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                                          By  J.P.  Moreno  
                                                      
                                         December  9,  2012  




                                                           
                               contact  the  author:      info@VHCreport.com  
                                                           
    
This report constitutes private research and is for informational purposes only and the opinions of the author herein are strictly
intended for reading only by those persons to whom it is or has been directly released by the author. The data and analysis
contained he
makes no representation or claim guaranteeing the accuracy of any opinions or information. Neither the author, nor his agents nor
any third party data provider, shall have any liability of any nature whatsoever for any loss of whatever nature sustained by any
person or entity which has relied on the information or analysis contained in this publication. You should always obtain reliable
current information and perform your own due diligence before investing or trading. You bear responsibility for your own investment
research and trading decisions and this publication does not serve as a substitute or endorsement for either and the author
disclaims all responsibility and liability in connection therewith. Always seek the advice of a qualified securities professional before
making any investment.

The author owns shares in VirnetX Holding Corporation (VHC). Both the author and his associates could have exposure to VirnetX
shares and derivatives at any time and without notice. This is not an investment recommendation and the data, and analysis based
upon the data, may be subject to error despite best efforts. All opinions expressed herein are subject to change without notice.
                                             J.P. Moreno - December 2012


     TABLE  OF  CONTENTS
       
     Apple  Update.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  3  
               Key  Developments  From  The  Trial.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .   5  
                                                                                                  13  
     Secure  SIP  Model     What  It  Means.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  
               Apple  Secure  Domain.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  16  
     4G  Rollout  Timing.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  23  
     Monetization  Update.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  25  
                                                                                                                             
                                                                                                                             
                                                      Introduction  

     This  report  updates  and  expands  upon  my  original                         Enabling  
     Advanced  Communications:  How  VirnetX  Will  Profit  From  Next-­Gen  
     Networks ,  published  in  July  2012  and  available  at  www.VHCreport.com.  
     There  have  been  many  important  developments  concerning  VirnetX  since  the  
     publication  of  the  White  Paper,  with  the  most  significant  event  being  the  
     conclusion  of  the  jury  trial  vs.  Apple  and  a  $368.2  million  verdict  in  the  
                             VirnetX  has  also  signed  settlement  and  licensing  
     agreements,  filed  additional  patent-­infringement  lawsuits,  and  updated  its  
     essential  patents  declaration  with  standards  developing  organizations.    In  
     this  report  I  will  outline  the  new  information  revealed  over  the  last  several  
     months  and  provide  analysis  on  how  it  affects  VirnetX  going  forward.  
     In  2010,  VirnetX  defeated  Microsoft  and  proved  it  owned  the  Secure  SIP  
                            recent  win  against  Apple  now  reaffirms  my  conclusion  that  
     VirnetX  owns  this  security  model.    In  this  update  I  will  explain  how  Apple  is  
     using  this  model  to  create  a  proprietary  Apple  Secure  Domain  to  offer  secure  
     real-­time  communication  applications  such  as  FaceTime  and  iMessage  to  its  
     customers.    I  will  also  demonstrate  how  iMessage,  which  is  included  in  a  new  
     lawsuit  against  Apple,  is  using  VirnetX  technology.  
     After  discussing  the  rollout  timing  of  4G  LTE-­Advanced  networks,  I  provide  a  
     monetization  update  that  takes  into  account  the  recent  jury  verdict.    My  
     sum-­of-­parts  analysis  results  in  a  value  of  $132  per  share.    As  more  events  
     unfold,  I  will  update  my  conclusions  and  model.  
       


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                                             J.P. Moreno - December 2012


                                                       Apple  Update  

     On  November  6,  2012,  a  federal  jury  in  Tyler,  TX  issued  a  verdict  awarding  
     VirnetX  $368,160,000  in  its  patent  infringement  case  against  Apple.  The  trial  
     was  originally  scheduled  to  include  Cisco,  Avaya,  and  Siemens,  but  the  Court  
     agreed  to  modify  the  trial  schedule  after  a  hearing  in  September.  The  three  
     remaining  defendants  are  now  scheduled  for  a  jury  trial  in  the  same  U.S.  
     District  Court  for  the  Eastern  District  of  Texas,  Tyler  Division,  beginning  in  
     March  2013.  After  the  jury  verdict,  Judge  Leonard  Davis  ordered  VirnetX  and  
     Apple  to  attend  mediation  prior  to  December  14,  2012.  A  hearing  for  all  
     post verdict  motions  has  been  set  for  December  20,  2012.    

     Immediately  following  the  jury  verdict,  VirnetX  filed  a  new  lawsuit  against  
     Apple,  with  Judge  Davis  assigned  to  the  case.  This  complaint  accuses  Apple  
     of  infringement  on  the  same  four  patents  at  issue  in  the  previous  lawsuit,  

     applications  and  products  that  were  not  included  in  the  previous  dispute.  In  
     addition  to  FaceTime  and  VPN  On  Demand  functionality,  VirnetX  also  
     identifies  i
     iPhone  5,  iPod  Touch  5th  Generation,  iPad  4th  Generation,  iPad  mini,  
     servers,  and  all  computers  using  the  Mountain  Lion  operating  system.  In  the  
     new  filing  VirnetX  alleges  that  Apple  has  willfully  infringed  the  asserted  
     patents.  This  indicates  VirnetX  may  ask  the  Court  for  enhanced  damages  for  
     past  infringement     a  multiple  of  up  to  three  times  any  damages  that  might  
     be  awarded  in  the  future.  

     The  following  table  summarizes  the  patent  infringement  claims  of  the  new  
     lawsuit:  
                                 Apple Products
            servers/computers that support VPN On Demand functionality
           servers/computers that support FaceTime/iMessage functionality
             computers running FaceTime for Mac application/iMessage
                                      iPhone 5
                             iPod Touch 5th Generation
                                 iPad 4th Generation
                                      iPad mini
             computers/hardware associated with the Mountain Lion OS
           servers, master discs, media that store, cache, or distribute iOS

       
       



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                                   J.P. Moreno - December 2012


     With  the  substantial  jury  award  from  the  prior  lawsuit  and  the  filing  of  the  
     new  patent  infringement  lawsuit,  I  believe  VirnetX  is  in  a  very  strong  
     position  to  actualize  a  significant  recurring  royalty  stream  from  Apple.  
     Although  it  is  not  a  final  resolution,  the  jury  verdict  from  November  
     represents  a  major  victory  for  VirnetX.  In  rendering  its  decision,  the  jury  
     found  that  Apple  did  indeed  infringe  on  each  asserted  claim  alleged  by  
     VirnetX.  Also,  the  jury  found  each  and  every  patent  claim  to  be  valid.  This  

     patented  technology  going  forward,  including  the  March  2013  jury  trial  
     against  the  remaining  defendants.  
     There  is  reason  to  believe  Apple  might  still  decide  to  settle  with  VirnetX.  In  
     addition  to  facing  the  newly  filed  lawsuit  in  November,  Apple  may  be  wary  of  
     the  post-­verdict  ruling  of  the  Court.  Another  element  of  pressure  is  a  
     separate  dispute  between  the  two  companies  currently  being  investigated  by  
     the  U.S.  International  Trade  Commission  (ITC).    On  October  16,  2012,  the  
                                           nt  against  Apple  and  ordered  a  February  21,  
     2014  target  date  for  completion  of  the  investigation.  This  complaint  
     effectively  replaces  the  previous  VirnetX  ITC  investigation  that  was  
     terminated  as  a  result  of  a  procedural  discrepancy  back  in  July.    
     It  is  unknown  how  and  when  a  final  resolution  in  the  Apple  dispute  will  be  
     reached.  Although  VirnetX  and  Apple  have  been  ordered  to  mediation,  there  
     is  no  guarantee  the  companies  will  agree  to  settle  the  dispute.  At  the  
     hearing  on  December  20th,  Judge  Davis  will  address  all  post verdict  motions  
     and  hear  arguments  from  both  parties.  He  will  then  enter  a  written  judgment  
     sometime  after  the  hearing  is  completed.  The  judgment  may  include  a  
     royalty  rate  for  future  product  sales  as  well  as  an  injunction.  After  the  
     written  judgment  is  entered  Apple  may  choose  to  file  an  appeal.  
     It  is  important  to  recognize  that  the  jury  was  only  presented  information  
     regarding  infringement  related  to  VPN  on  Demand  and  FaceTime  
     functionality.  VirnetX  believes  that  the  infringing  products  intersect  its  

     considerable  royalty  base  that  encompasses  the  entire  iOS  device.  During  

     should  be  calculated  using  the  smallest  saleable  unit  that  utilized  the  
     patented  technology.  In  other  words,  the  methodology  for  assessing  
     damages  considered  the  lowest  priced  model  for  each  Apple  product  when  
     determining  the  royalty  base.  For  example,  when  looking  at  covered  sales  


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                                    J.P. Moreno - December 2012


     for  the  iPhone  3Gs,  the  expert  used  the  base  price  for  8GB  model  which  was  
     a  lower  cost  model  than  the  larger  capacity  16GB  and  32GB  models.  The  
     expert  witness  for  VirnetX  also  used  a  royalty  rate  of  1%  in  determining  past  
     damages  amounted  to  $708  million.  
     In  my  July  2012  White  Paper  I  estimated  that  a  settlement  between  VirnetX  
     and  Apple  could  amount  to  $500  million  in  past  usage.  I  believe  this  number  
     is  supported  by  the  recent  jury  decision  awarding  the  company  $368.2  
     million  in  past  damages  for  only  those  products  identified  in  the  lawsuit.  
     When  factoring  in  additional  sales  from  newer  products  (e.g.  iPhone  5,  iPad  
     4th  Generation,  iPad  mini)  my  estimate  seems  to  be  in  line  with  a  realistic  
     settlement  amount.  

