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41 UNITED STATES DISTRICT

NORTHERN DISTRICT OF TI

DALLAS DIVISION

In re SOURCECORP SECURITIES 3 :04-cv-023 -LITIGATION

This Document Relates To :

ALL ACTIONS .

'r" N DiSTRIGT OF TEXA$FILED

ry `_

[JUN 1 5

CLERK, U.S.D CTC CURTBy__,____„_

Deput y

DEMAND FOR JURY TRIAL

CONSOLIDATED AMENDED COMPLAINT FORVIOLATION OF THE FEDERAL SECURITIES LAWS - CLASS ACTIO N

Lead Plaintiff Dale R. Templin ("Plaintiff') alleges the following based upon Lead

Counsel's investigation, which included a review of regulatory filings and reports b y

SOURCECORP INCORPORATED (f/k/a F .Y.I. Incorporated) ("SOURCECORP" or the

"Company"), as well as securities analysts' reports and advisories about the Company, pres s

releases and other public statements issued by the Company, interviews with former

SOURCECORP employees , and media repo rts about the Company.

QiT11A41AiiAD V

1 . Plaintiff brings this securities-fraud class action under Securities Exchange Act o f

1934 ("Exchange Act") § 10(b) and § 20(a) on behalf of all persons (the "Class") who purchase d

SOURCECORP common stock between May 3, 2001 and October 27, 2004, inclusive (th e

"Class Period")

2 . This case involves SOURCECORP and SOURCECORP's wholly-owne d

subsidiary, Image Entry Inc ., ("Image") and Image's founder Bill Deaton ("Deaton") (Image an d

Deaton are referred to collectively as the "Image Defendants") . Deaton and Image cooke d

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Image's books in flagrant violation of federal law and Generally Accepted Accounting Principle s

("GAAP") . Then, Image and Deaton passed Image's inflated earnings information t o

SOURCECORP . Image's numbers accounted for a signific ant portion of SOURCECORP' s

revenue. So, when Image's and Deaton's illegal accounting practices came to light, the price o f

SOURCECORP 's common stock , traded on the National Association of Securities Dealer s

Automated Quotation System ("NASDAQ"), plummeted over $5 per share in one day on volum e

that was 4,300% higher than the day before SOURCECORP's first corrective disclosure .

SOURCECORP ultimately had to restate its financials for years 2001 through 2003 and for the

first half of 2004, and the United States Securities & Exchange Commission ("SEC") launched a

formal investigation into the circumstances surrounding SOURCECORP' s restatement of

earnings .

3. Two SOURCECORP officers and directors are not without substantial culpability.

It was SOURCECORP and its President and CEO, Ed H. Bowman, Jr. ("Bowman"), and the

Vice-President and CFO Barry Edwards ("Edwards") who repeatedly signed, filed, and published

certifications stating that SOURCECORP's internal controls and disclosure controls were

adequate when, in fact, neither the disclosure controls nor internal controls were at all adequate .

In fact , according to several confidential witnesses ("CW's"), SOURCECORP employed no

internal controls at all over it subsidiaries until sometime in 2004 when the Image Defendants '

accounting irregularities were discovered, even though Bowman and Edwards made numerou s

public statements during the Class Period to tout and certify these purported internal controls .

4. Further, SOURCECORP , Bowman, and Edwards (collectively the

"SOURCECORP Defendan ts") knowingly misstated SOURCECORP's policy for recognizing

revenue from the beginning of the Class Period until early 2003 . This is so because while the

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SOURCECORP Defendants said they and SOURCECORP subsidiaries recognized revenue onl y

when they possessed documentation to substantiate the revenues, that was, in fact, not true . In

fact, Edwards knew that some subsidiaries did not have contracts to substantiate certain revenues .

Yet he signed public filings from May 2001 through early 2003 that said otherwise .

5 . The SOURCECORP Defendants filed and published at least fourteen quarterly

financial reports that overstated revenues and earnings and that understated expenses . Several

CW's have told Lead Plaintiff' s investigators that the blame for the inaccurate financials

originated with Image and its founder Deaton (collectively, the "Image Defendants") .

6. Throughout the Class Period, the Image Defendants consciously misbehaved ; they

intentionally reported inflated revenues and understated expenses . The Image Defendants here

apparently took their cues from Enron ; they shifted expenses to entities unassociated with

SOURCECORP, entities that Deaton controlled, i .e ., off-balance-sheet entities. And they did so

with one aim in mind : that Deaton would collect $25 million from SOURCECORP . The source

of this $25 million payday was the purchase agreement between SOURCECORP and Deaton

when, in 2001 , Deaton agreed to sell Image to SOURCECORP. Whether Deaton got paid the

$25 million depended upon whether Image hit certain revenue and earnings targets for the firs t

three years after SOURCECORP bought Image . So, no matter what, Deaton was going to hit the

earnings targets necessary to collect his $25 million . And that's just what he and Image did ; but

to do so, they violated Exchange Act Rule 10-b5 (a) and (c) . They employed devices, schemes ,

and artifices to defraud, and they engaged in acts, practices, and a course of business tha t

operated as a fraud and deception upon the Lead Plaintiff and Class here in connection with th e

purchase of SOURCECORP common stock.

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7 . Amazingly, the SOURCECORP Defendants agreed to allow Image to do its own

accounting with little or no oversight from the parent SOURCECORP . And that accounting

directly effected and affected Deaton's $25 million payday. SOURCECORP gave Deaton every

motivation to commit fraud but then provided no oversight and no meaningful internal controls to

ensure that Deaton did not. Yet the SOURCECORP Defendants assured and certified tha t

SOURCECORP employed adequate internal and disclosure controls . Much to their dismay and

detriment, investors like the Lead Plaintiff here now know otherwise .

JURISDICTION AND VENUE

8. This Court possesses subject-matter jurisdiction under 28 U.S .C. §§1331, 133 7

and 1367 and Exchange Act § 27 (15 U .S.C. § 78aa) .

9. This action arises under Exchange Act § 10(b) and § 20(a) (15 U.S.C. §§78j(b)

and 78t (a)) and Exchange Act Rule lOb -5 (17 C .F.R. § 240 .1Ob-5) .

10. Exchange Act § 27 (15 U .S .C . § 78aa) and 28 U.S .C. § 1391(b) and (c) make

venue proper in this district and division . SOURCECORP maintains its principal place of

business in Dallas, and many of the acts giving rise to the violations complained of herein took

place in this Dallas .

11 . Defendants used the instrumentalities of interstate commerce, e .g., the telephone ,

and the NASDAQ to effect their fraud .

PARTIES

12. Lead Plaintiff, Dale R. Templin , purchased SOURCECORP common stock at

artificially inflated prices during the Class Period as is detailed in a previously-filed certification,

which Lead Plaintiff incorporates here by reference .

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13. Defendant SOURCECORP , a Delaware corporation, keeps its principal place of

business at 3232 McKinney Avenue, Suite 1000 , Dallas, Texas , 75204. On February 14, 2002 ,

SOURCECORP changed its name from F.Y.I . Incorporated to SOURCECORP and changed it s

trading or ticker symbol on the NASDAQ to "SRCP" .

14. Defendant Image Entry , Inc. ("Image") is SOURCECORP' s wholly-owned

operating subsidiary. Image keeps its principal place of business at 715 N . Main Street, London,

Kentucky 40741 . CW 11 identified Image as the operating subsidiary that fraudulently

recognized revenue and omitted certain expenses from its financial results and disclosures . In

addition, CW3 confirmed that Image must have been the subsidiary in question because it wa s

the only company acquired in 2001 with an earn-out agreement (the "Earn-out Agreement" )

ending in 2004 .

15 . The individual defendants identified below (the "Individual Defendants"), serve d

at all times material, as senior officers and/or directors of SOURCECORP or Image in th e

positions set forth below :

1 Plaintiffs investigation included interviews with former SOURCECORPemployees. Certain of those former employees are quoted or cited herein as ConfidentialWitnesses. The positions and approximate dates of employment of all such ConfidentialWitnesses are listed below :

Confidential WitnessDesignation

Former Position Dates of Employment

CW #1 Senior Accountant 2003-2004CW #2 Regional Controller August 2000-October 2003CW #3 Vice President of Operations 1996-October 200 3CW #4 Financial Planning/Analysis

ManagerSeptember 1999-February2002

CW #5 Accounting Manager 1999-2002CW #6 Human Resources Department 1996-200 1

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(a) Defendant Ed H. Bowman, Jr . ("Bowman") is, and was at all relevant times ,

SOURCECORP' s President and Chief Executive Officer ("CEO") and a member of

SOURCECORP' s Board of Directors . During the Class Period, Bowm an held a significant stoc k

position in SOURCECORP . For example, in April 2003, Bowman held 524 ,625 shares of

SOURCECORP stock, or 3% of SOURCECORP's outstanding shares . He also held exerciseabl e

warrants for another 492,025 shares .

