F V

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

VIVIAN OH, Individually and on Behalf of AllOthers Similarly Situated,

Plaintiff,

vs .

NAVARRE CORPORATION, ERIC H .PAULSON, JAMES G . GILBERTSON, BRIAN T.BURKE, CHARLES E, CHENEY and CARY L .DEACON,

1, 3

Civ. No. D,5'CLASS ACTION

COMPLAINT FOR VIOLATIONS OF FEDERALSECURITIES LAWS

Defendants .DEMAND FOR JURY TRIAL

NATURE OF THE ACTION

This is a federal class action on behalf of purchasers of the common stock of Navarr e

Corporation ("Navarre" or the "Company") between January 21, 2004 and February 22, 2005, inclusive (th e

"Class Period"), seeking to pursue remedies under the Secu ri ties Exchange Act of 1934 (the "Exchange Act") .

2 . Navarre was formed in 1983 and is headquartered in New Hope, Minnesota, Defendant

Navarre engages in the publication and distribution of various home entertainment and multimedia products ,

including personal computer software, audio and video titles, and interactive games .

During the Class Period, defendants issued false financial results which understated expenses

in at least the third quarter of fiscal 2004 and first quarter of fiscal 2005 .' As a result, Navarre's stock trade d

at artificially inflated levels, trading above $15 per share during the second half of calendar 2004 .

4. On January 10, 2005, Navarre announced the acquisition of FUNimation Productions, Ltd .

and The FUNimation Store, Ltd. (collectively "FUNimation") for $100 million in cash and between 1 .495

million and 1 .827 million shares of Navarre stock, depending on the price of Navarre stock. The release

noted FUNimation' s growing sales from 2001 to 2003, but did not report its sales for any period of 2004 .

5 . After this announcement, Navarre's stock reached its Class Period high of $18 .77 per share .

6 . Defendants took advantage of the inflation in Navarre's stock during the Class Period, sellin g

994,362 shares of Navarre stock for proceeds of $13 .8 million .

7 . On January 18, 2005, Navarre filed a registration statement with the SEC to raise up to $14 0

million through the sale of its common stock to fund the acquisition of FUNimation . The Registration

Statement reported the following with respect to FUNimation's financial results (while at the same time

representing that FUNimation's quarterly results were not materially affected by seasonality) :

We believe that, if consummated, the FUNimation acquisition will continue therecent expansion of our publishing business, enable us to establish new relationships withvendors and customers and provide us with attractive content to publish and distribute . Forthe years ended December 31, 2002, 2002 and 2003, FUNimation had net sales of $49 .8million, $63 .7 million and $81 .6 million, respectively, and pre-tax income of $20 .0 million,

Navarre's fiscal year ends on March 31 .

-1-

$24.9 million and $30 .5 million, respectively . For the nine months ended September 30,2004, FUNimation's gross margin, after cost of wholesale and retail sales and royaltyexpense, was 51 .3%.

8 . On January 26, 2005, Navarre reported favorable third quarter fiscal 2005 results, which ,

according to defendants, reflected "the continuing execution of our strategic plan ." On the conference call

following the earnings release, defendants were forced to acknowledge increased inventory levels and refused

to confirm earnings guidance . One analyst on the call also pointed out that Navarre had concealed a 22%

decline in FUNimation' s sales during interim 2004 :

[ANALYST] : One more quick question on the Funa rnation acquisition . I'mreading the that your sales were down 22% through September 2004 . Can you tell me whythis material fact was not in the Press Release .

[COMPANY SPEAKER]: We filed the document, the S3 . Any information aboutthe transaction, you can refer to that , we won't take questions related to that for obviou sreasons .

9. After the call and earnings release, analysts following Navarre decreased their estimates fo r

Navarre's fiscal 2005 and fiscal 2006 EPS . The Company's stock price dropped as well, falling to the $10 t o

$12 per share range .

10. Then, on February 22, 2005, the Company suddenly withdrew its Registration Statement

initially filed for purposes of funding its acquisition of FUNimation . This sudden withdrawal reignited

rumors that the Company' s accounting was problematic . On this news, the stock dropped to below $7 per

share .

11 . As a result of these materially false and misleading statements and failures to disclose ,

Navarre common stock traded at inflated prices during the Class Period. Plaintiff and other members of th e

Class purchased or otherwise acquired Navarre common stock relying upon the integrity of the market pric e

of Navarre common stock and market information relating to Navarre, and have been damaged thereby .

12. Later, on May 31, 2005, the Company issued a press release entitled "Navarre Corporation t o

Postpone Release of Fourth Quarter and Fiscal Year 2005 Financial Results and Related Investor Conferenc e

Call ." The press release stated in part :

The Company is presently determining the amount and timing of recognition ofdeferred compensation expense related to the Company 's ChiefExecutive Officer's 200- 1

-2-

employment agreement, as amended December, 2003, which have been on file with theSecurities and Exchange Commission. The Company is also reviewing the recognitionand classification of certain fiscal 2005 tax items .

As a result of these items, the year end closing process is taking longer thananticipated and the Company has concluded that it is necessary to postpone the scheduledearnings release and subsequent conference call scheduled far Wednesday, June 1, 2005,at I1 : 00 am EDT. The Company currently anticipates that these non-cash charges mayrequire a restatement ofprior periods and will have an impact on the Company's historicalfinancial statements, but have no impact on cash flows .

The Company is moving quickly and carefully to address these matters and reportits consolidated results as soon as practical. Additional details regarding the earningsrelease and conference call will be forthcoming.

13. As a result of this announcement, Navarre's stock dropped to $8 per share, compared to the

$18 per share prices it traded at during the Class Period .

JURISDICTION AND VENUE

14. The claims asserted herein arise under and pursuant § § 10(b) and 20(a) of the Exchange Ac t

[15 U .S.C. §§78j(b) and 78t(a)) andRule lOb-5 promulgated thereunder by the SEC [17 C.F.R. §240.l0b-5] .

15. This Court has jurisdiction over the subject matter of this action pursuant to 28 U .S .C .

§§1331 and 1337, and §27 of the Exchange Act.

16. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U .S .C. § 1391(b) .

Many of the acts charged herein, including the preparation and dissemination of materially false an d

misleading information, occurred in substantial part in this District and Navarre conducts business in thi s

District . Navarre's principle place of business is located at 7400 49th Avenue North, New Hope, MN 55428 .

17. In connection with the acts alleged in this complaint, defendants, directly or indirectly, used

the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstat e

telephone communications and the facilities of the national securities markets .

PARTIES

18. Plaintiff Vivian Oh, as set forth in the accompanying certification and incorporated by

reference herein, purchased common stock of Navarre at artificially inflated prices during the Class Perio d

and has been damaged thereby .

-3-

19. Defendant Navarre engages in the publication and distribution of various home entertainment

and multimedia products, including personal computer software, audio and video titles, and interactive games .

The Company operates in distribution and publishing segments . The distribution segment is operated through

Navarre Corporation. This segment distributes and offers fulfillment services in connection with various

finished goods that are provided by its vendors, which include various publishers, music labels, and movie

studios. These finished goods comprise personal computer software, compact disc and DVD audio, DVD and

VHS video, video games, and accessories . This segment provides retailers and publishers with services for

the distribution of these products, including vendor-managed inventory, electronic data interchange services,

fulfillment services, cross docking and assumed receipt, and retailer-oriented marketing services. The

publishing segment is operated through its Encore Software and BCI Eclipse entities . This segment is the

licensee or owner of personal computer software, compact disc and DVD audio, DVD and VHS video, and

video game titles. This segment licenses, packages, markets, and sells these products to third party

distributors, directly to retailers . Navarre's international customers include wholesale clubs, mass

merchandisers, other third party distributors, computer specialty stores, music specialty stores, book stores,

office superstores, and electronic superstores . Navarre was formed in 1983 and is headquartered in New

Hope, Minnesota .