                           Key  Developments  From  The  Trial  

     The  recent  App                                                  -­term  business  model  
     for  a  number  of  reasons.    First  and  foremost,  the  positive  jury  verdict  and  
     the  corresponding  significant  damages  award  cannot  be  understated.    All  
     patent  claims  were  not  only  deemed  valid,  but  Apple  was  found  to  be  
     infringing  all  asserted  claims  for  the  patents  that  were  part  of  the  case.    
     Regardless  of  whether  Apple  decides  to  appeal  or  not,  I  believe  this  signals  
     another  positive  development  by  VirnetX  as  the  company  forges  ahead  to  
     protect  and  strengthen  its  patents.    This  will  aid  the  company  in  its  efforts  to  
     license  and  assert  its  intellectual  property.  Beyond  the  obvious  benefits  that  
     come  with  a  favorable  jury  verdict,  it  is  important  to  consider  the  overall  trial  
     proceedings  and  identify  other  valuable  insights  into  further  understanding  
     the  VirnetX  story.  
     The  following  is  an  overview  of  the  Key  Developments  from  the  Apple  Trial,  
     each  to  be  discussed  in  greater  detail  later  in  this  section:  
            Secure  SIP  Invented  and  Owned  by  VirnetX  
            VPN  on  Demand  Uses  VirnetX  Technology  
            VirnetX  GABRIEL  Video  Feature  Could  Compete  With  FaceTime     Might  
            This  Lead  to  a  Permanent  Injunction?  
            Established  Royalty  Rates  
            Monetary  Damages     What  is  Covered?  
              
       
       



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                                    J.P. Moreno - December 2012


     Secure  SIP  Invented  and  Owned  by  VirnetX  
     In  the  original  White  Paper,  I  concluded  that  many  of  the  core  concepts  
     patented  by  VirnetX  scientists  are  foundational  to  Secure  SIP  which  was  
     later  released  by  the  IETF  as  an  open  model.  So  what  was  new  in  the  Apple  
     trial  that  provides  us  additional  insight  on  this  subject?    It  was  already  well-­
     known  that  the  SAIC  scientists  did  not  invent  SIP,  VPNs,  or  DNS  lookups.    
     What  the  scientists  developed  were  unique  solutions  to  automatically  secure  
     the  SIP  protocol.    We  now  know  this  was  by  design.  SAIC  is  often  involved  in  
     government  contract  work.    Court  transcripts  prior  to  the  trial  show  that  the  

     main  inventors  of  SIP,  Professor  Henning  Schulzrinne,  was  retained  as  a  
     subcontractor  to  SAIC.    Dr.  Schulzrinne,  who  was  employed  by  Columbia  
     University,  met  the  scientists  in  1999  and  shared  with  them  a  presentation  
     on  SIP.    Dr.  Robert  Short,  co-­inventor  on  substantially  all  of  the  patents  in  
     the  VirnetX  patent  portfolio,  testified  that  the  conception  of  the  idea  to  use  
     DNS  lookups  to  trigger  VPNs  came  on  the  train  ride  home  from  the  
     university  following  the  meeting  with  Dr.  Schulzrinne.  




       
     Earlier  this  year,  and  b
     defendants,  Cisco                       deposed  Dr.  Schulzrinne.  During  the  
     deposition,  the  Cisco  attorney  asked  Dr.  Schulzrinne  questions  regarding  his  
     SIP  presentation  and  prior  art.    The  questions  were  asked  in  an  indirect  


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                                   J.P. Moreno - December 2012


     manner  and  Dr.  Schulzrinne  was  never  specifically  asked  if  he  believed  the  
     SAIC  scientists  (who  are  now  at  VirnetX)  stole  his  ideas  and  patented  them.  

     because  the  ultimate  plan  was  to  use  a  paid  expert  to  testify  that  Dr.  
     Schulzrinne  gave  the  ideas  to  the  SAIC  scientists.  This  theory  of  the  defense,  
     referred  to  as  a  conspiracy  theory  by  McKool  Smith,  the  firm  representing  
     VirnetX,  insinuated  that  Dr.  Schulzrinne  had  conceived  of  the  ideas  to  secure  
     SIP  and  passed  them  on  to  the  SAIC  scientists  who  would  later  patent  them.    
     During  the  deposition,                        avoided  showing  Dr.  Schulzrinne  the  
     VirnetX  patents  or  asking  him  directly  whether  or  not  his  ideas  had  been  
     stolen.  But  the  McKool  Smith  attorneys  understood  what  the  defense  was  
     attempting  to  do  with  its  deposition.  So  they  decided  to  take  a  direct  
     approach  and  remove  any  uncertainty  that  could  be  used  against  VirnetX  at  
     trial.    They  asked  Dr.  Schulzrinne  directly  what  Cisco  did  not  want  to  ask:    
     Did  the  SAIC  scientists  steal  his  ideas?  
     When  McKool  Smith  asked  Dr.  Schulzrinne  who  proposed  the  notion  that  
     SAIC  scientists  may  have  stolen  his  ideas,  Dr.  Schulzrinne  indicated  that  it  
     was  proposed  by  the  Cisco  attorney.    McKool  Smith  pointed  out  to  Dr.  
     Schulzrinne  that  the  defense  attorneys  could  have  taken  him  through  the  
     VirnetX  patents  and  asked  him  if  the  SAIC  scientists  had  stolen  his  idea.    Dr.  
     Schulzrinne  responded  that  the  Cisco  attorney  chose  not  to  take  that  action.    
     Was  this  because  there  was  not  enough  time?    Absolutely  not     the  defense  
     still  had  hours  left  on  the  deposition.    Yet,  rather  than  show  Dr.  Schulzrinne  
     the  patents  and  the  claims  in  question  and  ask  him  directly  whether  they  
     were  his  ideas,  Cisco  chose  to  pass  the  witness.    Later,  Cisco  still  made  the  
     request  to  use  its  expert  to  testify  that  Dr.  Schulzrinne  had  conceived  of  
     these  ideas  and  that  somehow  the  SAIC  scientists  took  them  from  him.    This  
     request  was  denied  and  ultimately  the  conspiracy  theory  was  abolished.  
     Dr.  Schulzrinne  was  one  of  the  key  inventors  of  the  original  SIP  protocol  and  
     did  meet  with  the  SAIC  scientists  back  in  1999.    He  refused  to  join  in  on  
                notion  that  he  disclosed  the  inventions  that  the  scientists  patented.    
     The  only  thing  he  admitted  to  disclosing  was  the  DNS  lookup  feature  used  by  
     SIP.    Dr.  Schulzrinne  did  not  invent  DNS  lookups.    This  has  been  around  for  
     decades.    It  is  how  the  Internet  works  and  has  often  been  described  as  the  
     Internet  phone  book.    In  my  opinion,  as  a  subcontractor  to  SAIC,  there  was  
     no  better  person  than  Dr.  Schulzrinne  to  explain  SIP  functionality.  Dr.  
     Schulzrinne  knew  how  SIP  uses  DNS  lookups  in  the  signaling  process,  prior  
     to  establishing  a  multimedia  session.    But  this  is  what  is  important  to  