(b) Defendant Barry Edwards ("Edwards") is, and was at all relevant times ,

SOURCECORP' s Chief Financial Officer ("CFO") and Executive Vice President. Like

Bowman during the Class Pe riod, Edwards held a significant stock position in SOURCECORP

during the Class Period . For example, in April 2003, Edwards held 38,500 shares o f

SOURCECORP stock and exercisable warrants for another 27,500 shares .

(c) Defendant Bill D. Deaton ("Deaton") founded Image and at all relevant time s

served as its President and CEO . Deaton lives in London, Kentucky. According to

SOURCECORP's Form 8-K filed with the SEC on or about April 12, 2001, Defendant Deato n

was entitled up to $25 million under the Earn-out Agreement with SOURCECORP, if and onl y

if, Image was able to reach specific revenue guidelines over a three-year period . According to

CW6, Deaton left Image in September or October of 2004 .

SOURCECORP DEFENDANTS' FRUADULENT CONDUC T

16 . During the Class Pe riod , the SOURCECORP Defendants perpetrated a host of

wrongs under the Exchange Act . For example , the SOURCECORP Defendants: (i) knowingly

cert ified that SOURCECORP employed adequate disclosure and inte rnal controls when , in fact,

SOURCECORP did not; (ii) knowingly misrepresented the revenue -recognition policies and

practices that SOURCECORP an d its subsidiaries used during the Class Period; (iii) recklessly

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published financial reports that overstated revenue and earnings while understating expenses, an d

(iv) recklessly certified financial reports that overstated revenue and earnings while understating

expenses .

SOURCECORP Defendants Falsely Certified SOURCECORP' s Internal Controls .

17. On November 14, 2002, SOURCECORP filed and Bowman signed the followin g

certification under Sarbanes-Oxley Act ("SOX") § 302, which SOURCECORP attached to and

incorporated into its Form 10-Q for 3Q 2002 . The cert ification provided as follows :

I, Ed H . Bowman , Jr., certify that :

4. The registrant's other certifying officers and I areresponsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rulesl3a-14 and 15d-14) for the registrant and we have

a) designed such disclosure controls and procedures toensure that material information relating to the registrant, includingits consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterlyreport is being prepared;

b) evaluated the effectiveness of the registrant'sdisclosure controls and procedures as of a date within 90 days priorto the filing date of this quarterly report (the "Evaluation Date") ;and

c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date ;

5. The registrant's other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant'sauditors and the audit committee of the registrant's board ofdirectors (or persons performing the equivalent function) :

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a) all significant deficiencies in the design or operationof internal controls which could adversely affect the registrant'sability to record, process, summarize and report financial data andhave identified for the registrant's auditors any material weaknessin internal controls ; and

b) any fraud, whether or not material , that involvesmanagement or other employees who have a signific ant role in theregistrant 's internal controls ; and

6. The registrant's other certifying officers and I haveindicated in this quarterly report whether there were significantchanges in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions withregard to significant deficiencies and material weakness.

18. Defendant Edwards signed a certification that was identical in all material respect s

to that signed by defendant Bowman. Edwards' certification was also attached to and

incorporated into the Form 10-Q.

19. SOURCECORP filed and Bowman and Edwards signed similar certifications on

or about March 31, 2003 ; May 13, 2003 ; August 13, 2003 ; November 13, 2003 ; March 12, 2004 ;

May 10, 2004; and August 9, 2004 . All were attached to and incorporated by reference into SE C

fi lings by SOURCECORP .

20. The statements made in the above quoted SOX certification were materially fals e

and misleading because in fact, neither Bowman nor Edwards had "designed such disclosure

controls and procedures to ensure that material information relating to the registrant, including it s

consolidated subsidiaries, is made known to us by others within those entities ." This is so

because, on January 21, 2005, the SOURCECORP Defendants announced in a Form 8 -K filing

with the SEC that :

(1) For revenue to be properly recognized in accordance withthe [SEC] Staff Accounting Bulletin No . 104 . . . , each ofthe following conditions must be met : persuasive evidence

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of an arrangement must exist, the price must be fixed ordeterminable, delivery must occur or services must berendered and collection must be reasonably assured . TheCompany has identified certain instances where one ormore of the aforementioned revenue recognitionconditions, as applied to certain customer contracts, werenot met during the noted time periods at the operatingsubsidiary that is the subject of the Company'sinvestigation . As such some or all of the revenuepreviously recognized for these customer contracts shall bereversed.

(2) * * * [C]ertain operating expenses of the operatingsubsidiary that is the subject of the Company'sinvestigations were not properly recognized and included inthe operation subsidiary's financial results during the notedtime period .

(3) * * * Based on the preliminary findings of the Company'sinvestigation, earnings before interest and taxes attributableto such subsidiary were overstated during the earn-outperiods resulting in payments made by the Company underthe provisions of the earn-out that otherwise would nothave been made. The Company's current assessment isthat the goodwill resulting from such payments should bewritten down.

21 . The statements made in the above quoted SOX certification were materially fals e

and misleading also because in fact, neither Bowman nor Edwards had "designed such disclosur e

controls and procedures to ensure that material information relating to the registrant, including its

consolidated subsidiaries, is made known to us by others within those entities ." This is so

because, on March 23, 2005, the SOURCECORP Defendants held a conference call, a transcript

of which they attached to an SEC Form 8-K filing . On that call, which Defendant Bowman was

the moderator; SOURCECORP's Chief Accounting Officer, Bryan Hill, admitted the following :

In addition to the revenue adjustment, the internalinvestigation identified certain expenses of the operatingsubsidiary that were not properly recorded in the operatin g

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subsidiary' s financial results. According to theinvestigation , certain former members of the operatingsubsidiary ' s management allegedly diverted the expenses toentities they controlled, but that are unrelated toSOURCECORP, resulting in omission of the relatedexpenses for the operating subsidiary's andSOURCECORP 's reported financial results .

22. The statements made in the above quoted SOX certification were materially fals e

and misleading also because in fact, neither Bowman nor Edwards had "designed such disclosur e

controls and procedures to ensure that material information relating to the registrant, including it s

consolidated subsidiaries, is made known to us by others within those entities ." This is so

because, in that same conference call and its transcript, Defendant Bowman confessed tha t

SOURCECORP 's internal controls had not been at a level sufficient to detect the Imag e

Defendants' fraud . To that end, Bowman said, "We have taken prompt action to build on ou r

existing control systems and take our controls to a new level . * * * None of us ever want to go

through this again. We are confident that from a control perspective, we are emerging from thes e

events as a much stronger company."

23. The SOURCECORP Defendants acted consciously or with severe recklessness

when SOURCECORP filed and when Bowman and Edwards signed each of these certification s

referred to in paragraphs 17 through 19, supra. This is so because the size and scope of the

restatement bespeaks scienter. SOURCECORP admitted in a March 23, 2005 conference cal l

that the restatement resulted in a $33 .9 million downward adjustment to the company' s

previously reported income for over three years . Further, as several CW's confirmed :

SOURCECORP employed no internal controls to verify that, in fact, the results that Image

repo rted to SOURCECORP " fairly present[ed], in all mate rial respects, the financial condition

and results of operations for [Image] ." For example :

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• CW5 confirmed that SOURECORP performed no internal audits ;

• CW5 added that "operating managers in the field were bonused ontheir bottom line, so accountants in Dallas had to be careful not tolet them pad their numbers ; "

• CW2 confirmed CW5's information about no internal audits whenCW2 told Lead Plaintiff's investigators that SOURCECORPallowed its subsidiaries to "do their own thing" on reportingfinancial performance until mid-2003 and that "everyone was doingaccounting in a different way ; it really was a nightmare ;"

• CW4 further confirmed what CW2 and CW5 said about nointernal audits at SOURECORP when CW4 told Lead Plaintiff'sinvestigators that each subsidiary used a different accounting systemand that SOURCECORP 's headquarters in Dallas would acceptnumbers from the subsidiary without independently verifying thatthe subsidiary 's reports were correct or that they were prepared inaccordance with SOURCECORP's own disclosure policies,revenue-recognition policies, or GAAP ;

• CW5 also confirmed that, even after SOURCECORP boughtImage, Image maintained total control over Image 's accountingnumbers for the whole three-year period of Deaton 's earn-outagreement ;

• CW2 confirmed that SOURCECORP knew that earn-outagreements like Deaton's incentivized former owners like Deatonto "exaggerate" their profits ;

• CW4 confirmed CW2's information when CW4 told LeadPlaintiff's investigators that former owners like Deaton, who hadearn-out agreements, would meet their targets for three years, andthen, in the fourth year the subsidiary would "miss its numbers ;"

• CW2 left no doubt that Defendant Edwards knew about internalcontrol deficiencies at SOURCECORP . During the "first few daysof 2003," Defendant Edwards told CW2 that SOURCECORP waschanging its revenue-recognition policy for work-in-progressreceivables because some SOURCECORP subsidiaries did nothave contracts to substantiate their revenues . CW2 told Edwardsthat the subsidiary where CW2 worked had such documentation,Edwards told CW2 that other SOURCECORP subsidiaries did not ;and

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• CW 1 and his boss visited Image in Kentucky for four days in thesummer of 2004 updating SOURCECORP's Sarbanes-Oxleydocumentation compliance . The only person CW1 and his bossmet with was Michael Sulfridge, who was the financial manager ofImage. While they were in Kentucky, Sulfridge spent only onehour with CW1 and his boss, giving CW1 the impression that therewas something wrong at Image . CW1 stated, "That guy[Sulfridge] was totally cagey. . . . I had a feeling there wassomething wrong but it was a surprise that it was so big . "

24. These materially false and misleading certifications caused plaintiffs to purchas e

SOURCECORP common stock at inflated prices because during the Class Period,

SOURCECORP 's common stock traded on an efficient market.