20. (a) Defendant Eric H. Paulson ("Paulson") was, throughout the Class Period, Navarre's

Chairman, President and Chief Executive Officer . During the Class Period, Paulson sold 699,962 Navarre

shares for insider trading proceeds of more than $9,492,586 . Further, Paulson was instrumental in the

Company's stock-for-stock acquisition of FUNimation and the Company's credit facility .

(b) Defendant James G. Gilbertson ("Gilbertson") was, throughout the Class Period,

Navarre's Chief Financial Officer and Vice President . During the Class Period, Gilbertson sold 42,000

Navarre shares for insider trading proceeds of $630,420 .

(c) Defendant Brian T. Burke ("Burke") was, throughout the Class Period, Navarre' s

Chief Operating Officer (Distribution Services) . During the Class Period, Burke sold 52,400 Navarre shares

for insider trading proceeds of $614,726 .

-4-

(d) Defendant Charles E. Cheney ("Cheney") was, throughout the Class Period ,

Navarre's Vice Chairman. During the Class Period, Cheney sold 50,000 Navarre shares for insider trading

proceeds of $714,500 .

(e) Defendant Cary L . Deacon ("Deacon" ) was, throughout the Class Period, Navarre's

Chief Operating Officer (Publishing and Licensing ) . During the Class Period , Deacon sold 150 ,000 Navarre

shares for insider trading proceeds of $2,347,439 .

(f) Defendants Paulson , Gilbertson , Burke , Cheney and Deacon are referred to herein as

the "Individual Defendants, "

21 . During the Class Period, the Individual Defendants, as senior executive officers and/or

directors of Navarre, were privy to confidential and proprietary information concerning Navarre, its

operations, finances, financial condition and present and future business prospects . The Individual

Defendants also had access to material adverse non-public information concerning Navarre, as discussed in

detail below. Because of their positions with Navarre, the Individual Defendants had access to non-public

information about its business, finances, products, markets and present and future business prospects via

access to internal corporate documents, conversations and connections with other corporate officers and

employees, attendance at management and/or board of directors meetings and committees thereof and via

reports and other information provided to them in connection therewith . Because of their possession of such

information, the Individual Defendants knew or recklessly disregarded that the adverse facts specified herein

had not been disclosed to, and were being concealed from, the investing public .

22. The Individual Defendants are liable as direct participants in the wrongs complained o f

herein. In addition, the Individual Defendants, by reason of their status as senior executive officers and/or

directors, were "controlling persons" within the meaning of §20(a) of the Exchange Act and had the power

and influence to cause the Company to engage in the unlawful conduct complained of herein . Because of

their positions of control, the Individual Defendants were able to and did, directly or indirectly, control the

conduct of Navarre's business .

-5-

23 . The Individual Defendants, because of their positions with the Company, controlled and/or

possessed the authority to control the contents of its reports, press releases and presentations to securities

analysts and through them, to the investing public . The Individual Defendants were provided with copies of

the Company's reports and press releases alleged herein to be misleading, prior to or shortly after their

issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected . Thus, the

Individual Defendants had the opportunity to commit the fraudulent acts alleged herein .

24. As senior executive officers and/or directors and as controlling persons of a publicly trade d

company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, and was

traded on the NASDAQ and governed by the federal securities laws, the Individual Defendants had a duty to

disseminate promptly accurate and truthful information with respect to Navarre's financial condition and

performance, growth, operations, financial statements, business, products, markets, management, earnings

and present and future business prospects, to correct any previously issued statements that had become

materially misleading or untrue, so that the market price of Navarre stock would be based upon truthful and

accurate information . The Individual Defendants' misrepresentations and omissions during the Class period

violated these specific requirements and obligations .

25. The Individual Defendants are liable as participants in a fraudulent scheme and course o f

conduct that operated as a fraud or deceit on purchasers of Navarre common stock by disseminating

materially false and misleading statements and/or concealing material adverse facts . The scheme: (i)

deceived the investing public regarding Navarre's business, operations and management and the intrinsic

value of Navarre stock; (ii) enabled the Individual Defendants to sell over I million shares of their personally

held Navarre stock and thereby reap over $13 .6 million in gross proceeds ; (iii) obtain (and maintain) the

Company's new credit facility; (iv) complete a stock-for-stock acquisition using 1 .3 million shares of the

Company's inflated shares ; and (v) caused plaintiff and members of the Class to purchase Navarre common

stock at artificially inflated prices .

26. As alleged herein, defendants acted with scienter in that defendants knew that the public

documents and statements issued or disseminated in the name of the Company were materially false and

-6-

misleading; knew that such statements or documents would be issued or disseminated to the investing public ;

and knowingly and substantially participated or acquiesced in the issuance or dissemination of such

statements or documents as primary violations of the federal securities laws . As set forth elsewhere herein in

detail, defendants, by virtue of their receipt of information reflecting the true facts regarding Navarre, their

control over, and/or receipt and/or modification of Navarre's allegedly materially misleading misstatements

and/or their associations with the Company which made them privy to confidential proprietary information

concerning Navarre, participated in the fraudulent scheme alleged herein .

27. Defendants were further motivated to engage in this course of conduct in order to : (i) use 1 .3

million shares as currency for its FUNimation acquisition ; (ii) obtain a new credit facility on more favorable

terms than it would have had the truth about its accounting been known; and (iii) enable the Individual

Defendants to sell over 994,362 million shares of their personally held Navarre stock and thereby reap over

$13,799,671 million in gross proceeds .

PLAINTIFF'S CLASS ACTION ALLEGATIONS

28 . Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a)

and (b)(3) on behalf of a class consisting of all those who purchased the common stock of Navarre between

January 21, 2004 and February 22, 2005, inclusive, and who were damaged thereby (the "Class") . Excluded

from the Class are defendants, the officers and directors of the Company, at all relevant times, members of

their immediate families and their legal representatives, heirs, successors or assigns and any entity in which

defendants have or had a controlling interest .

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

Throughout the Class Period, Navarre stock was actively traded on the NASDAQ . While the exact number of

Class members is unknown to plaintiff at this time and can only be ascertained through appropriate discovery,

plaintiff believes that there are hundreds or thousands of members in the proposed Class . Record owners and

other members of the Class may be identified from records maintained by Navarre or its transfer agent and

may be notified of the pendency of this action by mail , using the form of notice similar to that customarily

used in securities class actions .

-7-

30. Plaintiff's claims are typical of the claims of the members of the Class as all members of th e

Class are similarly affected by defendants' wrongful conduct in violation of federal law complained of herein .

31 . Plaintiff will fairly and adequately protect the interests of the members of the Class and ha s

retained counsel competent and experienced in class and securities litigation .

32. 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 :

(a) whether the federal securities laws were violated by defendants' acts as allege d

herein;

(b) whether statements made by defendants to the investing public during the Clas s

Period misrepresented material facts about the business and operations of Navarre ;

(c) whether the price of Navarre common stock was artificially inflated during the Clas s

Period; and

(d) to what extent the members of the Class have sustained damages and the prope r

measure of damages .