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                                  J.P. Moreno - December 2012


     remember:    SAIC  scientists                                           And  that  is  
     precisely  what  they  did.    In  my  opinion,  once  they  understood  how  SIP  
     works,  they  came  up  with  new  inventions  such  as  using  secure  domain  
     names  and  DNS  lookups  to  automatically  trigger  VPNs.  Essentially,  they  
     patented  concepts  that  form  the  basis  for  the  Secure  SIP  model  as  I  
     described  in  the  White  Paper.    These  ideas  were  patented  before  any  public  
     release  of  the  Secure  SIP  model.  
     These  scientists  were  contracted  to  find  a  way  to  automatically  secure  SIP  
     because  secure  real-­time  communications  over  the  Internet  using  this  
     protocol  was  desired.    Basic  SIP  did  not  offer  security  on  its  own.    The  
     scientists,  some  of  the  best  in  their  field,  accomplished  this  task  and  
     patented  their  inventions.    We  are  now  seeing  how  valuable  these  inventions  
     are,  as  the  Secure  SIP  model  has  already  been  used  in  automatic  VPN  
     applications,  securing  VoIP  products,  and  in  other  video  and  chat  
     applications  that  provide  automatic  encryption  over  the  internet  upon  
     connection.    Very  soon,  since  the  Secure  SIP  model  is  built  into  the  3GPP  
     Release  10  Standard,  the  same  technology  will  be  used  globally  for  
     automatically  securing  real-­time  communications  on  all-­IP  networks.  
     VPN  on  Demand  Uses  VirnetX  Technology  
     Before  the  trial  began,  Apple  was  sanctioned  in  April  by  Judge  Davis  for  
     improperly  terminating  the  deposition  of  one  of  its  engineers,  Christophe  
     Allié.    Allié  was  a  lead  engineer  with  extensive  knowledge  of  the  technology  
     behind  the  VPN  on  Demand  feature.  After  being  questioned  about  an  idea  he  
     tried  to  patent,  which  was  a  concept  already  patented  by  VirnetX,  the  Apple  
     attorneys  decided  to  shut  the  deposition  down.    Here  is  a  summary  of  what  
     led  to  the  sanctions:  
                                                                                          ed  



           iPhone.  


           against  Apple,  which  VirnetX  alleges  claims  systems  and  methods  that  
           create  a  VPN  based  on  a  DNS  request.  


           of  using  a  domain  name  to  determine  whether  to  establish  a  VPN,  
                                                          



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                                       J.P. Moreno - December 2012


             During  his  deposition,  Allié  testified  that  he  had  no  knowledge  of  
                                                                              



             limitation  of  the  cla
             he  still  thought  Apple  was  first  to  come  up  with  the  idea  of  determining  
             whether  to  establish  a  VPN  based  on  a  domain  name  request.  It  was  at  
                                                                                          ition.  
             Judge  Davis  determined  
             the  deposition,  and  VirnetX  was  deprived  of  the  opportunity  of  

                                                                         unsel  terminated  
             the  deposition  at  the  precise  moment  Mr.  Allié  was  going  to  provide  his  
             answers.  While  the  Apple  attorneys  
                                                                                        them  
             the  right  to  stop  the  deposition.  
                                                                         ow  critical  VPNs  on  
     demand  are                                                      is  being  used  by  
     Apple.    He  also  used  internal  Apple  documents  to  demonstrate  how  the  VPN  
     on  Demand  feature  was  a  major  factor  in  breaking  Research  in  Motion              the  
     manufacturer  of  Blackberry  devices)  grip  on  the  corporate  market,  as  well  as  
                                                                         By  going  back  to  
     2005,  Dr.  Jones  also  described  the  historical  use  of  VPNs  at  Apple,  and  how  
     Apple  had  failed  to  make  their  own  technology  work.    At  this  stage  of  the  
     trial,  Dr.  Jones  highlighted  how  Christophe  Allié  tried  to  file  a  patent  with  
                                             However,  his  patent  filing  occurred  years  
     after  the  VirnetX  patent  was  granted.  
                                                                                     filed  years  
     before  Christophe  Allié  filed  his                    for  the  same  technology.  
     VirnetX  GABRIEL  Video  Feature  Could  Compete  With  FaceTime     
     Might  This  Lead  to  a  Permanent  Injunction?  
     The  VirnetX  website  provides  links  for  a  video  and  a  White  Paper  for  the  
                                                                                      
     http://virnetx.com/technology/gabriel-­video  and  http://virnetx.com/technology/white-­paper  

                                                                    ail,  which  is  in  beta  
     testing.    This  paper  outlined  which  applications  the  software  would  initially  



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                                          J.P. Moreno - December 2012


     offer:  


     offers  seamless  access  to  a  select  number  of  high-­utility  peer-­to-­peer  applications.  The  
     initial  set  of  candidate  offerings  include:  
       
               File  sharing     including  user-­defined  folder  access  policies  on  a  per-­peer  basis  and  
               drag-­and-­drop  user  interface  
             Real-­time  communication  (RTC)     incorporating  instant  messaging  (e-­chat),  Voice-­
             over-­IP  (VoIP)  (e-­talk),  and  message  posting  with  attachments  (e-­post).  
             Remote  Desktop     allowing  secure  desktop  access  across  the  Internet  

             Distributed  file  backup  and  synchronization     providing  opportunistic  data  backup  
             and  synchronization  
             background,  non-­                         

     It  is  noteworthy  that  GABRIEL,  in  its  earliest  stages  did  not  offer  a  video  
     application.    However,  at  a  pre-­trial  hearing,  VirnetX  counsel  Doug  Cawley  
     stated  the  following:  

          The  evidence  will  show,  Your  Honor,  that  VirnetX  has  a  product,  it  is  in  beta,  it  can  
         replace  the  infringing  activity  of  Apple;;  and  we  will  be  asking  Your  Honor,  assuming  a  
         successful  outcome  in  this  trial,  to  enter  a  permanent  injunction  prohibiting  continued  
         enforcement     infringement  of  the  patent  by  Apple,  so  that  VirnetX  can  move  into  the  
                           (Source:  Pre-­trial  Conference  Transcript,  October  18,  2012,  p.  20)      
       
     Interestingly,  on  Day  1  of  the  Apple  trial,  a  live  demonstration  of  GABRIEL  

     FaceTime  application.    The  demonstration  was  performed  on  an  Android  
     device.    After  the  jury  verdict  was  announced,  VirnetX  attorneys  stayed  true  
     to  their  word  by  filing  a  sealed  motion  for  a  Permanent  Injunction  on  
     November  21,  2012.    Apple  must  give  serious  consideration  to  a  potential  
     Permanent  Injunction  against  some  of  its  most  popular  products.  
     Established  Royalty  Rates  


     licensing  agreements.    For  major  broad-­based  manufacturers,  such  as  Apple,  
     I  anticipated  a  range  between  0.75%  and  1.5%.    For  manufacturers  with  
     narrow-­based  product  range  offerings,  such  as  Aastra,  that  range  was  
     between  1.0%  and  2.5%.    For  Aastra  specifically,  my  revenue  model  
     assumed  a  1.5%  royalty  rate.    During  the  recent  jury  trial,  information  about  
                                                                         d  on  reports  from  

     licensees  were:    Aastra  1.6%,  Mitel  1.15%,  and  NEC  1.6%.  


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                                    J.P. Moreno - December 2012


     Monetary  Damages     What  is  Covered?  
     The  Apple  trial  also  provided  much  insight  into  the  methods  used  by  Roy  
     W                                in  determining  fair  damages  owed  by  Apple.    
     The  three  methods  and  corresponding  damages  he  used  are  as  follows:  
        1) Reasonably  Royalties  on  Apportioned  Base:    $708  Million  
        2) Nash  Bargaining  Solution:    $730  Million  
        3) Entire  Market  Value:    $749  Million  
     Mr.  Weinstein  took  the  lowest  of  the  three  amounts  and  concluded  that  
     VirnetX  was  owed  $708  million  by  Apple.  
     Reasonably  Royalties  on  Apportioned  Base:    $708  Million  
     This  method  is  based  on  a  hypothetical  negotiation  between  the  two  parties  
     extending  back  to  2009.    Mr.  Weinstein  essentially  applied  a  1%  royalty  to  
     an  apportioned  revenue  base  to  come  up  with  the  $708  million  in  damages.  
     In  other  words,  Mr.  Weinstein  took  out  revenue  and  apportioned  the  base  
     down  before  applying  the  1%  royalty.    This  was  accomplished  by  using  the  

     patented  inventions.    After  using  this  analysis  for  each  product  involved  in  
     the  case,  Mr.  Weinstein  could  then  apply  a  1%  royalty  rate  to  a  more  
     conservative  revenue  base,  which  he  calculated  to  be  $70.8  billion.  As  was  
     mentioned  earlier,  the  royalty  rates  agreed  to  by  Aastra,  Mitel,  and  NEC  all  
     exceed  1%.    And  in  these  cases,  they  are  not  paying  on  the  smallest  
     saleable  unit,  but  rather,  on  a  much  larger  unit.    When  comparing  these  
     other  licensing  agreements,  Mr.  Weinstein                         for  calculating  
     damages  from  Apple  appear  to  be  very  conservative.  
     Nash  Bargaining  Solution:    $730  Million  
     In  the  Nash  Bargaining  Solution  method,  Mr.  Weinstein  determined  the  exact  
     profit  on  Apple  products  that  is  related  to  the  accused  features,  and  then  
     split  that  profit  between  the  two  parties.    Using  this  method,  Mr.  Weinstein  
     came  up  with  $730  million  in  damages.    The  Nash  Bargaining  Solution  is  
     based  on  the  idea  that  a  company  would  rather  split  profits  than  to  not  have  
     any  profits  at  all.    For  example,  if  Apple  refused  to  make  a  deal  with  VirnetX  
     to  have  FaceTime  on  its  devices  and  had  the  feature  removed,  then  Apple  
     would  lose  all  profits  directly  related  to  the  exact  profits  that  are  directly  tied  
     to  the  cash  value  FaceTime  adds  to  the  device.    Mr.  Weinstein  used  this  
     method  to  determine  that  value  and  then  split  the  profit  between  Apple  and  
     VirnetX.  