25 . During the Class Period, SOURCECORP' s common stock traded in an open,

well-developed and efficient market for the following reasons: (i) several analysts followed and

reported SOURCECORP's financial health, including but not limited to, SG Cowen & Compan y

and William Blair & Comp any; (ii) the market, i.e., NASDAQ , quickly absorbed

SOURCECORP's disclosure of good news about increasing earnings and bad news about the

disaster at Image and the resulting restatement ; for example, when on October 27, 2004 upon the

first bad-news announcement, SOURCECORP' s stock plummeted almost $6 .00 per share in one

day on incredibly heavy volume - 4,300% higher than the day before the bad-new s

announcement; (iii) before its restatements and failure to timely file SEC reports,

SOURCECORP qualified to use SEC Registration Statement Form S-3; for example,

SOURCECORP, then known as F.Y .I ., Inc ., issued S -3's on Ap ri l 28, 1998, March 29, 1999, an d

May 26, 1999, and (iv) plenty of market marker activity surrounded SOURCECORP common

stock .

26. Consequently, transaction causation, i .e., reliance, is presumed via the fraud-on-

the-market theory .

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27. These materially false and misleading certifications caused plaintiffs' financia l

loss because when SOURCECORP made its corrective disclosure and announced that it would

have to restate earnings; that its financials could not be relied upon ; that SOURCECORP violated

its own publicly-stated revenue-recognition policy; and that its internal controls were not a s

strong as represented , SOURCECORP' s stock price dropped thirty percent on historically high

volume in just one day .

SOURCECORP Defendants Falsely Certified SOURCECORP 's DisclosureControls .

28. On March 31, 2003, SOURCECORP filed its Annual Report SEC Form 10-K .

Defendants Bowman and Edwards, among others, signed the 10-K, which provided in part that :

The Company maintains disclosure controls and procedures, whichit has designed to ensure that material information related to theCompany, including its consolidated subsidiaries, is made known tothe Company's disclosure committee, and/or certifying officers (i .e .Chief Executive Officer and Chief Financial Officer), on a timelybasis . In response to recent legislation and proposed regulations, theCompany reviewed its internal control structure and its disclosurecontrols and procedures . Although the Company believes its pre-existing disclosure controls and procedures were adequate to enablethe Company to comply with its disclosure obligations, as a result ofsuch review, the Company implemented minor changes, primarily toformalize and document the procedures already in place . TheCompany also established a disclosure committee, which consists ofcertain members of the Company's senior management . Within the90 days prior to the filing date of this report, the Company carriedout an evaluation, under the supervision and with the participationof the Company's management, including the Company's ChiefExecutive Officer and Chief Financial Officer, of the effectivenessof the design and operation of the Company's disclosure controlsand procedures pursuant to Securities Exchange Act of 1934, asamended, Rule 13a-14 and 15d-14 . Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded thatthe Company's disclosure controls and procedures are effective intimely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to beincluded in the Company's periodic SEC Filings .

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29. On May 13, 2003, August 13, 2003, November 13, 2003, March 12, 2004, Ma y

10, 2004, and August 9, 2004, the SOURCECORP Defendants filed, and Defendants Bowman

and Edwards, among others, signed SEC filings that contained a substantially similar certification

about SOURCECORP's controls .

30. These certifications were materially false and misleading when made, a s

paragraphs 20 through 23 explain .

31 . The SOURCECORP Defendants made these materially false and misleadin g

certifications either consciously or with severe recklessness, as paragraph 23 explains .

32 . These materially false and misleading certifications caused plaintiffs to purchas e

SOURCECORP common stock at inflated prices, as paragraphs 24 through 26 explain .

33 . These materially false and misleading certifications caused plaintiffs' financia l

loss, as paragraph 27 explains .

SOURCECORP Defendants Knowingly Or Recklessly Misstate SOURCECORP'sRevenue-Recognition Policies And Practices.

34. On or about April 9, 2002, SOURCECORP filed and Defendants Bowman and

Edwards signed SOURCECORP's SEC Form 10-K/A. That form purpo rted to explain

SOURCECORP' s revenue-recognition policy as follows :

Revenue is recognized when the services are rendered, orproducts are delivered to the customer . Unearned revenuerepresents certain services which are billed in advance ofperforming the services .

35. On or about August 18 , 2002, SOURCECORP filed and Defendants Bowman and

Edwards signed SEC Form 10 -Q to report SOURCECORP' s results for 2Q 2002 . That form said

the following about SOURCECORP's revenue-recognition policy :

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Revenue Recognition. Our revenue is principally driven bytransaction volumes. We generally recognize revenue astransactions are completed and accepted by customers . In a fewinstances, due to contractual terms and billing cycle cutoffs, we areunable to bill for work completed in a certain period . In thesecases, we recognize the revenue in the month that the work isperformed in order to match the revenue with the cost of services .The work is billed to the customer according to the terms of theagreement or during the following billing cycle .

36. On or about March 31, 2003, SOURCECORP filed and Defendants Bowman and

Edwards signed SEC Form 10-K to report SOURCECORP 's results for fiscal year 2002, whic h

purported to explain SOURCECORP' s revenue -recognition policy as follows :

Revenue Recognition. We recognize our revenue as it becomesrealized or realizable and earned according to the criteria providedby Staff Accounting Bulletin 101, Revenue Recognition inFinancial Statements . Revenue recognition occurs once persuasiveevidence of an arrangement exists, delivery has occurred or serviceshave been rendered, the sales price is fixed or otherwisedeterminable, and collection is reasonably assured .

37. SOURCECORP filed and Defendants Bowman and Edwards signed SEC forms

containing substantially similar purpo rted explanations of SOURCECORP' s revenue-recognition

policy on or about May 13, 2003, August 13, 2003, November 13, 2003, March 12, 2004, May

10, 2004, and August 9, 2004 .

38. These purported explanations of SOURCECORP's revenue -recognition policy

were mate rially false and misleading when made because, as SOURCECORP later admitted on

October 27, 2004, SOURCECORP was violating its publicly-stated policy for recognizing

revenue :

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(1) The adjustments for 2003 relate to revenue and associatedexpenses that were recognized prior to deliveringcontractually required output for a certain customer. Aportion of the adjustments for 2004 relate to revenue andassociated expenses that may have been recognized prior todelivering contractually required output to certain customers .

(2) A portion of the adjustments for 2004 relate to services whichwere performed and delivered to certain customers in excessof the volume and /or revenue limits set by the contract .

39. These purported explanations of SOURCECORP' s revenue-recognition polic y

were materially false and misleading when made also because , as SOURCECORP later admitted

in January 2005 , SOURCECORP was violating its publicly-stated policy for recognizing

revenue, as paragraphs 20 and 21 explain .

40. The SOURECORP Defendants issued these purported explanations o f

SOURCECORP' s revenue-recognition policy either consciously or with severe recklessness, a s

paragraph 23 explains.

41 . These materially false and misleading statements about SOURCECORP's

revenue-recognition policy caused plaintiffs to purchase SOURCECORP common stock at

inflated prices, as paragraphs 24 through 26 explain .

42. These materially false and misleading statements about SOURCECORP's

revenue-recognition policy caused plaintiffs' financial loss, as paragraph 27 explains .

SOURCECORP Defendants Recklessly Published False And Misleading FinancialReports .

43 . On May 3, 2001, the SOURCECORP Defendants announced results for 1Q 2001 ,

which ended March 31, 2001 :

Earnings Per Share Rises to $ .52 Per Share on Record Revenueand Net Income

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DALLAS, May 3 /PRNEWSWIRE / -- F.Y.I . Incorporated (Nasdaq :FYII) . . . today announced record results for its first fiscal qua rterended March 31, 2001 .

First quarter revenue increased 13 percent to $121 .4 million from$107.8 million for the same period last year . First quarter netincome and diluted earnings per share rose 21 percent to $8 .7million from $7.2 million and 13 percent to $ .52 from .46,respectively, compared to the same period results last year .

The announcement quoted Defendant Bowman :

F.Y.I. delivered record revenue and profit results for the firstquarter, along with increased operating margins of 13 .4 percent, upfrom 12 .6 percent for the same period in 2000 .

44. On or about May 15, 2001, SOURCECORP filed and Defendants Bowman an d

Edwards signed SEC Form 10-Q for the same period . That form repeated the results misstated in

the release quoted in paragraph 43 .

