ; "Group 8 . . All Others ." Certain of these categories also reflected additional GAAPviolations and are discussed below .

-20-

43 . The Company's publicly- stated policy was to account for RE&C's long-term

contracts under the percentage-of-completion accounting method, pursuant to which incurre d

costs were recorded as the work is performed and costs plus estimated profits were recorded a s

revenues, thereby providing for the recognition of estimated profits throughout the performanc e

of contracts . Under this accounting method , Raytheon was required by GAAP to recognize the

entire amount of any losses estimated through the complete duration of the contracts as soon as

the losses became evident .

44. The relevant elements of GAAP are set forth in definitive pronouncements by the

Financial Accounting Standards Board and by the American Institute of Certified Publi c

Accountants . Under these pronouncements, GAAP requires that a loss : (a) that is probable to

occur; and (b) that can be estimated reasonably, must be accrued in full as a charge to current

income in a company's financial statements . See Financial Accounting Standards Boar d

Statement of Financial Accounting Standards ("SFAS"), No . 5, ¶ 8 . Disclosure of the specific

nature of the loss is also required . SFAS No . 5, ¶ 9.5 Statement of Position 81-1, Accounting fo r

Performance of Construction-Type and Certain Production-Type Contracts ("SOP 81-1 "), whic h

provides guidance in accounting for long-term contracts, further states that :

a. "For a contract on which a loss is anticipated, generally accepted

accounting principles require recognition of the entire anticipated loss as soon as the los s

becomes evident" (¶ 24) ;

'Where a loss is probable to occur, but cannot be estimated reasonably, disclosure of therange of possible loss or a statement that no estimate of the loss can be made is required . SFASNo. 5, 1J 10 .

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b. "[E]ntities with significant contracting operations generally have th e

ability to produce reasonably dependable estimates " (~ 25); and

c. "When the current estimates of total contract revenue and contract cost

indicate a loss, provision for the entire loss on the contract should be made ." (¶ 85) (Emphasis

added.)

45 . Raytheon's own SEC fi lings recognized these GAAP requirements and stated that

under the Company's Accounting Policies for contracts in process : "When the current contract

estimate indicates a loss, provision is made for the total anticipated loss ." (Emphasis added . )

Raytheon's SEC filings further stated that : "Contracts in process are stated at cost plus estimate d

profit but not in excess of realizable value . "

46. The "Group I Write-Offs" section of RE&C's internal August 1998 Actionabl e

Assets Memo revealed that (in violation of these GAAP requirements and the Company's ow n

Accounting Policies) by August 1998, write-downs had not been taken on approximately 4 0

contracts in process for which probable, material losses already had been quantified .

47. The August 1998 Actionable Assets Memo stated that, in the aggregate, the 4 0

projects showed a negative ETC fee (or loss) of $171 million and that RE&C actually required

$251 million of additional client funding to reach that negative ETC fee or loss level . Absent the

additional funding, which was not provided for under the contracts, the 40 contracts showed, i n

the aggregate, a negative ETC fee of $422 million, all of which should have been immediatel y

written-down or reserved for under GAAP because the losses were both probable and reasonabl y

estimable .

-22-

48 . The August 1998 Actionable Assets Memo also contained a detailed spreadshee t

which revealed that over 75% of the losses were from RE&C's top seven contracts in process a s

follows :

Client ETC Fee Required Funding Required Write-Down Or Reserv e

Samge (PP9) ($34,349,000) $103,287 ,000 $137,636,000

Posven ($20,188,000) $ 2,269,000 $ 22,457,000

GE (Ratchaburi) ($18,044,000) $ 12,214,000 S 30,258,000

Fina Oil & Chemical ($16,956,000) $ 2,163,000 $ 19,119,00 0

Sun Coal ($16,397,000) $ 17,805,000 $ 34,202,000

Jindal Tractebel Pwr . ($14,303,000) $ 7,802,000 S 22 ,105,000

Umatilla ($11,245,000) $ 44,412,000 $ 55 ,657,000Sub total ($ 131,482 ,000) $189,952,000 $321,434,000

Total ($170,744,000) $250,641,000 $421,355,000

49 . The PP9 contract, for example, was listed in the August 1998 Actionable Assets

Memo with a negative ETC fee (or estimated loss) of $34,349,000, assuming that RE&C could

obtain $103,287,000 of additional funding in the form of claims and change orders from the

client to cover additional cost overruns . Absent such additional funding, the contract was

estimated to result in a loss of $137,636,000 . There was no reasonable basis for RE&C

management to anticipate that any additional funding would be obtained from the client (GE)

pursuant to the PP9 contract .6 In fact, GE had already told Raytheon that it would not pay th e

'Historically, RE&C had been successful in collecting only 20-30% of the additionalfunding it had requested from its clients .

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$103,287,000 of requested additional funding, had rejected RE&C's proposed change orders and

had noticed RE&C's default on the contract. By the start of the Class Period, Raytheon note d

that discussions with GE had "collapsed " and a notice of arbitration had been filed . See also

paragraphs 196-199 below . Nonetheless , in violation of GAAP, the quanti fied losses of

$13 7,636,000 had not been recognized by RE&C in connection with the PP9 contract as of tha t

date or with regard to any of the other above listed contracts where RE&C had quantified a

negative ETC fee and improperly assumed additional client funding, despite the fact that all such

losses were probable and reasonably estimable . The PP9 contract alone required an immediate

write-down or reserve totaling $137,636,000 .'

50. All of the information repo rted in the August 1998 Actionable Assets Memo also

could have been derived from the ESRs on a contract-by-contract basis with respect to th e

negative ETC fees (or losses) and the unfunded claims and was available and presented to al l

defendants by either the ESRs or both sets of internal reports . In fact, the August 1998

Actionable Asset Memo itself understated probable losses because (as set forth below) the ESRs

(at the direction of RE&C management) typically omitted or understated costs and losses, such a s

probable liquidated damages, as was known or recklessly disregarded by the Raytheo n

Defendants and PwC. Moreover, because of their critical significance to the Company's financia l

performance and balance sheet, the adverse performance of the above-listed seven RE& C

'Indeed, demonstrating the Raytheon Defendants' personal involvement in the accounting

irregularities, although senior RE&C management had decided to write-off at least $28 .8M on

the PP9 contract in the first quarter of 1998 and that write-off had been approved by Raytheon's

Corporate Controller Michelle Heid and reflected in Raytheon's general ledger, the write-downwas unilaterally canceled and reversed by defendant Picard, then-CEO of Raytheon, prior to the

start of the Class Period .

-24-

contracts in process (among others) was clearly material to the Company's reported results an d

position and was carefully followed by all Individual Defendants at all relevant times .

51 . In addition, at an August 26, 1998 RE&C Board of Directors presentation befor e

the start of the Class Period, it was noted, inter alia, that :

a. RE&C had been using "unrealistic fee rate assumptions ; "

b. RE&C had "presumed 100% claim recovery" on its contracts which ha d

the result of "mask[ing] overruns ; "

c . RE&C had been relying on "unrealistic recovery plans ;"and

d. the "root cause" of RE&C's problems was that it would "hide [the] ba d

news" and believed that "the next big win [would] fix everything . "

52 . Both before and throughout the Class Period, the Raytheon Defendants engaged i n

a pervasive policy of avoiding taking writedowns on contracts by making unsubstantiated and

unrealistic assumptions regarding their ability to recover on claims and obtain client approval on

pending and potential change orders . The Raytheon Defendants would consistently assume

without basis and in the face of strong evidence to the contrary that clients on particular project s

would agree to fund all or the majority of change orders, even though existing communications

with the clients clearly indicated the contrary . Similarly, the Raytheon Defendants consistentl y

assumed that they would obtain 100% recovery on pending or potential claims that were o r

would be the subject of arbitration or litigation, without any supporting reasons for believing thi s

was the case . Raytheon would then book revenue and/or avoid recognizing losses based on thes e

unrealistic assumptions in violation of GAAP and Raytheon 's own inte rnal policies .

-25 -

53 . On October 7, 1998, the date the Class Period begins, the Raytheon Defendant s

recognized some (but not all) of the losses attributable to the contracts identified above by taking

a one-time charge in the third quarter of 1998 of $310 million before-tax (or $180 million after-

tax) . That charge, however, failed to include more than half of the losses already quantified b y

RE&C management as of that time (including in excess of $350 million of write-downs require d

in this category as well as the other categories described below), as reflected in the internal ESR s

and the August 1998 Actionable Assets Memo, including material losses attributable to the PP9 ,

Umatilla and Ratchaburi contracts in the "Group I Write-Offs" category. For example, with

regard to the PP9 contract, Raytheon added reserves of only $40,300,000 for claim recovery a s

opposed to a then-estimated loss and required "Write-Off' (excluding liquidated damages) o f

$137,636 ,000. Similarly , for the Umatilla contract Raytheon added reserves of $13 .9 million as

opposed to a then-estimated loss and required "Write-Off' of $55,657,000 and on the Ratchaburi

contract Raytheon added reserves of $24,300,000 as opposed to a then-estimated loss an d

required "Write-Off' (excluding liquidated damages ) of $30,258,000 .

54 . On September 8, 1998, shortly before the (materially insufficient) charges wer e

announced by Raytheon on the first day of the Class Period, RE&C's Manager of Contrac t

Accounting, Gregory Flick, who was the RE&C employee responsible for putting together th e

August 1998 Actionable Assets Memorandum, issued a memorandum to his superiors in

connection with their upcoming meeting with Michele Held, Raytheon's Corporate Controller ,

demonstrating that the proposed $310 million of before-tax RE&C charges Raytheon planned to

announce on October 7, 1998 was less than half of what was required :

-26-

Don't know what Shay [Assad] has told Dan Burnham but from my perspectivewe have total exposures of $646 million (see attached page derived fromActionable Assets Profile in August [1998] Actionable Assets Book) . . . . Hopethis helps with [Corporate Controller] Michele Hyde today .

Instead, Controller Heid actually suggested "push[ing] [or deferring] some smaller write-offs t o

improve [the] quarter ." '

55 . In the aggregate, defendants' $310 million (before tax) charge at the start of th e

Class Period covered about half, or $219 million out of the $422 million (before tax) of required

write-offs listed in the "Group 1 Write-Offs" category the August 1998 Actionable Asset Memo. 9

As set forth below and evidenced by Flick's September 8, 1998 memorandum , other required

write-downs such as those demonstrated by the "Group 3 Litigation/ADR" and "Group 5 Wi n

Job" sections of the Actionable Assets Memo were not covered by defendants' $310 million

(before tax) charge announced at the start of the Class Period .

'Included in Flick's September 8, 1998 memorandum, was a $150 million write-off of

goodwill in connection with RE&C acquisition of Litwin Engineers & Constructors, Inc .

("Litwin") on July 26, 1995. After the Litwin transaction closed, RE&C improperly de-booked

costs on Litwin's low-margin contracts and offset the costs into goodwill in violation of GAAP

by recording approximately $75 million in additional Litwin goodwill, which was amortized over

a 40 year time period . The purpose of that action was to show an artificially high fee rate on

Litwin's contracts in process . As reflected in Flick's September 8, 1998 memorandum, by the

start of the Class Period, it was clear that at least all of the Litwin goodwill (including the

approximately $75 million of goodwill added in violation of GAAP) should have been written-

off, The Raytheon Defendants, however, only wrote off $45 million of the Litwin goodwill on

the first day of the Class Period . The Raytheon Defendants' failure to write-off the improperly

recorded Litwin goodwill by the start of the Class Period constituted another violation of GAAP .Nonetheless, PwC passed on this goodwill in connection with a July 1998 review by concluding

that Litwin appeared to be an "active" subsidiary of RE&C . Also included in Flick's

memorandum was a proposed $50 million of additional reserves for anticipated cost growth on

RE&C's problem contracts .

' The other $91 million of the $310 million (before tax) charge was for other itemsincluding $30 .5 million for facilities closures .

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56 . At the time of the October 7 , 1998 announcement, defendant Bu rnham wa s

specifically asked by a reporter during a Raytheon securities analyst conference call if "ther e

[would] be another shoe to drop at some point down the line ." Defendant Burnham's response ,

contrary to the facts set forth in, inter alia, the August 1998 Actionable Assets Memo, was :

Well if we thou ht there would be any more shoes to drop, we'd drop them now .We've just taken an aggressive action, a bold action . . . We do not have anyfurther expectations. Indeed, I think if we're going to be surprised in any regard,

we're going to be surprised on the upside . [Emphasis added . ]

It was not until the end of the Class Period that the Raytheon Defendants finally began t o

disclose that there were additional material losses which needed to be recognized and reported ,

which included material losses that had been probable and estimable and should have been

reported by no later than the start of the Class Period. At and after the end of the Class Period ,

defendants belatedly recognized the necessity of recognizing such losses as follows :

a. on October 12, 1999, the Raytheon Defendants announced that additiona l

charges of $125 million (before-tax) would be taken as a result of "contract performance issues "

on four contracts at RE&C during the 1999 third quarter; and

b . on April 11, 2000, the Raytheon Defendants announced that RE&C wa s

being treated as a "discontinued operation" and as a result, expected losses of $0 .15-$0.20 per

share attributable to RE&C would not be included in Raytheon's first quarter 2000 results .

Thereafter, the Raytheon Defendants announced they had reached an agreement to sell RE&C to

Morrison Knudsen Corporation (later renamed Washington Group International, Inc . ("WGI")) .

As a result of the transaction, the Company recorded an "estimated loss on disposal" of $270

million pre-tax, or $191 million after-tax, relating to RE&C (which included losses relating to

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the PP9, Ratchaburi and Umatilla contracts) . As set forth below, WGI subsequently too k

additional, material write-downs in excess of $700 million before-tax on the RE&C contract s

(including the Umatilla contract) and initiated litigation against the Raytheon Defendants fo r

accounting fraud because the projects had incurred massive losses rather than the "profits "

recorded by RE&C.

57. Prior to the start of the Class Period, the Raytheon Defendants knew or recklessl y

disregarded that an additional $93,000 ,000 of write -downs required by GAAP were not taken o n

10 already completed projects listed in the "Group 3 Litigation/ADR" section of the 199 8

Actionable Assets Memo . As reflected by the Actionable Assets Memo, RE&C had booked a

total of $93,000,000 of "revenues" in excess of client payments on these contracts to cove r

previously incurred cost overruns, where the client refused to pay any such amounts . The

Raytheon Defendants caused RE &C to fail to recognize these losses while litigation o r

arbitration proceedings were initiated or pending against these clients .

58. Similar to the "Group 1 Write-Offs" category, contracts in "Group 3

Litigation/ADR" required immediate and full write -downs or loss reserves under GAAP, a s

RE&C had booked revenues which exceeded actual payments received from its clients and n o

additional payments were probable nor reliably estimated .1° SOP 81-1, ¶ 65 states : "Recognition

of amounts of additional contract revenue relating to claims is appropriate only if it is probable

that the claim will result in additional revenue and if the amount can be reliably estimated . "

59. Pursuant to the Saudi Aramco contract, for example, RE&C had recorded, as earl y

"The contracts in "Group 3 . . Ligation/ADR", however, were completed contracts and,

for that reason, were not included in the "Group 1 Write-Offs" category which concerned

contracts in process .

-29-

as 1996, $24,471,000 of sales in excess of actual revenues received from Saudi Aramco, then a

closed project . The Raytheon Defendants caused RE&C to fail to recognize that amount as a los s

even though the project was completed and as no additional payments were expected from the

client while RE&C made an arbitration claim against Saudi Aramco for the $24,471,000 (in

Saudi Arabia) . The Company knew that there was no reasonable expectation of recovery of any

of the $24,471,000 booked as revenue that exceeded the actual revenues paid by Saudi Aramco ,

based both on the terms and conditions of the contract and RE&C's historic relationship with the

customer. Nor could the Raytheon Defendants reliably estimate that they would recover th e

entire $24,471,000 amount which was already booked as if it had been received by the customer .

The $24,471,000 loss was quantified by RE&C management and should have been recognized b y

the Company as a loss in 1996 in accordance with GAAP . As of the date of this Complaint ,

Raytheon still has received no recovery from the Saudi Aramco arbitration and the Raytheo n

Defendants are uncertain if the arbitration is even still pending in Saudi Arabia .

60. As demonstrated by the August 1998 Actionable Assets Memo, the "Group 3

Litigation/ADR" category also included :

a . a completed contract involving Gulf Chemical Corp . in which RE&C had

booked $46,972,000 of "sales" in excess of actual revenues received from the client which was

not recoverable and could not be reliably estimated and should have been written-down i n

accordance with GAAP as of August 1998. That loss was quantified by RE&C management an d

should have been recognized by the Company in accordance with GAAP by no later than January

1996, and was never recognized during the Class Period . Instead , RE&C pursued litigation

against Gulf Chemical Corp . while internally questioning (before the Class Period) both the

30

value of the Gulf Chemical asset it sought to attach as well as the "unpredictable" outcome of the

litigation . As of the date of this Complaint, WGI (which has acquired Raytheon's interest in the

Gulf Chemical litigation) continues to question the value of the Gulf Chemical assets and has

received no monetary recovery from the litigation .

b. a completed contract involving Hoffman-LaRoche in which RE&C ha d

booked $6,971,000 of "sales" in excess of actual revenues received from the client which was not

recoverable and should have been written-down in accordance with GAAP as of August 1998 .

That loss was quantified by RE&C management and should have been recognized by the

Company in accordance with GAAP by no later than January 1996, and was never recognized

during the Class Period . Ultimately, RE&C wrote-down the $6 .9 million of Hoffman-LaRoche

sales in the second quarter of 2000, when Hoffman-LaRoche obtained a judgment against RE&C

for $31 .2 million in the litigation .

61 . All of the above-described losses pertaining to "Group 3 Litigation/ADR" were

not booked by RE&C, using the existence of litigation or arbitration as an excuse to avoid write-

downs or loss reserves , even though the losses were actually incurred and therefore should have

been written-down or reserved for in accordance with GAAP, regardless of RE&C's attempts to

recover on its claims through post-contract litigation . The "Group 3 Litigation/ADR" category,

as set forth in the August 1998 Actionable Assets Memo, contained 10 inactive or completed

contracts which required, in the aggregate , approximately $93 million of write-downs or

reserves .

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RE&C's Premature Recognition Of Revenues And Profit sOn Anticipated Contracts And Failure To Take Write-DownsWhen The Anticipated Contra cts Failed To Materialize

62 . By August 1998, the Raytheon Defendants also had caused RE &C, in violation of

GAAP, to recognize , in the aggregate , approximately $ 83,000 ,000 of "revenues" o n

approximately 14 anticipated contracts, even though : (i) the contracts had not been signed; (ii) no

legally binding commitments had been made to RE&C ; and (iii) the contracts did not financially

close . In further violation of GAAP, by the start of the Class Period, the Raytheon Defendants

failed to remove these "revenues" (which had not been earned) from RE&C's and the Company's

books and take a corresponding write-down of approximately $26,000,000 to cover

unreimbursed out-of-pocket costs and certain non-existent "profits" recognized prior to the

anticipated signing of the contracts .