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                                      J.P. Moreno - December 2012


     Entire  Market  Value:    $749  Million  
     Mr.  Weinstein,  to  the  extent  it  is  shown  that  the  patented  feature  is  what  is  
     driving  the  device,  used  the  Entire  Market  Value  method  which  allows  him  to  
     use  the  profits  from  the  whole  device.    Mr.  Weinstein  concluded  that  the  
     damages  using  this  method  were  $749  million.  
     An  Apple  presentation  had  information  from  a  survey  that  asked  customers  
     what  was  the  most  desired  feature  in  their  device,  and  18%  of  the  time  it  
     was  FaceTime.    Mr.  Weinstein  then  applied  the  entire  market  value  rule  on  
     18%  of  the  products  using  FaceTime  to  come  up  with  the  revenue  that  is  
     tied  to  the  patented  feature  driving  sales  for  these  devices.    He  then  applied  
     a  conservative  royalty  to  determine  the  damages.    McKool  Smith  argued  that  
     securing  FaceTime  is  a  VirnetX  patented  invention:    a  one-­click  secure  
     communication  between  two  parties.    This  is  what  Steve  Jobs  wanted     one-­
     click,  easy  to  use,  secure  FaceTime  calls.  

     During  his  testimony  at  the  trial,  Mr.  Weinstein  discussed  how  important  
     VirnetX  technology  was  with  respect  to  Apple  products,  both  in  terms  of  
     functionality  and  in  sales.    He  mentioned  that  over  the  last  two  years,  more  
     than  2.6  billion  FaceTime  secure  calls  were  made  by  using  VirnetX  
     technology.    His  conclusion  was  that  VirnetX  technology  was  highly  


                                   




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                                   J.P. Moreno - December 2012


                          Secure  SIP  Model     What  It  Means  

     It  is  now  evident  that  VirnetX  owns  the  Secure  SIP  model.    The  inventors  
     intentionally  worked  on  a  project  that  had  the  explicit  goal  of  modifying  the  
     SIP  protocol  to  make  it  secure,  and  they  patented  the  inventions.    The  
     VirnetX  Secure  DNS  Model  is  illustrated  below:  




       
     The  work  to  secure  the  SIP  protocol  led  to  patented  ideas  such  as  using  a  
     DNS  lookup  to  trigger  a  VPN.    Inventions  like  this  are  unique  and  powerful  
     on  their  own.    For  example,  the  concept  of  using  a  domain  name  to  trigger  a  
     VPN  forms  the  basis  of  many  corporate  VPN  applications  today.    While  this  
     idea  has  specific  uses  on  its  own,  when  used  in  conjunction  with  other  
     VirnetX  patented  inventions  like  secure  domain  names  and  secure  DNS  
     proxy  servers,  together  they  form  a  model  that  is  the  basis  for  automatically  
     securing  real-­time  communications:    Secure  SIP.    It  is  easy  to  become  
     overwhelmed  trying  to  grasp  each  claim  of  every  VirnetX  patent.    I  believe  it  

     and  recognize  that  VirnetX  invented  the  Secure  SIP  model.      




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                                  J.P. Moreno - December 2012




       
     Once  we  understand  that  VirnetX  owns  the  Secure  SIP  model,  we  can  
     logically  ask  the  question:  
     How  is  the  Secure  SIP  model  used  today,  and  where  will  it  be  used  
     in  the  future?  
     The  question  is  significant  because  if  VirnetX  invented  this  security  model,  
     then  any  company  using  the  model,  or  elements  of  it,  is  using  VirnetX  
     technology.  To  help  answer  this  question,  it  is  important  to  recall  what  SIP  
     was  originally  designed  for.    As  described  in  the  original  White  Paper,  SIP  
     was  originally  designed  as  a  signaling  mechanism  for  VoIP  communication,  
     and  has  since  been  expanded  to  other  forms  of  multimedia  communication  
     such  as  video  and  instant  messaging.    SIP  was  not  inherently  secure  on  its  
     own.    The  scientists  at  SAIC  came  up  with  the  concepts  to  automate  security  
     for  the  signaling  protocol  and  multimedia  communication.    In  essence,  the  
     VirnetX  patents  allow  for  a  one-­click  automatic  security  mechanism.    The  
     user  gets  security  upon  connection  without  being  required  to  enter  a  
     password.    The  Secure  SIP  model  can  be  used  for  securing  multimedia  of  all  
     types:  voice,  video,  messaging,  and  other  real-­time  communication,  or  any  
     combination  of  these.    The  security  model  is  elegant,  yet  very  powerful  and  I  
     believe  is  already  widely  used  today.  
       
       


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                                   J.P. Moreno - December 2012


     What  are  some  examples  of  how  I  believe  Secure  SIP  (or  an  element  
     of  the  model)  is  used  today?    
     There  are  three  main  categories  of  Secure  SIP  in  commercial  use  today:  
     Apple  Secure  Domain  for  iOS  devices,  secure  VoIP  communications,  and  
     corporate  VPN  applications     where  VPNs  are  triggered  by  automatic  DNS  



     Domain.  Secure  VoIP  communications  use  the  Secure  SIP  model,  which  is  
     often  found  in  many  technical  documents  of  IP  telephony  manufacturers  
     such  as  Avaya  and  Cisco.    Since  SIP  was  originally  designed  for  VoIP  
     applications,  this  is  not  a  surprise.  PBX  phone  systems  by  companies  like  
     Avaya,  Cisco,  Mitel,  NEC,  and  Siemens  are  an  example  of  secure  VoIP  
     communications  that  utilize  Secure  SIP  today.  




       
     I  believe  that  the  Secure  SIP  model  is  
     release  secure  real-­time  communication  applications  such  as  FaceTime  and  
     iMessage.    The  model  is  what  allows  a  company  like  Apple  to  build  a  secure  
     domain  for  its  users.    With  that  in  mind,  it  is  worth  spending  some  time  on  
     the  Apple  Secure  Domain  as  well  iMessage  functionality.    This  will  clearly  
     demonstrate  how  powerful  the  Secure  SIP  model  is  and  how  Apple  is  using  
     VirnetX  technology  to  release  new  applications  such  as  iMessage.  



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                                  J.P. Moreno - December 2012


     Apple  Secure  Domain  
     I  believe  Apple  has  built  a  proprietary  secure  domain  based  on  major  
     elements  of  the  SIP  Secure  model.    Some  elements  are:  
           Secure  Domain  Names:    Apple  IDs  or  Apple  Phone  Numbers  at  the  
           device  level  
           Secure  DNS  Servers:    Apple  DNS  Servers  that  manage  Apple  devices  
           via  Apple  IDs  or  Phone  Numbers  that  correspond  with  IP  Addresses  
           Encrypted  Signaling  between  Device  and  Secure  DNS  Server:  
           Encryption  triggered  by  Secure  Domain  Names  
           Encrypted  Media  between  Devices:  Encryption  triggered  by  Secure  
           Domain  Names  




             
     Apple  promoted  its  use  of  a  series  of  open  protocols  to  create  FaceTime,  
     including  support  for  SIP  for  call  setup  and  SRTP  for  encrypted  video  
     delivery.  I  believe  Apple  took  the  SIPS  URI  (email  address)  concept  from  the  
     Secure  SIP  model  and  created  the  Apple  ID  system  (email  addresses).    
     Apple  uses  Apple  IDs  and  phone  numbers  to  function  as  Secure  Domain  
     Names.    It  is  worth  not