45 . On August 9, 2001, SOURCECORP Defendants announced results for 2Q 2001 ,

which ended June 30, 2001 :

Earnings Per Share from Ongoing Operations Rise 20% to$.55, Excluding One-time ItemsDALLAS, August 9, 2001 - F .Y.I. Incorporated (Nasdaq: FYII),. . . today announced . . . its earnings results for the second fiscalquarter ended June 30, 2001 .

Second quarter revenue increased 22 percent to $106 .9 millionfrom $87.3 million for the same period last year . Second quarternet income and diluted earnings per share rose 35 percent to $9.7million from $7.2 million and 20 percent to $ .55 from $.46,respectively, compared to the same period results from last year .These results consist of the Company's results from ongoingoperations and exclude the one-time charges recorded in the secondquarter and the results of operations for all divested units .

The announcement quoted Defendant Bowman :

F.Y.I. continued to deliver strong financial results from ongoingoperations during the second quarter with record revenue and profitresults . . . . Cash flow from ongoing operations also remained very

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strong during the second quarter, increasing 116 percent to $10 .6million from $4 .9 million for the same period in 2000 .

46. On or about August 14, 2001, SOURCECORP filed and Defendants Bowman and

Edwards signed SEC Form 10-Q for 2Q 2001 . That form repeated the results misstated in the

release quoted in paragraph 45 .

47. On November 14, 2001, SOURCECORP Defendants announced results for 3 Q

2001, which ended September 30, 2001 :

DALLAS, November 14, 2001 -- F .Y.I. Incorporated (Nasdaq :FYII) . . . today announced its earnings results for the third fiscalquarter ended September 30, 2001 .

Third quarter revenue increased 10 percent to $102 million from$92.7 million for the same period last year. Third quarter netincome rose 8 percent to $8 .5 million from $7 .9 million and dilutedearnings per share were $ .48 versus $.49, a decline of 2 percentcompared to the same period results from last year . These resultsconsist of the Company's results from ongoing operations andexclude the one-time gains recorded in the third quarter and theresults of operations for all divested units during the second andthird quarter of 2001 .

The announcement quoted Defendant Bowman :

We produced solid cash flow from ongoing operations of $13 .1million, up 24 percent from the second quarter . New businessbookings were very strong . During the quarter, we signed contractswith total expected value of $57 million. This is up 58 percent overthe second quarter and 35 percent over the third quarter of 2000 .

48. On or about November 14, 2001, SOURCECORP filed and Defendants Bowman

and Edwards signed SEC Form 10-Q for 3Q 2001 . That form repeated the materially false an d

misleading financials quoted in paragraph 47 .

49. On May 9, 2002, SOURCECORP Defendants announced "stronger than

expected" results for IQ 2002, which ended March 31, 2002 :

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DALLAS, MAY 9, 2002 - SOURCECORP-TM- (Nasdaq : SRCP),. . . today reported 2002 first quarter diluted earnings per share of$.34 on revenues of $103 .3 million .

The announcement quoted Defendant Bowman :

During the first quarter of 2002, the Company . . . completed ourcost reduction plan, announced in early January, on schedule; weachieved our targeted cash flows from operations[ . ]

The Company recorded slightly stronger than expected revenuesduring the first quarter, with a sequential increase of approximately3 .4 percent from the fourth quarter of 2001 . * * *

New sales were strong during the quarter . The Company closedsales expected to produce total revenues of approximately $47 .7million, a sequential increase of 45 percent over sales during thefourth quarter of 2001 .

50. On or about May 15, 2002, SOURCECORP filed and Defendants Bowman an d

Edwards signed SEC Form 10-Q for 1Q 2002 . That form repeated the materially false and

misleading financials quoted in paragraph 49 .

51 . On August 7, 2002, SOURCECORP Defendants announced results for 2Q 2002,

which ended June 30, 2002:

DALLAS, August 7, 2002 - SOURCECORPTm (Nasdaq : SRCP), . .. today reported 2002 second quarter diluted earnings per share of$ . 42 on revenue of $105 .8 million.

** *

The Company produced cash flow from operations of $12 .7million for the second quarter of 2002, an increase of 18 .7 percentfrom the first quarter of 2002 .

The announcement quoted Defendant Bowman :

Revenue modestly exceeded our expected range of $100 million to$103 million for the quarter and improved by approximately 2 .4percent, compared with the Company's revenue for the first quarterof 2002 . During the second quarter, operating margins alsoincreased sequentially by 230 basis points from 10 .9 percent to13.2 percent, as a result of both our cost reduction plan which wecompleted during the first quarter and favorable revenue mix[ .]

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52. On or about August 18 , 2002, SOURCECORP filed an d Defendants Bowman and

Edwards signed SEC Form 10-Q for 2Q 2002 . That form repeated the materially false and

misleading financials quoted in paragraph 51 .

53. On November 6, 2002, SOURCECORP Defendants announced results for 3Q

2002, which ended September 30, 2002 :

Revenue and Earnings Increase Over Q2 Result s

DALLAS, November 6, 2002 - SOURCECORPTM (Nasdaq :SRCP) . . . today reported 2002 third quarter diluted earnings pershare of $ .44 with revenue of $107 .5 million, in line with thefinancial guidance provided by the Company in August .

***

During the third quarter, the Company closed sales anticipated toproduce total revenue of approximately $47 .4 million, includingamounts expected to be recognized in future years .

The announcement quoted Defendant Bowman :

The Company's overall business and financial results continued toimprove sequentially during the third quarter . Revenue increasedby approximately 1 .6 percent, compared with the Company'srevenue for the second quarter of 2002 .

These third quarter new business results represented a significantincrease over our second quarter results, as expected . Year-to-date,we have added approximately $118 million in new business sales,which give us additional revenue visibility into 2003 and beyond.

54. On or about November 14, 2002, SOURCECORP filed and Defendants Bowman

and Edwards signed SEC Form 10-Q for 3Q 2002 . That form repeated the materially false an d

misleading financials quoted in paragraph 53 .

54. On February 19, 2003, SOURCECORP Defendants announced results for 4Q

2002 and for FY 2002, which ended December 31, 2002 :

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•

Company Provides Increased Outlook for Q1 and InitialOutlook for Q2 and 2003 Full Year .

DALLAS, February 19, 2003 - SOURCECORPTM (Nasdaq :SRCP), . . . today reported 2002 annual revenues of $429 .4 millionand diluted earnings per share of $1 .65. Compared with pro-forma2001 annual results, revenues increased 2 .4 percent and dilutedearnings per share decreased 25 percent . Fourth quarter 2002revenues and diluted earnings per share were $112 .8 million and$.45, respectively, both at the upper end of the increased guidancefor the quarter provided by the Company last month .

56. On or about March 31, 2003, SOURCECORP filed and Defendants Bowman an d

Edwards signed SEC Form 10-K, which repeated the same materially false and misleading

financials quoted in paragraph 55 .

57. On May 7, 2003, SOURCECORP Defendants announced results for 1 Q 2003 ,

which ended March 31, 2003 :

DALLAS, May 7, 2003 - SOURCECORPTT' (Nasdaq: SRCP) . . .today repo rted 2003 first quarter revenue of $109 . 5 million anddiluted earnings per share of $ .47 . First quarter revenue andearnings per share were at the top end of financial guidanceprovided by the Company in February .

The announcement quoted Defendant Bowman, who misled investors to believe that

SOUCECORP was operating according to plan :

Overall, gross and operating profits and margins, and net incomeincreased on both a sequential and year-over-year basis whencompared with the fourth and first quarters of 2002, respectively.Also, diluted earnings per share increased 23 .7 percent sequentiallyand 38 .2 percent year-over-year .

Compared with the first quarter of 2002, revenue increased byapproximately six percent, reflecting increases from Legal ClaimsAdministration and Legal Consulting Services . The higher marginsassociated with these project revenues and the cost savingsinitiatives that we completed during 2002 contributed significantl y

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to the year-over-year increase in first quarter diluted earnings pershare .

58. On or about May 13, 2003, SOURCECORP filed and Defendants Bowman and

Edwards signed SEC Form 10-Q for IQ 2003 . That form repeated the materially false and

misleading financials quoted in paragraph 57 .

59. On August 6, 2003, SOURCECORP Defendants announced SOURCECORP' s

results for 2Q 2003, which ended June 30, 2003 :

DALLAS, August 6, 2003 - SOURCECORPTM (Nasdaq: SRCP), . .. today reported 2003 second quarter revenue of $101 . 8 million anddiluted earnings per share of $ .35 .

The Company produced cash flow from operations of $29 .4 millionduring the second quarter of 2003, an increase of approximatel y131 percent from the second quarter of 2002 .

60. On or about August 13, 2003, SOURCECORP filed and Defendants Bowman an d

Edwards signed SEC Form 10 -Q for 2Q 2003 . That form repeated the mate rially false and

misleading financials quoted in paragraph 59 .