63 . GAAP provides that persuasive evidence of an arrangement must exist prior to the

recognition of revenue thereon . See Financial Accounting Standards Board ("FASB") Statemen t

of Financial Accounting Concepts No . 2, ¶ 63 ; SOP 97-2, ¶ 8 ; SEC Staff Accounting Bulletin

No . 101 . GAAP further provides that revenues should not be recognized until they are : (1)

realized or realizable ; and (2) earned . See FASB Statement of Financial Accounting Concepts

No. 5, 1831 . In addition, GAAP provides that profit is deemed to be realized only when the

collection of the sales prices is reasonably assured . Accounting Principles Board ("APB")

Opinion No. 10, 1 12.

64. With regard to long-term contracts, SOP 81-1, ¶ 12 further provides that :

"Contracts . . . are binding agreements between buyers and sellers in which the seller agrees, for

compensation, to perform a service to the buyer's specifications . Contracts consist of legally

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enforceable agreements . . . ." Even in the case of legally-binding long-term agreements ,

however :

a. SOP 81-1, ¶ 49 states that: "Profit is not assumed to accrue merely as a

result of the acquisition of material or other tangible items used in the performance of the

contract or the awarding of subcontracts" ;

b. SOP 81-1, ¶ 50 states that : "Some of the costs incurred, particularly in th e

early stages of the contract, should be disregarded . . . because they do not relate to contract

performance ;" and

c. SOP 81-I, ¶ 75a further provides that : "Costs that are incurred for a

specific anticipated contract and that will result in no future benefits unless the contract i s

obtained should not be included in contract costs or inventory before the receipt of the contract . "

(Emphasis added.)

65 . The "Group 5" section of RE&C's August 1998 Actionable Assets Memo ,

appropriately entitled "Win Job," revealed that (in violation of these GAAP requirements) RE& C

had booked, in the aggregate , approximately $83,000,000 of "revenues" on approximately 1 4

anticipated contracts, even though the contracts had not been signed and no payments or legall y

binding commitments had been made to RE&C. In further violation of GAAP, $26,000,000 of

actual unreimbursed out-of-pocket costs and certain non-existent "profits" recognized prior to the

anticipated signing of these contracts were not written-off when RE&C ultimately failed t o

obtain the contracts .

66. For most of the contracts in this category, RE&C had booked costs and revenue s

equal to the amount of actual pre-contract costs incurred, even though no legally binding

-33-

commitment had been made and no cash was received and, thereafter, failed to write-down the

revenues booked and recognize losses on the uncollected costs . For at least two contracts in this

category, however, RE&C had booked "revenues" and "costs" well in excess of actual pre-

contract costs incurred as well as "profits" on such revenues and costs and, thereafter, failed t o

write-down the out-of-pocket costs actually incurred and the estimated "profits" recorded .

67. The August 1998 Actionable Assets Memo contained a detailed spreadshee t

which revealed these needed write-offs . For example, the eight largest contracts in the "Wi n

Job" category were as follows :

Client Costs Booked Sales Booked Profit Booked

Smith (Karnataka) $40,963,000 $44,150,000 $3,187,000

American Agri-Tech $10,291,000 $14,896,000 $4,542,000

Kasco (Kuwait) $ 1,931,000 $ 1,931,000 -

AES (1B Valley) $ 1,575,000 $ 1,575,000 -

British Gas $ 1,566,000 $ 1,566,000 -

General Fertilizer $ 1,487,000 $ 1,487,000 -

City of Great Falls $ 1,021,000 $ 1,053,00 0

SPIC (Tuiticorn) $ 989,000 $ 1,010,000 -

68 . In nearly all cases, non-binding letters of intent were obtained from the client b y

RE&C, as a pretext for the booking of revenues by the Company in violation of GAAP to cover

certain pre-contract costs, even prior to the execution of a binding contract . When the contracts

later failed to materialize, whether because of lack of financing or some other reason, RE&C, i n

-34-

further violation of GAAP , failed to write-down these prematurely booked amounts and to

recognize losses on the actual out-of-pocket costs incurred .

69. As shown in paragraph 67 above, at least with regard to two such contracts ,

substantial profits were also booked in violation of GAAP based on non-binding letters of intent ,

even prior to the execution of the contracts . In further violation of GAAP , these profits were not

written-down when the contracts failed to materialize . The Smith (Karnataka) anticipated

contract, for example, concerned a situation where a non-binding letter of intent was signed i n

June 1995 for the building of a power plant in India . Even though there was no financing for the

anticipated project , RE&C booked $44,150,000 in " sales" and $3,187,000 in "profits" in June

1995 upon the signing of the letter of intent based on fictitious costs incurred . Thereafter ,

financing was never received and RE&C avoided writing-off the revenues and profits it had

already booked in anticipation of the contract for a period of over three years while the projec t

remained classified as "inactive " as shown by the August 1998 Actionable Assets Memo . As set

forth below, PwC specifically noted Raytheon's failure to write-off the Smith (Karnataka )

revenues and profits during its 1998 audit and the issue was brought to defendant Assad' s

attention in September 1998, yet no write-downs or reserves were taken by the Company .

70 . Similarly, with regard to the American Agri-Tech "win job" project, RE& C

booked $14,896,000 of sales and $4,542,000 of profits in 1996, even though there was n o

financial closing on the contract . On October 20, 1998, defendant Assad reported to defendant s

Burnham and Picard that the entire deal was in jeopardy given the lack of financing and that, "I f

this deal falls apart, our 4th quarter results will be impacted by $6 .3M [profit before taxes ]

because this deal was partially taken to sales/income in 1996 ." Nonetheless, defendants failed t o

-35-

write down the sales and profit booked when the project was canceled in 1998 for lack o f

financing, sales and pro fits which never should have been recognized under GAAP in the first

instance . As set forth below, write downs on the Smith Karnataka and American Agri-tech "wi n

jobs" were not taken until the end of 1999, even though PwC pointed to the need for them i n

1998 and before the issuance of its "clean" audit opinion during the Class Period .

71 . The other anticipated contracts listed above and appearing in the August 1998

Actionable Assets Memo had similarly been outstanding for lengthy periods of time and wer e

also classified as "inactive " without write -offs : Kasco (Kuwait) (since December 1995) ; AES

(IB Valley) (since December 1995) ; British Gas (since December 1995) ; General Fertilizer (sinc e

December 1995); City of Great Falls (since October 1996) ; and SPIC Tuiticorn (since March

1997) . Yet, as indicated in the August 1998 Actionable Assets Memo, none of the actual out-of-

pocket costs incurred by RE&C in anticipation of the contracts had been written off as losses fo r

as much as 2 1/2 years later .

72 . The August 1998 Actionable Assets Memo also included in the "Group 5 Wi n

Job" category the Avoca Natural Gas contract in which RE&C had recognized $48,653,000 o f

revenues on a contract that had been canceled shortly after its signing because of lack of

financing and before RE&C had performed any services . Pursuant to the contract, RE&C had

received a total of $35,555, 000 from the customer, including termination fees . That sum was

less than the amount of revenues RE&C had prematurely recognized . Nonetheless, RE&C faile d

to write-off the difference between the revenues it had already booked and the fees it actually ha d

received, or a difference of $13,098,000, upon cancellation of the contract .

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RE&C's Acceleration Of RevenuesAnd Profits On Contracts In Process

73 . In order to further artificially increase profits and revenues, the Raytheon

Defendants caused RE&C to prematurely book costs on certain contracts before the costs were

actually incurred by RE&C and before RE&C was under any obligation to pay such costs so that

the Company, in violation of GAAP, could prematurely advance its recognition of revenues and

profits . For each cost prematurely booked, RE&C, under the guise of applying the percentage-

of-completion method, prematurely booked corresponding revenues and profits . In nearly all

cases, RE&C accomplished these premature bookings by requiring its vendors and

subcontractors to provide RE&C with "earned value" or cost estimates, which RE&C was not

required to pay (and did not pay), but which estimates were used simply as a pretext for

prematurely recognizing costs, revenues and profits, which otherwise would not have bee n

recorded by RE&C . There was no legitimate basis for accelerating the recognition of such cost s

(and corresponding revenues and pro fi ts ) under GAAP . In fact, the accelerations deviated from

the Company's standard method of measuring progress toward completion (i .e . actual costs

incurred based on the receipt of vendor or subcontractor invoices) which was applied to al l

RE&C contracts except those appearing on the monthly acceleration schedules described below .

74. SOP 81-1, ¶ 43 states that : "Meaningful measurement of the extent of progres s

toward completion is essential since this factor is used in determining the amounts of estimate d

contract revenue and estimated gross profit that will be recognized as earned in any give n

period." SOP 81-1, ¶ 68 further states that costs must be accumulated "properly and consistentl y

by contract with a sufficient degree of accuracy to assure a basis for the satisfactory measurement

-37-

of earnings." The Raytheon Defendants caused RE&C to violate these GAAP requirements ,

among others, in prematurely booking costs and recognizing revenues and profits under th e

percentage-of-completion method .

75 . A monthly acceleration schedule was issued to the Controller of RE&C whic h

contained a list of contracts in process and the amount of costs accelerated . By August 21, 1998 ,

the monthly acceleration schedule indicated that RE&C had prematurely booked approximatel y

$311,075,000 of costs on various contracts in process ( including , for example , Zuhai Power

($38,132,000) ; Ratchaburi ($46,762,000) ; PP9 ($37,202,000) ; Posven ($15,996,000) ; Salt End

($8,186,000) ; Hudson Bergen ($42,794,000); Umatilla ($12,109,000 )) so that corresponding

revenues and profits could be booked . The 1998 Actionable Assets Memo also revealed th e

following accelerations (among others) :

Client Costs Accelerate d

Guangdong Zhuhai Power $26,218,000

New Jersey Transit $10,487,00 0

Merck (Ballydine) $ 9,882,000

Acme Steel Company $ 6,171,00 0

FWEC (EZHOU) $ 6,151,000

76 . RE&C's cost accelerations caused the financial results reported by the Compan y

to be materially false and misleading and artificially inflated at all relevant times throughout the

Class Period .

77 . RE&C's pattern of accelerating revenues and profits also caused it to enter int o

unfavorable contracts, merely to provide the appearance of consistent quarterly sales an d

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earnings expectations . For example, with regard to the Posven contract, a project level employe e

noted in a August 1998 memorandum to RE&C management : "There was an urgency to sign the

[Posven] contract and [purchase orders] for the main subcontractor, KM, steel, insurance an d

freight in order to maximize 19971st quarter's sales and profits . In fact, we signed the [Posve n

contract] on around April 6 and the other purchase orders in the same time frame and booke d

$19M sales to date as of the end of the first quarter ." Thus, with regard to Posven, not only did

the Raytheon Defendants accelerate revenues and earnings, they also started booking revenue s

and profit on the contract in the first quarter of 1997, even though the contract was not signed

until six days after the close of that quarter .

78. In other cases, RE&C accelerated its recognition of revenues and profits merely to

meet earnings targets . For example, an October 20, 1997 memorandum from RE&C

management stated: "Please take a close look at what we can do to accelerate Fina to get close t o

our sales forecast. I would like a report by Friday . "

79. Similar cost accelerations occurred throughout the Company, including wit h

RSC's ASTOR program for the U.K . Ministry of Defence . The ASTOR cost accelerations and

premature revenue recognition took place immediately after Raytheon's selection as the preferre d

bidder for the ASTOR contract by the U .K. in June 1999, even though a legally-binding contract

with the U.K. was not signed until December 1999 . As part of its second quarter 1999 review ,

PwC issued a summary of unadjusted differences regarding Raytheon's accounting which note d

PwC's exception to Raytheon's recording of $1 .4 million of revenues on the ASTOR program in

the second quarter of 1999 . Nonetheless , the Raytheon Defendants did not reverse this GAAP

violation prior to the issuance of PwC's unqualified audit opinion for Raytheon's 1998 financials .

-39-

Raytheon's Pre-Class Period Investigation With The Assistance Of PwC

Reveals That RE&C's Accounting Is "Less Conservative" Than Industry Peers,

Nonetheless, The Raytheon Defendants Fail To Take All Required Write-Downs

And Accelerate Their GAAP Violations During The Class Period

80. Shortly before the start of the Class Period, defendant Burnham requested

Raytheon's Corporate Controller, Michelle Held, and PwC to undertake a review of RE&C' s

accounting practices relative to industry standards .

81 . Thereafter, PwC reported to Burnham, that RE&C was the "most significant risk

facing [the ] Company for [ the] past several years," in part icular, RE&C's "very aggressive

approach . . . in regard to claims" and that there was an "SEC risk" for Raytheon's third quarte r

1998 charges . The "very aggressive approach . . . in regard to claims" referred to RE&C's failur e

to take write-downs based on the assumption that it would receive additional funding from it s

customers, when the revenues booked based on change orders and claims for such funding wer e

not yet approved by or, in numerous cases, even submitted to the customer and not likely to b e

paid .

82. A memorandum sent by Controller Heid to CEO Burnham on October 13, 199 8

also concluded (with the input and assistance from PwC) that "RE&C's accounting practice s

were less conservative than the industry standard" and accordingly that modifications were

enacted including, for example, that RE&C would no longer record revenue from claims an d

change orders absent client approval . Heid noted that, "[h]ad this practice been in place prior t o

1998, many of the claims written off [at the start of the Class Period] would not have bee n

booked ." Id. Nonetheless, at the start of the Class Period (and as documented by PwC) ,

Raytheon failed to write-off more than $100 million of losses based on non-client-approve d

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change orders and claims ( including $63 million for the PP9 project and $44 million for the

Umatilla project) leading to an inconsistent position on this critical issue . Indeed, at the Augus t

1998 RE&C Board meeting it was noted that "aggressive claims management [was] necessary t o

meet expectations" (even after Raytheon's $310 million RE&C charge at the start of the Clas s

Period) . '

83 . Thereafter, during the Class Period, as specifically noted by PwC to, inter alia ,

defendants Burnham and Caine, Raytheon failed to follow its own new policy and booked tens o f

millions of "revenues" on unapproved funding requests to RE&C customers such as Umatilla ,

Pine Bluff and Posven . PwC raised concerns during a 1999 meeting with Burnham, that in 199 8

the Company had set out with a new policy of not booking unapproved change orders, but mad e

exceptions to that policy during the Class Period which added to PwC's concern of an "alread y

weak balance sheet." In PwC's First Quarter 1999 review with defendants Burnham and Caine ,

PwC also noted : "The Company' s recording of revenue and now, fee is inconsistent with its

practice of recording revenue and fee only when approved by customer ." Similarly, durin g

PwC's Second Quarter 1999 review with defendants Burnham and Caine, PwC noted : "The

Company continues to book revenue and fee on unapproved change orders . . . . "

84 . In total, as reflected in PwC's documents, during the Class Period, the Raytheo n

Defendants improperly recognized revenue on $137 million of pending and potential chang e

orders on the Umatilla contract ; $30 .5 million of potential claims and backcharges on the Posve n

" Nonetheless, Raytheon later told the SEC, in connection with its review discussedbelow, that the $310 million October 1998 RE&C charges reflected a purported change in how

claims and litigation were pursued and that there was a determination to be less aggressive with

RE&C's clients to preserve RE&C's customer relationships .

-41-

contract ; and $11 .95 million on the Pine Bluff contract in violation of RE&C's purportedly ne w

and more conservative accounting policy. These bookings also violated GAAP because the

collection of the revenues recorded was not probable and could not be estimated reliably . On the

Umatilla contract, for example, the government eventually only offered RE&C one-tenth of wha t

it was seeking to recover. WGI also alleged fraud in RE&C's treatment of the Umatilla claims

and change orders as discussed below.

The Raytheon Defendants Caused RE&C Project Managers To AssumeUnrealistic and Unachievable Recovery Plans On Problem ContractsTo Understate Expected Losses And/Or Liquidated Damage s

85 . The Raytheon Defendants' publicly represented that, by the start of the Clas s

Period, they had purportedly taken a "hard look" at RE&C's operations and taken all require d

charges. In fact, documents obtained through discovery demonstrate that senior RE& C

management continued to require project management to assume unrealistic and unachievabl e

recovery plans in calculating what and how much should be written down or reserved on RE&C

contracts experiencing problems, delays and cost overruns as of the start of the Class Period .

86. For example, on the Posven contract, a project controls employee discussed the

reviews of senior RE&C management shortly before the start of the Class Period as follows :

Reviews were limited by the time available and therefore amounted tobroad/oversight type reviews . Many of the details remain to be developed . WhileI feel the overall logic is reasonable I am uncomfortable with the limited reviewthat has taken place . The approach and timing for construction of severaldifferent areas remains unresolved . . .

The plan indicates we can achieve the required completion date (June 7, 1999) to

nullify the liquidated damages . It is my personal opinion that while the schedule

indicates it can be done the chances of achieving this date are slim or none. I am

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still of the opinion that we will be several months later than the June 7th date .[Emphasis added.]

87. As a result of the Posven review and purported recovery plan put in place b y

RE&C management, approximately $11 million of anticipated liquidated damages on the Posven

project were not written down or reserved for at the start of the Class Period . Thereafter, in

February 1999, the same Posven project employee requested to be removed from the projec t

given the unrealistic schedule being shown on the project books. He stated : "Professionally this

approach is unacceptable to me and therefore I am requesting that a replacement be found for m e

that is more in tune with the philosophy advocated by the management." Not surprisingly ,

although it was not disclosed to the public, the RE&C contract write downs announced at the end

of the Class Period included $36 million for Posven, the majority of which was for schedule

delays and liquidated damages .

88. Similarly, with regard to the Ratchaburi project, a project controls employee note d

during the Class Period : "Project Management suppressed predictions of serious cost overruns i n

engineering and material procurement from the fall of 1998 until the project management chang e

in May of 1999 ." Again, while it was not disclosed by the Raytheon Defendants, Ratchaburi was

another of the "four problem contracts" covered by the RE&C charge announced at the end of the

Class Period. As noted above, the charge taken for Ratchaburi on the first day of the Clas s

Period, itself, was approximately $7 million less than listed in the "Group I Write Offs" section

of the August 1998 Actionable Asset Memo and relations between RE&C and GE were so poo r

as to make change order recovery not probable and reliably estimated .

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89. Through their pre-Class Period project reviews, senior RE&C managemen t

repeatedly avoided writing down millions of dollars of anticipated (and in some cases alread y

assessed) liquidated damages based on missed contract completion deadlines . For example, by

the start of the Class Period, RE&C had been assessed $12 .8 million of liquidated damages o n

the Jindal contract and the customer refused to pay $6 millions of billings on the contract as a

result . Yet, at the start of the Class Period, no charge was taken to cover the Jindal liquidate d

damages, even though the customer refused to negotiate the issue and had already rejected i n

writing all of RE&C's requests for schedule extensions . As with the Posven contract describe d

above, liquidated damages were not written down on the Jindal contract until the last day of the

Class Period . At that time, PwC noted that RE&C had "no defense" to the Jindal liquidate d

damages .