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                                  J.P. Moreno - December 2012



     creates  the  option  of  a  message  arriving  at  the  same  time  to  multiple  
     devices  belonging  to  the  same  user,  which  is  similar  to  the  SIP  parallel  
     forking  feature.    Apple  IDs  (email  addresses)  or  phone  numbers  when  used  
     as  Secure  Domain  Names  that  trigger  security  are  using  VirnetX  technology.  
     Similar  to  the  Secure  DNS  Proxy  Server  in  the  Secure  SIP  model,  an  Apple  
     user  registers  a  device  with  Apple  Secure  DNS  servers.    The  Apple  Secure  
     DNS  servers  store  IP  addresses  of  Secure  Domain  Names,  and  the  Secure  
     DNS  servers  recognize  that  Secure  Domain  Names  require  encryption  of  the  
     signal  (device  to  server)  and  the  media  stream  (device  to  device).    When  
     functioning  in  this  manner,  these  specialized  DNS  servers  are  using  VirnetX  
     technology.  
     In  my  opinion,  the  proprietary  Secure  Domain  that  has  been  created  by  
     Apple  functions  very  similar  to  the  Secure  SIP  model.    Apple  uses  Secure  
     Domains,  Secure  DNS  servers,  and  DNS  lookups  to  trigger  encryption  of  the  
     signal  and  media  stream.    Because  Apple  can  only  control  its  own  devices  
     and  servers  (other  devices  from  other  manufacturers  do  not  register  with  
     the  Apple  Secure  DNS  servers)  the  secure  domain  is  proprietary.    Once  
     established,  the  highly-­scalable  SIP  model  allows  for  new  applications  to  be  
     added  at  any  time.    For  example,  Apple  originally  released  FaceTime  (secure  
     video  calling),  and  then  later  released  iMessage  (secure  messaging)  in  the  
     iOS5  upgrade.    It  is  entirely  possible  that  Apple  is  already  developing  new,  
     unreleased  secure  real-­time  communication  applications,  based  upon  this  
     security  platform.  
     I  am  a  firm  believer  that  Apple  should  be  credited  with  innovating  and  
     developing  game  changing  products.    The  release  of  the  iPhone  has  forever  
     changed  the  mobile  device  landscape.    Without  a  doubt,  the  iPad  has  done  
     the  same  thing  for  tablets.    FaceTime  and  iMessage  are  very  powerful  real-­
     time  communication  applications  which  many  consider  to  be  examples  of  

     and  useful,  I  do  not  believe  Apple  came  up  with  these  ideas  on  their  own.    
     SIP  is  an  open  protocol  that  has  been  around  for  many  years  and  is  the  
     basis  for  VoIP  and  other  multimedia  communication.    Apple  essentially  
     implemented  the  SIP  model  as  a  platform  for  developing  real-­time  
     communication  applications  such  as  FaceTime  and  iMessage.    Because  Apple  
     opted  to  include  automatic  security,  it  also  adopted  the  Secure  SIP  model.    
     Apple  did  not  invent  SIP,  a  widely  recognized  open  protocol.    Apple  did  not  


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                                              J.P. Moreno - December 2012


     invent  the  Secure  SIP  model  that  allows  for  automatic  security  of  SIP.    That  
     distinction  belongs  to  the  SAIC/VirnetX  scientists.    These  scientists  are  the  
     experts  and  true  innovators  that  developed  a  powerful  security  model  that  
     companies  like  Apple  can  implement  to  automatically  secure  real-­time  SIP-­
     based  communications.    
     iMessage  to  understand  how  this  security  model  is  being  used.    
       
     Apple  iMessage  Highlights  
                                                    Apple iMessage Highlights
          Messaging platform that works between all Apple devices     iMessages are routed across a packet-switched network.
          that can run iOS 5 (or later) iPhone, iPod Touch, iPad,     SMS has a maximum character restriction and forces
          iPad mini, etc. and Apple laptops or Macs running the       long messages to be split up and sent as multiple texts.
          new OS X Mountain Lion operating system.                    iMessages do not have this limitation.
          iMessage is included/integrated with the operating system
                                                                      Photos and videos can also be sent using iMessage.
          as a key application ready to use out of the box.
                                                                      Essentially replaces SMS (text messaging) and does not
          Operates over the standard packet-switched internet
                                                                      require a wireless carrier SMS plan. It only requires a
          rather than through the circuit-switched backend of
                                                                      data connection to exchange messages (Carrier Data
          traditional SMS. iMessages are not text messages.
                                                                      Plan or Wi-Fi).
          iMessages are shown in blue bubbles and the send            SMS text messages are shown in traditional green
          button is blue when you can send using iMessage.            colored bubbles and a green send button is displayed.



          Uses both phone numbers and email addresses for             iMessage uses TLS for encryption. See Secure SIP
          recipient identification.                                   model.
                                                                      iMessage speed is somewhere in between IM and SMS.
          many other SMS-less messaging solutions available in        Delivery on iMessage is speedy almost all the time, and
                                                                      depends on having a fast data connection.
                                                                      Has recipient typing status, read receipts, group
          Uses SMS as a failover delivery mechanism when
                                                                      messaging, and delivery reports. When your contact is
                                                                      typing a message, a typing bubble appears (additional
                                                                      proof this is not a text message, but rather a real-time
          those five minutes, the sender falls back to SMS.
                                                                      connection.
       
     Apple  iMessage  Uses  VirnetX  Technology  
     In  my  opinion,  Apple  used  the  Secure  SIP  framework  to  develop  applications  
     such  as  FaceTime  and  iMessage.    Apple  has  highlighted  the  fact  that  
     iMessage  is  a  secure  messaging  platform.    Not  surprisingly,  iMessage  is  
     specifically  identified  in  the  latest  lawsuit  filed  by  VirnetX.    I  believe  
     iMessage  clearly  demonstrates  the  Secure  SIP  (VirnetX)  technology  at  work.  
     An  Apple  user  sends  a  text  message,  and  in  certain  cases  these  are  
     automatically  converted  to  an  iMessage,  and  the  message  shows  up  as  
     BLUE.    In  other  cases,  the  text  message  is  simply  sent  as  a  normal  SMS  
     message  and  shows  up  on  screen  as  GREEN.    The  user  does  nothing  
     different.    So  what  is  happening?    



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                                   J.P. Moreno - December 2012


                               Blue  iMessages:    Apple  User  1  (AU1)  sends  
                               message  to  Apple  User  2  (AU2)  
                               BLUE  =  Secure  real-­time  encrypted  messaging  
                               over  the  internet  (packet-­switched  network)  
                                 When  AU1  sends  a  message  to  AU2,  Apple  Secure  DNS  
                                 servers  recognize  both  devices  (Secure  Domain  
                                 Names)  for  which  it  has  IP  addresses  stored.    As  long  
                                 as  both  users  have  internet  access  (via  a  wireless  data  
                                 plan  or  a  Wi-­Fi  connection),  Apple  servers  
                                 automatically  turn  this  into  an  iMessage,  and  the  color  
                                 changes  to  BLUE.    An  iMessage  takes  a  completely  
     different  path  than  a  SMS  text  message  that  travels  across  cellular  
     networks.  An  iMessage  is  an  encrypted  data  message  over  the  packet-­
     switched  Internet.    DNS  lookups  are  used  in  the  process  and  the  end  result  
     is  a  secure  real-­time  communication  link  being  established  between  AU1  and  
     AU2.    This  direct  connection  explains  why  users  can  see  the  typing  status  of  
     other  users  when  using  iMessage.    In  addition  to  text,  the  application  allows  

     internet  connection  becomes  inaccessible  during  an  iMessage  session,  real-­
     time  messages  cannot  be  delivered  and  will  therefore  default  back  to  a  
     standard  SMS  message  after  a  few  minutes.    Simply  put,  the  transmission  
     times  out  because  iMessage  delivery  is  not  available.  
     Blue  Message  Summary:    A  secure  communication  link  established  using  
     secure  domain  names  and  DNS  lookups:    This  is  VirnetX  technology  and  
     looks  like  the  Secure  SIP  Model.  
     Green  (Text)  Messages:    Apple  User  1  (AU1)  
     sends  message  to  Samsung  User  2  (SU2)  
     GREEN  =  SMS  text  messages  through  cellular  
     networks  (standard  circuit-­switched  networks)  
     When  AU1  sends  a  message  to  SU2,  Apple  Secure  
     DNS  servers  recognize  the  first  device,  but  not  the  
     second.    SU2  (Samsung  device)  is  not  registered  with  
     Apple  servers  and  will  not  have  a  Secure  Domain  
     Name  that  requires  security.    Thus,  the  message  
     defaults  to  standard  SMS  text  messaging,  and  the  
     message  shows  up  as  GREEN.    SMS  messages  are  


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                                       J.P. Moreno - December 2012


     transmitted  across  cellular  networks.  
     Green  Message  Summary:  
     Even  if  the  message  gets  routed  as  a  normal  SMS  text  message  because  the  
     end  user  does  not  have  an  Apple  device,  Apple  is  still  using  VirnetX  
     elements.    The  originating  Apple  device  (AU1)  sending  the  message  still  has  
     a  Secure  Domain  Name  registered  with  Apple  Secure  DNS  Servers.    The  
     device  communicates  with  the  server,  which  is  basically  the  signaling  leg  of  
     the  Secure  SIP  model.    Even  if  encryption  isn't  triggered,  because  the  
     second  user  (SU2)  does  not  have  an  Apple  device,  VirnetX  technology  is  still  
     being  used  in  the  process.    This  is  similar  to  an  airbag  in  a  car,  just  because  
     an  airbag  is  not  used  every  time  a  person  drives  does  not  mean  it  is  not  
     inside  the  car.    An  airbag  is  only  used  when  triggered.  
     iMessage  /  VirnetX  Summary:  
     Apple  has  graphically  (BLUE  messages)  told  all  of  us  when  VirnetX  
     technology  is  being  used.    Apple  devices  use  secure  domain  names  to  trigger  
     encryption  of  real-­time  messages  between  devices  across  the  Internet.    The  
     proprietary  Apple  Secure  Domain  is  available  for  all  Apple  users  and  is  
     currently  being  used  for  iMessage  and  FaceTime  as  both  secure  real-­time  
     applications.    Both  applications  offer  a  one-­click  security  feature  which  is  
     based  on  VirnetX  technology.                                           ,  which  
     encompasses  Apple  devices,  Apple  servers,  Apple  ID's,  Apple  operating  
     systems,  etc.,  is  based  on  the  Secure  SIP  model.  
     The  Secure  SIP  model  and  many  of  its  key  elements  are  covered  specifically  

     the  VirnetX  patent  portfolio.    Because  the  elements  involved  are  so  
     foundational  to  the  Apple  system,  I  believe  Apple  would  have  an  extremely  
     difficult  time  avoiding  the  VirnetX  patents.    Apple  cannot  simply  remove  
     these  applications,  because  they  are  built  into  the  operating  system,  and  
                                                .  
       