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

of this controversy since j oinder 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 individually redress the wrongs done to them. There will be no

difficulty in the management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

34. On January 21, 2004, the Company issued a press release entitled "Navarre Corporatio n

Reports 31 % Sales Increase and Record Net Income in The Third Quarter of Fiscal 2004; Company Reports

Its Tenth Consecutive Quarter of Profitability ." The press release stated in part:

Navarre Corporation, a leading distributor and publisher of a broad range of homeentertainment and multimedia software products, today reported record sales and net incomefor the fiscal 2004 third quarter ended December 31, 2003 .

-8-

Highlights for the quarter include :

Consolidated net sales increased approximately 31 % to $153.0 million from $117 .0million last year.

Consolidated net income increased by approximately 20% to $3 .6 million or $0 .15per share as compared to $3 .0 million or $0 .14 per share last year on a fully dilutedbasis . The net income includes a non-recurring charge of approximately $1 .4million in the third quarter (this charge represents $0 .06 per share) . This charge wascomprised of a non-recurring, non-cash charge for stock based compensation of$536,000 and a special charge for non-recurring debt retirement expense of$908,000 incurred in connection with the complete discharge of the Hilco financingused for the BCI acquisition.

Income from operations grew by approximately 51 % to $4 .5 million as compared to$3 million in the same period last year .

The Company reported $14.1 million cash and no debt at the end of the quarter .

Eric Paulson, President and CEO stated, "The Company achieved the largestquarterly sales and profit result in its 20 year history. Management continues toaggressively execute our operating plan for organic and acquisition growth. NDScontinued its strong organic growth and the quarter 's sales represent record volume forthe division. NDS continued to grow its foothold in theproductivity space and expand itscustomer roster of major label music and DVD Video. The highlight of the quarter forNDS was the volume generated by video games. "

Paulson continued, "The slight decline in NEM sales in the quarter reflects our moveaway from holiday driven titles . We anticipate our fourth fiscal quarter results will reflectour improved roster of artists and labels . Encore demonstrated strong growth with itscommitment to increase its licensing and content expansion in the PC category ."

Paulson concluded, "As well, we are very encouraged by BCI's results forNovember and December . We continue to be bullish about this acquisition and itspotential to add to Navarre's earnings . "

For the third quarter ended December 31, 2003

Navarre reported an increase in consolidated net sales of approximately 31% to$153 .0 million compared with $116.9 million in last year's third quarter. On a divisionalbasis, NDS, which distributes non-proprietary entertainment products including computersoftware, video games, major label music and DVD video, reported a net sales increase ofapproximately 32% to $132 .3 million compared to $100 .1 million in the fiscal third quarterlast year. The division saw increased revenues during the quarter from strong e-commercesales from its e-commerce retail customers, increased distribution of productivity titles to itschain customers, as well as continued strong sales in internet security products .

35. On February 23, 2004, the Company issued a press release entitled "Navarre Corporation

Raises Guidance for Net Sales and Net Income for Fiscal 2004." The press release stated in part:

-9-

Navarre Corporation, a distributor and publisher of a broad range of home entertainment andmultimedia software products, today raised guidance for net sales and net income for the2004 fiscal year ,

The Company is nowforecasting that itsfiscal year 2004 net sales will increase 23to 25%, and its net income is expected to increase 70 to 80% over the prior fiscal year .The Company hadpreviously announced guidance that projected an increase in net salesof 7 to 10%, and an increase in net income of 14 to 25% over the prior fiscal year.

Eric Paulson, President and CEO, Navarre Corporation, stated, "Our Distributionbusiness has demonstrated superior organic growth across all of the categories it distributes ;PC and console software, DVD Video and music . The Publishing Group is experiencingexcellent sales and continues to add to Navarre's overall margin and profit . We believe thatit is important to update our guidance to more clearly represent these trends and theirimpact on our results for this fiscal year. "

36. On February 26, 2004 and February 27, 2004, defendant Paulson sold 200,000 Navarre shares

at $6 .67 to $6 .90 per share, resulting in net proceeds of $1,338,025 .

37. On May 26, 2004, the Company issued a press release entitled "Navarre Corporation Reports

Record Quarterly and Fiscal Year 2004 Profit and Sales ; Company Provides Guidance for Fiscal Year 2005 ;

Company Reports 11th Consecutive Profitable Quarter." The press release stated in part :

Navarre Corporation, a leading publisher and distributor of a broad range of homeentertainment and multimedia software products, today reported fiscal 2004 fourth quarterand year-end results for the period ended March 31, 2004.

• Net sales for the fiscal fourth quarter ended March 31, 2004, increased 70% to$142 .6 million as compared to $83 .6 million for the same quarter ended March 31,2003 .

• Net income for the fiscal fourth quarter increased 641% to $3 .3 million or $0 .12fully diluted earnings per share as compared to $442,000 or $0 .02 fully dilutedearnings per share for the same period last year .

• Net sales for the fiscal year ended March 31, 2004, increased 32% to $475 .2 millionas compared to $359 .4 million for the fiscal year ended March 31, 2003 .

• Net income increased 106% to $8 .9 million or $0 .37 fully diluted earnings per sharecompared to $4 .3 million or $0.20 fully diluted earnings per share over the sameperiod last year.

Eric Paulson, Chairman and CEO of Navarre Corporation, commented, "Fiscal Year2004 was another record year for our company, both operationally and financially . Our 4thquarter results were also a company record . The restructuring of our company has allowedus to increase our focus on growing the high margin publishing segment of our businesswhile we continue to focus on aggressive organic growth in our core distribution business .In the last twelve months, the Company grew over $110 million . "

-10-

Paulson continued, "Our distribution segment provides a highly efficient foundationfor our current publishing business . This foundation assists in making our acquisitions evenmore profitable as we drive sales and consolidate back room operations . The company willalso continue to seek out acquisitions and co-publishing transactions, such as Riverdeep, inthe publishing sector."

Paulson concluded, "Included in our results, is our management decision to shutdown the development of Encore's video game console projects which primarily consisted ofthe Daredevil video game project . As a result, the Company wrote off $4 .3 million ofdevelopment costs during the quarter and a total of $5 .6 million for the fiscal year. Thesecharges are reflected as a reduction in our gross margin . We have refocused Encore on itscore competencies of software publishing . "

Business Segment HighlightsDistribution Services

The Distribution Services segment distributes software, video games, accessories,major label music and DVD video, as well as independent music . For the 4th quarter, endedMarch 31, 2004, the segment achieved a 55% increase in net sales to $127 .2 million, ascompared to $82 .3 million for the same period last year . The segment achieved a 26%increase in net sales to $449 .1 million, for the fiscal year ended March 31, 2004, ascompared to $355 .9 million for the same period last year .

The segment's growth during the 2004 fiscal year was achieved through increases inall of its product groups . Software continues to expand its market share presence across allcategories . Internet security and anti-virus products remained strong in light of continuedvirus outbreaks . Major label music, DVD video and Video Games grew due to thecombinations of increased publisher and customer rosters and benefited from strong releasesthroughout the year . Independent music also grew due to its increased label and artist rosterand its continued focus on catalog across all music genres .

Publishing and Licensin g

The publishing segment ofNavarre includes Encore Software and BCI DVD video .For the 4th quarter, ended March 31, 2004, the segment achieved sales of $20 .0 millionbefore inter-company sales elimination of $4 .6 million as compared to $6 .2 million beforeinter-company sales elimination of $4.8 million for the same period last year . For the yearended March 31, 2004, the segment achieved $46 .2 million in sales before inter-companysales elimination of $20 million . This compares to last year' s sales of $14.7 million andbefore inter-company sales elimination of $11 .2 million . Navarre purchased BCI Eclipse,LLC. November 1, 2003 .