90. A draft presentation dated August 18, 1998 for the RE&C Board of Directors ,

clearly demonstrates that defendants (despite defendants Burnham's Class Period statements t o

the contrary) planned to address liquidated damages through the establishment of future reserves

or write downs :

Liquidated Damages risk/bonus risks/customer claims : $200 million [before tax] ;$116 million [after tax] . Comments : No reserve . Address through aggressivenegotiations and establishment of future reserves . [Emphasis added . ]

Similarly, the final Board of Directors presentation, dated August 26, 1998 (which was made

available to PwC), stated :

Liquidated Damages risk/bonus risks/customer claims : $200 million [before tax] ;$116 million [after tax] . Comments : No reserve . [Emphasis added .]

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91 . Not surprisingly, (although it was never disclosed to the public) about half of the

$125 million (before-tax) write down announced by the Raytheon Defendants on the last day o f

the Class Period as a result of "contract performance issues" resulted from the need to cover

liquidated damages exposures .

Material Cost Overruns , Delays And Violations Of GAAPIn Connection With Raytheon 's P-3 Orion Contract

92 . The P-3 Orion aircraft was originally designed and manufactured by Lockheed

Martin Corp . ("Lockheed Martin") in 1961 and has since become the most widely used maritim e

patrol and anti-submarine warfare aircraft in the world . At all relevant times, over 500 P-3 Orio n

aircraft were in operation worldwide with approximately one-half of those active within the U .S .

Navy and serving as the U.S. Navy's only land-based, long-range patrol aircraft .

93 . Although most U .S . Navy P-3 Orion aircraft had averaged little more than 12,000

flying hours each in more than 20 years of service, airframe problems from widespread corrosion

and localized fatigue cracks emerged from the saline and often turbulent environmen t

encountered in low-altitude maritime operations .

94. In 1994, Raytheon's E-System's division signed a fixed-price contract with th e

U.S. Navy reportedly valued at $204 .8 million for the refurbishing of fifty (50) P-3 Orion aircraft

by the end of 2002 as part of the U .S . Navy's "Sustained Readiness Program ." The program was

intended to extend the useful life of the aircraft to 38 years .

95 . Since its acquisition of E-Systems, Raytheon, in its Annual Reports distributed t o

shareholders, has described the P-3 Orion contract as a "key" RSC program ; a "major marke t

opportunity ;" and a "vital" modification program .

-45-

96. Throughout the Class Period, however, the Raytheon Defendants knew but faile d

to disclose that the P-3 Orion contract was both materially over-budget and behind schedule .

Pursuant to the P-3 Orion contract, Raytheon was obligated to complete refurbishment work on

32 P-3 Orion aircraft by the end of 1999, at a cost of approximately $6 million per aircraft. By

the end of 1999, however, Raytheon had completed the refurbishment of just six aircraft at a cos t

of more than $150 million . Given the admitted importance of this project and the material exten t

of its delays and cost-overruns set forth herein, all of the Raytheon Defendants had knowledge o f

or recklessly disregarded these adverse undisclosed facts throughout the Class Period . Indeed ,

Raytheon and Raytheon Aircraft Integration Systems ("AJS") (the Raytheon subsidiar y

responsible for the contract) senior management were kept apprised of Raytheon's advers e

performance under the P-3 Orion contract through quarterly reviews attended by, among others ,

defendants Burnham and Swanson .

97 . As an initial matter , the Raytheon Defendants knew or recklessly disregarded tha t

"marginal rates" were used by E-Systems in bidding for the P-3 Orion contract and that "bid s

were very aggressive" because the SRP P-3 Orion program was considered a "must win" progra m

as a result of major program losses at E-Systems in 1993 . An internal Raytheon report on the P-3

Orion program noted: "Without SRP, the division's rates would have been severely impacte d

affecting ongoing programs and future business ." Indicative of E-Systems' desperation to win th e

job, the contract was bid to cam 0% profit on the substantial amount of "core" work required t o

be performed on each of the aircraft .'' See also note 14 below .

''The P-3 Orion contract called for "core" work to be performed on each of the aircraft

and "conditional" and "over and above" work to be performed on some of the aircraft based on an

assessment of each of the aircraft's condition .

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98. According to an internal e-mail authored by Raytheon's Corporate Director of

Contracts, Richard Foley, "Raytheon knew back in 1995 that [the P-3 Orion] program was bid

aggressively ." From their due diligence in connection with Raytheon's E-Systems acquisition in

1995, the Raytheon Defendants were aware of the fact that the E-Systems division had

aggressively underbid Lockheed Martin, the original equipment manufacturer of the P-3 Orion

aircraft, to win the P-3 Orion contract and that E-Systems had failed to account for the extensive

amount of work and complex engineering that would be needed to refurbish each P-3 Orion

aircraft. E-System's first request for additional funds was issued to the U .S. Navy just one month

into the contract .

99 . Even prior to the start of the Class Period, the Raytheon Defendants knew or

recklessly disregarded that the P-3 Orion fixed-price contract was plagued with substantia l

problems that would cause the Company to incur significant losses and experience significant

delays in delivering aircraft as called for under the contract . Specifically, Raytheon originally

had expected that the P-3 Orion contract would be a "production" project, meaning that once

certain non-recurring engineering and tooling preparations were completed, the work to b e

performed on each aircraft would be substantially similar, requiring repetitive effort that

reasonably could be performed on a fixed price basis. As Raytheon's P-3 Orion project manager

documented in a letter to the Navy : "Critical to the structure of the [P-3 Orion] and the resulting

contract was the premise that the material condition of aircraft selected for [the P-3 Orion

contract] and delivered to [Raytheon] would be substantially consistent and would be suitable for

performance of the contract as solicited." Well before the Class Period began, however, the

Raytheon Defendants knew or recklessly disregarded that this premise was faulty, as all the

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aircraft to be refurbished were in an extremely deteriorated state and the required repairs were not

uniform from plane to plane so that the production line approach which was the basis for the

Company's bid would not work .

100. The first P-3 Orion aircraft to be refurbished were inducted at Raytheon's facilities

in early 1997 and, by September 30, 1998, the first 25 aircraft had been inducted . According to a

letter sent from Raytheon's P-3 Orion project manager to the Navy, "[t]he severely degraded

condition of the P-3 fleet became obvious upon induction of the aircraft ." (Emphasis added.)

Therefore, by the time the Class Period began in October 1998, the Raytheon Defendants knew

or recklessly disregarded that the condition of the aircraft to be refurbished was so materially

different than anticipated as to render timely and profitable performance under the contract

impossible. In fact, Raytheon's P-3 Orion program director told the Navy that Raytheon

"determined on the first aircraft that [it] could not go into rate production" on the P-3 Orion

contract even though Raytheon's bidding on the contract was "based on the premise of repetitive

effort" which Raytheon thought it could perform "with less skill . "

101 . Contrary to expectations in bidding on the project, refurbishment of the P-3 Orion

aircraft did not consist primarily of repetitive "core" work . Rather, as documented by Raytheon's

P-3 Orion project manager to the Navy, each aircraft required "an unmanageable level of both

'conditional' and 'over and above' work" that resulted in a dramatic increase in both the time and

expense necessary to perform the work required by the contract . For example, while the contract

budgeted for approximately 1,420 hours of "over and above" work per aircraft, Raytheon's actual

experience early on in the contract was that the aircraft required an average of 25,000 hours each

of "over and above" work . According to Raytheon's submission to the Navy, this meant that :

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"Over & Above effort was eighteen ( 18) times greater than anticipated which impacted not only

[Raytheon's] capability to perform the over and above tasks efficiently, but also [Raytheon's ]

ability to accommodate this effort within the aircraft delivery schedule ." Raytheon informed the

Navy in writing on August 19, 1998 (prior to the start of the Class Period), that Over & Abov e

work far exceeded the budget of 1,420 hours per aircraft and was precluding the Company' s

ability "to attain a smooth production flow due to the perturbations caused by the development of

special solutions for the large number of Over and Above repairs ." Under the fixed price

contract, however, Raytheon was unable to recover substantial added costs caused by the

extensive amount of Over & Above work necessary to refurbish each aircraft . This was

considered to be an "untenable financial situation" for Raytheon .

102. The deteriorated condition of the aircraft also resulted in significant delays . For

example, although work on the first aircraft to be refurbished under the contract was supposed to

be completed and the aircraft delivered on October 15, 1997, it was not actually delivered unti l

May 18, 1998 . Similarly, although the second aircraft to be refurbished under the contract wa s

originally supposed to be delivered on November 3, 1997, it was not finished until January 9 ,

1999. In addition to being late, both of these aircraft were extremely over budget . Indeed,

refurbishment of the first aircraft required Raytheon to perform a total of 175,345 hours of wor k

as compared to the budgeted amount of only 42,214 hours . Similarly, refurbishment of th e

second aircraft required Raytheon to perform a total of 165,625 hours of work as compared to th e

budgeted amount of only 38,742 .

103 . As a result of the foregoing, Raytheon experienced substantial losses under the P-

3 Orion contract both before and during the Class Period . Indeed, well before the beginning of

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the Class Period, Raytheon had already determined that the P-3 Orion contract would not be

profitable at completion, with losses being internally forecast as far back as early 1997 .

According to internal Raytheon documents, as of September 16, 1998, a loss of $26 .2 million

was estimated on the contract after a "bottoms up" review . During the fourth quarter of 1998 ,

estimated completion costs increased by $11 million, resulting in an estimated 19 .5% loss on the

contract . On February 18, 1999 , Raytheon P-3 Orion management inte rnally circulated an

updated version of a document entitled "SRP Profitability Model" which reported that the P-3

Orion contract would result in a loss of $48 .8 million. By March 1999, before the Raytheo n

Defendants' Class Period statements concerning the P-3 Orion project were issued, Raytheon' s

internal estimates were that the P-3 Orion contract would lose $61 million.

104. As of April 1999 (contemporaneous with the Raytheon Defendants ' Class Perio d

statements regarding the P-3 Orion set forth below), based on Raytheon 's actual experience

refurbishing the first three aircraft under the P-3 Orion contract, Raytheon was 429 .3% over

budget in terms of hours required to perform the necessary work .

105 . Due to Raytheon's inability to complete work within the contractually allotte d

time period, the dates by which specific aircraft were to be completed and delivered repeatedly

had to be extended. The dates for completion and delivery of the first three refurbished aircraf t

had already been extended numerous times before the beginning of the Class Period .

Additionally, in early April 1999 (contemporaneous with the Raytheon Defendants' public

statements regarding the P-3 Orion), the contract was modified again to extend the delivery

schedule for the next 22 aircraft to be refurbished . In exchange for the adjustments to the

delivery schedule, the Navy required that Raytheon "release[] the Navy from all claims, demands,

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audit, findings, costs, debts, and causes of action . . . which it may have against the government ,

which arise out of or relate to the P-3 Orion contract or performance up through the executio n

date of this modification . "

106 . Thus, the modification to the delivery schedule required that Raytheon formally

release in writing any claim it had to try and recover the $61 million in losses it had alread y

determined it would incur under the contract as of March 1999 . The handwritten notes of an

unidentified Raytheon employee commented on this result as follows : "there is not equity in thi s

change order -- the revised delivery schedule is not worth $60 m ." Nonetheless, the formal

release was executed by Raytheon on April 9, 1999 . Raytheon's P-3 Orion project manager late r

commented in a letter to the Navy that throughout the project the Navy was only willing t o

permit "marginal schedule extensions with no substantial relief in contract pricing ." Raytheon

considered its efforts to express concern to the Navy and put forward modification concepts to b e

of "no avail . "

107. The Navy continually expressed its conce rn and dissatisfaction with Raytheon' s

inability to perform as required under the contract . By the beginning of 1998, and continuin g

throughout the Class Period, monthly governmental reports sent to Raytheon repeatedl y

emphasized that "the P-3 program remains behind schedule and over budget." Moreover, as o f

March 1999, the Navy had suspended progress payments on the P-3 Orion contract to Raytheon

due to its failure to comply with the (revised) delivery schedule. Only after Raytheon executed

the April 9, 1999 modification to the contract referred to above, which required Raytheon t o

release any claim it had to try and recover the $61 million in losses it had already expected t o

incur, did the Navy agree to lift the progress payment suspension . However, within weeks after

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executing the April 9, 1999 modification, Raytheon was again delinquent in aircraft deliveries

and the Navy again suspended progress payments on the contract .

108 . According to a former RSC Vice President, in February 1999, a special Raytheon

team known as "Team 30" was created and sent to Greenville, Texas by senior RSC management

to identify and solve the P-3 Orion problems and delays . Within one week, the team reporte d

back to senior RSC management that the P-3 Orion problems could not be fixed within the short-

term and that the contract would continue to experience significant overruns and delays as a

result . According to the former RSC Vice President, the Team 30 report and problems an d

delays with the P-3 Orion project were well known within RSC by March 1999 ; however, no

disclosure was made .

109. In fact, discovery demonstrates that throughout 1998 and 1999, Raytheo n

established teams known by a number of different names to try and improve its performanc e

under the P-3 Orion contract . Raytheon knew, however, that these teams would be unable t o

make the contract profitable or quickly implement any significant improvements . Rather, the

teams were focused on long-term incremental efforts to try to reduce delivery delinquencies and

losses under the contract. For example, in December 1998, Raytheon established th e

"Discrepancy Identification & Disposition Team" (the "DIDT") to identify "the levels o f

discrepancies related to [the P-3 Orion] aircraft" and provide a "clear path of disposition ." Given

the extent of the problems with the P-3 Orion contract, the effort of the DIDT was considered

"stalled " as of the "Spring [of] 1999 . "

110 . Additionally, sometime during the first quarter of 1999, Raytheon senio r

executives Bob Horowitz and Peter Quast, along with a Raytheon corporate advisor, were sent to

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review the P-3 Orion program in order to develop long-term "R6Sigma" initiatives intended to

reduce cost overruns and schedule delays by incrementally improving Raytheon's performanc e

under the P-3 Orion contract .

111 . Similarly, due to the problems being experienced under the P-3 Orion contract, b y

March 1999, the Raytheon Defendants had retained Deloitte Consulting ("Deloitte") to conduc t

an extensive analysis of Raytheon's performance under the contract . Deloitte concluded that i n

order to improve Raytheon' s cost and schedule performance to satisfy Navy requirements ,

Raytheon would have to dramatically reconfigure its work processes, which would require tha t

the contract would have to be renegotiated with the Navy .

112. The findings of Raytheon's teams, executives and consultants consistentl y

confirmed to senior RSC management that the P-3 Orion problems could not be fixed within th e

short-term and that the contract would continue to experience significant overruns and delays as a

result .

113. Thus, the problems, delays and cost overruns associated with the P-3 Orio n

contract were well known within Raytheon well before the Raytheon Defendants' Class Period

statements regarding the P-3 Orion set forth below . For example, on March 22, 1999, a regular

quarterly review of RSC's operating results took place to report the status of RSC's business unit s

to Raytheon . In attendance at this meeting , among others, was defendant Swanson . At the

meeting, defendant Swanson along with other members of Raytheon senior management wer e

informed that the deteriorated condition of the P-3 aircraft was negatively impacting Raytheon' s

cost and schedule performance under the contract . The same day that this meeting took place,

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the government sent a letter to Raytheon informing it that progress payments had been suspended

due to Raytheon's inability to meet contractual delivery deadlines .

114. Despite defendants' awareness or reckless disregard of the significant problem s

being experienced under the P-3 Orion contract , no public disclosure was made . Rather,

defendants proceeded to issue materially false and misleading statements regarding the P-3 Orio n

project as set forth below .

115 . The losses and schedule delays on the P-3 Orion project continued to increas e

during the Class Period . By August 1999, due to the severity of the problems Raytheon had been

experiencing since well before the start of the Class Period, Raytheon began considering option s

including immediately stopping all work on the P-3 Orion contract and allowing the Navy to

terminate the contract for default, which (by Raytheon's own estimates) would have resulted i n

losses in excess of $400 million .

116. By September 1999, Raytheon P-3 Orion management estimated that completin g

the contract under a "best program execution" would result in a loss of $140 million and noted

that the project was placed in a "extremely negative financial position" and represented a

"significant financial loss for Raytheon" which "increases with each aircraft delivery ." Raytheon

internally noted that it "was not close to recovering costs through the existing contract pricing "

and that restructuring was "cut short due to Navy affordability limitations . "

117 . As noted above , GAAP , SOP 81 - 1, ¶ 85, required that Raytheon recognize th e

entire anticipated loss on the P-3 Orion contract as soon as the loss became evident, which, i n

this instance, was prior to the issuance of the Company's 1998 year-end financial results . Indeed,

by November 10, 1998, Raytheon estimated a loss of $30 .3 million on the project as compared to

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an estimated loss of $26 .2 million on September 16, 1998 . In violation of GAAP, the Raytheon

Defendants failed to take any write-downs until the end of the Class Period, when the Company

wrote-down $70 million on the P-3 Orion contract . Prior to that time, Raytheon actuall y

recorded a profit on the P-3 Orion contract at a 4 .5-6% margin throughout the Class Period . That

entire profit, approximately $9 million on a cumulative basis, was reversed as part of the $70

million written-down at the end of the Class Period .

118. In violation of GAAP, the Raytheon Defendants failed to take write -downs on th e

P-3 Orion contract during the Class Period (and, instead, actually booked profit) based on the

hoped for receipt of an additional follow-on contract from the U .S. Navy to refurbish additiona l

P-3 Orion aircraft beyond the 50 called for by the awarded contract (which follow-on work wa s

never awarded) . In internal documents created shortly after the start of the Class Period an d

updated periodically thereafter (including, for example, a February 18, 1999 "SRP Profitability

Model"), Raytheon P-3 Orion management noted that if they combined the expected losses from

the existing P-3 Orion contract with the profits they could potentially earn from a potential (but

not awarded) follow-on work, they could reach a 4 .5-6% profit rate on both contracts combined .

Such accounting treatment is specifically prohibited by GAAP .

119. A prerequisite to combining contracts for purposes of accounting is that there b e

two or more actual contracts as defined by SOP 81-1 . As noted above, SOP 81-1, ¶ 12 define s

contracts as "binding agreements between buyers and sellers in which the seller agrees, fo r

compensation, to perform a service to the buyer's specifications . Contracts consist of legally

enforceable agreements . . . ." No follow-on contract existed at the time that the Raytheo n

Defendants decided to avoid recognizing losses on the P-3 Orion contract by combining its

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results with anticipated profits from future follow-on work and no such contract eve r

materialized . Therefore, the Raytheon Defendants' decision to account for the P-3 Orion contrac t

by combining losses expected under the contract with anticipated profits from future unawarde d

follow-on work constituted a clear violation of GAAP .