61 . On November 5, 2003, SOURCECORP Defendants announced results for the 3 Q

2003, which ended September 30, 2003 :

DALLAS, November, 5 2003 - SOURCECORPTM (Nasdaq :SRCP ), . . . today reported 2003 third quarter revenue of $100 .9million and diluted earnings per share of $ .40 .

62. On or about November 13, 2003, SOURCECORP filed and Defendants Bowman

and Edwards signed SEC form 10-Q for 3Q 2003 . That form repeated the materially false an d

misleading financials quoted in paragraph 61 .

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63 . On February 18, 2004 and then purportedly corrected on February 19, 2004, th e

SOURCECORP Defendants announced results for 4Q 2003 and for FY 2003, which ende d

December 31, 2003 :

DALLAS, Feb. 18 /PRNewswire-FirstCall/ - SOURCECORP®(Nasdaq : SRCP-News), . . . today reported fully diluted earningsper share of $0 .43 for the fourth quarter ended December 31, 2003 .This represents a 13 percent increase over the same quarter in 2002 .Sequentially, earnings per share improved 8% over the third quarterof 2003. Driven by stronger than expected project revenue fromLegal Claims Administration, revenues for the fourth quarter of2003 were $112 million, an 11 percent increase over the thirdquarter of 2003 . Net income was $7.0 million, versus $6 .7 millionin Q4'02.

For the fiscal year ended December 31, 2003, SOURCECORP'sfully diluted earnings per share were $1 .65, an increase of 4 .4percent over 2002 on slightly lower revenues . The current yearfully diluted earnings per share benefited from our share repurchaseprogram. During 2003, we acquired 1,306,979 shares at an averagecost of $15 .84 per share. Revenue for the full year was $424million, versus $429 million in 2002.

64. On or about March 12, 2004, SOURCECORP filed and Defendants Bowman and

Edwards signed SEC Form 10-K for FY 2003 . The form repeated the materially false and

misleading financials quoted in paragraph 63 .

65. On May 6, 2004, SOURCECORP Defendants announced results for 1Q 2004,

which ended March 31, 2003 :

DALLAS, Texas (May 6, 2004) - SOURCECORP, Inc.(NASDAQ: SRCP), . . . today repo rted revenues for the first quarterof 2004 of $110.3 million compared to $109 .5 million in the p rioryear quarter[ . ]

66 . On or about May 10, 2004, SOURCECORP filed and Defendants Bowman and

Edwards signed SEC Form 10-Q for IQ 2004 . That form repeated the materially false and

misleading financials quoted in paragraph 65 .

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67. On August 5 , 2004, SOURCECORP Defendants announced results for 2Q 2004,

which ended June 30, 2004 :

DALLAS, Texas (August 5, 2004 ) - SOURCECORP, Inc .(NASDAQ: SRCP), . . . today reported revenues for continuingoperations for the second quarter of 2004 of $97 .5 million. Thiscompares to $92 .2 million in the prior year quarter, an increase of5.7%, driven largely by solid growth in our critical statementsbusiness , higher project revenue from Legal offerings , strongervolumes in our Healthcare offe rings related to project staffing andscanning services , and $2 million from the KeyPoint acquisitionwhich closed in the second quarter. Diluted earnings per sharefrom continuing operations were $0 .39, a 6 .0% increase over lastyear's second quarter, and in line with Comp any and analysts'expectations .

68. On or about August 9, 2004, SOURCECORP filed and Defendants Bowman and

Edwards signed SEC Form 10-Q for 2Q 2004. That form repeated the materially false an d

misleading financials quoted in paragraph 67 .

69. SOURCECORP' s reported Class Period results, discussed in paragraphs 43

through 68, supra., were materially false and misleading when announced, as paragraphs 2 0

through 23 and paragraph 75 explain . Further, the results were material false and misleading

when announced because, as explained in paragraphs 95 through 107, SOURCECORP's reporte d

Class Period results violated GAAP.

70. The SOURCECORP Defendants announced these materially false and misleading

results either consciously or with severe recklessness, as paragraph 23 explains .

71 . These materially false and misleading results caused plaintiffs to purchas e

SOURCECORP common stock at inflated p rices, as paragraphs 24 through 26 explain.

72. These materially false and misleading results caused plaintiffs' financial loss, a s

paragraph 27 explains.

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SOURCECORP Defendants Recklessly Certified False And Misleading FinancialReports .

73 . On or about May 15, 2001, SOURCECORP filed its SEC Form 10-Q to repor t

results for 1Q 2001 . Defendants Bowman and Edwards signed the report, which purported t o

assure investors that SOURCECORP 's financial statements (and the input provided by its

subsidiaries) were accurate :

The accompanying consolidated financial statements and relatednotes to consolidated financial statements include the accounts ofF.Y.I. Incorporated and our subsidiaries .

In the opinion of our management, the accompanying consolidatedfinancial statements include all of our accounts and the adjustmentsnecessary to present fairly our financial position at March 31,2001, our results of operations for the three ended March 30, 2000and 2001 .

74. SOURCECORP filed SEC Forms, Defendants Bowman and Edwards signed thos e

forms , which made similar assurances to investors that SOURCECORP 's financial statement

(and the input provided by its subsidiaries) were accurate on or about August 14, 2001 ,

November 14, 2001, May 15, 2002, August 18, 2002, November 6, 2002, May 13, 2003, Augus t

13, 2003, November 13, 2003, May 10, 2004, and August 9, 2004.

75 . These assurances were materially false and misleading when made becaus e

SOURCECORP admitted the following :

• On October 27, 2004, SOURCECORP announced that"previously issued financial statements . . . for the year endedDecember 31, 2003, as well as previously issued financialstatements for the 2004 quarterly periods ended March 31, 2004and June 30, 2004, should no longer be relied upon;

• On January 21, 2005, SOURCECORP filed with the SEC Form8-K, which announced, among other things that : "[T]heCompany's Audit Committee, on January 17, 2005, concluded thatthe Company's previously issued financial statements and relatedindependent auditors' reports for the years ended December 31,

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2001 and 2002, should no longer be relied upon . * * * Asmaterial adjustments to the Company's financial statements will berequired, investors should not rely on the financial informationcontained in the Company's Annual Report on Form 10-K for theyears ended December 31, 2001 . . . 2002, and . . . 2003 or in theCompany's Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2004 and June 30, 2004, or any other financialinformation previously furnished by the Company regarding suchperiods .

76. The assurances above were also materially false and misleading when made, a s

explained in paragraphs 20 through 23 .

77. The SOURECORP Defendants issued these purported assurances about

SOURCECORP 's financials either consciously or with severe recklessness, as paragraph 23

explains .

78 . These materially false and misleading assurances caused plaintiffs to purchase

SOURCECORP common stock at inflated prices , as paragraphs 24 through 26 explain .

79. These materially false and misleading assurances caused plaintiffs' financial loss ,

as paragraph 27 explains .

80. On or about August 18, 2002, SOURCECORP filed its SEC Form 10-Q to report

results for 2Q 2002, which ended on June 30, 2002 . Defendants Bowman and Edwards signe d

the certification, which provides as follows :

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,United States Code), each of the undersigned officers ofSOURCECORP, Incorporated, a Delaware corporation (the"Company"), does hereby certify that :

The Quarterly Report on Form 10-Q for the quarter ended June 30,2002 (the "Form 10-Q") of the Company fully complies with therequirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934 and information contained in the Form 10-Q fairl y

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presents, in all material respects , the financial condition and resultsof operations of the Company.

81 . The SOURECORP Defendants filed similar cert ifications , each signed by Bowan

and Edwards, on or about : November 14, 2002 ; March 31, 2003 ; May 13, 2003 ; August 13 ,

2003; November 13, 2003 ; March 12, 2004 ; May 10, 2004; and August 9, 2004 .

82. Each of these certifications referred to in paragraphs 80 and 81, supra ., was

materially false and misleading when made ; in fact, the information contained in

SOURCECORP's Class Period SEC filings did not "fairly present [], in all material respects, the

financial condition and results of operations for the Company." Further, SOURCECORP' s

improper revenue-recognition practices led SOURCECORP to announce that it would have to

adjust its revenues and diluted earnings per share for 2003 by at least $5 .4 million and $0.1 9

respectively. For the six months ended June 30, 2004, the Company stated that it may have to

adjust its revenues and diluted earnings per share by at least $2 .8 million and $0.10 respectively .

83 . These purported certifications were materially false and misleading when mad e

also because, as SOURCECORP later admi tted in January 2005, SOURCECORP was not in fact

adhering to its publicly-stated policy for recognizing revenue, as paragraphs 20 and 21 explain .

84. The SOURECORP Defendants issued these purported explanations of

SOURCECORP' s revenue-recognition policy either consciously or with severe recklessness, as

paragraph 23 explains .

85. These materially false and misleading certifications caused plaintiffs to purchas e

SOURCECORP common stock at inflated prices, as paragraphs 24 through 26 explain .

86. These materially false and misleading certifications caused plaintiffs' financia l

loss, as paragraph 27 explains .