38. On June 1, 2004, defendant Burke sold 26,000 Navarre shares at $12 .14 per share, resulting

in net proceeds of $315,640 .

39. On July 21, 2004, the Company issued a press release entitled "Navarre Corporation Reports

Record First Quarter Fiscal 2005 Profit and Sales ; Company Raises Its 2005 Sales and Earnings Projections ."

The press release stated in part :

-11-

Navarre Corporation, a leading publisher and distributor of a broad range of homeentertainment and multimedia software products, today reported fiscal 2005 first quarterresults for the period ended June 30, 2004 .

Highlights for the quarter include :

• Consolidated net sales for the quarter increased 73% to $126 .7 million from $73 .1million in the same period last year .

• Consolidated income from operations increased to $4 .5 million from $224,000 in thesame period last year .

+ Consolidated net income for the quarter increased to $4 .6 million or $0.16 perdiluted share compared with $308,000 or $0.01 per diluted share in the same periodlast year .

• Gross margin on a consolidated basis for the quarter, as a percent to net sales, was14.9% compared with 13 .7% in the same period last year .

+ Operating expenses on a consolidated basis for the quarter, as a percent to net saleswere 11 .4% compared with 13 .4% in the same period last year .

• An acquisition credit facility was established with GE Commercial Finance thatprovides up to a $20 million revolving credit facility for acquisitions .

• The Company reported cash and cash equivalents of $12.2 million and no debt at theend of the first fiscal quarter.

• Publishing revenue, before inter-company elimination, represented 21 .5% of totalnet sales in the quarter versus 6 .0% last year .

• Company reports 12th consecutive profitable quarter .

Eric Paulson, Chairman and CEO of Navarre Corporation stated, "The results of ourfirst fiscal quarter 2005 reflect continued momentum across all business sectors at theCompany . The evolution of our Company's strategy is underway as evidenced by thePublishing revenue, representing 21 .5% of sales, before inter-company elimination, in thequarter versus 6 .0% last year . The organization structure, breaking out Publishing andDistribution, was put in place prior to the end of fiscal year 2004 and continues to lead ourrevenue and profit growth . Publishing manages and controls content . Distribution providesimproved services and cost savings for Navarre and its subsidiaries as well as for our tradingpartners . "

Paulson continued, "We expect our new warehouse material handling facilities tocome online shortly. This facility will handle our growth and should take our alreadyefficient distribution capabilities to an even higher level . This year we will be holding ourannual shareholder meeting at our corporate headquarters and allowing the attendees to tourthis state-of-the-art facility . "

Jim Gilbertson, VP, CFO stated, "In June we established an acquisition creditfacility with GE Commercial Finance . The agreementprovides the Company with a creditline of up to $20 million for acquisitions . This agreement will help us achieve ourpreviously stated acquisition growth goals. "

-12-

A reconciliation of net sales with and without inter-company eliminations of salesappears in an accompanying table . Net sales before eliminations are measures ofperformance that are not defined by generally accepted accounting principles ("GAAP") andshould be viewed in addition to, and not in lieu of, net sales as reported on a GAAP basis .

40. By late July 2004, Navarre's stock price was trading in the $15 per share range, as compare d

to the $6 per share range at the beginning of the Class Period . Defendants took advantage of this inflation ,

selling the following amount of their Navarre shares in late July, August and September :

SHARES PRICES PROCEEDS

Gilbertson 42,000 $15.01 $ 630,420

Cheney 50,000 $14.29 $ 714,500

Paulson 200,000 $15.59-16.45 $3,034,302

Deacon 150,000 $15.62-15.85 $2,347,439

TOTAL 442,000 $6,726,661

41 . On October 1, 2004, defendant Paulson sold an additional 50,000 Navarre shares at $13 .91 to

$14.36 per share, resulting in net proceeds of $708,587 .

42. On October 20, 2004, the Company issued a press release entitled "Navarre Corporatio n

Reports Record Second Quarter Fiscal 2005 Profit and Sales ; Company Raises Its Fiscal Year 2005 Sales and

Earnings Projections." The press release stated in part:

Navarre Corporation, a leading publisher and distributor of a broad range of homeentertainment and multimedia software products, today reported fiscal 2005 second quarterresults for the period ended September 30, 2004 .

Highlights for the quarter include :

- - Consolidated net sales for the quarter increased 36% to $146 .2 million from $107 .5million in the same period last year .

- - Consolidated income from operations for the quarter increased to $4.9 million from$1 .7 million in the same period last year .

- - Consolidated net income for the quarter increased to $4 .9 million or $ .17 per dilutedshare compared with $1 .7 million or $0 .08 per diluted share in the same period lastyear .

- - Gross margin on a consolidated basis for the quarter, as a percent to net sales, was14.3% compared with 12 .6% in the same period last year .

-13-

- -- Operating expenses on a consolidated basis for the quarter, as a percent to net salesremained 11.0%, as in the same period last year.

- - The Company reported cash and cash equivalents of $8 .3 million and no debt at the

end of the second fiscal quarter .

- - Publishing revenue, before inter-company elimination, represented 14.2% of totalnet sales in the quarter versus 8 .2% last year .

- - Company reports 13th consecutive profitable quarter .

Eric Paulson, Chairman and CEO of Navarre Corporation, stated, "The results of oursecond fiscal quarter 2005 reflect the continuing execution of our strategic plan . Both ourPublishing and Distribution segments continue to meet our expectations and our organicgrowth remains on track. "

Paulson continued, "Our new distribution facilities and material handling systemsare coming on-line and will be operationally effective during the fiscal 3rd quarter . Theimplementation costs incurred to bring these systems online were approximately $435,000during the quarter . These initiatives position the Company's operating capabilities tosupport our future growth. As we have stated, we anticipate the positive expense benefits tobe reflected in our results next fiscal year . "

Jim Gilbertson, Vice President/Chief Financial Officer, commented, "The organicgrowth of the Company's Distribution segment is on track . Personal computer software grewdue to strong sales of new Internet security and anti-virus products . DVD video and consolevideo games also continued to grow as a result of increased publishers as well as benefitingfrom strong releases throughout the quarter . The Publishing segment represented 14 .2% ofthe company's revenues for the quarter, before inter-company elimination, an increase from8.2% during the same period last year . In addition to the increased percentage of top-linerevenue, the Publishing segment has increased the Company's overall margins ."

SECOND QUARTER ENDED SEPTEMBER 30, 200 4

For the second quarter ended September 30, 2004, Navarre reported an increase of36% in consolidated net sales to $146.2 million, as compared with $107.5 million for thesecond quarter of fiscal 2004. The Company reported gross margin of $21 .0 million or14.3%, as compared with $13 .5 million or 12.6% in the comparable period last year . Totaloperating expenses for the quarter were $16 .0 million or 11 .0% as compared with $11 .8million or 11 .0% in last year's second quarter . Income from operations for the second quarterended September 30, 2004 increased 186 .2% to $4.9 million, as compared with $1 .7 millionthe same period last year . Net income for the period increased 186 .1% to $4 .9 million,compared with $1 .7 million in the comparable period last year . Fully diluted earnings pershare for the second quarter ended September 30, 2004 were $0 .17 per share, compared with$0.08 per share in the comparable period last year .