120 . Indeed, paragraph 3 .35 of the AICPA's Audit and Accounting Guide for Audits o f

Federal Government Contractors explicitly states : "[L]osses should not be deferred in

expectation of future or follow-on contracts or in anticipation that the customer will exercis e

options for the delivery of additional units, components, or spare parts ." (Emphasis added.) The

Raytheon Defendants' actions constituted a blatant violation on this unambiguous prohibition .

121 . Paragraph 37 of SOP 81-1 further states that contracts may not be combined fo r

accounting purposes unless they are, inter alia, "negotiated as a package in the same economic

environment with an overall profit margin objective ." Paragraph 37 further states : "Contracts no t

executed at the same time may be considered to have been negotiated as a package in the sam e

economic environment only if the time period between the commitments of the parties to th e

individual contracts is reasonably short . The longer the period between the commitments of th e

parties to the contracts, the more likely it is that the economic circumstances affecting th e

negotiations have changed . "

122 . With regard to the P-3 Orion contract, in addition to the fact that no follow-o n

contract had ever been awarded, Raytheon violated these clear GAAP provisions in that it wa s

combining the accounting for a contract entered into in 1994 with a potential, follow-on contrac t

the Company hoped to enter into in 1999 (five years later), which was based on completel y

different circumstances . In fact, according to RSC's Director of Navy Programs, the negotiation s

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regarding the follow-on contract, which failed to result in any agreement, were severely impacte d

by RSC's intent to restructure the work to be performed in refurbishing the aircraft an d

Raytheon's desire to bring about "a change in the total scope of the program .""'

123 . The Raytheon Defendants' GAAP violations were pa rticularly egregious give n

that at the time the 4 .5-6% profits were being booked on the P-3 Orion contract during the Clas s

Period, the follow-on contract had not been awarded and, in fact, never was awarded .

Moreover, at all times , receipt of the follow- on contract (which never materialized) was in

serious doubt, given that the Navy did not have sufficient funds available and Raytheon and the

Navy were "far apart" in their negotiations (which were suspended by the Navy in July 1999) .

Indeed, by March 1999, negotiations in connection with possible follow-on work confirmed tha t

the Navy did not have the budget for the actual amount of work anticipated . The Navy also

specifically opposed any allocation of costs between the existing contract and any follow-on

award .' 4

"Not only did Raytheon's accounting violate GAAP, but it also contradicted Raytheon'sown publicly stated policy of excluding future contract awards in its repo rted backlog . In theCompany's 1998 10 -K, the Raytheon Defendants repo rted: "During the third quarter of 1998, theCompany changed its method of recording backlog . . . in order to provide a consistent method ofreporting across and within the Company's businesses . Backlog now includes the full value ofthe contract awards when received, excluding awards and options expected in future periods . "(Emphasis added . )

14 In fact, there is a federal prohibition against "buying-in," whereby a government

contractor buys into a losing contract with the intent of recovering costs and profits in a follow-

on contract . The rule requires government contracting officers to take appropriate action to

ensure against recovery of "buying-in" losses through the pricing of follow-on contracts . After

the end of the Class Period, the Navy specifically accused Raytheon of "buying-in" to the P-3

Orion contract when it expressed its opinion that Raytheon's losses on the first 13 aircraft werewaived .

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124. As a result of an independent U .S . Navy review , on January 21, 2000, the P-3

Orion contract was canceled by the U .S . Navy pursuant to a stop work order issued by Dian e

Balderson, a contracting official in the Naval Air Systems Command headquarters in Patuxent

River, Maryland. The stop work order required Raytheon to complete work on just seven

additional P-3 Orion aircraft, resulting in a total of just 13 aircraft .

125 . Raytheon suffered $70-75 million of losses in connection with the P-3 Orion

contract before it was canceled by the U.S. Navy. Had the Navy required Raytheon to complete

the contract as to all exercised options, Raytheon's losses would have been in excess of $22 0

million . The historic and projected P-3 Orion losses were presented to defendant Swanson ,

Chairman and CEO of RSC, Kenneth C . Dahlberg, the President and COO of RSC and AI S

executives, on a monthly basis throughout the pendency of the contract and during the Clas s

Period. Defendant Burnham also reviewed the monthly reports with defendant Swanson at majo r

project meetings, which occurred at least once every financial quarter . It was only at the end of

the Class Period, however, that Raytheon revealed its material problems in the P-3 Orion

program, including their material adverse impact on the Company's financial results .

126. The Raytheon Defendants ' knowledge of their violations of GAAP and the false

and misleading nature of their statements regarding the P-3 Orion contract is furthe r

demonstrated by a letter that Raytheon sent to the SEC on November 24, 1999 . In that letter, th e

Raytheon Defendants falsely described their decision to take a $70 million charge on the P- 3

Orion contract during the third quarter of 1999 in the following manner :

The largest of the problem contracts is a fixed price contract to the U .S. government that

required us to modify thirty-two aircraft . At the beginning of 1999, only one aircraft was

completed. While the modification costs for the first aircraft were high, significan t

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learning curve improvements and cost reductions were expected throughout the year . As

of the third quarter, thirteen aircraft were in progress . It became apparent at this time that

a loss provision was appropriate because the modifications [to the aircraft] required were

more expensive than planned due to the condition of the aircraft, and that anticipated cost

efficiencies were not being realized .

Contrary to the foregoing, since well before the beginning of the Class Period, the Raytheo n

Defendants knew that the P-3 Orion contract would not be profitable due to the substantiall y

deteriorated condition of the aircraft . Moreover, although Raytheon had attempted throughout

1998 and 1999 to achieve incremental cost reductions, with little success, the Raytheo n

Defendants knew that such reductions, even if realized, would not be sufficient to prevent the P- 3

Orion contract from incurring substantial losses. The Raytheon Defendants had delayed taking a

charge only by combining their expected losses on the P-3 Orion contract with anticipated profit s

on an unawarded follow -on contract that never materialized in violation of GAAP . Rather than

revealing any of this to the SEC, the Raytheon Defendants created the false impression that the

need for the charge was based on recently discovered information regarding the increased cost o f

modifications due to the condition of the aircraft and Raytheon's failure to realize "cos t

efficiencies ." The Raytheon Defendants did not reveal to the SEC their reliance on a hoped fo r

follow-on contract which never materialized because they knew that such reliance was imprope r

and a violation of GAAP (as discussed above) .

127. At all relevant times, the Raytheon Defendants considered the SRP program to b e

material to Raytheon's operations and integral to its plans to compete for billions of dollars in

future work refurbishing maritime patrol and reconnaissance aircraft . According to an internal

Raytheon document, Raytheon considered the loss of the P-3 Orion contract to be "devastating t o

[its] Future Business Strategy ." This same document stated that termination of the contrac t

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negatively impacted Raytheon 's ability to compete for $3 billion in work in the German/Italia n

market and $8 billion in work from the U .S . Navy. Another internal Raytheon document forecas t

that the Navy's decision to issue a "stop work" order on the P-3 Orion contract would contribut e

to a loss of $30 billion of potential future work over the next 15 to 20 years .

128 . As a result of defendants' above-described violations of GAAP, each and every

balance sheet and income statement issued by the Company during the Class Period was

materially false and misleading when issued based on the failure to take the required write-

downs, which would have caused a material reduction in the Company's reported assets and

earnings . Accordingly, as set forth below, each of the Company' s qua rterly and year-en d

earnings announcements, conference calls and financial statements was materially false an d

misleading at all relevant times .

False and MisleadingStatements During the Class Period

Raytheon's October 7, 1998 Announcemen t

129. On October 7, 1998, the first day of the Class Period, the Raytheon Defendants, a s

a group , issued a press release announcing that the Company would take non-recurring charges ,

totaling $284 million after-tax, or $0 .83 per share, during the third quarter of 1998, related t o

RE&C and Raytheon's Commercial Electronics operations , as follows :

(1) "A restructuring charge of $50 million after-tax, or $0 .15 per share ,

related to downsizing of facilities at RE&C;"

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(2) "A change in the estimate of the financial impact attributable to th e

downturn in the engineering and construction business environment and unfavorabl e

developments in certain contracts and contract claims at RE&C of ($310 million before tax or )

$180 million after-tax, or $0.52 per share;" and

(3) "A special charge of $54 million after-tax, or $0 .16 per share, to

exit a business at Raytheon Commercial Electronics, which includes a Korean joint venture . "

130. On October 7, 1998, the Raytheon Defendants also held a conference call wit h

securities analysts to review the Company's announcement . During the call, defendant Burnham

and other senior executive officers of the Company made presentations and answered specifi c

questions concerning the Company's announcement and financial performance . During the call ,

defendant Burnham stated :

[T]hese charges are tough medicine and nobody likes them . But they put us on a

very strong footing for the future .

Over the past several months, we've taken a hard look at our RE&C operation andhave identified solutions such as lowering its overhead structure, strengthening itsmanagement team in order to improve project execution and sharing more risk topartnership These actions will put engineers and constructors well on its way tocorrecting its problem . [Emphasis added . ]

During the call, defendant Burnham was specifically asked by a reporter if "there [would] b e

another shoe to drop at some point down the line ." Defendant Burnham's response was :

Well if we thought there would be any more shoes to drop, we'd drop them now .We've just taken an aggressive action, a bold action . . . We do not have anyfurther expectations . Indeed, I think if we're going to be surprised in any regard,we're going to be surprised on the upside . [Emphasis added . ]

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Similarly, defendant Assad told analysts :

I've done a complete and thorough assessment of our programs and found that weneeded to reassess our costs to complete . We've done that . This is toughmedicine, but we have faced up to reality [Emphasis added .]

131 . The Raytheon Defendants ' October 7, 1998, statements regarding

RE&C were materially false and misleading when made as these defendants knew but failed t o

disclose that the charges announced for RE&C on October 7, 1998, failed to include more tha n

half of the losses and required write-downs already quantified by RE&C management as of that

time, as reflected in the internal ESRs and the August 1998 Actionable Assets Memo a s

discussed in detail in paragraphs 31-91 above . Rather than disclosing the full extent of RE&C's

material problems and taking the required write-downs and/or reserves, at the start of the Clas s

Period, the Raytheon Defendants determined to take less than half of the required write-down s

and deceive the investing public as to RE&C's and the Company's true performance . Given these

facts, defendant Burnham's above-quoted statements that RE&C was "well on its way" to

correcting its problems and that he did not expect any other "shoes to drop" and Assad's above-

quoted statement that RE&C had "faced up to reality" were materially false and misleading whe n

made .

Raytheon's 1998 Third Quarter Result s

132. On October 20, 1998, the Raytheon Defendants, as a group, issued a press releas e

reporting the Company's consolidated 1998 third quarter financial results . The Compan y

reported third quarter earnings of $295 million excluding non-recurring charges, or $0.86 per

share, on sales of $4 .7 billion. The third quarter charges of $284 million on an after-tax basi s

were consistent with the Company's October 7, 1998 announcement . The Raytheon Defendant s

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also reported that RE&C's third quarter sales were $556 million and RE&C's operating income

for the quarter was $16 million, excluding the non-recurring charges. In connection with these

reported results, the Company's press release contained a quoted statement from defendant Picar d

which stated : "At Raytheon Engineers & Constructors, we have identified certain problems an d

are well on our way to correcting them . "

133 . On October 28, 1998, the Raytheon Defendants also held a conference call wit h

securities analysts to review Raytheon's reported third quarter 1998 results .

134 . On or about November 2, 1998, the Raytheon Defendants filed with the SEC the

Company's Form I 0-Q for the 1998 third quarter . The Company's Form 10-Q containe d

financial statements repeating the Company's 1998 third quarter reported financial results

described above, including RE&C's reported results . The Form 10-Q was signed by defendan t

D'Angelo .

135 . The Raytheon Defendants ' October 20, 1998, statements regarding the Company' s

and RE&C's 1998 third quarter results and Form 10-Q (including the financial statement s

contained therein) were materially false and misleading in that the Company, RE&C and RS C

failed to disclose hundreds of millions of dollars of losses and write-downs required under

GAAP ( including for the P-3 Orion contract ) and prematurely recognized tens of millions o f

dollars of profits on accelerated costs and revenues as set forth in paragraphs 31-128 above . The

Raytheon Defendants knew but failed to disclose that the charges announced for RE&C o n

October 7, 1998, failed to include more than half of the losses and required write-downs already

quantified by RE&C management as of that time, as reflected in the internal ESRs and the

August 1998 Actionable Assets Memo and discussed in detail above . Rather than disclosing the

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full extent of the Company's and RE&C's material problems and taking the required write-downs ,

at the start of the Class Period, the Raytheon Defendants determined to take only less than half of

the required write-downs and/or reserves and deceive the investing public as to RE&C's and the

Company's true performance . Given these facts, defendant Picard's above-quoted statement tha t

RE&C was "well on its way " to correcting its problems was materially false and misleadin g

when made .

136. As the Raytheon Defendants intended and anticipated, all of the above-described

representations were picked up and relied upon by securities analysts in issuing highly favorabl e

reports and recommendations, which encouraged buying interest in Raytheon stock . For

example, on October 27, 1998 and October 29, 1998, Morgan Stanley and SG Cowen ,

respectively , issued "STRONG BUY" recommendations for Raytheon and estimated earnings of

$3 .70-$3 .75 per share for the Company in 1999 .

Raytheon's 1998 Fourth Quarter And Year-End Results

137 . On January 26, 1999, the Raytheon Defendants, as a group , issued a press release

reporting the Company's consolidated fourth quarter and year-end 1998 financial results . The

Company reported 1998 earnings of $1 .14 billion, or $3 .34 per share, excluding special items, o n

revenues of $19.8 billion. The Company reported fourth quarter net income of $369 million, o r

$1 .08 per share, on reported revenues of $5 .4 billion. The Raytheon Defendants also reporte d

that RE&C's fourth quarter sales were $657 million and RE&C's operating income for the quarte r

was $22 million .

138. On January 26, 1999, the Raytheon Defendants also held a conference call with

securities analysts to review the Company's reported fourth quarter and year-end 1998 results .

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139. The Raytheon Defendants' January 26, 1999, statements regarding the Company's

and RE&C's 1998 fourth quarter and year-end results were materially false and misleading in that

the Company, RE&C and RSC failed to disclose hundreds of millions of dollars of losses an d

write-downs as required by GAAP ( including for the P-3 Orion contract) and prematurel y

recognized tens of millions of dollars of profits on accelerated costs and revenues and the GAA P

violations continued thereafter as set forth in paragraphs 31-128 above. The Raytheon

Defendants knew but failed to disclose that the charges announced for RE&C on October 7 ,

1998, failed to include more than half of the losses and required write-downs already quantifie d

by RE&C management as of that time, as reflected in the inte rnal ESRs and the August 1998

Actionable Assets Memo and discussed in detail in above . Given these facts, RE&C's and the

Company's financial performance were materially overstated at all relevant times throughout th e

Class Period .

140 . As the Raytheon Defendants intended and anticipated, all of the above-described

representations were picked up and relied upon by securities analysts in issuing highly favorabl e

reports and recommendations, which encouraged buying interest in Raytheon stock . For

example, on January 26, 1999 and January 27, 1999, CIBC Oppenheimer and SG Cowen .,

respectively, issued "STRONG BUY" recommendations for Raytheon and estimated $3 .70

earnings per share for the Company in 1999 .

-6 5-

Raytheon's 1998 Form 10-K, Annual ReportAnd PwC's Unqualified Audit Opinion

141 . On or about March 24, 1999 , the Raytheon Defendants filed with the SEC the

Company's Form 10-K for the year-ended December 31, 1998, which was signed by defendant s

Picard, Burnham and D'Angelo .

142 . a. On or about April 1, 1999, the Raytheon Defendants also filed with th e

SEC and disseminated to shareholders the Company's 1998 Annual Report . The Company's

1998 Annual Report contained financial statements repeating the Company's and RE&C's year-

end reported financial results described above . The 1998 Annual Report also contained a letter

signed by defendants Burnham and D'Angelo which stated :

The financial statements and related information contained in this Annual Report

have been prepared by and are the responsibility of Raytheon's management . The

Company's financial statements have been prepared in conformity with generally

accepted accounting principles and reflect Judgments and estimates as to the

expected effects of transactions and events currently being reported . Raytheon's

management is responsible for the integrity and objectivity of the financial

statements and other financial information included in this report . To meet this

responsibility, the Company maintains a system of internal accounting controls to

provide reasonable assurance that assets are safeguarded and that transactions are

properly executed and recorded . The system includes policies and procedures,

internal audits, and Company officers' reviews . [Emphasis added . ]

b. The 1998 Annual Repo rt contained a Report of Independent Accountant s

signed by defendant PwC which stated :

In our opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of income, of stockholders' equity, and of cash flowspresent fairly, in all material respects, the financial position of Raytheon Compan yat December 31, 1998 and 1997, and the results of their operations and their cash

flows for each of the three years in the periods ended December 31, 1998, in

conformity with generally accepted accounting principles . These financial

statements are the responsibility of the Company's management ; our responsibility

is to express an opinion on these financial statements based on our audits . We

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have conducted our audits of these statements in accordance with generallyaccepted auditing standards which require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation . We believe that our auditsprovide a reasonable basis for the opinion expressed above . [Emphasis added .]

The 1998 Annual Report contained the following description of the P- 3

Orion program :

RSC, a world leader in aircraft integration, has two major P-3 maritime patrol

aircraft modernization assignments : the U .S. Navy's Sustained Readiness

Program, a structural refurbishment program ; and the Sea Sentinel program for

the Royal Australian Air Force, a mission system upgrade . The Navy's Sustained

Readiness Program calls for 50 aircraft to be refurbished by the end of 2002 . The

first modernized P-3 aircraft passed a rigorous flight-test and was accepted in

April . The second aircraft was delivered in early 1999 . In addition to the first 50

aircraft, negotiations are under way for a follow-on contract to refurbish 48

additional aircraft .

The foregoing description of the P-3 Orion program was drafted by AIS employees under th e

direction of AIS General Manager, Glenn Hood, who (given their day-to-day responsibilities)

were intimately familiar with the problems being experienced under the P-3 Orion contract . In

fact, these were the small group of employees corresponding with the Navy and creating th e

internal reports and correspondence described above . This description was then reviewed and

approved by defendant Swanson prior to being included in Raytheon's 1998 Annual Report . At

the time Raytheon issued its 1998 Annual Report, the Navy had suspended all progress payment s

under the P-3 contract due to Raytheon's inability to comply with contractually mandated aircraf t

delivery deadlines .

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d. The 1998 Annual Report contained the following description o f

Raytheon's Umatilla contract to construct a chemical demilitarizatio n

facility :

A world leader in building and operating chemical weapons destruction facilities,Raytheon is the contractor at three of the six U .S . Army chemical demilitarization sitesunder way , including the Umatilla Army Depot facility currently under construction.