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SOURCECORP Defendants Falsely Assured Investors That SOURCECORP'sFinancials Complied With GAAP .

87. On or about March 31 , 2003, SOURCECORP filed and Defendants Bowman and

Edwards signed SOURCECORP' s SEC Form 10-K which, among other things, purpo rted to

assure investors that SOURCECORP prepared its financial statements according to GAAP :

Management's Discussion and Analysis of Financial Condition andResults of Operations are based on the related consolidatedfinancial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States ofAmerica . The preparation of the financial statements requires theuse of estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses .

88. SOURCECORP filed and Defendants Bowman and Edwards signed SEC forms

making similar purported assurances on or about May 13, 2003 ; August 13, 2003 ; November 13,

2003 ; March 12, 2004 ; May 10, 2004; and August 9, 2004 .

89. These purported assurances were materially false and misleading because, as

SOURCECORP would later admit , its Class Period financial statements actually violated GAAP .

SOURCECORP so admitted in public announcements on October 27, 2004, January 21, 2005 ,

February 15, 2005, and March 23, 2005 .

90. These purported assurances were materially false and misleading and

SOURCECORP' s financials violated GAAP also for the reasons explained in paragraphs 95

through 107.

91 . These purported assurances were materially false and misleading when made als o

because, as SOURCECORP later admitted in January 2005, SOURCECORP was not in fac t

adhering to its publicly-stated policy for recognizing revenue, as paragraphs 20 and 21 explain .

Further, Defendants ' representations that SOURCECORP 's financial statements were prepared in

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accordance with GAAP were materially false and misleading because SOURCECORP

Defendants or their agents/employees : (1) engaged in the numerous and varied fraudulent

revenue recognition practices detailed in this Complaint, all of which materially overstated th e

Company's reported revenues and other financial results and enabled the Company to falsely

represent that it the Company was on target to meet its guidance ; (2) failed to disclose that it

omitted certain expenses for certain customers in order to meet its revenue targets ; and (3) failed

to disclose the lack of internal controls necessary to ensure that orders were not improperl y

booked. Each of these misrepresentations, material omissions and fraudulent revenu e

recognition practices, standing alone , was a material breach of GAAP, applicable SE C

regulations and the Company's own accounting policies .

92. The SOURECORP Defendants issued these purpo rted assurances eithe r

consciously or with severe recklessness, as paragraph 23 explains .

93 . These materially false and misleading assurances caused plaintiffs to purchase

SOURCECORP common stock at inflated prices, as paragraphs 24 through 26 explain .

94. These materially false and misleading assurances caused plaintiffs' financial loss ,

as paragraph 27 explains .

SOURCECORP 's Financials Violated GAAP.

95. Regulation S-X2 applies to SOURCECORP and provides that fin ancial statements

filed with the SEC that are not prepared in compli ance with GAAP are presumed to be

misleading and inaccurate . Accounting Series Release ("ASR") 4, codified at SRA 34 .

96. Exchange Act § 13 requires, in part, that SOURCECORP :

devise and maintain a system of internal accounting controlssufficient to provide reasonable assurances that - -

2 Regulation S-X governs the form and content requirements for financial statements that are included withSEC filings.

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transactions are recorded as necessary (i) to permit preparation offinancial statements in conformity with generally acceptedaccounting principles or any other criteria applicable to suchstatements, and (ii) to maintain accountability for assets ;

15 U.S.C. § 78m(b) .

97. Under GAAP, revenue should not be recognized until it is both ea rned and

collectible . SAB 101 ; SFAC No . 5,1183-84 . Under GAAP, as defined in SAB 101 and

pronouncements of the FASB Board, these two conditions are generally met whe n

all of the following criteria are met :

(a) Persuasive evidence of an arrangement exists . SAB 101 ; SFAC No . 2,¶63 ;

(b) Delivery has occurred or services have been rendered . SFAC No . 5, ¶84 ;

(c) The seller ' s price to the buyer is fixed or determinable . SFAC No . 5, ¶83 ;and

(d) Collectibility is reasonably assured. Accounting Research Bulletin("ARB") 43, CH 1A ¶1, APB 10, ¶12 .

98 . For companies like SOURCECORP that sell products and services , revenue is

earned, according to SAB 104 for example , when the products are received and accepted by

SOURCECORP' s customers . SOURCECORP violated this GAAP provision and others b y

repeatedly recognizing revenue upon the shipment of products which were not delivered to th e

customer or where there was no assurance that the customer would accept or pay for the products

and services , as Defendant Edwards' statement to CW2 confirms and as paragraphs 20 through

23 explain.

99. FASB's Statement of Financial Accounting Standards ("SFAS") No . 48 requires

that where the right of return is granted to customers , either implicitly or explicitly, by virtue of

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exceeding volume and/or revenue limits set by a contract, revenue should be deferred unless

certain conditions exist, including :

(a) the seller's price to the buyer is substantially fixed or determinable at thedate of sale ;

(b) the buyer has paid the seller, or the buyer is obligated to pay the seller andthe obligation is not contingent on resale of the product; and

(c) the amount of future returns can be reasonably estimated .

100. Even where the above conditions of SFAS No . 48 are met, an entity is required to

accrue adequate and timely reserves for probable returns and allowances for bad debts . SFAS

48, Revenue Recognition when Right of Return Exists, ¶7, SFAS No . 5, Accounting for

Contingencies , ¶¶22-23 .

101 . As SOURCECORP admi tted on October 27, 2004, SOURCECORP violated

GAAP by recognizing revenue on products that were in excess of the volume and/or revenu e

limits set by the contract and before contractually required goods and services were received by a

particular customer. In short, SOURCECORP admitted that it violated the GAAP rules and

principles laid out above .

102 . SAB 101 recognizes that only in extremely limited circumstances, may revenue b e

realized and earned before actual delivery occurs . SAB 101 sets forth specific criteria that shoul d

be met in order for a registrant to consider recognizing revenue on a "sale" where delivery has

not yet occurred, including :

(a) the risks of ownership must have passed to the buyer ;

(b) the customer must have made a fixed commitment to purchase the goods,preferably in written documentation ;

(c) there must be a fixed schedule for delivery of the goods ;

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(d) the seller must not have retained any specific performance obligations suchthat the earning process is not complete ; and

(e) the product must be complete and ready for shipment .

Further, SAB 101 makes clear that revenue cannot be recognized if the buyer has a right to

return the product and/or service and any one of the following conditions exist :

(a) the buyer does not pay the seller at the time of sale , and the buyer is notobligated to pay the seller at a specified date or dates , SFAS No. 48, ¶6(b)and 22 ;

(b) the buyer does not pay the seller at the time of sale but rather is obligatedto pay at a specified date or dates, and the buyer's obligation to pay iscontractually or implicitly excused until the buyer resells the product orsubsequently consumes or uses the product, SFAS No . 48, ¶6(b) and 22 ;

(c) the buyer's obligation to the seller would be changed (e .g., the seller wouldforgive the obligation or grant a refund) in the event of theft or physicaldestruction or damage of the product, SFAS No . 48, ¶6(c) ;

(d) the buyer acquiring the product for resale does not have economicsubstance apart from that provided by the seller , SFAS No. 48, ¶6(d) ; or

(e) the seller has significant obligations for future performance to directlybring about resale of the product by the buyer . SFAS No . 48, ¶6(e) .

103. As noted in SAB 101, the SEC further requires that the following items b e

disclosed and discussed by all registrants, in accordance with the SEC's Financial Reportin g

Release No. 36, including, changing trends in shipments into, and sales from, a sales channel o r

separate class of customer that could be expected to have a significant effect on future sales o r

sales returns .

104. These same straight-forward accounting principles are also reflected i n

SOURCECORP' s own revenue recognition policy, which was stated in SOURCECORP's Form

10-K filed with the SEC on or about March 31, 2003 .

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105. The SOURCECORP Defendants admitted in several public statements, sta rt ing on

October 27 , 2004 that they violated both GAAP and its own revenue recognition policies by

repeatedly recognizing revenue before products were shipped or services tendered, and collection

was not reasonably assured .

106. In addition to the accounting violations desc ribed above , the SOURCECORP

Defendants and the Image Defendants allowed SOURCECORP to present its financial statements

in a manner that violated, among others, the following GAAP principles :

(a) the principle that a conservative approach be taken to ensure tha t

uncertainty and risks inherent in business situations are adequately considered, and that errors i n

measurement be in the direction of understatement rather than overstatement of net income an d

net assets . (See SFAC No. 2 IT 91-97) ;

(b) the principle that the financial information presented should be complete .