43. Subsequent to this release, from November 1, 2004 to January 3, 2005, Paulson again sold a

large number of his Navarre shares, thereby benefiting from the inflation in Navarre's stock price caused i n

part by the financial manipulations :

-14-

SHARES PRICES PROCEEDS

Paulson 249,962 $14.51-18.11 $4,269,328

44. On January 10, 2005, the Company issued a press release entitled "Navarre Agrees t o

Acquire FUNimation, a Leading Provider and Licensor of Anime and Children's Entertainment ." The press

release stated in part :

Navarre Corporation a leading publisher and distributor of broad range of homeentertainment and multimedia software products, announced that it has executed a definitiveagreement to acquire 100% of the general limited partnership interests in FUNimationProductions, Ltd. and the FUNimation Store, Ltd. Navarre anticipates that this transactionwill close before May 15, 2005 .

FUNimation based in Fort Worth, Texas, is a leading home video distributor andlicensor of Japanese animation and children's entertainment in the United States providingtitles that include Dragonball Z, Dragonball GT, Yu Yu Kahusho, Case Closed and FulmetalAlchemist. In addition to the home video distribution of its proprietary content, FUNimationengages in third-party marketing, sales and distribution agreements with content providers,including 4Kids Entertainment, Inc ., Nelvana, Alliance Atlantis and WBGH . FUNimationalso acquires master licenses to properties through long-term arrangements and leverages thisproprietary content into various revenue streams including television broadcast, VHS andDVD home videos, toys, video games, and trading cards . For the years ended December 31,2001, 2002 and 2003, FUNimation had net sales of $49 .8 million, $63.7 million and $81 .6million, respectively, and pre-tax net income of $20 .0 million, $24 .9 million and $30 .5million, respectively .

Navarre is acquiring the FUNimation partnership interests for a payment at closingby Navarre of approximately $100,500,000 in cash, plus its issuance of between 1,495,216and 1,827,486 shares of Navarre common stock . . . .

Eric Paulson, Chairman and CEO of Navarre stated, "The completion of theFUNimation acquisition will be a continuation of the transformation of our company as itreflects the ongoing execution of our strategy to utilize the strong underlying asset of ourdistribution business to support and assist in the growth of our higher margin publishingbusiness ." Paulson continued, "FUNimation will bring new business skills of internationallicensing and brand development . With the signing of this agreement, we look forward towelcoming FUNimation to the portfolio of companies in our Publishing segment . "

45 . Subsequent to this release, Navarre's stock price reached its Class Period high of $18 .77 per

share .

46. On January 18, 2005, Navarre filed a registration statement with the SEC to raise up to $140

million through the sale of its common stock to fund the acquisition of FUNimation . The Registration

Statement reported the following with respect to FUNimation's financial results (while at the same time

representing that FUNimation's quarterly results were not materially affected by seasonality) :

-15-

We believe that, if consummated, the FUNimation acquisition will continue therecent expansion of our publishing business, enable us to establish new relationships withvendors and customers and provide us with attractive content to publish and distribute . Forthe years ended December 31, 2002, 2002 and 2003, FUNimation had net sales of $49 .8million, $63 .7 million and $81 .6 million, respectively, and pre-tax income of $20 .0 million,$24.9 million and $30 .5 million, respectively. For the nine months ended September 30,2004, FUNimation's gross margin, after cost of wholesale and retail sales and royaltyexpense, was 51 .3%.

47. On January 26, 2005, the Company issued a press release entitled "Navarre Corporation

Reports Record Profit and Sales for 3rd Quarter of Fiscal 2005 ; Company Reports Its 14th Consecutive

Quarter of Profitability." The press release stated in part:

Navarre Corporation, a publisher and distributor of a broad range ofhome entertainment andmultimedia software products, today reported record sales and net income for the fiscal 2005third quarter ended December 31, 2004 .

Financial highlights for the quarter include :

Consolidated net sales increased approximately 18% to $183 .6 million from $156.0million for the same quarter last year.

• Consolidated net income increased to $10 .4 million, or $0 .36 per diluted share, ascompared to $3.6 million, or $0 .15 per diluted share, for the same period last year .

Income from operations grew to $8 .1 million as compared to $4 .5 million in thesame period last year.

Eric Paulson, Chairman and CEO, stated, "The results of our third fiscal quarterreflect the continuing execution of our strategicplan . OurDistribution segment continuesto meet our expectations and our organic growth remains on track. Of particular note, netsales from our Publishing segment, before inter-company sales elimination, grewapproximately 76% for the quarter versus the same period last year . The sales increase inour Publishing segment reinforces our ability to grow this business organically . A greatportion of this increase is attributable to the sales of newly licensed products . "

Jim Gilbertson, Vice President and CFO, stated, "The Company continues tomanage its overall capital position to aid growth. Significant growth in the anti-virussoftware category has caused us to hold higher levels of inventory to meet future salesdemands from our retail customers. The payment terms with these vendors is slightly lessfavorable compared to other vendors. In the Publishing segment, the Company invested$5 million in advances on previously announced licenses in the quarter . As well, we haveinvested in more inventory to support our publishing growth . "

Fiscal 2005 third quarter ended December 31, 2004

Navarre reported an increase in consolidated net sales of approximately 18% to$183.6 million compared with $156 .0 million in last year's third quarter. On a businesssegment basis, the Distribution segment, which distributes home entertainment products,including computer software, video games, major label and independent music and DVDvideo, reported a net sales increase of approximately 18% to $175 .9 million compared to

-16-

$149.2 million in the fiscal third quarter last year before inter-company sales elimination .Before inter-company sales elimination, Navarre's Publishing segment reported increasedsales of approximately 76% to $21 .6 million versus $12.3 million during the same period lastyear.

Consolidated net income increased to $10 .4 million or $0.36 per diluted share ascompared to $3 .6 million or $0 .15 per diluted share for the same period last year .

48. On the conference call following the earnings release, defendants were forced to

acknowledge increased inventory levels and refused to confirm earnings guidance . One analyst on the cal l

also pointed out that Navarre had concealed a 22% decline in FUNimation's sales during interim 2004 :

[ANALYST] : One more quick question on the Funamation acquisition . I'mreading the that your sales were down 22% through September 2004 . Can you tell me whythis material fact was not in the Press Release .

[COMPANY SPEAKER] : We filed the document, the S3 . Any information aboutthe transaction , you can refer to that, we won't take questions related to that for obviousreasons .

49. After the call and earnings release, analysts following Navarre decreased their estimates for

Navarre's fiscal 2005 and fiscal 2006 EPS .

50. The withdrawal sent the Company's shares tumbling from $15 .50 to $11 .18 in the following

trading days - a consecutive multiple day drop of approximately 30% .

51. Then, on February 22, 2005, the Company issued a press release entitled "Navarre

Corporation Files Application to Withdraw Registration Statement." The press release stated in part:

Navarre Corporation, a publisher and distributor of a broad range of home entertainment andmultimedia software products, today announced that it has filed an application with theSecurities and Exchange Commission for the withdrawal of the Registration Statement filedon January 18, 2005 . . . . The Company is considering various sources of financing to fundthe initial cash portion of the FUNimation acquisition .

Navarre's President and CEO, Eric Paulson, stated, "The Company continues towork toward the completion of the agreement to acquire FUNimation and we expect tocomplete the transaction as previously announced . "

52. On February 22, 2005, as the Company was finalizing its Form 10-K which would quas h

previous rumors as to the veracity of the Company's accounting, the Company suddenly withdrew its

Registration Statement initially filed for purposes of funding its acquisition of FUNimation . This sudden

withdrawal reignited rumors that the Company's accounting was problematic . On this news, the stock

dropped to below $7 per share .