143 . The Raytheon Defendants' statements regarding the Company's, RE&C's and

RSC's 1998 financial results in the 1998 Form 10-K and 1998 Annual Report, including th e

financial statements contained therein, were materially false and misleading in that the Company

failed to disclose hundreds of millions of dollars of estimated losses and write-downs require d

under GAAP ( including for the P-3 Orion contract ) and prematurely recognized tens millions o f

dollars of pro fits on accelerated costs and revenues and the GAAP violations continued thereafte r

as set forth in paragraphs 31-128 above . The Raytheon Defendants knew but failed to disclos e

that the charges announced for RE&C on October 7, 1998, failed to include more than half of the

losses and required write-downs already quantified by RE&C management as of that time, as

reflected in the internal ESRs and the August 1998 Actionable Assets Memo and discussed i n

detail above . Given these facts, RE&C's and the Company's financial performance wer e

materially overstated at all relevant times throughout the Class Period .

144 . The Raytheon Defendants' statements regarding the Company's P-3 Orion

program in the 1998 Annual Report were materially false and misleading when made in that the y

failed to disclose that the Company was suffering from material delays and cost overruns in

connection with the P-3 Orion contract which were masked by defendants ' GAAP violations a s

set forth in paragraphs 92-127 above . As held by the Court in its August 29, 2001 Memorandum

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and Order : "Having opened the door to discussing the schedule and progress on the contract ,

Raytheon was obligated to disclose the material information regarding delays and overruns tha t

would affect RSC's ability to complete the contract in a timely fashion ." The Raytheo n

Defendants knowingly or recklessly failed to make such disclosure .' S

145 . The Raytheon Defendants ' statements regarding the Company's Umatilla contract

in the 1998 Annual Report were materially false and misleading when made in that they failed t o

disclose, among other things, that as early as March 1998, the Company was aware that th e

project would experience severe cost overruns, that the project was over 200 days behind

schedule, that the customer had not approved over $100 million in pending and potential chang e

orders and that Raytheon had nevertheless been recording revenue based on these unapprove d

change orders in violation of GAAP and the Company's own internal policies . For example, a

PwC September 25, 1998 PwC report on Umatilla stated : "Since March 1998, when the severity

of potential overruns began to become apparent to the project management team, it has sough t

advice from several RE&C internal experts . . . . It appears that all levels of RE&C senio r

management is aware of what is going to at the project . . . "

146 . The material falsity of defendant PwC's unqualified audit opinion contained in th e

1998 Annual Report is further described in paragraphs 178-220 below .

"The Raytheon Defendants' statements regarding the P-3 Orion program were alsomaterially false and misleading when made because at the time the Annual Report was issued,the Navy had not exercised the last option on the P-3 Orion contract, which would have raisedRaytheon's commitment from 36 to 50 planes . In fact, that option was never exercised (as aresult of Raytheon's poor performance) and the contract was curtailed to 32 aircraft . Ultimately,as set forth above, the Navy terminated the P-3 Orion contract at 13 planes because of Raytheon'smaterial delays and cost overruns .

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Raytheon's 1999 First Quarter Result s

147 . On April 22, 1999, the Raytheon Defendants , as a group , issued a press releas e

reporting the Company's consolidated 1999 first quarter financial results . The Company reported

first quarter earnings of $241 million, or $0 .71 per share, before the effect of an accounting

change, on revenues of $4 .9 billion. The Raytheon Defendants also reported that RE&C's firs t

quarter sales were $544 million and RE&C's operating income for the quarter was $31 million .

148 . On April 22, 1999, the Raytheon Defendants also held a conference call wit h

securities analysts to review the Company's reported 1999 first quarter results .

149 . On or about May 19, 1999, the Raytheon Defendants filed with the SEC th e

Company's Form 10-Q for the 1999 first quarter . The Company's Form I 0-Q contained financia l

statements repeating the Company's and RE&C's 1999 first quarter reported financial result s

described above .

150. The Raytheon Defendants' April 22, 1999, statements regarding the Company's ,

RE&C's and RSC's 1999 first quarter results and Form I0-Q (including the financial statement s

contained therein) were materially false and misleading in that the Company and RE&C failed to

disclose hundreds of millions of dollars of losses and write-downs required under GAA P

(including for the P-3 Orion contract) and prematurely recognized tens of millions of dollars o f

profits on accelerated costs and revenues and the GAAP violations continued thereafter as se t

forth in paragraphs 31-128 above . The Raytheon Defendants knew but failed to disclose that th e

charges announced for RE&C on October 7, 1998, failed to include more than half of the losse s

and required write -downs already quantified by RE&C management as of that time , as reflecte d

in the internal ESRs and the August 1998 Actionable Assets Memo and discussed in detai l

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above. In addition, the Raytheon Defendants knew or recklessly disregarded that, in violation o f

Raytheon's new, "more conservative" accounting policies, tens of millions of dollars of revenue s

continued to be recognized on unapproved RE&C change orders and claims (which were not

probable to be collected nor reliably estimated), including, for example, on the Umatilla contract

on which unapproved change orders grew rapidly from $44 million at the time of the Augus t

1998 Actionable Assets Memo to $110 million by the end of the first quarter of 1999 . Given

these facts, RE&C's and the Company's financial performance were materially overstated at al l

relevant times throughout the Class Period .

151 . As the Raytheon Defendants intended and anticipated, all of the above-describe d

representations were picked up and relied upon by securities analysts in issuing highly favorabl e

reports and recommendations, which encouraged buying interest in Raytheon stock . For

example , on April 23, 1999, Morgan Stanley issued a "STRONG BUY" recommendation fo r

Raytheon which stated :

Raytheon reported 1Q99 operating EPS of $0 .71, in line with consensus andslightly better than our $0 .70 estimate .

We are keeping our $3 .70 EPS estimate for 1999 (in line with consensus) . We arealso leaving our 2000 EPS estimate unchanged at $4 .10 (consensus is $4 .14) .

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Raytheon's 1999 Second Quarter Result s

152. a. On July 22, 1999, the Raytheon Defendants, as a group , issued a press

release reporting the Company's consolidated 1999 second quarter financial results . The

Company reported second quarter earnings of $294 million, or $0 .86 per share, on reporte d

revenues of $5 .2 billion . The Raytheon Defendants also reported that RE&C's second quarte r

sales were $650 million and RE&C's operating income was $20 million .

b. On July 22, 1999, the Raytheon Defendants also held a conference cal l

with

securities analysts to review the Company's reported 1999 second quarter results .

153 . On or about August 18, 1999, the Raytheon Defendants filed with the SEC th e

Company's Form 10-Q for the 1999 second quarter . The Company's Form 10-Q contained

financial statements repeating the Company's and RE&C's 1999 second quarter reported financia l

results described above and was signed by defendant Caine .

154. The Raytheon Defendants ' July 22, 1999, statements regarding the Company's ,

RE&C's and RSC's 1999 second quarter results and Form 10-Q (including the financial

statements contained therein) were materially false and misleading in that the Company and

RE&C failed to disclose hundreds of millions of dollars of losses and write-downs require d

under GAAP ( including for the P-3 Orion contract ) and prematurely recognized tens of million s

of dollars of profits on accelerated costs and revenues and the GAAP violations continue d

thereafter as set forth in paragraphs 31-128 above . The Raytheon Defendants knew but failed t o

disclose that the charges announced for RE&C on October 7, 1998, failed to include more than

half of the losses and required write-downs already quantified by RE&C management as of tha t

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time, as reflected in the internal ESRs and the August 1998 Actionable Assets Memo a s

discussed in detail above . In addition, the Raytheon Defendants knew or recklessly disregarded

that, in violation of Raytheon's new, "more conservative" accounting policies, tens of millions o f

dollars of revenues continued to be recognized on unapproved RE&C change orders and claims

(which were not probable to be collected nor reliably estimated), including, for example, on the

Umatilla contract on which unapproved change orders grew rapidly from $44 million at the tim e

of the August 1998 Actionable Assets Memo to $118 million by the end of the second quarter of

1999. Given these facts, RE&C's and the Company's financial performance and position were

materially overstated at all relevant times throughout the Class Period .

155 . As part of its second quarter 1999 review, PwC specifically discussed the P- 3

Orion project with, among others, defendants Caine and Burnham. PwC's second quarter 199 9

discussion outline noted : "The follow-on contract is expected to drive the profit rate of the tota l

effort . As successful negotiation of the follow-on work is necessary to meet the total effort profi t

rate of 4 .5%, the booking rate will be re-evaluated once a firm contract value is known for th e

follow-on contract ." Accordingly, defendants Caine and Burnham, among others, were aware o f

Raytheon's improper reliance on the unawarded follow-on contract to avoid required write-down s

in connection with the P-3 Orion contract . Nonetheless, Caine signed the Form 10-Q issued b y

the Company for the Second Quarter of 1999.

156. As the Raytheon Defendants intended and anticipated, all of the above -described

representations were picked up and relied upon by securities analysts in issuing highly favorabl e

reports and recommendations, which encouraged buying interest in Raytheon stock . For

example, on July 22, 1999 and July 23, 1999, CIBC Oppenheimer and ING Barings, respectively ,

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issued "STRONG BUY " recommendations for Raytheon and estimated $3 .70-$3 .75 earnings per

share for the Company in 1999 and $4.10-$4.15 earnings per share for the Company in 2000 .

The Truth Begins To Emerge

157. On September 16, 1999, the Raytheon Defendants issued a press release which

stated that the Company expected to take a charge to earnings in the 1999 third quarter related t o

"further cost reduction opportunities" at RE&C and RSC . According to the press release ,

however, the charge was limited to "additional facility closures, certain asset disposals an d

opportunities to reduce indirect costs and overhead" (rather than contract write-downs) . The

press release stated that the total amount of any charge to earnings was "likely to be in the rang e

of $350-450 million , pre-tax ." In response to this announcement, on September 16, 1999, the

price of Raytheon Class B common stock declined by $7 5/16 per share, or 12%, to close at $5 3

5/8 per share, on extraordinary trading volume of 4,572,900 shares and the price of Raytheo n

Class A common stock declined by $7 1/4 per share, or 12%, to close at $50 3/4 per share, o n

extraordinary trading volume of 1,818,300 shares . According to Bloomberg News , this decline

in Raytheon's stock price reportedly represented the largest one-day decline in the Company' s

stock price in at least two decades . Bloomberg News further reported that, during a September

16, 1999, conference call which followed the Company' s press release , defendants Burnham and

Caine stated that they were "forced" to issue the Company's September 16, 1999, press releas e

because of a drop in the Company's stock price during the prior week .

158 . On October 12, 1999, the last day of the Class Period, The Wall Street Journa l

published an investigative article on Raytheon which reported that, undisclosed to investors, th e

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Company was over cost or behind schedule on more than a dozen of its Pentagon fixed-price

contracts . The Wall Street Jou rnal repo rt stated :

Raytheon Co ., long viewed as a successful example of defense-industryconsolidation, is over cost or behind schedule on more than a dozen of itsPentagon fixed-price contracts , according to people familiar with the programs .

Raytheon already disclosed in September that it was having some problems in itsdefense-electronics and construction units that will result in reporting a pretaxcharge of $350 million to $450 million . The Company is expected to give detailsof the charge to financial analysts tomorrow at meetings in New York and Boston .

Some of those Pentagon contracts are included in the charge, which will be postedfor the third quarter, but others aren't .

Among the fixed price contracts that are running over cost are Raytheon's

lucrative Tomahawk cruise missiles, P-3 Orion patrol aircraft and RC-135

reconnaissance aircraft programs, said those familiar with the matter . Also having

trouble are the shoulder-held Javelin missile, the Navy Extremely High FrequencySatellite Communications program, and the conversion of a military plant inUmatilla in northern Oregon for commercial use, they said . [Emphasis added.]

159. Immediately following the issuance of The Wall Street Journal article, the

Company contacted the New York Stock Exchange to inform it that the Company would b e

issuing a press release and holding a conference call with securities analysts later that day . As a

result, trading in Raytheon common stock on October 12, 1999, was halted by the New Yor k

Stock Exchange pending release of additional Company information.

160. a. Thereafter, at approximately 11 :31 a .m ., on October 12, 1999, th e

Raytheon Defendants issued a press release which stated that the Company would be taking tota l

charges of $638 million pre-tax to be recorded in 1999, or $1 .15 per share, plus an additional $3 0

million pre-tax to be recorded in 2000 as follows :

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(1) "$320 million in operating charges related primarily to contrac t

performance issues on four contracts at each RSC ($195 million) and RE&C ($125 million) ; "

(2) "$274 million in new restructuring charges for additiona l

employment and facility space reductions and related period expenses ;" and

(3) "$74 million in special charges, primarily to write down to fai r

market value certain assets such as the Company's investment in Iridium ($35 million), wireless

networking inventory ($33 million), and the exit from the personal rapid transit business . "

b. The Company also announced in the press release that it had reduced it s

earnings expectations for 1999 and 2000 as a result of revenue shortfalls and lower-than-

expected margins. The Company stated that it reduced its estimate for 1999 earnings to $1 .40-

$1 .50 per share (including the effect of all charges), or $2 .70-$2 .80 per share excluding charges,

compared to the most recent consensus estimate of $3 .56 per share . For the year 2000, the

Company announced estimated earnings per share in the range of $2 .10-$2 .25, compared to th e

most recent consensus estimate of $3 .91 per share .

161 . At approximately 1 :00 p.m ., on October 12, 1999, the Raytheon Defendants held a

conference call with securities analysts to review the Company's announcement . During the call ,

defendant Burnham and other senior executive officers of the Company made presentations an d

answered specific questions concerning the Company's announcement and financial performance .

Among other things, during the call defendant Burnham stated that "execution issues" ha d

adversely affected Raytheon's performance, including "a number of program performance issues "

in Aircraft Integration Systems (which referred to the above-described problems and delays in th e

Company's P-3 Orion program) . The Raytheon Defendants did not identify the four RSC and th e

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four RE&C contracts mentioned in the October 12, 1999 press release. Discovery demonstrates ,

however, that at RSC, the $70 million write down associated with the P-3 Orion contract wa s

twice as large as any of the other RSC contracts written down .

162 . In response to The Wall Street Journal report and the Company's October 12 ,

1999, announcement and conference call, when trading was resumed in Raytheon common stock ,

at approximately 3 :34 p.m . on October 12, 1999, the price of Raytheon Class B common stoc k

declined by $19 .50 per share, or nearly 50% , to close at $22 '/2 per share, which represented a

70% decline from the Class Period high closing price of the stock of $73 '/2 per share on July 8 ,

1999 . Similarly, when trading resumed, the price of Raytheon Class A common stock decline d

by $18 .75 per share , or 44%, to close at $24 1/4 per share , which represented a 70% decline fro m

the Class Period high closing price of $74 15/16 per share on July 7, 1999 .

163 . In response to the Company's October 12, 1999, disclosures, analyst Paul Nisbe t

of JSA Research stated : "The credibility has gone to near -zero, and it's going to be a long time

before it is back." Similarly, analyst William Fiala of Edward Jones stated: "It doesn't get much

uglier. What makes this so serious is that the problems that were disclosed today were in area s

that are the bread and butter of Raytheon ." Analyst Cal von Rumohr of S .G. Cowen & Compan y

stated: "People are shocked . The estimate has come down a huge amount, and it's very har d

sitting on the outside to sort out how much of this is lack of control . "

164. As set forth above, throughout the Class Period, the Raytheon Defendants an d

PwC issued materially false and misleading statements regarding the Company which misled th e

investing public . Among other things, as set forth in detail above, the Raytheon Defendant s

failed to take required , material charges for RE&C and the P-3 Orion contract which wer e

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required by GAAP, as demonstrated by the ESR reports, the August 1998 Actionable Assets

Memo and other documents described above, and either intentionally or recklessly not recorde d

by defendants at that time .

165 . The market price for Raytheon common stock was open, well-developed an d

efficient at all relevant times . As a result of the materially false and misleading statements an d

omissions set forth herein, Raytheon common stock traded at artificially inflated prices

throughout the Class Period . Lead Plaintiff and other members of the Class purchased Raytheo n

common stock relying upon the integrity of the market price of Raytheon common stock and

have been damaged thereby. The material misrepresentations and omissions particularized i n

this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by Lead Plaintiff and other members of the Class at all relevant times .

166 . On October 21, 1999, the SEC sent Raytheon an inquiry which stated :

[W]e are puzzled by the magnitude of the adjustments proposed for the thirdquarter of 1999 . We note that your June 30, 1999 10-Q refers to project delays,

cancellations, and cost growth contributing to an erosion in profit margins at

RE&C, but does not state that additional charges have been taken and/or will be

needed . Yet within two months of that date of that filing, Raytheon announced

additional contract charges of $125 million at RE&C . The proposed $195 million

charge relating to contracts at Raytheon Systems Corporations (RSC), announced

concurrently, is particularly problematic . Raytheon actually reported higher

operating margins (14 .5%) in the Electronics business in the second quarter of

1999 compared to the second quarter of 1998 (13.3%). We find it difficult to

envision the scenario under which your monthly status reports would provide no

indication of performance problems for three consecutive quarters, and then,

coincidentally with a new restructuring initiative and additional contract charges

at RE&C, alert you to $195 million dollars of problems on four separate RSC

contracts . We remind you that it is the responsibility of management to maintain

adequate books and records, along with a reliable system of internal controls, as

the foundation for reliable reporting . We also remind you of your responsibility to

communicate information to investors in a timely manner .

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167. As set forth above, PwC, itself, had noted an "SEC risk" at the time of its pre-

Class Period meeting with defendant Burnham . After the SEC inquiry was commenced, an

internal PwC memorandum stated :

The Raytheon CFO, Frank Caine , has requested that PwC perform a DETAILEDreview of Raytheon 's responses to the SEC comment letter as compared to bothPwC workpapers (external and in Team Asset ) as well as every quarter DO[Discussion Outline] .

We realized this is an enormous effort, but an effort we must make to ensure thatPwC workpapers and DOs support Raytheon's response in case our workpapersare reviewed by the SEC . Knowing this, perform the detailed review of anyworkpapers and DOs from any year you think is necessary, but concentrating onaudit years 1998, 1997 and 1996. [Emphasis in original . ]

Post-Class Period Revelation s

168 . On February 16, 2000, The Boston Globe reported that Raytheon's P-3 Orion

contract was canceled by the U.S. Navy pursuant to a stop work order issued by Diane Balderson ,

a contracting official in the Naval Air Systems Command headquarters in Patuxent River ,

Maryland. The stop work order required Raytheon to complete work on just seven additional P- 3

Orion aircraft, or a total of only 13 planes .

169. On January 18, 2000, the Raytheon Defendants issued a press release which stated

that the Company expected earnings for the fourth quarter of 1999 to be lower than consensu s

estimates . The press release stated that the Company expected fourth quarter earnings per share

to be between $0 .20 -$0 . 25 and full year 1999 earnings per share to be in the range of $1 .15-

$1 .20, versus the $1 .40-$1 .50 range projected by the Company on October 12, 1999 . The

Company also revised its outlook for full year 2000 earnings per share from the $2 .10-$2 .2 5

range projected on October 12, 1999, to $1 .60 -$1 .75 .