                                    




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                                     J.P. Moreno - December 2012


     How  will  Secure  SIP  be  used  globally  over  the  next  decade?  


     communication  will  work  on  4G  LTE-­Advanced  networks.    The  Secure  SIP  
     model  and  VirnetX  technology  will  soon  be  used  globally  to  secure  real-­time  
     communications  on  next-­generation  networks.    It  will  not  matter  what  
     device  manufacturer  or  service  provider  users  choose,  because  each  will  
     utilize  secure  real-­time  communications.  




       
     As  highlighted  in  the  original  White  Paper,  the  3GPP  chose  SIP  as  its  base  
     signaling  protocol  in  2000  and  it  has  become  the  backbone  of  the  IMS  
     architecture.    Therefore,  the  reason  the  VirnetX  patent  portfolio  is  so  
     valuable  is  because  the  company  holds  the  keys  to  securing  all  SIP-­based  
     communications  on  4G  all-­IP  networks  in  the  future.  Understanding  that  the  
     VirnetX  patents  are  at  the  heart  of  the  Secure  SIP  model  explains  why  
     companies  cannot  easily  avoid  the  technology.    When  secure  domain  names,  
     DNS  lookups,  and  secure  DNS  servers  are  used  to  automatically  trigger  
     security  between  two  devices,  VirnetX  technology  is  used.    This  model  is  the  
     basis  for  securing  real-­time  communications  on  all  next-­generation  
     networks.  
                                  




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                                      J.P. Moreno - December 2012


     Key  VirnetX  Elements  in  Release  10  Specifications:  




       
            Secure  Domain  Names  
            Secure  DNS  Servers  
            Secure  Signaling  from  Device  to  Secure  DNS  Server  
            Automatic  VPNs  (Secure  Communication  Links)  triggered  by  DNS  
            lookup  
       
     Conclusion:  
     I  believe  VirnetX  proved  it  owned  the  Secure  SIP  model  during  the  Microsoft  
     trial  and  this  was  validated  and  confirmed  in  the  Apple  trial.    This  means  
     that  any  company  using  the  Secure  SIP  model  in  applications  and  products  
     today  is  using  VirnetX  technology.    It  also  explains  why  VirnetX  patents  are  
     essential  for  automatically  securing  4G  LTE-­Advanced  real-­time  
     communications.    Secure  SIP  is  built  into  the  3GPP  R10  Standard  and  is  
     covered  by  the  VirnetX  patent  portfolio.  This  model  allows  for  secure  links  
     between  devices  to  automatically  be  established  upon  connection.    Secure  
     SIP  is  built  into  the  standard  and  there  is  no  workaround  or  alternative  for  
     companies  to  avoid  the  technology  when  complying  with  3GPP  Release  10  
     specifications.    As  such,  4G  LTE-­Advanced  licensing  represents  an  enormous  
     revenue  opportunity  for  VirnetX  over  the  next  decade.  
                                   




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                                                                  J.P. Moreno - December 2012


                                                                        4G  Rollout  Timing  
     VirnetX  technology  is  a  necessary  component  of  the  fastest  developing  
     mobile  system  technology  in  history.  To  reiterate  a  key  point  of  the  July  
     2012  White  Paper:    The  largest  opportunity  for  the  company  is  directly  
     related  to  4G  LTE-­Advanced  licensing.  As  basic  LTE  networks  grow  and  
     evolve  into  advanced  networks,  every  4G  mobile  device  will  eventually  
     require  a  unique  secure  domain  name.  The  first  commercial  networks  using  
     LTE-­Advanced  user  devices  will  launch  in  2013.  
     On  November  2,  2012,  the  Global  Mobile  Suppliers  Association  (GSA)  
     reported  that  360  operators  have  committed  to  commercial  LTE  network  
     deployments  or  have  begun  pre-­commitment  trials  or  studies  concerning  LTE  
     rollouts.  Additionally,  the  GSA  forecasts  that  by  the  end  of  2013  there  will  be  
     209  commercial  LTE  networks  in  75  countries  worldwide.  The  evolutionary  
     path  of  these  early  LTE  networks  undeniably  includes  moving  toward  LTE-­
     Advanced.  Below  is  a  summary  of  a  few  high-­profile  mobile  operators  and  
     the  current  timetable  for  deployment  of  LTE-­Advanced  services:  
                        Mobile Operator                              Country                   LTE Launch Date                                      LTE-Advanced
                   AT&T Mobility                                      USA                         September 2011                                expected 2013
                   Clearwire                                          USA                                 -                                     expected 2013*
                   Dish Network                                       USA                                 -                                     estimated 2016
                   MetroPCS                                           USA                         September 2010                         planned merger with T-Mobile
                   Sprint                                             USA                            July 2012                                  expected 2013
                   T-Mobile USA                                       USA                                 -                                     expected 2013
                   Verizon Wireless                                   USA                         December 2010                                 estimated 2014
                   Telstra                                         Australia                      September 2011                             estimated 2016-2017
                   NTT DoCoMo                                        Japan                        December 2010                                 estimated 2015
                   SK Telecom                                     South Korea                        July 2011                               expected 2013-2014
                   Yota                                             Russia                         January 2012                                 expected 2013
                   Tele2 and TeleNor                                Sweden                        November 2010                              estimated 2014-2015
                   EE (Everything Everywhere)                         UK                           October 2012                              estimated 2014-2015
             *              LTE  network  launch  is  reported  to  be  LTE-­Advanced-­ready;;  little  visibility  on  which  parts  of  the  standard  will  be  implemented  at  launch.  

     Although  the  evolution  of  LTE-­Advanced  is  occurring  faster  than  previously  
     forecast,  I  still  believe  implementation  of  the  standard  will  be  spotty  for  the  
     first  couple  of  years.  The  technology  should  grow  rapidly,  becoming  
     mainstream  around  2016,  as  operators  upgrade  their  LTE  networks  to  
     include  advanced  services.  
     On  September  19,  2012,  VirnetX  announced  it  had  updated  its  essential  
     patents  declaration  for  4th  Generation  wireless  networks  to  the  3GPP,  having  
     submitted  statements  directly  to  the  European  Telecommunications  
     Standards  Institute  (ETSI)  and  the  Alliance  for  Telecommunications  Industry  
     Solutions  (ATIS).  Below  are  the  specifications  (or  developing  specifications)  


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                                                    J.P. Moreno - December 2012