-17-

POST CLASS PERIOD REVELATIONS

53. Later, on April 29, 2005, the Company issued a press release entitled "Navarre Corporation

Announces It Will Report Fourth Quarter and Fiscal 2005 Results on May 31, 2005 ." The press release stated

in part :

Navarre Corporation, a leading publisher and distributor of a broad range of homeentertainment and multimedia software products, today announced that it will report itsfourth quarter and fiscal year 2005 results, ended March 31, 2005, post market close on theevening of Tuesday, May 31, 2005 .

54. On May 31, 2005, the Company issued a press release entitled "Navarre Corporation to

Postpone Release of Fourth Quarter and Fiscal Year 2005 Financial Results and Related Investor Conferenc e

Call ." The press release stated in part:

The Company is presently determining the amount and timing of recognition ofdeferred compensation expense related to the Company's Chief Executive Officer's 2001employment agreement, as amended December, 2003, which have been on file with theSecurities and Exchange Commission . The Company is also reviewing the recognitionand classification of certain fiscal 2005 tax items .

As a result of these items, the year end closing process is taking longer thananticipated and the Company has concluded that it is necessary to postpone the scheduledearnings release and subsequent conference call scheduled for Wednesday, June 1, 2005,at 11:00 am EDT. The Company currently anticipates that these non-cash charges mayrequire a restatement ofpriorperiods and will have an impact on the Company's historicalfinancial statements, but have no impact on cash flows.

The Company is moving quickly and carefully to address these matters and reportits consolidated results as soon as practical. Additional details regarding the earningsrelease and conference call will be forthcoming.

55 . On June 2, 2005, the Company issued a press release entitled "Navarre Corporation Reports

Financial Results for Fourth Quarter and Fiscal Year 2005; Company Provides Updated Guidance for Fiscal

Year 2006; Company Will Host a Webcast Monday, June 6, 2005 at 2:00p.m. ET; Company Announces

Intention to Restate Certain Financial Statements ." The press release stated in part :

Navarre Corporation, a leading publisher and distributor of a broad range of homeentertainment and multimedia software products, today reported fiscal year 2005 fourthquarter and year-end results for the period ending March 31, 2005 .

Financial Highlight s

Record net sales for the fiscal year ended March 31, 2005 increased approximately27% to $596.3 million, as compared to net sales of $470 .9 million for the fiscal yearended March 31, 2004 .

-18-

• Record net income for fiscal year 2005 increased approximately 69% to $12 .5million or $0 .44 per diluted share, as compared to $7 .4 million or $0 .31 per dilutedshare for fiscal year 2004, as restated . . . .

• Net sales for the fiscal year fourth quarter ended March 31, 2005 increasedapproximately 1% to $141 .9 million, as compared to net sales of $140 .9 million forthe same period last year .

• Net loss for the fiscal year 2005 fourth quarter was $2 .5 million or a loss of $0.09per diluted share, as compared to net income of $3 .3 million or $0 .12 per dilutedshare for the same period last year .

• Operating loss for fiscal year 2005 fourth quarter was $2 .7 million. Included in thequarterly operating income results were the following expenses : FUNimationtransaction expenses of $578,000, the previously announced compensation expenseof approximately $5 .8 million to acquire the remaining twenty percent ownershipposition in Encore, expenses of $769,000 related to Sarbanes-Oxley Act of 2002compliance, and incentive-based deferred compensation expenses of $363,000.

• Gross margin increased to 15 .3% of net sales for fiscal year 2005, as compared to12.3% for fiscal year 2004 . For the fiscal year 2005 fourth quarter, gross marginincreased to 16 .9% of net sales, as compared to 11 .4% for the same period last year .

• The Company's cash, inventory and receivable balance as of March 31, 2005 was$15.5 million, $40 .6 million and $96 .5 million, respectively.

Eric Paulson, Chairman and CEO of Navarre Corporation, commented, "I am proudof what the Company has accomplished in fiscal year 2005, but disappointed in the delay ofreleasing our earnings . The delay was primarily the result of a complex compensation issuewhich required close review and consensus by our previous and current audit firms. Irecognize the effect this delay has on our shareholders and apologize on behalf of theCompany and its representatives . Notwithstanding the delay, fiscal year 2005 was a recordyear in every way despite the restatement issues described in this release . We look forward tofiscal year 2006 as the Company continues to execute its strategy of transforming Navarreinto a leading home entertainment publishing and licensing company, using our highlyeffective distribution services operation as a platform. Our recently completed acquisition ofFUNimation is an example of our continued focus on this strategy and will drive sales andprofits in the future ." Mr. Paulson continued, "During fiscal year 2005, the Company spentheavily on capital expenditures and operating expenses to reengineer its infrastructureincluding a new warehouse and material handling system to support our anticipated futuregrowth. We expect to see the results in higher productivity this year . "

Jim Gilbertson, Vice President and Chief Financial Officer, stated, "In fiscal year2005 the company achieved revenue, earnings and margin growth in what has been a verybusy year for the company. During the year we completed our new warehouse facility andpicking system, worked toward the closing of the FUNimation acquisition and focused onpreparations for Sarbanes-Oxley compliance ."

Business Segment Highlight s

Publishing Business Segment

-19-

The Publishing segment of Navarre includes Encore and BCI . For the fourth quarterended March 31, 2005, Publishing achieved net sales of $21 .5 million (before inter-companyeliminations), as compared to net sales of $20.0 million (before inter-company elimination)for the same period last year . Publishing reported net sales of $95 .8 million (before inter-company eliminations) for the fiscal year ended March 31, 2005 as compared to net sales of$46.2 million (before inter-company eliminations) for fiscal year ended March 31, 2004 . Thegrowth of Navarre's Publishing segment revenues can be attributed to increased organicgrowth at both Encore and BCI, which were acquired in August of 2002 and November of2003, respectively. In addition, the announced acquisition of FUNimation is expected toprovide additional sales and net income growth opportunities in fiscal year 2006 . . . .

Distribution Business Segment

The Distribution segment distributes PC software, CD audio, DVD video, and videogames and accessories . For the fourth quarter, ended March 31, 2005, Distribution achieveda 9.6% increase in net sales to $137.5 million (before inter-company eliminations), ascompared to net sales of $125 .5 million (before inter-company eliminations) for the sameperiod last year . Distribution achieved a 25 .2% increase in net sales to $556 .9 million (beforeinter-company eliminations), for fiscal year ended March 31, 2005, as compared to $444 .7million (before inter-company eliminations) for fiscal year end 2004 . . . .

Distribution's growth during fiscal year 2005 was achieved through increases inmajor product groups . Software, major label music, DVD video and video games grew dueto the combination of an increased roster of publishers and the placement of additionalproducts with customers .

Intention to Restate Certain Financial Statements

The Company's management, in consultation with the Company's AuditCommittee of the Board of Directors, determined that the Company's consolidated

financial statements for its fiscal year 2004 third quarter, fiscal year 2004, and the firstquarter and third quarter of fiscal year 2005 will be restated. As a result of the fiscal year2005 audit, it was determined that expenses related to the incentive-based deferredcompensation of the Company's Chief Executive Officer should have been recorded in thethird quarter of fiscal 2004 and first quarter of fiscal 2005. As a result, additionalexpenses and accrued liabilities of $1.5 million and $2.2 million will be recorded in thesequarters, respectively. These expenses, which are non-cash during the periods presented,were determined in accordance with the provisions of the Chief Executive Officer's 2001employment agreement.

It was also determined that the Company's deferred tax benefit recorded in thethird quarter of fiscal 2005 was improperly included in income and should have beenapplied to shareholders' equity. Consequently, the tax benefit of $2.4 million recognizedduring the quarter will be reduced and shareholders' equity will be increased by the sameamount with no overall effect to cash or equity.