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170, On January 19, 2000, The New York Times reported that Raytheon had "shocked "

Wall Street "again" by lowering its profit forecast for the third time since September 1999 .

171 . On April 11, 2000, the Raytheon Defendants issued a press release which state d

that the Company expected earnings for the first quarter of 2000 to be negatively affected b y

"contract problems" at RE&C and that it was in discussions regarding a potential sale of the unit .

The Company further announced that as a result of RE&C's anticipated disposal, as of the firs t

quarter of 2000, RE&C's results would not be reported in the Company's continuing operations .

The press release stated that the losses attributable to RE&C's operations in the first quarter o f

2000 would be in the range of $0 .15-$0 .20 per share .

172 . On April 11, 2000, Bloomberg News reported that the Company's April 11, 2000 ,

announcement was its fourth earnings warning since September 23, 1999 . Bloomberg New s

quoted analyst Paul Nisbet, of JSA Research, as describing the Company's decision t o

discontinue reporting RE&C's results as part of its continuing operations as a "way of escaping a

profit warning ." Bloomberg News also reported that analyst William Fiala stated the followin g

regarding Raytheon's April 11, 2000, announcement : "I think the problems go back even furthe r

than October . I think that Wall Street is still very concerned that there's not more skeletons in th e

closet. You know, they have yet to have any confidence themselves that they can't assure no

more bad news and this is just one more in a whole streak of bad news . So the bottom line is, I

think that there are still more problems within Raytheon ."

173. On April 17, 2000, the Raytheon Defendants announced that the Company ha d

sold RE&C to WGI . As a result of the transaction, the Company recorded an estimated "loss o n

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disposal" of $270 million pre-tax, or $191 million after-tax, a significant portion of which wa s

attributable to earlier concealed losses .

174 . On October 23, 2000, WGI announced that it had commenced a "rigorous review "

of all major projects that it acquired from RE&C and that as a result of the review, which wa s

still ongoing, WGI determined take a $700 million reduction in the carrying value of the

contracts it had acquired from RE&C . Shortly thereafter, WGI initiated litigation against th e

Raytheon Defendants and filed for bankruptcy .

175 . On March 8, 2001, WGI filed an amended complaint against the Raytheon

Defendants in Idaho state court making accounting fraud allegations strikingly similar to thos e

set forth herein . Among other things, WGI alleged, based on information obtained from "key"

former RE&C employees who subsequently became WGI employees, that :

~j 19 After . . . having access to the complete books and records of the[RE&C] business acquired from Raytheon and to key projectmanagement, [WGI] . . . began to uncover the true state of [RE&C]business .

¶ 26 As a result of its continuing post-acquisition in-depth review of the[RE&C] assets acquired, it has become clear to [WGI] that Raytheonmanagement consistently engaged in inappropriate accounting practicesand intentional earnings manipulation by overstating revenue, understatingcosts, avoiding recognition of losses and thereby severely overstating fee(profit) and understating losses on numerous projects . Moreover, it isclear that this earnings manipulation continued in late 1999 and the firstquarter of 2000 -- at the time Raytheon was marketing the [RE&C]business to [WGI] . . . .

¶ 29 In light of Raytheon's poor financial performance, and the increasing

pressure to avoid further negative impacts to earnings, Raytheon

management discouraged [RE&C] project teams, systematically and

overtly, from reporting adverse financial information about the various

[RE&C] projects . On a continuing basis, as a result of monitoring and

analyzing the status of the projects, including actual expenditures ,

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commitments, forecasts and trends, the project teams (i) detected

substantial negative variances from the project budgets in the costs being

experienced at the projects, (ii) brought such negative trends in

expenditures, commitments, and forecasts to the attention of Raytheon

management, (iii) requested that the ESRs and project budgets be adjusted

to reflect increased costs and/or reduced profit or expected losses ; and (iv)

were told by Raytheon management not to adjust the ESRs or, if

adjustments were permitted, to reduce or defer such adjustments, or to

offset an adjustment in one category with a corresponding decrease in cost

in another category so as to hide the negative impact to the project .

30 . . . One of the primary methods by which Raytheon discouraged anddelayed accurate reporting of adverse financial information was by placinga project ESR "under review ." When a project team reported adverseinformation, the project ESR was put "under review" and the adverseinformation was "suspended" for a period up to 60 days .

176. With regard to the Umatilla contract, WGI specifically alleged that Raytheo n

knew that potential claims with an aggregate value of $58.8 million actually had a value of onl y

$2 .6 million and that "the $58 .8 million figure was a 'plugged' figure arrived at to cause the ES R

to project a profit of 4 .9%, which was Raytheon's corporate goal for the Umatilla project ." In

total, after its review, WGI alleged that it projected a loss in excess of $100 million on th e

Umatilla contract .

177. Similar to WGI, L-3 Communications, the purchaser of Raytheon's former AI S

division, disclosed on March 11, 2003, that it would be seeking an $86 . 1 million reduction in th e

purchase price paid for AIS to reflect estimated costs to complete ce rtain AIS contracts based o n

conditions that existed prior to the acquisition. According to L-3, the majority of the revised

costs pertained to a 1994 AIS contract to refurbish P-3 Orion aircraft for the Australian Airforce ,

but also included costs related to the SRP program for the U.S. Navy . Paralleling the undisclose d

problems that Raytheon experienced on the P-3 Orion contract, L-3 stated that AIS ha d

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experienced design, schedule and cost growth problems on the Australian P-3 Orion contract fo r

several years . Although the contract had been entered into in 1994 and was discussed during th e

Class Period as quoted in paragraph 142c above, as of March 1, 2002, AIS had delivered onl y

three out of 18 aircraft to be refurbished under the Australian contract, none of which had bee n

accepted by the customer . Nevertheless, AIS had recognized $435 million in revenue out of the

total contract value of $450 million prior to L-3's acquisition of A1S .

PwC's Knowing Or Reckless Participation In The Frau d

178. Lead Plaintiff incorporates by reference all of the allegations above insofar as the y

relate to PwC and Raytheon's financial results as if fully set forth herein .

179. PwC, including its predecessors, has served as Raytheon 's purportedly

independent outside auditor at all relevant times . Throughout this period, as set forth below ,

Raytheon was a major client of PwC, both for audit and non -audit consulting services .

180. As a result of its longstanding relationship with Raytheon and the nature of th e

accounting and non-auditing services rendered to the Company, PwC personnel were regularl y

present at Raytheon's corporate facilities prior to and throughout the Class Period and ha d

continual access to, and knowledge of, Raytheon's confidential corporate financial and busines s

information through conversations with employees of Raytheon and through quarterly reviews o f

Raytheon' s non-public documents , including , inter alia, the RE&C Actionable Asset Memos and

ESR reports discussed in detail in paragraphs 32-128 above . As set forth herein in detail, PwC

knew or recklessly disregarded the Raytheon Defend ants ' GAAP violations regarding both

RE&C and Raytheon's RSC division (including the P-3 Orion contract) .

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181 . Nonetheless , PwC issued an unqualified audit opinion, dated January 26, 1999, on

Raytheon's 1998 financial statements in which it stated that Raytheon's 1998 financial statement s

were presented in conformity with GAAP and that PwC's audit was performed in accordance

with GAAS :

In our opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of income, of stockholders' equity, and of cash flowspresent fairly, in all material respects, the financial position of Raytheon Compan yat December 31, 1998 and 1997, and the results of their operations and their cashflows for each of the three years in the periods ended December 31, 1998, inconformity with generally accepted accounting principles . These financialstatements are the responsibility of the Company's management ; our responsibilityis to express an opinion on these financial statements based on our audits . Wehave conducted our audits of these statements in accordance with grenerallyaccepted auditing standards which require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement . An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation . We believe that our auditsprovide a reasonable basis for the opinion expressed above . [Emphasis added . ]

182. As set forth below, PwC turned a blind eye to Raytheon's systemic and pervasiv e

GAAP violations and issued an unquali fied audit opinion on Raytheon 's 1998 financial

statements, even though PwC knew or recklessly disregarded that : (a) the financial statement s

had not been prepared in conformity with GAAP and did not present fairly, in all materia l

respects, the financial position of Raytheon and its subsidiaries as of December 31, 1998, and th e

results of Raytheon's operations and cash flow for the period ended December 31, 1998; and (b)

PwC had not audited Raytheon 's 1998 financial statements in accordance with GAAS .

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183 . Among other things, as set forth herein, PwC knew or recklessly disregarded that

Raytheon 's 1998 financial statements violated GAAP and were materially false and misleading

and inherently unreliable because :

a. The Raytheon Defendants had caused RE&C to fail to write-dow n

hundreds of millions of dollars of losses on its major contracts in proces s

and certain completed contracts, including unapproved chang e

orders and claims, which RE&C already had quantified in internal ESR

reports and Actionable Asset Memos and which losses were both probable

and reasonably estimable ;

b. The Raytheon Defendants had caused RE&C to book tens of millions o f

dollars of "revenues" on approximately a dozen anticipated contracts ,

even though: (i) the contracts had not been signed ; (ii) no legally binding

commitments had been made to RE&C ; (iii) and the contracts neve r

financially closed . Nonetheless, millions of dollars of unreimbursed out-

of-pocket costs and non-existent "profits" recognized prior to th e

anticipated fin ancial closing of the contracts were not written -off when

RE&C ultimately failed to obtain the contracts ;

The Raytheon Defendants had caused RE&C to prematurely boo k

revenues and profits on a number of contracts in process by prematurel y

booking hundreds of millions of dollars of costs not actually incurred and

recognizing revenues and profits on such prematurely booked costs ;

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d. The Raytheon Defendants had caused RE&C project managers to assume

unrealistic and unachievable recovery plans on contracts experiencin g

problems, delays and cost overruns in order to understate expected losses

and/or liquidated damages resulting from schedule delays and performanc e

problems despite substantial evidence to the contrary; and

The Raytheon Defendants had failed to take material write-downs on the

P-3 Orion contract which were required by no later than the start of th e

Class Period and violated specific GAAP prohibiting the combining o f

follow-on contracts in order to avoid recognizing the losses on th e

contract .

184. In certifying Raytheon's 1998 financial statements, PwC also falsely represente d

that its examination was made in accordance with GAAS . The audit conducted by PwC was

knowingly or recklessly not performed in accordance with GAAS in the following respects :

a. PwC violated GAAS Standard of Reporting No . 1 that requires the audit

report to state whether the financial statements are presented in accordance with GAAP. PwC's

opinion falsely represented that Raytheon's 1998 financial statements were presented i n

conformity with GAAP when they were not for the reasons alleged herein ;

b. PwC violated GAAS Standard of Reporting No. 4 which requires that,

when an opinion on the financial statements as a whole cannot be expressed, the reasons therefo r

must be stated . PwC should have stated that no opinion could be issued by it on Raytheon's 199 8

financial statements or issued an adverse opinion stating that the 1998 financial statements were

not fairly presented. PwC also failed to require Raytheon to restate its previously issue d

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materially false and misleading financial statements and allowed Raytheon to make material

misrepresentations regarding the Company to its shareholders and to the investing public during

the Class Period . The failure to make such a qualification, correction, modification and/o r

withdrawal was a violation of GAAS, including the Fourth Standard of Repo rting;

PwC violated Standard of Field Work No . 3, which requires sufficient

competent evidential matter to be obtained through inspection, observation, inquiries and

confirmations to afford a reasonable basis for an opinion regarding the financial statements unde r

audit . There is nothing in PwC's workpapers produced in this litigation to indicate that i t

reviewed sufficient competent evidential matter that the hundreds of millions of dollars of cost

overruns and unapproved change orders and claims were probable of collection and that the

amount of collection was reliably estimated , as required by GAAP. As set forth below, th e

evidence summarized in PwC's own reports (produced in this litigation by both the Raytheon

Defendants and PwC) actually demonstrates that recovery of the cost overruns, change orders an d

claims were not probable in material amounts or reliably estimated . For example, with regard t o

the PP9 contract, as discussed below, there was significant evidence gathered by PwC that the

customer, GE, was refusing to pay over $100 million of change orders and claims, that

negotiations had broken down and that GE intended to pursue an even larger counter claim

against RE&C . There simply was no competent evidential matter to afford a reasonable basi s

that the PP9 change orders and claims would be recovered in the amounts reflected in RE&C's

books. In fact, all of the evidence gathered by PwC was to the contrary . See also , ,

discussion of other RE&C and P-3 Orion contracts below ;

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d. PwC violated GAAS General Standard No.2 that requires that an

independence in mental attitude is to be maintained by the auditor in all matters related to th e

assignment because it stood to gain massive non-audit fees as set forth below;

e. PwC violated GAAS Standard of Field Work No . 2 which requires the

auditor to make a proper study of existing internal controls, including accounting, financial an d

managerial controls, to determine whether reliance thereon was justified, and if such controls ar e

not reliable, to expand the nature and scope of the auditing procedures to be applied . As set forth

herein, PwC knew or recklessly disregarded, inter alia, that RE&C management applied it s

"earned value" methodology inconsistently in improperly accelerating its recognition of revenue s

and profits and that RE&C failed to follow consistently its CFR and other accounting and

controls policies, all demonstrating poor or non-existing internal controls ;

f. PwC violated GAAS Standards of Reporting No .3 which requires tha t

disclosures in the financial statements are to be regarded as reasonably adequate unless otherwis e

stated in the report . Financial statements that are presented in accordance with GAAP are t o

include adequate disclosures of material matters . These matters relate to the form and content o f

the financial statements and their accompanying notes . In this case, as set forth herein, ther e

were material losses that should have been disclosed and recognized pursuant to GAAP in the

financial statements for the calendar year ended December 31, 1998, but were not . If

management omits from the financial statements, including the accompanying notes, informatio n

that is required by GAAP, the auditor should express a qualified or an adverse opinion and

should provide the information in his report . Notwithstanding this requirement, PwC knowingly

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or recklessly issued an unqualified opinion on Raytheon's consolidated financial statements fo r

the year ending December 31, 1998 ; and

g. PwC violated GAAS General Standard No . 3 that requires that due

professional care must be exercised by the auditor in the performance of the audit and th e

preparation of the report .

185 . PwC's unqualified audit opinion, which represented that Raytheon's 1998 financia l

statements were presented in conformity with GAAP , was materially false and misleading

because PwC knew or was reckless in not knowing that Raytheon's 1998 financial statements

violated principles of fair reporting and GAAP . In the course of rendering its unqualified audi t

certification on Raytheon's 1998 financial statements, PwC knew it was required to adhere to ,

among others , each of the herein described standards and principles of GAAS, including the

requirement that the financial statements comply in all material respects with GAAP. PwC, i n

issuing its unqualified opinion , knew or recklessly disregarded that by doing so it was engagin g

in gross departures from GAAS, thus making its opinions materially false, and issued suc h

cert i fication knowing or recklessly disregarding that GAAS had been violated .

186. As a result of its failure to accurately report on Raytheon's 1998 financia l

statements , PwC utterly failed in its role as an auditor as de fined by the SEC . SEC Accountin g

Series Release No . 296, Relationships Between Registrants and Independent Accountants ,

Securities Act Release No. 6341, Exchange Act Release No . 18044, states in part :

Moreover, the capital formation process depends in large part on the confidence of

investors in financial reporting . An investor's willingness to commit his capital to

an impersonal market is dependent on the availability of accurate, material and

timely information regarding the corporations in which he has invested or

proposes to invest . The quality of information disseminated in the securitie s

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markets and the continuing conviction of individual investors that suchinformation is reliable are thus key to the formation and effective allocation ofcapital . Accordingly, the audit function must be meaningfully performed and theaccountants' independence not compromised . The auditor must be free to decidequestions against his client's interests if his independent professional judgmentcompels that result . [Emphasis added . ]

PwC Knew Of Or Recklessly Disregarded Raytheon's RE&C GAAP Violation s

187. Contemporaneous documents produced from Raytheon's and PwC's files i n

discovery demonstrate PwC's knowing or reckless behavior . For example, as part of its 199 8

year-end audit, on January 11, 1999, PwC specifically requested in a written memorandum a lis t

of information it needed to complete its 1998 audit, including, RE&C's "latest 'Actionable Assets '

review," thus demonstrating, inter alia, that PwC was aware of and, in fact, reviewed th e

Actionable Asset Memos described above . Significantly, although PwC requested that critical

document on January 11, 1999, and stated that its deadline for receiving the document wa s

January 18, 1999, PwC dated its "clean" audit opinion for 1998, January 26, 1999, just one week

after its deadline for receiving the Actionable Asset Memo .

188 . Shortly after the start of the Class Period, on November 12, 1998, PwC als o

received a document entitled "Raytheon Engineers & Constructors Cambridge Building Sal e

Potential Treatment of Gain" which set forth ways RE&C could use a potential gain to offse t

some of its accounting irregularities . The document indicated that the gain could be used t o

offset, inter alia, $9M of receivables on the Avoca "Win Job" set forth above and allocated the

balance of the potential gain, $8 .2M, to the general category of "Actionable Assets ."

189. It was also apparent from the ESR reports made available to PwC at leas t

quarterly that the charge announced by the Company regarding RE&C on October 7, 1998, faile d

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to include more than half of the losses already quantified by RE&C management as of that date ,

including, but not limited to, the losses attributable to the PP9, Ratchaburi and Umatilla contract s

described above.1 6

190. The Company's third quarter 1998 charge and the supporting documentation wa s

also specifically reviewed by PwC before the Company's October 7, 1998 announcement, an d

PwC acted knowingly or recklessly in issuing an unqualified audit opinion thereafter without

requiring the Company to take the additional material write-downs as reflected in the Company' s

internal reports .

191 . In addition to the ESR reports, which PwC received on a quarterly basis, and th e

Actionable Asset Memos, from which all of the Raytheon Defendant's above-describe d

accounting irregularities and viola tions of GAAP at RE&C were apparent, the PwC audit tea m

was also presented , on a quarterly basis, with a detailed breakdown of RE&C's contracts i n

process. Because over 70% ofRE&C's required write downs concerned RE&C's seven largest

contracts in process as described above, PwC acted knowingly or recklessly in failing to consider

the GAAP violations set fo rth above before issuing its "clean" audit opinion . RE&C's contracts

in process were material and constituted approximately one-third of the Company' s total

contracts in process .

192 . PwC also knew or recklessly disregarded at the time of its 1998 audit that RE&C

was using unrealistic and overly aggressive assessments of whether and how much RE&C woul d

f6PwC's 1998 audit workpapers included a document entitled "Understanding RE&C's

Executive Summary Report" (revised as of October 1998) which demonstrated a sophisticated

understanding of how to read RE&C's ESR reports . "Key observations" in the guide concerning

change orders included "need[ing] additional information on the probability of approval, the

nature of the changes, and their incorporation into the budget . "

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recover on its unapproved change orders and claims, which in the aggregate amounted t o

hundreds of millions of dollars . Among other things, PwC specifically reported to defendant

Burnham in 1998 (before the issuance of its unqualified audit opinion) that RE&C wa s

"identified as [the] most significant risk facing [the] company for [the] past several years," i n

particular , RE&C's "very aggressive approach . . . in regard to claims ;" that there was an "SE C

risk" for Raytheon's third quarter 1998 charges ; and that there had been "significant deterioration

in 1998 " at RE&C .