     that  VirnetX  has  included  in  its  declaration:  
                         3GPP TS 26.237: "IP Multimedia Subsystem (IMS) based Packet Switch Streaming (PSS) and
                 1.      Multimedia Broadcast/Multicast Service (MBMS) User Service; Protocols" Release 11 or Prior
                         Release
                         3GPP TS 24.228: "Signaling flows for the IP multimedia call control based on Session Initiation
                 2.
                         Protocol (SIP) and Session Description Protocol (SDP); Stage 3" Release 5 or Prior Release
                 3.      3GPP TS 23.228: "IP Multimedia Subsystem (IMS); Stage 2" Release 11 or Prior Release
                         3GPP TS 23.234 ("3GPP system to Wireless Local Area Network (WLAN) interworking; System
                 4.
                         description") Release 10 or Prior Release
                         3GPP TS 24.234 ("3GPP system to Wireless Local Area Network (WLAN) interworking; WLAN
                 5.
                         User Equipment (WLAN UE) to network protocols; Stage 3") Release 11 or Prior Release
                         3GPP TS 32.593 ("Telecommunication management; Home enhanced Node B (HeNB)
                 6.      Operations, Administration, Maintenance and Provisioning (OAM&P); Procedure flows for Type 1
                         interface HeNB to HeNB Management System (HeMS)") Release 11 or Prior Release
                         3GPP TS 33.234 ("3G security; Wireless Local Area Network (WLAN) interworking security")
                 7.
                         Release 11 or Prior Release
                         3GPP TS 33.401 ("3GPP System Architecture Evolution (SAE); Security architecture") Release 11
                 8.
                         or Prior Release
                 9.      3GPP TS 43.318 ("Generic Access Network (GAN); Stage 2") Release 10 or Prior Release
                         3GPP TS 44.318 ("Generic Access Network (GAN); Mobile GAN interface layer 3 specification")
                10.
                         Release 11 or Prior Release
                         3GPP TS 23.234 ("3GPP system to Wireless Local Area Network (WLAN) interworking; System
                11.*
                         description") Release 10 or Prior Release
                         3GPP TS 24.234 ("3GPP system to Wireless Local Area Network (WLAN) interworking; WLAN
                12.*
                         User Equipment (WLAN UE) to network protocols; Stage 3") Release 11 or Prior Release
                         3GPP TS 32.593 ("Telecommunication management; Home enhanced Node B (HeNB)
                13.*     Operations, Administration, Maintenance and Provisioning (OAM&P); Procedure flows for Type 1
                         interface HeNB to HeNB Management System (HeMS)") Release 11 or Prior Release
                         3GPP TS 33.234 ("3G security; Wireless Local Area Network (WLAN) interworking security")
                14.*
                         Release 11 or Prior Release
                         3GPP TS 33.401 ("3GPP System Architecture Evolution (SAE); Security architecture") Release 11
                15.*
                         or Prior Release
                16.*     3GPP TS 43.318 ("Generic Access Network (GAN); Stage 2") Release 10 or Prior Release
                         3GPP TS 44.318 ("Generic Access Network (GAN); Mobile GAN interface layer 3 specification")
                17.*
                         Release 11 or Prior Release
          *                                                                        

                                                      VirnetX  Key  Patents:
                      U.S. Patent                                         Description
                                       Method for transparently creating a virtual private network in response to a domain
                       6,502,135
                                       name query
                                       Establishment of a secure communication link based on a domain name service
                       7,490,151
                                       (DNS) request
                       7,188,180       Method of establishing a secure communication link between computers of virtual
                       8,051,181       private network
                       7,209,479       Third party VPN certification
                       7,418,504
                                       Agile network protocol for secure communications using secure domain names
                       7,921,211
                                       Method for automatically establishing secure communication link between
                       6,839,759       computers of virtual private network without user entering any cryptographic


       
                                       information
                                                 

VHCreport.com                                                                                                                Page 24
                                    J.P. Moreno - December 2012


                                     Monetization  Update  
     I  have  categorized  four  revenue  streams  for  VirnetX  going  forward:                      
     1)  Device/Product  Licensing,  2)  Secure  Domain  Services  Licensing,                        
     3)  GABRIEL  Licensing/Sales,  and  4)  Secure  Domain  Name  Registry  Fees.  The  
     two  primary  revenue  sources  will  be  related  to  licensing  manufactured  
     products  &  software  and  
     licensing  secure  domain  services  
     associated  with  next-­generation  
     networks.    
     During  the  recent  trial,  VirnetX  
     demonstrated  a  beta  version  of  
     its  GABRIEL  connection  
     application  on  an  Android  mobile  
     device.  I  anticipate  this  product  
     will  be  released  across  
     commercial  mobile  marketplaces  
     at  some  point  in  the  future.  It  
     remains  to  be  seen  what  type  of  success  VirnetX  will  achieve  with  its  
     standalone  application,  so  at  this  point  it  will  not  be  included  in  my  
     monetization  analysis.  To  date,  VirnetX  has  not  announced  a  partner  or  
     timeline  with  regards  to  establishing  its  secure  domain  name  registry.  
     Without  specific  information  on  how  it  will  be  operated  and  maintained,  I  am  
     unable  to  quantify  potential  registration  fees  and  other  possible  income  
     generated  from  the  registry.  As  such,  this  component  has  been  omitted  from  
     my  monetization  model.    
     I  have  updated  the  sum-­of-­parts  analysis  for  VirnetX  to  include  recent  
     developments  and  public  information  that  has  become  available  since  my  
     original  report.  The  most  notable  adjustments  to  the  model  are:  
        Removing  the  Apple  settlement  estimate  and  adding  expected  damages  
        from  Apple  as  awarded  by  a  federal  jury.  
        Lowering  estimated  past  usage  settlement  amounts  for  the  remaining  
        defendants  (Cisco,  Avaya,  &  Siemens).  
        Adding  recurring  royalty  revenues  associated  with  the  new  licensing  
        agreements  for  Mitel  and  NEC.  
        Adding  a  recurring  revenue  stream  for  current  Apple  iOS  products.  
        Lowering  4G  LTE-­Advanced  device  royalties  to  reflect  a  more  gradual  
        rollout  and  to  offset  Apple  iOS  products  already  included  in  the  model.  


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                                              J.P. Moreno - December 2012


     At  present,  VirnetX  has  approximately  $50  million  in  cash  and  liquid  fixed  
     income  investments.  Based  on  recent  company  filings,  I  am  using  a  fully  
     diluted  share  base  of  58,494,002.  
     Litigation  Settlements/Agreements  
                            Past Infringement                           Cisco                Avaya            Siemens
           Estimated Past Usage Settlement                         $200,000,000            $25,000,000        $5,000,000
           SAIC Obligation (25%)                                   ($50,000,000)           ($6,250,000)       ($1,250,000)
           Legal Contingency Fee (8%)                              ($16,000,000)           ($2,000,000)       ($400,000)
           Net Total                                               $134,000,000            $16,750,000        $3,350,000
           After-Tax (35%)                                         $87,100,000             $10,887,500        $2,177,500
           Value to VirnetX: $100,165,000

     In  light  of  testimony  provided  in  court  and  in  hearings  in  front  of  Judge  
     Davis,  I  have  reduced  the  payment  estimates  for  past  infringement  for  
     Cisco,  Avaya,  and  Siemens.  Lowering  the  expected  settlement  amounts  for  
     past  usage  is  supported  by  the  recent  deals  signed  with  Aastra,  Mitel,  and  
     NEC.  In  those  licensing  agreements,  VirnetX  appeared  willing  to  negotiate  a  
     higher  recurring  royalty  rate  in  lieu  of  receiving  larger  payments  covering  
     past  sales.  
     Current  Licensing  Agreements  
              Current Licenses                  2013           2014              2015             2016             2017
          Aastra Covered Shipments            $50,000,000   $52,500,000     $55,125,000         $57,881,250     $60,775,300
          Aastra Royalties (@ 1.6%)            $800,000      $840,000           $882,000         $926,100        $972,400
          Mitel Covered Shipments             $40,000,000   $42,000,000     $44,100,000         $46,305,000     $48,620,250
          Mitel Royalties (@ 1.15%)            $460,000      $483,000           $507,150         $532,500        $559,100
          NEC Covered Shipments           $120,000,000      $126,000,000   $132,300,000        $138,915,000    $145,860,750
          NEC Royalties (@ 1.6%)              $1,920,000     $2,016,000     $2,116,800          $2,222,640      $2,330,890
          Total Royalties                     $3,180,000     $3,339,000     $3,505,950          $3,681,240      $3,862,390
          After-Tax (35%)                     $2,067,000     $2,170,350     $2,278,860          $2,392,800      $2,510,550
          Present Value (10% discount)        $2,067,000     $1,972,840     $1,882,330          $1,796,990      $1,714,700
          Value to VirnetX: $9,433,860


     at  the  recent  jury  trial.  According  to  reports,  the  agreed  upon  royalty  rates  
     for  Aastra  and  NEC  are  1.6%  while  the  rate  for  Mitel  is  1.15%.  My  
     conservative  licensing  estimates  are  based  on  general  sales  forecasts  from  
     the  licensees  as  well  as  third  party  industry  reports.  I  am  assuming  only  a  
     small  portion  of  each  com
     covered  by  license,  with  modest  annual  growth  projected  for  each.  
                                           


VHCreport.com                                                                                                                 Page 26
                                         J.P. Moreno - December 2012


     4G  LTE-­Advanced  Licensing  Agreements  
            4G Product Licensing          2013           2014              2015             2016           2017
          Covered Shipments                    -        $5 Billion       $25 Billion     $110 Billion   $195 Billion
          Royalties (@ 1.0%)                   -      $50,000,000      $250,000,000      $1.1 Billion   $1.95 Billion
          After-Tax (35%)                      -      $32,500,000      $162,500,000     $715,000,000    $1.27 Billion
          Present Value (10% discount)         -      $29,542,500      $134,225,000     $536,965,000    $865,702,500
          Total: $1,566,435,000