The Company is presently working through the presentation ofthese restatementsand intends to make applicable filings as quickly as possible .

Guidance for Fiscal Year 200 6

The Company is providing updated guidance for fiscal year 2006. Guidance is basedon consolidated financial results including FUNimation . Based on the closing date of the

-20-

FUNimation acquisition, approximately 10 months of FUNimation operations will contributeto the Company 's fiscal year 2006 consolidated financial results .

UNDISCLOSED ADVERSE INFORMATION

56. In fact, Navarre's financials had been false for approximately two years due to its improper

accounting for compensation expenses . As a result, Navarre's results were presented in viola tion of Generally

Accepted Accounting Principles ("GAAP") . Navarre has also admitted it improperly recorded a tax benefit of

$2.4 million in its third quarter fiscal 2005 results released on January 26, 2005 .

57. GAAP are those p rinciples recognized by the accounting profession as the conventions, rules

and procedures necessa ry to define accepted accounting practices at a particular time . Regulation S-X, 17

C.F.R. §210 . 4-01(a)(1), states that financial statements filed with the SEC which are not prepared in

compliance with GAAP are presumed to be misleading and inaccurate . Regulation S-X requires that inte rim

financial statements must also comply with GAAP, with the exception that interim financial statements need

not include disclosures that would be duplicative of disclosures accompanying annual financial statements .

58 . Pursuan t to GAAP, as set forth in Accounting Principles Board Opinion ("APB") No . 20, the

type of restatements and revisions announced by Navarre were to correct for material errors in previously

issued financial statements . APB No. 20, ¶¶7-13 . The restatement of past financial statements is a disfavored

method of recognizing an accounting change as it dilutes confidence by investors in the financial statements,

it makes it difficult to compare financial statements and it is often difficult, if not impossible, to generate the

numbers when restatement occurs . Id. ¶14 . Thus, GAAP provides that financial statements should only be

restated in limited circumstances, i .e., when there is a change in the reporting entity, there is a change in

accounting principles used or to correct an error in previously issued financial statements . Navarre's

restatements and revisions were not due to a change in reporting entity or a change in accounting principle,

but rather to errors in previously issued financial statements . Thus, the restatements and revisions were an

admission by defendants that Navarre's previously issued financial results and its public statements regarding

those results were false and misleading . Moreover, immaterial corrections are not required to be restated . Id.

¶38. Thus, the restatement indicates that the errors were material .

-21-

~ ! M

59. As a result of these materially false and misleading statements and failures to disclose,

Navarre common stock traded at inflated prices during the Class Period . Plaintiff and other members of the

Class purchased or otherwise acquired Navarre common stock relying upon the integrity of the market price

of Navarre common stock and market information relating to Navarre, and have been damaged thereby .

LOSS CAUSATIONIECONONHC LOS S

60. During the Class Period, as detailed herein, defendants engaged in a scheme to deceive the

market and a course of conduct that artificially inflated Navarre's stock price and operated as a fraud or deceit

on Class Period purchasers of Navarre stock by misrepresenting the Company's business success and future

business prospects . Defendants achieved this fagade of success, growth and strong future business prospects

by misrepresenting the Company's financial statements, earnings and prospects . Later, however, when

defendants' prior misrepresentations and fraudulent conduct were disclosed and became apparent to the

market, Navarre stock fell precipitously as the prior artificial inflation came out of Navarre's stock price . As

a result of their purchases of Navarre stock during the Class Period, plaintiff and other members of the Class

suffered economic loss, i.e., damages, under the federal securities laws .

61 . During the Class Period, the defendants presented a misleading picture of Navarre's busines s

and prospects . Thus, instead of truthfully disclosing during the Class Period that Navarre's business was not

as healthy as represented, defendants caused Navarre to falsely report its results and forecasted earnings .

During the Class Period, defendants repeatedly emphasized Navarre was "well positioned" to expand its

"leadership position . "

62. These false claims of current earnings that met expectations and strong future results caused

and maintained the artificial inflation in Navarre's stock price throughout the Class Period and until the truth

was revealed to the market .

63 . Defendants' false and misleading statements had the intended effect and caused Navarre

stock to trade at artificially inflated levels throughout the Class Period, trading as high as $18 .77 per share on

January 11, 2005 .

-22-

I S

64. On January 27, 2005, the inflation began to come out of Navarre's stock price as defendants

refused to confirm guidance and were questioned pointedly on a conference call about their press release .

65. On February 22, 2005, defendants withdrew their Registration Statement causing questions

about their accounting and business . This caused more inflation to come out of the price, with Navarre stock

dropping to below $7 per share .

66. Later, on May 31, 2005, defendants were forced to publicly disclose that Navarre woul d

restate its fiscal 2004 -2005 results . On June 2, 2005 , Navarre disclosed more about the extent of the misstated

earn ings. These public revelations indicated that Navarre had failed to achieve the results represented through

its past reported earnings and that the Company 's prospects for business success and earnings growth for

fiscal 2005-2006 and beyond were severely diminished. As investors and the market became aware that

Navarre 's actual business prospects were poorer than represented, which had been obfuscated by defendants,

the prior artificial inflation came out of Navarre ' s stock price, damaging investors .

67. As a direct result of defendants ' withdrawal of its Registration Statement and its later

confirming admissions and the public revelations regarding the truth about Navarre's previous representations

and its actual business prospects going forward, Navarre's stock price plummeted 27%, falling from $15 .46

on January 26, 2005 to $6 .40 per share on February 23, 2005, a drop of $9.06 per share . This drop removed

the inflation from Navarre's stock price, causing real economic loss to investors who had purchased the stock

during the Class Period . In sum, as the truth about defendants' fraud and Navarre's business performance was

revealed, the Company's stock price plummeted, the artificial inflation came out of the stock and plaintiff and

other members of the Class were damaged, suffering economic losses up to $9 .06 per share.

68. The 58% decline in Navarre's stock price at the end of the Class Period was a direct result of

the nature and extent of defendants' fraud finally being revealed to investors and the market . The timing and

magnitude of Navarre's stock price declines negate any inference that the loss suffered by plaintiff and other

Class members was caused by changed market conditions, macroeconomic or industry factors or Company-

specific facts unrelated to the defendants' fraudulent conduct . During the same period in which Navarre's

stock price fell 58% as a result of defendants' fraud being revealed, the Standard & Poor's 500 securitie s

- 23 -

f i a

index was up slightly. The economic loss, i.e., damages, suffered by plaintiff and other members of the Class

was a direct result of defendants' fraudulent scheme to artificially inflate Navarre's stock price and the

subsequent significant decline in the value of Navarre's stock when defendants' prior misrepresentations and

other fraudulent conduct was revealed .

COUNT Y

Violation of Section 10(b) of the Exchange Act and Rule 10b-5Promulgated Thereunder Against All Defendants

69. Plaintiff repeats and realleges each and every allegation contained above as if fully set fort h

herein .

70. During the Class Period, Navarre and the Individual Defendants, and each of them, carried

out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did : (a)

deceive the investing public, including plaintiff and other Class members, as alleged herein; (b) artificially

inflate and maintain the market price of Navarre common stock; and (c) cause plaintiff and other members of

the Class to purchase Navarre 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 .

71 . Defendants : (a) employed devices, schemes, and artifices to defraud; (b) made untrue

statements of material fact and/or omitted to state material facts necessary 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 the Company's stock in an effort to maintain an artificially high market price for

Navarre common stock in violation of § 10(b) of the Exchange Act and Rule IOb-5 . All defendants are sued

either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as

alleged below.