193 . As set forth above, prior to the start of the Class Period, PwC also assiste d

Raytheon's Corporate Controller Heid in reaching her conclusion that "RE&C's accountin g

practices were less conservative than the industry standard ." PwC was aware of modification s

purportedly enacted by Raytheon as of the start of the Class Period including , specifically, that

RE&C would no longer record revenue from unapproved claims and change orders . Indeed,

PwC was sent a copy of Heid's October 13, 1998 letter to Burnham which stated these facts .

Nonetheless, as set forth above, at the start of the Class Period and before PwC's 1998 clean audi t

opinion , Raytheon, in violation of GAAP, failed to write-off more than $ 100 million of losses

based on non-client-approved change orders and claims (including $63 million for the PP 9

project and $44 million for the Umatilla project) where collectability was not probable and could

not be reasonably estimated, leading to an inconsistent application of Raytheon's purported new

accounting policy . PwC subsequently documented this inconsistency in its own internal reports .

194. PwC's Interim 1998 Discussion Outline faxed to Raytheon on December 8, 199 8

(and produced to Lead Plaintiff in this litigation by both the Raytheon Defendants and PwC) ,

further reveals that PwC considered RE&C to have total "exposure" of at least $193 .8 million

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after the $310 million before-tax charge announced at the start of the Class Period ." PwC noted

in the same document, inter alia, that :

a. with regard to the PP9 contract , RE&C had only taken reserves of $4 0

million as compared to unapproved change orders of $103 million (whose collectability was

highly doubtful as set forth below) and RE&C also faced liquidated damages claims ;

b . With regard to the Umatilla contract, RE&C had an estimated loss of

$4 million on the contract which was not written-down and RE&C continued to rely on $44

million unapproved change orders in contravention of RE&C's purportedly new accounting

policy not to rely on unapproved change orders and that, in any event, there was not sufficient

client funding for the unapproved change orders . The unapproved change orders on the Umatill a

contract were material, and grew rapidly from $44 million at the time of the August 1998

Actionable Assets Memo to $110 million by the end of the first quarter of 1999 . In early 1999,

PwC reported that it was reviewing RE&C's continued reliance on unapproved change orders in

violation of RE&C's new policy and that it planned to raise the issue with the Audit Committee

of Raytheon's Board of Directors (which was chaired by then-Raytheon Board member L . Dennis

Kozlowski, the former Chairman and CEO of Tyco International, Ltd .) . The Umatilla ESRs

reviewed by PwC prior to the issuance of its unqualified 1998 audit opinion also demonstrated

that there was no approved Company Funds Request ("CFR") for Umatilla, in violation of

Raytheon policy which required an approved CFR for contracts recognizing revenue in excess o f

"Another version of this document places the year-end 1998 "exposure" ( after the $310million pre-tax charge) at $250 million, when factoring in RE&C's liquidated damages exposureson the PP9, Ratchaburi, Jindal and other problem contracts .

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contract funding which would document Raytheon's basis for recording the revenue . For

example, as of October 1998, the Umatilla ESR indicated a CFR Variance of $60 .7 million ; '

With regard to the Acme contract, RE&C had an estimated loss of $6 . 1

million on the contract which was not written-down and RE&C also faced back charges

exposures of $6 .2 million for which there was no reserve ;

d. With regard to the Jindal contract, RE&C had an estimated loss of $ 4

million on the contract which was not written-down and RE&C already faced assessed liquidated

damages of $12.8 million (out of a maximum of $37 .5 million) for which there was no reserve .

PwC further noted in a second Interim 1998 Discussion Outline that Jindal had stopped paying

all of RE&C's billings to date and assessed $12 .8 million of liquidated damages against RE&C

based on RE&C's failure to meet a June 1998 contractual deadline, which Jindal refused t o

negotiate , and that RE&C had filed a notice of arbitration . In fact , the PwC Interim 1998 outline

stated: "At this time last year, RE&C told PwC that Jindal had approved six months of schedule

relief, but that agreement was never consummated ;" and

C . With regard to the Ratchaburi contract , by January 13, 1999, PwC ha d

updated its 1998 Discussion Outline to state that RE&C faced "growing" liquidated damages o n

the Ratchaburi contract (capped at $17 million) for which there was insufficient reserves and that

the contract would result in a loss of $3 .6 million (not including the "growing" liquidated

damages ) . Another PwC Interim 1998 Discussion Outline stated that on the Ratchaburi contract ,

RE&C showed $86 .9 million of unbilled sales in the August 1998 ESR (which dropped to $62 .2

"As set forth above, WGI's fraud suit, fi led after the end of the Class Period, specifically

alleged that RE&C's $58 .8 million of Umatilla claims and change orders were a "plug" (a

contrived number) and only worth $2 .6 million .

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in the September 1998 ESR), consisting of $46.7 million in accrual earnings, $18 million in cost

overruns, and $17.1 million in change orders, that relations were "strained" on the Ratchaburi

contract which "may make change order resolution difficult" and that the change orders RE& C

continued to carry on its books (after the write-down at the start of the Class Period) "could be a t

risk . "1 9

195 . In total , the Interim 1998 Discussion Outline (produced to Lead Plaintiff by both

the Raytheon Defendants and PwC) reviewed 20 problem RE&C contracts, 10 of which appeare d

in the August 1998 Actionable Assets Memorandum. As demonstrated by the document, Pw C

was aware of sufficient facts regarding each of these contracts to indicate that collection of th e

amounts claimed to be due from customers was a longshot (let alone probable to be collected or

reliably estimated as required by GAAP) and that required PwC, at a minimum , to take further

steps to deem whether or not write-downs were required given the substantial "exposures" Pw C

noted during its audit . PwC knowingly or recklessly failed to take any such steps before issuing

its 1998 unqualified audit opinion .

196. With regard to the PP9 contract , documents produced to Lead Plaintiff by the

Raytheon Defendants and PwC demonstrate that PwC had noted even earlier in 1998 that RE& C

19The January 13, 1999 update also reported with regard to the Posven contract thatRE&C faced a $2 .1 million loss which was not written-down, not including $4 million in costsnot reflected in the ESR. The same update also noted that the Posven subcontractor was not

meeting its 10% per month progress agreed to in August 1998 (which was necessary for RE&C

to avoid approximately $9 million of liquidated damages) and that construction on the Posven

contract was only 33% complete versus a schedule of 74% . Finally, the January 13, 1999 updatefurther noted that as of the end of 1998 there were $282 .5 million of claims and change ordersassumed in RE&C's ESRs (including $103 million for PP9) and $51 million of potential

liquidated damages and other claims against RE&C not factored into the ESRs (including $12 .8million of liquidated damages on the Jindal contract) .

-95-

needed $125 million from the PP9 customer (GE) "to break even on [the] project ;" that "no

settlement [was] imminent , litigation [was] likely ;" that the relationship between RE &C and GE ,

the prime contractor on the PP9 project, was "poor ." PwC also noted earlier in 1998, that there

was "strong consideration" given to writing off the profits recognized to date on the PP9 project

(which were not written off during 1998, either at the start of the Class Period or thereafter) ; that

there was "no contractual relief in writing" for liquidated damages RE&C faced on the PP 9

contract ; that GE refused to approve RE&C's requested change orders and claims without

increased contract funding; and that the parties were preparing for arbitration (were results woul d

be uncertain) which had been initiated following a collapse of negotiations between RE&C and

GE. As PwC was aware and documented prior to completing its 1998 audit , GE also had its own

counterclaim against Raytheon for $136 million . As of December 31, 1998, the time of PwC' s

1998 audit, the expected range of recovery on the PP9 project was "under review b y

management," providing PwC with further notice of the collection issues with RE&C' s

unapproved change orders and claims .

197. A year earlier , in connection with PwC's 1997 review and site visit of the PP9

contract, PwC noted that there were $97 million of unapproved change orders, $26 million o f

which were still under development ; that the relationship between RE&C and GE was "strained ; "

and that GE's position was that it would not approved the change orders without increase d

funding which was unlikely to occur .

198. The August 1998 PP9 ESR, received by PwC, further demonstrates PwC' s

knowing or reckless conduct . First, the ESR shows that the PP9 contract was estimated to resul t

in no profit at completion, yet $34,349,000 of estimated profits already recognized by th e

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Company were not written-down by the Company in its third quarter 1998 charge (which PwC

specifically reviewed) or prior to the issuance of PwC's "clean" 1998 audit opinion . Second, the

$103,287,000 of "pending" and "potential" change orders listed in the PP9 ESR, were just

enough to result in no further losses on the contract . At a minimum, PwC should have reviewed

the basis for those "pending" and "potential" change orders and checked to see if they were

simply added to the ESR (as a "plug") to result in no further losses on the contract . The ESR

further revealed that in violation of Raytheon policy, there was no approved CFR for the

$103,287,000 of "pending" and "potential" change orders . The ESR also demonstrated that

RE&C had been successful in collecting only $755,000 out of $6,142,000 in cost overruns fro m

the PP9 client, or only 12% of them. Finally, the PP9 ESR revealed that RE&C had recognized

$151,946,000 of revenues on the PP9 contract based on "unbilled sales ." PwC acted knowingly

or recklessly in the face of all of these material facts . Instead of taking any further steps, PwC

simply noted in its 1998 audit discussion notes that RE&C was "exposed" to $103 million of

change orders as well as liquidated damages on the PP9 contract as compared to a reserve of only

$40 million (which reserve was the result of the (materially insufficient) charge at the start of the

Class Period) ."

199. Significantly, before the end of 1998, RE&C had begun negotiations with GE on a

settlement for the PP9 claims which provided that RE&C would release all of its outstanding

2"At the end of the Class Period, the SEC specifically told Raytheon that its priorintention to litigate its change orders and claims aggressively in an atmosphere of deterioratingclient relationships and/or strategy of pursuing claims through litigation appeared inconsistentwith Raytheon's position that recovery on the change orders and claims was probable and reliablyestimated and that, in any event, the specific known uncertainties with respect to collection of the"probable" amounts should have been disclosed in Raytheon's 1998 Form 10-K . PwC failed toinsist on any of these conditions in its 1998 audit .

-97-

change orders against GE, valued at that time at approximately $100 million, in exchange fo r

future work opportunities with GE on different projects and no cash payment on the claims o r

change orders . PwC's workpapers demonstrate PwC's concerns reviewed with defendant s

Burnham and Caine that : "The key issue from our point of view surrounding these discussions i s

how much of the $97M is "guaranteed" recovery through the new business ventures and if the

$97M is not fully recovered, how is the remaining balance dispositioned ." Although PwC raise d

such questions, it did not object to RE&C's improper treatment of GE settlement agreement (both

prior to and after the issuance of its 1998 "clean" audit opinion), whereby hopped for (but no t

guaranteed) future revenue resulting from the settlement agreement was treated as alread y

received revenue on the PP9 contract in violation of GAAP . Indeed , an additional $ 10 million of

anticipated future revenue resulting from the GE settlement agreement was booked as "revenue "

on the Ratchaburi contract as well, even though PwC noted that doing so was an "imprope r

consolidation of contracts" under GAAP, SOP 81-1 . When WGI subsequently reviewed RE&C' s

books prior to its purchase of RE&C assets, its outside accounting firm, Arthur Andersen,

immediately noted that the revenue recognized on the PP9 contract as a result of the G E

settlement agreement represented "a contingent gain, that cannot be recorded pursuant t o

[GAAP] SFAS No .5, as contingencies that might result in gains usually are not reflected in the

accounts since to do so might be to recognize revenue prior to its realization ." Andersen als o

noted (after reviewing documents from PwC) :

The Company uses aggressive accounting methods and aggressive profit estimatesin recording risk funded revenue .

-98-

The Company's policies for recognizing fee on claims and change orders appearsaggressive . We understand fee has been recognized in revenue and is included inLcontracts in process] related to claims, which is not compliant with SOP 81-1 .[Emphasis added.]' '

200. PwC's above-described Interim 1998 observations on the PP9, Umatilla an d

Posven contracts were reportedly based on "Site Visits" reviews, the most extensive form of PwC

review and audit, which purportedly "included a detailed review of the project contract, a visit t o

the project site by a member of the PwC audit team along with a PwC construction specialist, a

review and discussion with the project management on the project's results, schedule and risks .

A Detailed Review purportedly included a review of the project contract and a review an d

discussion with the project' s management on the project's results , schedule and risks .

201 . PwC's Interim 1998 observations on the Acme, Jindal and Ratchaburi contracts

were based on a "Limited Reviews" which purportedly included "obtaining the last project

information/results and reviewing this with the project management ." Limited Reviews also

purportedly included "review[ing] the status of the job with the project manager, projec t

accountant and others with an emphasis on contract performance , significant issues, and potential

exposure" as well as discussing "key factors and assumptions underlying management estimate s

to assess the reasonableness of [RE& C's] calculation of the ETC . "

202. RE&C contacts were selected for Site Visits reviews, Detailed Reviews o r

Limited Reviews based on contracts identified as "possible troubled contracts" or contracts that

bore "inherent risk ." As part of all of its reviews (whether Site Visits, Detailed Reviews o r

21 This same Andersen report noted that no reversal or write off had been taken by

RE&C on the Smith Karnataka "Win Job," even though PwC had specifically reported toRaytheon the need for reversal in both its 1997 and 1998 work papers .

-99-

Limited Reviews), PwC purportedly "develop[ed ] a list of potential project exposures re lating to

claims, disputed scope changes , liquidated damages and un-approved change orders [and]

review [ed] this list of potential exposures with the RE&C chief financial officer ." As part of all

of its reviews , PwC also , inter alia, was required to : (i) "assess the reasonableness of profit

margins ; ( ii) "compare actual performance to date to scheduled performance" ; (iii) "assess the

reasonableness of contingency and management reserve amount " ; and (iv) "determine the status

of any penalties . . . . "

203 . PwC failed to complete these steps necessary under its own audit guidelines (and

GAAS) for Site Visits reviews , Detailed Reviews and Limited Reviews in its 1998 audit as it

failed to independently assess , inter alia, the reliability of the profits booked on the contracts an d

the need for required write -downs under GAAP. With regard to all of the above -mentioned

contracts listed in PwC's audit workpapers , PwC failed to challenge Raytheon m anagement's

proposed accounting treatment , even in the face of the facts it noted (as described above) which

evidenced that write -downs were required under GAAP .

204 . With regard to the Raytheon Defendants ' improper practice of accelerating the

recognition of costs in order to prematurely book revenues and profits through the use of "earned

value" estimates as set forth in paragraphs 73-79 above, a November 11, 1998 PwC document

discussing important issues to be brought to the attention of Raytheon management, noted that

RE&C had a total of $318 million revenues booked as a result of "earned value accruals" as of

September 27, 1998, including $40.8 million on the Smith (Karnataka) project (a "Group 5 Wi n

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Job" project ), where no contract had been sign d .Z- That same document also noted that RE&C

had improperly capitalized pre-contract costs of $28 million, including $15 .1 million for the

American Agri-Tech ("Group 5 Win Job") project based on "earned value accruals," a project

which "never materialized ." The $28 million noted by PwC, also included "pre contract costs "

on the Kasco (Kuwait), AES (IB Valley), British Gas, SPIC (Tuiticorn), Bellary Coke, Vizag ,

Bangalore and Camino Columbia Toll Road "Group 5 Win Job" projects listed in the Augus t

1998 Actionable Asset Memo as described above . Although each of these issues should hav e

been remedied by the Company before PwC issued its "clean" audit opinion for 1998 and indeed ,

PwC took the position that "adjustment [was] not required [only] if financial close occur[ed] [by ]

December 1998," which did not occur , the GAAP violations were not corrected by the Company

in 1998 and PwC issued its "clean" 1998 opinion not withstanding all of these known an d

documented GAAP violations . Rather, a December 17, 1998 PwC email stated : " We told the m

about the pre-contract costs during our RE&C closing meeting with them and proposed a entry

for American Agri-Tech which is half of the $28 M . . . . They are going to write the stuff off

next year is what they told Twomey [a PwC audit Manager] . (Emphasis added .) The revenue s

recorded based on "earned value accruals" were finally reversed on the American Agri-Tech and

Smith (Karnataka) projects in 1999, with PwC belatedly taking the position that they should b e

reversed " in the accrual period in which [they] were recorded," or 1996. PwC's knowledge of the

12 In a separate document concerning this issue, PwC noted: "The accrual for Smith-Karnataka was supported only by two letters of intent which vouched for the cost of the totalproject ($40,750,000) . . . . This amount was improperly accrued for and this project is not goingforward." Later, during 1998, PwC noted with regard to the Smith (Karnataka) contract that the"contract was never signed" and "reversal [of RE&C's booked sales and fees] had not occurred . "

-10I-

$318 million of accelerations and decision to bring that issue to the attention of senior Raytheo n

management further evidences PwC's knowing or reckless conduct .

205 . Although RE&C's $318 million of accelerations should have been corrected prio r

to the issuance of PwC's "clean" audit opinion, they were not and PwC, nonetheless, issued it s

unqualified 1998 opinion . As part of its 1998 Audit, PwC specifically requested RE&C's "earne d

value worksheet" which totaled RE&C's improper cost accelerations described above, including

cost accelerations on unawarded "Win Job" contracts which never financially closed .

206 . PwC's knowledge of Raytheon's improper acceleration of revenue and profit

recognition dates back to even prior to the 1998 audit . For example, in its Interim 1997 review

(produced to Lead Plaintiff by both PwC and the Raytheon Defendants), PwC noted :

"Approximately $64M of net sales [year to date] were recorded using earned value methodology .

In our review of the documentation used to support earned value, we noticed inconsistencies in

the support provided for several projects ." As noted above in paragraphs 73-79, GAAP requires

that costs should be measured "properly and consistently" and states that : "Meaningfu l

measurement of the extent of progress toward completion is essential since this factor is used i n

determining the amounts of estimated contract revenue and estimated gross profit that will b e

recognized as earned in any given period ." It was in this context that PwC noted in 1998 that

RE&C was "still applying" the earned value methodology to improperly accelerate th e

recognition of revenues and earnings .

207. All of the above facts demonstrate that PwC acted knowingly or recklessly i n

issuing a materially false and misleading "clean" audit opinion for Raytheon's 1998 financial

statements in the face of RE &C's material GAAP violations .