     I  have  moved  back  my  4G  LTE-­Advanced  revenue  estimates  slightly.  The  
     timeframe  surrounding  4G  product  licenses  is  still  uncertain  and  I  am  
     anticipating  a  modestly  slower  ramp-­up  of  the  portion  of  the  technology  that  
     includes  VirnetX  technology.  Additionally,  I  have  backed  out  Apple  devices  
     from  this  section  as  they  are  now  being  accounted  for  separately  (see  Apple  
     iOS  Products  below).  As  iOS  devices  begin  to  include  LTE-­Advanced  
     functionality  in  the  near  future,  they  will  be  utilizing  VirnetX  technology  
     related  to  advanced  system  protocol.  However,  based  on  the  fact  that  iOS  
     devices  are  currently  intersecting  the  VirnetX  patent  portfolio  in  multiple  
     ways  (iMessage,  FaceTime,  VPN  On  Demand,  etc.)  as  determined  by  a  
     federal  jury,  I  anticipate  Apple  will  already  be  under  license  for  these  
     products  starting  in  2013.  No  additional  royalties  will  be  collected  for  future  
     Apple  models  built  to  LTE-­Advanced  specifications.  They  will  already  be  
     subject  to  royalties  per  the  existing  licensing  agreement  and  will  not  be  
     tolled  twice.    
     Secure  Domain  Services  Licensing  
          Secure Domain Services         2013         2014              2015              2016             2017
          Covered Devices                  -        50,000,000       250,000,000       1.10 Billion     2.00 Billion
          Royalties ($0.20/month)          -       $120,000,000      $600,000,000      $2.64 Billion    $4.80 Billion
          After-Tax (35%)                  -       $78,000,000       $390,000,000      $1.72 Billion    $3.12 Billion
          Present Value (10% discount)     -       $70,902,000       $322,140,000      $1.29 Billion    $2.13 Billion
          Total: $3,812,718,000

     Although  VirnetX  has  yet  to  announce  details  surrounding  its  master  registry  
     for  secure  domain  names,  I  believe  the  company  is  actively  working  behind  
     the  scenes  to  establish  the  framework  for  this  system.  Other  than  a  small  
     reduction  in  the  number  of  covered  devices  for  the  year  2017,  all  other  
     variables  for  secure  domain  services  licensing  remain  the  same  as  in  my  
     original  report.  Due  to  timing  factors  in  discounting  future  revenues,  the  
                                                                                       -­2016.    
     Secure  domain  services  licensing  represents  the  greatest  revenue  
     opportunity  for  VirnetX.  I  expect  these  agreements  will  be  structured  as  a  


VHCreport.com                                                                                                           Page 27
                                                          J.P. Moreno - December 2012


     partnership  that  involves  network  operators,  system  integrators,  content  
     providers,  and  VirnetX.  The  network  operators  will  collect  a  small  monthly  
     fee  from  its  subscribers  for  each  mobile  device  on  the  network.  Since  each  
     device  will  be  assigned  a  unique  secure  domain  name,  these  fees  will  cover  
     the  costs  associated  with  constructing  and  operating  the  next-­generation  
     identification  system.  Part  of  the  collected  money  will  then  be  distributed  to  
     the  other  partners,  such  as  the  system  integrators  who  are  responsible  for  
     maintaining  the  system  architecture  and  the  content  providers  who  create  
     and  manage  the  device  operating  systems  that  interact  with  the  secure  
     network.  My  model  assumes  that  each  device  will  be  charged  $1/month  and  
     that  VirnetX  will  receive  approximately  one-­fifth  of  the  partnership  income,  
     or  $0.20/month  per  device.  Forecasts  in  this  model  are  not  limited  to  
     consumer  handsets  and  also  include  a  variety  of  other  equipment  and  
     modules  that  will  be  utilized  on  next-­generation  networks.  
     Apple  iOS  Products  
                 Apple Royalties                            2013                    2014                   2015          2016           2017
          Damages Awarded*                             $246,667,200                    -                      -             -              -
          Covered iOS Shipments                           $40 Billion            $80 Billion            $85 Billion    $90 Billion    $95 Billion
          Royalties (@ 1.0%)                           $400,000,000           $800,000,000           $850,000,000     $900,000,000   $950,000,000
          After-Tax (35%)                              $420,333,680           $520,000,000           $552,500,000     $585,000,000   $617,500,000
          Present Value (10% discount)                 $420,333,680           $472,680,000           $456,365,000     $439,335,000   $421,752,500
          Total: $2,210,466,180
          *  Total  Jury  Award  of  $368,160,000,  less  25%  SAIC  obligation  and  8%  legal  contingency  fee.

     In  my  July  2012  report,  I  estimated  a  potential  settlement  amount  with  
     Apple  for  past  usage  would  be  $500  million.  That  number  included  
     infringement  for  all  Apple  products,  not  just  those  listed  in  the  original  and  
     amended  complaints.  Should  the  parties  agree  to  a  post-­verdict  settlement,  
     I  believe  $500  million  still  represents  a  realistic  dollar  figure     especially  
     since  the  new  lawsuit  involves  more  recent  products  (iPhone  5,  iPad  4th  
     Generation,  iPad  mini,  etc.).  For  my  model,  I  have  replaced  an  Apple  
     settlement  estimate  with  the  actual  $368.2  million  in  damages  awarded  by  
     the  jury.  From  this  amount,  I  have  subtracted  out  potential  royalties  VirnetX  
     must  pay  SAIC  as  well  as  an  assumed  8%  legal  contingency  fee.  
     In  the  original  White  Paper,  I  did  not  include  any  present-­day  royalties  from  
     Apple  in  my  model.  Because  of  the  positive  jury  verdict,  I  now  feel  
     comfortable  adding  iOS  product  royalties  with  a  1.0%  rate  beginning  in  
     2013.  While  there  is  no  certainty  that  the  dispute  with  Apple  will  be  resolved  
     in  the  next  year,  I  do  believe  the  positive  verdict  was  a  big  step  in  the  


VHCreport.com                                                                                                                                       Page 28
                                            J.P. Moreno - December 2012


     eventual  establishment  of  a  recurring  royalty  license.  Whether  iOS  product  
     royalties  are  captured  in  the  near  term  or  are  delayed  due  to  the  litigation  
     process,  I  believe  they  now  are  appropriate  for  my  long-­term  valuation.  
     I  have  taken  a  conservative  line  in  estimating  iOS  product  royalties  by  
     heavily  discounting  future  sales  of  iPhones,  iPads,  and  the  iPad  Touch  and  
     assumed  an  ASP  for  each  that  is  below  historical  sale  amounts.  Additionally,  
     I  have  removed  one-­half  of  the  potential  royalties  for  2013  to  account  for  
     unquantifiable  variables  associated  with  resolving/finalizing  the  dispute  
     (e.g.,  licensing  incentives  or  discounts,  additional  litigation  costs,  etc.).  For  
     purposes  of  simplicity,  other  Apple  products  like  the  FaceTime  for  Mac  
     application  and  system  hardware  are  not  included  in  this  valuation  model.  

     inclusive  of  all  provisions  in  a  future  VirnetX/Apple  licensing  agreement.    
     Sum-­of-­Parts  Analysis  
                                  Sum-of-Parts                            Value         Per Share
           Cash and Equivalents / Liquid Fixed-Income Holdings          $50,000,000       $0.85
           Litigation Settlements/Agreements (Cisco, Siemens, Avaya)   $100,165,000       $1.71
           Current Licensing Agreements (Aastra, Mitel, NEC)            $9,433,860        $0.16
           4G Product Licensing                                        $1,566,435,000     $26.78
           Secure Domain Services Opportunity                          $3,812,718,000     $65.18
           Apple Damages Award                                         $160,333,680       $2.74
           iOS Products                                                $2,050,132,500     $35.05
           Total Sum-of-Parts:                                         $7.75 Billion      $132

     I  am  using  a  sum-­of-­parts  methodology  to  estimate  the  intrinsic  value  of  
     VirnetX.  I  believe  this  valuation  model  is  very  conservative  as  I  have  
     assumed  a  high  corporate  tax  rate  of  35%,  a  discount  rate  of  10%,  and  a  
     fully  diluted  share  base  that  includes  all  warrants  and  options  registered,  
     vested  or  unvested.  I  believe  this  provides  a  little  more  margin  for  error  in  
     evaluating  future  revenues  and  an  overall  valuation.  
     Although  past  usage  settlement  amounts  with  the  remaining  defendants  
     have  been  estimated,  it  must  be  reiterated  that  litigation  disputes  are  highly  
     unpredictable.    Additionally,  the  damages  awarded  by  the  jury  may  be  
     subject  to  review  or  appeal     which  could  delay  any  revenue  received  from  
     Apple.    The  VirnetX  core  patents  are  still  subject  to  several  reexamination  
     proceedings  and  it  is  unknown  when  the  matter  will  be  resolved.  It  should  be  
     noted  that  the  viability  of  these  patents  has  been  tested  multiple  times  now.  

     intellectual  property  enforcement  as  VirnetX  has  received  two  positive  jury  
     verdicts  and  recorded  several  licensing  agreements  during  such  periods.  
VHCreport.com                                                                                       Page 29

								
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