(See SFAC No. 2,11 79-80) ;

(c) the principle of fair presentation ("even handed, neutral or unbiase d

information") . (See SFAC No. 1, ¶33) ;

(d) the principle of adequacy and fairness of disclosure ("an entities financia l

position and changes in its financial position is necessary to satisfy the broad purposes o f

financial repo rting") . (See SFAC No. 1, ¶34 and SFAC No . 5, ¶17, 12) ;

(e) the principle of materiality concerning information that is significant

enough to affect the judgment of a reasonable person . (See SFAC No. 2, ¶132) ;

(f) the principle that the financial statements contain and disclose relevant and

timely information for the economic decisions of the user . (See SFAC No. 2, 11 47, 48, 52, 56) ;

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(g) the principle that the financial statements provide reliable financial

information that represents the economic conditions or events that it purports to represent . (See

SFAC No. 2,115 8, 62) ;

(h) the principle that financial information should be comparable an d

consistent with similar information about other enterprises and with similar information about the

same enterp rise for some other period or some other point in time . (See SFAC No. 2 IT 111, 115 ,

117, 120) ;

(i) the principle that financial information should be neutral, or free from bias

towards a predetermined result . (See SFAC No . 2 1198, 99) ;

(j) the principle that financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources, and the effects of transactions ,

events, and circumstances that change resources and claims to those resources . (See SFAC No . 1

¶40) ;

(k) the principle that financial reporting should provide information that i s

useful to users of the financial statements in making rational investment, credit, and simila r

decisions . (See SFAC No. 1 ¶34) ;

(1) the principle that accounts receivable must be reported in the financial

statements at net realizable value . (See ARB 43, Chapter 3A) ; and

(m) the p rinciple that disclosure of an entity' s accounting policies should

identify and describe the accounting principles followed by the reporting entity and the method s

of applying those principles that materially affect the determination of financial position, change s

in financial position, or results of operations because information about the accounting policies

adopted by a report ing entity is essential for financial statement users . (See APB 22, ¶8, 12) .

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107. By announcing that it will restate its financial statements, and by restating it s

financial statements, SOURCECORP has now admi tted that its financial statements during, at

least, the Class Period were materially false and misleading in that GAAP provides that onl y

previously issued financial statements which are misstated as a result of an oversight or a misus e

of facts that existed at the time are to be retroactively restated . (See, e.g., APB 20 and APB 9) .

Image Defendants' Knowing Misconduct

108 . CW's 1 and 3 identified Image and Deaton as the culprits . SOURCECORP

identified, albeit indirectly, Image as the culprit subsidiary when SOURCECORP said that th e

culprit subsidiary was purchased in March 2001 . On or about November 1, 2004 ,

SOURCECORP filed and Defendant Bowman signed SEC Form 8-K :

The operating subsidiary that is the subject of the investigationwas acquired by the Company in March 2001 pursuant to anacquisition agreement that required the Company to make earn outpayments to the seller if certain financial hurdles were achieved bythe subsidiary . The last earn out period under the agreement forwhich such hurdles were measured ended February 28, 2004 .

109. According to SOURCECORP' s stock purchase agreement with the Image

Defendants, SOURCECORP bought Image in March 2001 and the last earn out period under the

agreement . . . ended February 28, 2004 .

110. As SOURCECORP admitted, the Image Defendants (1) recorded revenue before

Image delivered product to the customer ; (2) recorded revenue for product delivered in excess of

what contracts called for; and (3) shifted expenses to non-SOURCECORP entities, all in

violation of GAAP, as explained in 1195-107. The Image Defendants did so over the entire

Class Period, which ultimately caused SOURCECORP to adjust downward its Class Perio d

income by $33 . 9 million. Their fraudulent actions amounted to the scheme , device, artifice ,

practice, or course of business that Rules 1 Ob-5(a) and (c) forbid .

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111 . Defendant Deaton, Image's founder , ran Image before and after SOURCECOR P

bought Image from Deaton. Deaton and Image intentionally overstated revenues and understated

expenses to ensure that he hit the earnings targets necessary to receive his $25 million earn-out .

112. CW6 told Lead Plaintiff' s investigators that shortly after SOURCECORP

discovered the huge accounting irregularities at Image, Deaton left Image in September o r

October 2004. So did Image's head of accounting, Michael Sulfridge, the person that CW 1

identified as acting "cagey" during SOURCECORP's 2004 review of Image .

113. In addition to Deaton's and Sulfride's leaving Image around the time the

accounting irregularities surfaced, a strong inference of scienter arises as to Deaton given hi s

motivations for falsifying Image's results - the $25 million earn-out .

114. Deaton's and Image's scienter is further confirmed by the allegations in paragrap h

23 and by the size and scope of SOURCECORP' s restatement .

115. Deaton's and Image's passing inflated earnings numbers to paren t

SOURCECORP caused plaintiffs to buy SOURCECORP common stock at an artificially inflated

price, as explained in paragraphs 24 through 26 .

116 . Deaton's and Image's passing inflated earnings numbers to parent

SOURCECORP caused plaintiffs to lose millions, as explained in paragraph 27 .

SOURCECORP's True Financial Condition Reveale d

117 . On February 15, 2005, SOURCECORP Defendants updated the massive

restatement :

The Company disclosed on January 21, 2005 that certain write-downs of goodwill would be required for 2001, 2002, 2003 andthe first six months of 2004. These goodwill write-downs relate tothe overpayment of earn-out payments under the provisions of theacquisition related earn-out agreement . These earn-out paymentswere originally reported as a use of cash from investing activities ,

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but now should be characterized as a use of cash from operatingactivities .

As reported by the Company on January 21, 2005, the Companyoriginally expected to write-down between $10 . 0 million and$10.5 million of goodwill relating to acquisition payments inrespect of the Company's subsidiary currently under investigationduring the first six months of 2004 . The Company is updating itsestimated restatement adjustments for the first six months of 2004 .The Company has determined that the second half of 2004 is theappropriate period to write-down this goodwill , instead of the firsthalf of 2004 , which results in a movement of this write-downexpense from the first half of 2004 to the second half of 2004(specifically a movement from Q2 2004 to Q3 2004) .

** *

(1) As a result of the structure of the acquisition of the operatingsubsidiary that is the subject of this investigation, the formerowners of such subsidiary had the opportunity to earn additionalsale proceeds for the twelve-month periods ended February 28,2002, February 28, 2003 and February 29, 2004 based on earningsbefore interest and taxes of such operating subsidiary (in excess ofdesignated thresholds) calculated in accordance with GenerallyAccepted Accounting Principles for each respective period. Basedon the preliminary findings of the Company's investigation,earnings before interest and taxes attributable to such subsidiarywere overstated during the earn-out periods resulting in paymentsmade by the Company under the provisions of the earn-out thatotherwise would not have been made . The Company's currentassessment is that the goodwill resulting from such paymentsshould be written down .

(2) The goodwill write-down expense for 2004 will be recognizedduring the six months ended December 31, 2004 (see our updated2004 guidance discussion below for the impact of this expense onour guidance for such period) .

118 . On March 23, 2005, SOURCECORP Defendants announced that SOURCECOR P

had concluded its restatement for the years-ended December 31, 2001, 2002, 2003, and the firs t

two quarters of 2004, ended March 31, 2004 and June 30, 2004 :

DALLAS, Texas (March 23, 2005) - SOURCECORP,Incorporated (NASDAQ : SRCPE) (the "Company") today i s

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pleased to announce the completion of its restatement of certainfinancial information on an unaudited basis for the years endedDecember 31, 2001, 2002, 2003, and the six months ended June30, 2004 (collectively, the "Restatement Period") .

Restatement

As previously announced, the Company, with the oversight andapproval of the Audit Committee of its Board of Directors,conducted an investigation of the financial results of one of itsoperating subsidiaries in the Information Management andDistribution reportable segment . The findings of the investigationconcluded that the operating subsidiary had incorrectly recognizedrevenue for certain customer arrangements and omitted certainexpenses from its financial results reported to the Company.Collectively, the incorrect revenue recognition and expenseomission issues resulted in overpayments and over accruals by theCompany to the former owners of the operating subsidiary ofearn-out amounts payable under the earn-out provisions of theacquisition agreement for the operating subsidiary. The earn-outoverpayments and over accruals were originally recognized asadditional goodwill of the acquired business by the Company in itsfinancial statements .