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PwC Knew Of Or Recklessly Disregarded Raytheon 's P-3 Orion GAAP Violations

208 . As set forth above , the Raytheon Defend ants also violated GAAP in accountin g

for the P-3 Orion contract . Rather than recognizing the entire anticipated loss on the P-3 Orio n

contract as soon as the loss became evident, which was well before the issuance of the

Company's 1998 year-end financial results, the Raytheon Defendants actually booked a profit of

between 4 .5% and 6% on the P-3 Orion contract based on the hope of Raytheon receiving a

follow-on contract which was never awarded . PwC's own internal documents, produced by bot h

the Raytheon Defendants and PwC, demonstrate that PwC had contemporaneous knowledge o f

these facts .

209. For example, PwC's December 31, 1998 Year-end Discussion Outline for RSC

(produced to Lead Plaintiff by the Raytheon Defendants, but not PwC) confirms that PwC kne w

that Raytheon management expected to incur a loss of $34 million (or -19 .5%) on the P-3 Orion

contract as of the end of 1998 . Nevertheless, PwC went along with Raytheon's decision to boo k

a 6 .0% pr ofit on the contract for 1998, based only on Raytheon's representation that it had

"received a request for proposal for the sole-source follow-on contract ." The same documen t

further states that : "As shown in the table above, the follow on contract will drive the profit rat e

of the total effort . Thus, the profit rate will be re-evaluated once a firm contract value is know n

for the follow- on contract . "

210. Similarly, other internal PwC documents state as follows :

a. "Management compiled a profitability model during 3Q 1998 tha t

illustrates its justification for the 6% 'hedge' profit rate (the rate that management actually book s

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to recognize revenue) net of a loss rate of 14 .8% on the instant contract . During Q 1 1999, th e

hedge rate was reduced to 4 .5% . "

b. "The follow-on contract is expected to drive the profit rate of the tota l

effort . The profit rate for the instant contract is approximately [negative ] (16%), while th e

follow-on work is currently estimated to be 18%. As a successful negotiation of the follow-on

work is necessary to meet the total effort profit rate of 4 .5%, the booking rate will be re-

evaluated once a firm contract value is known for the follow-on contract . "

"Per program management , there is the possibility of follow on wor k

which Raytheon is hoping to win . This will involve additional upgrades/refurbishing of P- 3

planes, also for the U.S . Navy . Political lobbyists have been sent on Raytheon 's behalf t o

Washington, D .C. in order to try to stress the importance of such programs . "

211 . As set forth above, combining the existing P-3 Orion contract losses with hope d

for profits on a unawarded follow-on contract violated GAAP (SOP 81-1 ) specifically barrin g

such combining to avoid recognizing losses . Due to serious concerns that PwC's field partner

had regarding Raytheon's accounting for the P-3 Orion contract, the P-3 Orion program was th e

subject of a consultation with PwC's "National Consulting Group," PwC's top in-house "experts "

regarding technical accounting guidance and audits . This consultation took place on or aroun d

October 16, 1998 , just four days after the beginning of the Class Period . On that day, PwC field

partner Jean Hobby and PwC lead pa rtner Ed Pliner (now Raytheon's CFO) sent a memorandum

to Clark Chandler of PwC's National Consulting Group to obtain his opinion regarding th e

propriety of accounting for the instant P-3 Orion contract with unawarded follow-on work i n

-104-

order to avoid recognizing losses . That memorandum described the situation regarding the P-3

Orion contract as follows :

In the 3rd quarter of 1998, the Company is anticipating a follow-on contract as a solesource provider of an additional 48 planes . A request for quote for this work is expectedto be received in Q4 and the actual contract awarded in 1999. Therefore, managementperformed a bottoms-up EAC which included this effort . This combined EAC supportsprofit of approximately 6% while the EAC for the original contract on a stand-alone basisindicates a loss as estimated by management of $23M . It is management's intent tocombine these contracts and continue recognizing profit at 6%

As the foregoing makes clear, as of the fourth quarter of 1998, the Raytheon Defendants had

determined that the P-3 contract would incur significant loses and no follow-on contract had been

awarded. In fact, as the memorandum indicates, Raytheon had not even submitted a propose d

bid on the follow-on contract . Nevertheless, PwC determined (without any furthe r

documentation) that it would sign-off on the Raytheon Defendants' decision (in violation o f

GAAP) to avoid recognizing losses by combining the P-3 Orion contract with anticipated profits

on unawarded follow-on work when the entire premise of the accounting treatment was th e

award of a future follow-on contract (which never happened) . The award of the follow-on

contract was necessary in order to even consider the possibility of combining the contracts and

PwC knew that no such contract had been awarded .

212 . According to Jean Hobby, the National Consulting Group concurred with the Pw C

audit team's decision to sign-off on Raytheon's decision to account for the P-3 Orion contract b y

combining its results with hypothetical follow-on work that had not been (and never was)

awarded.23 Based on the foregoing, it is undisputable that PwC, at the highest levels, knew, o r

''Nevertheless, neither the National Consulting Group's concurrence or the basis for it

was recorded in PwC's workpapers .

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recklessly disregarded, at the time of its 1998 audit, that Raytheon, based only on a request fo r

proposal for unawarded follow-on work, was combining its estimated profits and losses a t

completion on two contracts (one of which was merely hypothetical) in clear violation of GAA P

(SOP 81- 1) as set forth in paragraphs 92-127 above to avoid recognizing losses on the instant P- 3

Orion contract .

213. Not only was PwC aware that Raytheon had violated GAAP by combining

existing contract losses with anticipated profits on a contract that had not been awarded, PwC

had no reasonable basis to conclude that Raytheon would ever be awarded a follow-on contract .

In fact, the only documentation that PwC ever received regarding the likelihood of Raytheo n

being awarded a follow-on contract was a one-page letter sent by AIS General Manager Glen n

Hood, the Raytheon employee responsible for the P-3 Orion project, to PwC in connection with

PwC's 1998 audit . This letter states as follows : "Based on receipt of the RFP [request fo r

proposal] for Sole Source follow on work and the intent to utilize Alpha contracting, there is low

risk in combining the Instant and the Follow On contracts on the P-3 Sustained Readines s

Program for ECAC purposes ." According to Mr . Hood , this letter was created and sent to PwC

at PwC's own request in connection with the completion of its 1998 audit of Raytheon . Had

PwC done any further investigation or audit it would have discovered that there was n o

reasonable expectation of any follow-on work being awarded to Raytheon given the Navy' s

budget constraints and the vastly increased nature of the "core" work required on each aircraft .

214. Following the fourth quarter of 1998, PwC continued to monitor the Company' s

P-3 Orion "profits" as compared to the expected loss on the contract . For example, PwC noted

that as of March 31, 1999, Raytheon recorded $6 .9 million of cumulative profit on the P-3 Orio n

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contact (at a 4 .5% margin), even though the Company projected a loss on the contract of $3 6

million. PwC further noted that as of June 30, 1999, Raytheon recorded $7 .4 million of

cumulative profit on the P-3 Orion contract (at a 4 .5% rate), even though the Company

anticipated a loss on the contract of $48 .3 million .

215. The above-quoted documents from Raytheon's and PwC's own files demonstrat e

that PwC knowingly or recklessly disregarded the Raytheon Defendants' violations of GAA P

concerning the P-3 Orion contract . At all times the P-3 Orion contract was considered a "key"

defense project for the Company and the GAAP violations resulted in the hiding of materia l

losses on this "key" project . Nonetheless, PwC issued a "clean" audit opinion for the Company' s

1998 financial statements during the Class Period .

PwC Received Large Non-Audit Fees From Raytheon

And Its Lead Audit Partner Joined Raytheon Just

Five Months After The End Of The Class Perio d

216. At all relevant times, PwC stood to receive massive fees for consulting service s

rendered to Raytheon, which dwarfed the audit fees it received from the Company, and provide d

a powerful motive for PwC to turn a blind eye to Raytheon 's pervasive GAAP violations. For

example, for the year ended December 31, 2000, Raytheon disclosed (pursuant to a new SE C

disclosure requirements) that the Company had paid PwC $3 million for audit services and $4 8

million for non-audit or consulting work . The 2000 non-audit consulting fees included $2 3

million of fees for "Financial Information Systems Design and Implementation ." For the year

ended December 31, 2001, Raytheon disclosed that the Company had paid PwC $4 million fo r

audit services and $80 million for non-audit or consulting work . The 2001 non-audit consultin g

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fees included $58 million of fees for "Financial Information Systems Design and

Implementation ."

217. Importantly, Raytheon had selected PwC during the Class Period to assist th e

Company in its implementation of SAP (business management ) software which promised PwC

over $100 million in fees for "Financial Information Systems Design and Implementation" over a

four year time period, making Raytheon one of PwC's largest consulting engagements .

218. The massive consulting fees PwC stood to gain from its non -audit consultin g

relationship with the Company at all relevant times significantly compromised PwC' s

independence from Raytheon and contributed to PwC 's failure to comply with GAAS during th e

Class Period ."

219. Recognizing the significant conflicts raised by these types of consulting activitie s

and the devastating impact of securities fraud on the public markets, these same types o f

consulting work will now be prohibited by new federal legislation known as the Sarbanes-Oxle y

Act of 2002 designed to reduce corporate fraud. Among other restrictions , public accounting

firms will be prohibited from offering their audit clients :

a. bookkeeping or other services related to the accounting records o r

financial statements of the audit client ;

b. financial information systems design and implementation ;

21 In addition, only five months after the end of the Class Period, PwC's Lead Audit

Partner, Edward Pliner joined Raytheon as a Vice President and Corporate Controller on March31, 2000 . Upon Caine's resignation, Pliner was named Senior Vice President and Chief FinancialOfficer of the Company .

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c . appraisal or valuation services, fairness opinions, or contribution-in-kin d

reports ;

d . actuarial services ;

C . internal audit outsourcing services ;

f. management functions or human resources ;

g. broker or dealer, investment adviser, or investment banking services ;

h. legal services and expert services unrelated to the audit ; and

i . any other service that the Board determines, by regulation, i s

impermissible .

220. While this legislation post-dated the Class Period, the concepts of independence

and its impairment were in effect at all relevant times . Most recently, PwC, itself, admitted to

the conflicts created by the massive consulting fees it stood to gain from its audit clients . On

July 31, 2002, in connection with the sale of PwC's consulting unit for $3 .5 billion to IBM,

PwC's Chief Executive Officer, Samuel A . DiPiazza Jr ., was quoted in The New York Times as

stating: "This really is the culmination of our efforts to move out of businesses that we felt were

a conflict ." (Emphasis added) .

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FIRST CLAIM

Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5Promulgated Thereunder Against All Defendants

221 . Lead Plaintiff repeats and realleges each and every allegation contained above as

if fully set forth herein .

222. During the Class Period, defendants, and each of them, carried out a plan, schem e

and course of conduct which was intended to and, throughout the Class Period, did : (i) deceive

the investing public, including Lead Plaintiff and other Class members, as alleged herein ; (ii )

artificially inflate and maintain the market price of Raytheon common stock; and (iii) cause Lea d

Plaintiff and other members of the Class to purchase Raytheon common stock at artificially

inflated prices, In furtherance of this unlawful scheme, plan and course of conduct, defendants ,

and each of them, took the actions set forth herein .

223 . Defendants, either individually or as a group : (a) employed devices, schemes, an d

artifices to defraud ; (b) made untrue statements of material fact and/or omitted to state materia l

facts necessary to make the statements not misleading ; and (c) engaged in acts, practices, and a

course of business which operated as a fraud and deceit upon the purchasers of Raytheo n

common stock in an effort to maintain artificially high market prices for Raytheon securities i n

violation of Section 10(b) of the Exchange Act and Rule I Ob-5 . All defendants are sued as

primary participants in the wrongful and illegal conduct charged herein and the Individual

Defendants are also sued as controlling persons as alleged below .

224 . In addition to the duties of full disclosure imposed on defendants as a result o f

their making of affirmative statements and reports, or participation in the making of affirmativ e

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statements and reports to the investing public, defendants had a duty to promptly disseminate

truthful information that would be material to investors in compliance with the integrate d

disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C .F .R. Sections

210 .01 et eq .) and Regulation S-K (17 C .F . R. Sections 229.10 et seq . ) and other SEC

regulations, including accurate and truthful information with respect to the Company's operations

and earnings so that the market price of the Company's securities would be based on truthful ,

complete and accurate information .

225. Defendants, individually and as a group, directly and indirectly, by the use, mean s

or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about the business ,

operations and future prospects of Raytheon as specified herein .

226 . Defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of Raytheon's value an d

performance , which included the making of, or the part icipation in the making of, untru e

statements of material facts and omitting to state material facts necessary in order to make th e

statements made about Raytheon and its business operations and future prospects in the light of

the circumstances under which they were made, not misleading, as set forth more particularly

herein, and engaged in transactions, practices and a course of business which operated as a fraud

and deceit upon the purchasers of Raytheon common stock during the Class Period .

227. Each of the Individual Defendants' primary liability, and controlling perso n

liability, arises from the following facts : (i) the Individual Defendants were high-leve l

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executives at the Company during the Class Period and members of the Company's managemen t

team; ( ii) each of these defendants, by virtue of his responsibilities and activities as a senio r

officer of the Company was privy to and participated in the creation, development and reportin g

of the Company's internal budgets, plans, projections and/or reports ; ( iii) each of these

defendants enjoyed significant personal contact and familiarity with the other defendants and wa s

advised of and had access to other members of the Company's management team, internal report s

and other data and information about the Company's finances, operations, customer relationship s

and sales at all relevant times ; and (iv ) each of these defendants was aware of the Company's

dissemination of information to the investing public which they knew or recklessly disregarde d

was materially false and misleading and also had access to, inter alia, the ESR reports an d

Actionable Assets Memos demonstrating the material falsity of such statements at all relevan t

times .

228 . Defendants had actual knowledge of the misrepresentations and omissions o f

material facts set forth herein, or acted with reckless disregard for the truth in that they failed t o

ascertain and to disclose such facts, even though such facts were available to them . Such

defendants' material misrepresentations and/or omissions were done knowingly or recklessly an d

for the purpose and effect of concealing Raytheon's operating condition and future busines s

prospects from the investing public and defrauding government officials responsible for defens e

and procurement as to the soundness and effectiveness of Raytheon's internal controls an d

defense production capacities . As demonstrated by defendants' overstatements an d

misstatements of the Company's business, operations and earnings throughout the Class Period,

defendants, if they did not have actual knowledge of the misrepresentations and omission s

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alleged, were reckless in failing to obtain such knowledge by deliberately refraining from takin g

those steps necessary to discover whether those statements were false or misleading .

229 . As a result of the dissemination of the materially false and misleading informatio n

and failure to disclose material facts , as set forth above, the market price of Raytheon common

stock was artificially inflated during the Class Period. In ignorance of the fact that market prices

of Raytheon common stock were artificially inflated, and relying directly or indirectly on th e

false and misleading statements made by defendants, or upon the integrity of the market in whic h

the securities trade, and/or on the absence of material adverse information that was known to o r

recklessly disregarded by defendants but not disclosed in public statements by defendants durin g

the Class Period, Lead Plaintiff and the other members of the Class acquired Raytheon common

stock during the Class Period at artificially high prices and were damaged thereby .

230. At the time of said misrepresentations and omissions, Lead Plaintiff and othe r

members of the Class were ignorant of their falsity, and believed them to be true . Had Lead

Plaintiff and the other members of the Class and the marketplace known of the true condition an d

business prospects of Raytheon, which were not disclosed by defendants, Lead Plaintiff and othe r

members of the Class would not have purchased or otherwise acquired Raytheon common stock,

or, if they had acquired such common stock during the Class Period, they would not have done s o

at the artificially inflated prices which they paid .

231 . By virtue of the foregoing, defendants have violated Section 10(b) of th e

Exchange Act, and Rule I Ob-5 promulgated thereunder .

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232. As a direct and proximate result of defendants ' wrongful conduct , Lead Plaintiff

and the other members of the Class suffered damages in connection with their respective

purchases and sales of the Company's common stock during the Class Period .

SECOND CLAIM

Violation Of Section 20(a) O fThe Exchange Act Against the Individual Defendants

233 . Lead Plaintiff repeats and realleges each and every allegation contained above as

if fully set forth herein .

234. The Individual Defendants acted as controlling persons of Raytheon within th e

meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-leve l

positions, participation in and/or awareness of the Company's operations and/or intimat e

knowledge of the Company's undisclosed problems, the Individual Defendants had the power t o

influence and control and did influence and control, directly or indirectly, the decision-making o f

the Company, including the content and dissemination of the various statements which Lead

Plaintiff contends are false and misleading . The Individual Defendants were provided with or

had unlimited access to copies of the Company's reports, press releases, public filings and other

statements alleged by Lead Plaintiff to have been misleading prior to and/or shortly after thes e

statements were issued and had the ability to prevent the issuance of the statements or cause th e

statements to be corrected and also had access to, inter alia, the ESR reports and Actionabl e

Assets Memos demonstrating the material falsity of such statements at all relevant times .

235 . In particular, each of these defendants had direct and supervisory involvement i n

the day-to-day operations of the Company and, therefore, is presumed to have had the power t o

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control or influence the particular transactions giving rise to the securities violations as allege d

herein, exercised the same and culpably participated in the same .

236. As set forth above, defendant Raytheon violated Section 10(b) and Rule IOb-5 b y

its acts and omissions as alleged in this Complaint . By virtue of their positions as controllin g

persons of Raytheon, the Individual Defendants are liable pursuant to Section 20(a) of the

Exchange Act. As a direct and proximate result of defendants' wrongful conduct, Lead Plaintiff

and other members of the Class suffered damages in connection with their purchases of the

Company's common stock during the Class Period .

WHEREFORE, Lead Plaintiff prays for relief and judgment, as follows :

a. Maintaining this action as a certified class action and Lead Plaintiff as a

cert ified class representative under Rule 23 of the Federal Rules of Civil Procedure ;

b. Awarding compensatory damages in favor of Lead Plaintiff and other

Class members against all defendants, jointly and/or severally, for all damages sustained as a

result of defendants' securities law violations, in an amount to be proven at trial, including inter-

est thereon ;

Awarding Lead Plaintiff and the Class their reasonable costs and expense s

incurred in this action, including counsel fees and expert fees ; and

d. Such other and further relief as the Court may deem just and proper .

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JURY TRIAL DEMANDED

Lead Plaintiff hereby demands a trial by jury.

Dated : March 17, 2003

IFICATE OF SERVICEI ww" am* " a inw copy of th aow decumsm wr :sWw "O ta+ ft" a for .acn aanrby Md ft >,09

Melvyn I . WeissSteven G. SchulmanJared SpecthrieSalvatore J . GrazianoCharles S. HellmanMILBERG WEISS BERSHAD

HYNES & LERACH LLPOne Pennsylvania PlazaNew York, N .Y. 10119-0165(212) 594-530 0

Lead Counsel for Lead PlaintiffAnd the Certified Class

MOULTO i & GANS, P .C.

IvaCncy Free n GansBBO No . . 84540

33 Broad Street, Suite 1100Boston, MA 02109-4216(617) 369-797 9

Special Local Counsel

To Lead Counsel

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