72. In addition to the duties of full disclosure imposed on defendants as a result of their making

of affirmative statements and reports, or participation in the making of affirmative 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 integrated disclosure provisions of the SEC as embodied in SEC

Regulation S-X (17 C .F.R. §§210 .01, et seq .) and Regulation S-K (17 C .F.R. §§229 .10, et seq .) and other

-24-

SEC regulations, including accurate and truthful information with respect to the Company's operations,

financial condition and earnings so that the market price of the Company's stock would be based on truthful,

complete and accurate information .

73. Navarre and the Individual Defendants, individually and in concert, directly and indirectly, by

the use, means 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 Navarre as specified herein .

74. These defendants employed devices, schemes and artifices to defraud, while in possession o f

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 Navarre's value and performance and continued substantial growth,

which included the making of, or the participation in the making of, untrue statements of material facts and

omitting to state material facts necessary in order to make the statements made about Navarre 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 Navarre common stock during the Class Period .

75. The Individual Defendants' primary liability, and controlling person liability, arises from th e

following facts : (a) the Individual Defendants were high-level executives and/or directors at the Company

during the Class Period; (b) the Individual Defendants were privy to and participated in the creation,

development and reporting of the Company's internal budgets, plans, projections and/or reports ; and (c) the

Individual Defendants were aware of the Company's dissemination of information to the investing public

which they knew or recklessly disregarded was materially false and misleading .

76. The defendants had actual knowledge of the misrepresentations and omissions of materia l

facts set forth herein, or acted with reckless disregard for the truth in that they failed to 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 and for the purpose and effect of

concealing Navarre's operating condition and future business prospects from the investing public an d

-25-

I P ?

supporting the artificially inflated price of its stock . As demonstrated by defendants' overstatements and

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 omissions alleged, were reckless in failing

to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether

those statements were false or misleading .

77. As a result of the dissemination of the materially false and misleading information and failure

to disclose material facts, as set forth above, the market price of Navarre common stock was artificially

inflated during the Class Period . In ignorance of the fact that the market price of Navarre common stock was

artificially inflated, and relying directly or indirectly on the false and misleading statements made by

defendants, or upon the integrity of the market in which the stock trade, and/or on the absence of material

adverse information that was known to or recklessly disregarded by defendants but not disclosed in public

statements by defendants during the Class Period, plaintiff and the other members of the Class acquired

Navarre common stock during the Class Period at artificially high prices and were damaged thereby .

78. At the time of said misrepresentations and omissions, plaintiff and other members of th e

Class were ignorant of their falsity, and believed them to be true . Had plaintiff and the other members of the

Class and the marketplace known of the true financial condition and business prospects of Navarre, which

were not disclosed by defendants, plaintiff and other members of the Class would not have purchased or

otherwise acquired their Navarre common stock, or, if they had acquired such stock during the Class Period,

they would not have done so at the artificially inflated prices which they paid .

79. By virtue of the foregoing, defendants have violated § 10 (b) of the Exchange Act, and Rule

IOb-5 promulgated thereunder .

80. As a direct and proximate result of defendants' wrongful conduct, 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 .

-26-

COUNT H

Violation of Section 20(a) ofthe Exchange Act Against All Defendants

81 . Plaintiff repeats and realleges each and every allegation contained above as if fully set forth

herein .

82. The Individual Defendants acted as controlling persons of Navarre within the meaning of

§20(a) of the Exchange Act as alleged herein . By virtue of their high-level positions, and their ownership and

contractual rights, participation in and/or awareness of the Company's operations and/or intimate knowledge

of the statements filed by the Company with the SEC and disseminated to the investing public, the Individual

Defendants had the power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various statements which

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

plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to

prevent the issuance of the statements or cause the statements to be corrected .

83. In particular, the Individual Defendants had direct and supervisory involvement in the day-to-

day operations of the Company 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 . The

Company controlled the Individual Defendants and all of its employees .

84. As set forth above, Navarre and the Individual Defendants each violated § 10(b) and Rul e

IOb-5 by their acts and omissions as alleged in this Complaint . By virtue of their positions as controlling

persons, the defendants are liable pursuant to §20(a) of the Exchange Act . As a direct and proximate result of

Navarre's and the Individual Defendants' wrongful conduct, plaintiff and other members of the Class suffered

damages in connection with their purchases of the Company's common stock during the Class Period .

PRAYER FOR RELIEF

WHEREFORE, plaintiff prays for relief and judgment, as follows :

-27-

A. Determining that this action is a proper class action, designating plaintiff as lead plaintiff an d

certifying plaintiff as a class representative under Rule 23 of the Federal Rules of Civil Procedure and

plaintiff's counsel as lead counsel ;

B. Awarding compensatory damages in favor of plaintiff and the other Class members against

all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an

amount to be proven at trial, including interest thereon ;

C. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action ,

including counsel fees and expert fees; and

D. Such equitable/injunctive or other and further relief as the Court may deem just and proper .

JURY DEMAND

Plaintiff hereby demands a trial by jury .

DATED : June 20, 2005 REINHARDT WENDORF & BLANCHFIELDGARRETT D. BLANCHFIELD, JR. (#209855)

s/Garrett D. Blanchfield, Jr.GARRETT D . BLANCHFIELD, JR .

E-1250 First National Bank Building332 Minnesota StreetSt. Paul , MN 55101Telephone: 651/287-2100651/287-2103 (fax)

LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP

WILLIAM S . LERACHDARREN J . ROBBINSRANDALL H. STEINMEYER (#270933)401 B Street, Suite 1600San Diego, CA 92101Telephone: 619/231-1058619/231-7423 (fax)

-28-

1 ,

MURRAY, FRANK & SAILER LLPBRIAN P. MURRAYERIC J . BELFI275 Madison Avenue , Suite 801New York, NY 10016Telephone : 212/682-1818212/682-1892 (fax)

GLANCY B1NKOW & GOLDBERG LLPLIONEL Z . GLANCY1801 Avenue of the Stars , Suite 311Los Angeles , CA 90067Telephone: 310/201-9150310/201-9160 (fax )

Attorneys for Plaintiff

S :ICptDrafi'Securities\Cpt Navarre.doc

-29-

3

GL,ANCY BINKOW Ao GOIDRG LLPSWORN CERTIFICATION OF PL JNTIFF VIYUW OHHAVARRE CORPORATION SECURITIES UT UOATTO N

lNMan Oh. certify that

1 . I have reviewed the Complaint aid authorized Its fling.

2. I dtd not purchase NAVARRE CORP ., the security that Is the subject of this action, atthe direction of plaintiffs counsel or In order to partTCipale In any pr vale action arlaing tinder thistitle.

3. (am willing to serve as a epresentative party on behalf of a class and will leanly atdepoattiati and trial , h necessary.

4- My trartssctJons In NAVARRL CORP. during lie Class Pedad set filth in theOcmplalnt are as follow:

I bought Ta00 shares on 02/03105 at $11 .25 per share

t sold 1000 shares on 08122/08 at $8 .71 per stiam

A. I have not served as a representative party, .an behalf of a Bass under this title MWIngthe last three years.

5. I will not accept any payment for saving as a I presentative party, e W.e t to receivemy pro rata share of any recovery or as ordered or approved by the court including the award toa representative plaintiff of reasonable rests and expenses (including lost Wages) directi ►relating to the represent Lion of the class.

Cl Chock hers if you are a current employee or former employee of the defendantCompany.

I declare under penalty of perjury that the foregoing am true and correct statamrntc.

Oared: ~„~ / _°.(PIM6 sign Your me Above)

v~v~,n •