119. The following charts illustrate the massive nature of the more than three year restatement :

Cumulative Restatement AdjustmentsFor Years Ended December 31, 2001, 2002 and 2003,

and the Six Months Ended June 30, 2004(In millions)

PreviouslyCumulative DisclosedChange to Ranges ofPreviously % of Amounts AdjustmentsReported PreviouslyResults Reported Low End High End

Decrease in revenue $16.6 1 .2% $12.1 $21. 3Increase in SG&A $1 .5 0.4% $1.0 $1. 2Decrease in income fromcontinuing operationsbefore taxes and earn-out

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PreviouslyCumulative Disclose dChange to Ranges o f

Previously % of Amounts AdjustmentsReported PreviouslyResults Reported Low End High End

over payments $18 .1 20.3% $13 .1 $22.5

Earn-out over payments $15 .8 N/A $12.8 $18.8

Decrease in income fromcontinuing operationsbefore taxes $33 .9 38.1% $25 .9 $41. 3

Restated Financial Results(In millions . except earnings per share )

Full Full Ful lYear Year Year Year-to-Date2001 2002 2003 June 30, 2004

Revenue $396.9 $378.5 $378.2 $194 . 8Income from continuin goperations beforetaxes $(25 .3) $31 .8 $33 .2 $15 . 4

Add: Earn-outOverpayment --- 8 .6 7.2 ---

Pro forma income fromcontinuing operation sbefore taxes (1) $(25 .3) $40.4 $40.4 $15 . 4

Diluted earnings pershare from continuingoperations $(1 .44) $1 .13 $1 .20 $0 .5 6

Add: EPS effect ofearn-out overpayment --- 0 .31 0.26 ---

Pro forma dilutedearning per sharefrom continuin goperations $(1 .44) $1 .44 $1 .46 $0.56

LEAD PLAINTIFF'S CLASS ACTION ALLEGATIONS

120. Lead Plaintiff brings this action as a class action under Rules 23(a) and (b)(3) o f

the Federal Rules of Civil Procedure. The Class consists of all persons who purchase d

SOURCECORP common stock during the Class Period and who were damaged thereby (th e

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"Class"). The Class excludes the Defendants, officers and directors of the Company, members o f

their immediate families and their legal representatives, heirs, successors or assigns and an y

entity in which any of the Defendants have or had a controlling interest .

121 . The members of the Class are so numerous that joinder of all members i s

impracticable .

122. Lead Plaintiff's claims are typical of the claims of the members of the Class as al l

members of the Class are similarly affected by Defendants' wrongful conduct in violation o f

federal law .

123. Lead Plaintiff will fairly and adequately protect the interests of the members o f

the Class and have retained counsel competent and experienced in securities class actio n

litigation .

124. Common questions of law and fact exist as to all members of the Class and

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

questions of law and fact common to the Class are whether :

(a) the SOURCECORP Defendants violated Exchange Act § 10(b) ;

(b) the Image Defendants violated Rules 1Ob-5(a) and (c) ;

(c) the SOURCECORP Defendants' public statements misled investors abou t

SOURCECORP' s revenue -recognition policy;

(d) the SOURCECORP Defendants' cert ifications and assurances misled

investors about SOURCECORP' s internal and disclosure controls ;

(e) the SOURCECORP Defendants issued false and materially misleading

financial statements filed with the SEC during the Class Period;

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(f) the SOURCECORP Defendants acted either consciously or with severe

recklessness;

(g) the linage Defendants acted either consciously or with sever recklessness ;

and

(h) the Class suffered damages and the proper measure of such damages .

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

adjudication of this controversy since joinder of all Class members is impracticable .

COUNT I

For Violations of Section 10(b) of the Exchange Actand Rule 10b-5 Against All Defendant s

126. Plaintiff realleges the allegations set forth above as if fully set forth herein . Lead

Plaintiff brings this count under Exchange Act § 10(b) and Rule I Ob-5 against all Defendants.

127. The Defendants : (a) employed devices , schemes , and artifices to defraud ; (b )

made untrue statements of material fact and/or omitted to state material facts necessary in orde r

to make the statements made not misleading ; and (c) engaged in acts, practices, and a course of

business which operated as a fraud and deceit upon the purchasers of SOURCECORP shares in

an effort to maintain art ificially high market p rices for SOURCECORP 's shares in violation o f

Exchange Act § 10(b) and Rule IOb-5 .

128. The SOURCECORP Defendants made misstatements and omissions of material

fact .

129. The Defendants acted either consciously or with severe recklessness .

130. The Defendants' conduct caused Lead Plaintiff and the Class to purchas e

SOURCECORP common stock at inflated prices .

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131 . Neither the Lead Plaintiff nor the Class knew or had reason to suspect the falsity

of the SOURCECORP Defendants ' public misstatement and omissions or any of the other

misconduct complained of herein.

132. The Defendants ' conduct and SOURCECORP' s subsequent corrective disclosure

and massive restatement of earnings cost the Class millions of dollars .

COUNT II

Violation of Section 20(a) of the Exchange ActAgainst Defendants SOURCECORP, Bowman and Edwards

133 . Plaintiff repeats the allegations set forth above as if set forth fully herein .

134. Defendant SOURCECORP acted as a controlling person of Image within the

meaning of Exchange Act §20(a) as alleged herein. Throughout the Class Period, SOURCECORP

held a 100% equity interest in Image . By virtue of its participation in Image's operations and/or

intimate knowledge of its internal financial condition, business practices and products ,

SOURCECORP had the power to influence and control and did influence and control, directly o r

indirectly, the decision-making of Image, including the content and dissemination of the variou s

statements which plaintiffs contend are false and misleading . SOURCECORP was provided with

or had unlimited access to copies of Image's statements alleged by plaintiff to be misleading prior

to and/or shortly after these statements were issued and had the ability to prevent the issuance o f

the statements or cause the statements to be corrected.

135 . Defendants Bowman and Edwards acted as a controlling person of SOURCECORP

and Image within the meaning of Exchange Act § 20(a) as alleged herein . By virtue of their high-

level positions , substantial stock holdings and participation in SOURCECORP 's and Image' s

operations and/or intimate knowledge of their internal financial condition, business practices and

products, Defendants Bowman and Edwards had the power to influence and control and di d

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influence and control, directly or indirectly, the decision-making of SOURCECORP and Image,

including the content and dissemination of the various statements which plaintiff contend are false

and misleading . Defendants Bowman and Edwards were provided with or had unlimited access t o

copies of Image's statements alleged by Plaintiff to be 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 the

statements to be corrected .

136. In particular, Defendants SOURCECORP, Bowman and Edwards had direct

involvement in or intimate knowledge of the day-to-day operations of Image and therefore are

presumed to have had the power to control or influence the particular transactions giving rise to the

securities violations as alleged herein, and exercised the same .

137. As set forth above, Image and Deaton violated Exchange Act § 10(b) and Rule I Ob-

5 by their acts and omissions as alleged in this Complaint . By virtue of their positions a s

controlling persons, Defendants SOURCECORP, Bowman and Edwards are liable under

Exchange Act §20(a) .

138. As a direct and proximate result of the wrongful conduct of defendants, Lead

Plaintiff and other class members suffered damages in connection with their purchase of

SOURCECORP stock during the Class Period .

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiff prays for relief and judgment, as follows :

(A) Determining that this action is a proper class action under Rule 23 of th e

Federal Rules of Civil Procedure ;

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(B) Awarding compensatory damages in favor of Lead Plaintiff and the other

Class members against all Defendants, jointly and severally, for all damages sustained as a resul t

of Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;

(C) Awarding Lead Plaintiff and the Class their reasonable costs and expenses

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 .

JURY TRIAL DEMANDED

Lead Plaintiff demands jury trial .

Dated: June 15, 2005

Respectfully submitted,

By : l L 1-7d-

Roger F . Caxton (TX Bar No. 04329000)Robert J . Hill (TX Bar No. 09652100)CLAXTON & HILL, PLLC700 McKinney Plac e3131 McKinney Avenue, LB-103Dallas, Texas 75204Telephone: (214) 969-9029Facsimile : (214) 953-0583Liaison Counselfor Lead Plaintiff

COHEN, MILSTEIN, HAUSFELD &TOLL, P.L.L.C.Herbert E. MilsteinSteven J . TollDaniel S . SommersJulie Goldsmith ReiserScott L. AdkinsJason M. Leviton1100 New York Ave ., N.W .West Tower, Suite 500Washington, D.C. 20005Telephone:(202) 408-4600Facsimile: (202) 408-4699Lead Counselfor Lead Plaintiff

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CERTIFICATE OF SERVICEI certify that a true and correct copy of the foregoing instrument has been served on the

following counsel of record on this day of June, 2005, via First Class Mail :

Patricia J . VillarealThomas R. JacksonGreg L. WeselkaMichael L. DavittJONES DAY2727 North Harwood StreetDallas , Texas 7520 1

Joe KendallWillie C . BriscoeProvost Umphrey Law Firm, LLP3232 McKinney Avenue, Suite 700Dallas , Texas 75204

Samuel H. RudmanDavid A. RosenfeldMario Alba, Jr.Lerach Coughlin Stoia Geller Rudman &Robbins, LLP200 Broadhollow Road, Suite 406Melville , New York 11747

Frank E. GoodrichRandall K . PulliamBaron & Budd, PC3102 Oak Lawn Avenue, Suite 1100Dallas , Texas 7521 9

Steve G . ShulmanMilberg Weiss Bershad Hynes & Lerach, LLPOne Pennsylvan ia PlazaNew York, New York 1011 9

Maya SaxenaJoseph E . White, II IMilberg Weiss Bershad Hynes & Lerach, LLP5355 Town Center Road, Suite 900Boca Raton, Florida 3348 6

Richard B . BrualdiThe Brualdi Law Firm29 Broadway, Suite 2400New York, New York 1000 6

Marc A. TopazRichard A. ManiskasTamara SkvirkySchiffrin & BarrowayThree Bala Plaza East, Suite 400Bala Cynwyd, Pennsylvania 19004

Robert J. Hil l

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