By the end of the first quarter of 2001, it was clear Ms. Vinson would have to prepare another bad financial report. As the company's revenue fell, its line costs, as a percentage of revenue, were well above the company's 42% goal. Again, Ms. Vinson and her colleagues searched for costs they could reduce. But this time they could find no large pools of reserves to transfer to solve the profit shortfall. The gap was a whopping $771 million.

As the situation grew dire, a troubling solution was ordered up by Mr. Sullivan, according to a former WorldCom employee. Rather than count line costs as part of operating expenses in the quarterly report, they would shift $771 million in line costs to capital-expenditure accounts, according to SEC filings. The shift would boost the company's bottom line. That's because operating expenses, such as salaries and benefits, are subtracted from income as they occur, reducing a company's current profit. Capital expenses are subtracted from income over long periods of time.

When Mr. Yates told Ms. Vinson about the $771 million transfer, she was shocked, according to the person close to her. While the accounting maneuver in October had been questionable, she believed this transfer was even less defensible. Accounting rules make clear that line costs are to be counted as operating leases, which can't be delayed by calling them capital expenses.

In fact, Mr. Yates initially had refused to execute the plan when Mr. Myers told him about it, according to a person close to Mr. Yates. And in turn Mr. Myers, the controller, had argued to Mr. Sullivan that the transfer could not be justified, says a former employee. But Mr. Myers eventually passed the order down the line to Mr. Yates after he was persuaded by Mr. Sullivan that the transfer was WorldCom's only way out of its troubles, according to the former employee.

When the order landed on Ms. Vinson's lap she felt trapped, the person close to her says. Threatening again to resign wasn't going to help. And she was still reluctant to quit without another job. She and Mr. Normand met with Mr. Yates in his immaculate office to talk about their concerns, but nothing was resolved, according to a person close to Mr. Yates.

That night Ms. Vinson reviewed her options with her husband, the person close to her says. She decided to put together a resume and begin looking for a job. She didn't think about retaining a lawyer or talking to the SEC, says this person. She hadn't really started to think about the ramifications of her actions.

At WorldCom, the wheels were already in motion to transfer the line costs. Ms. Vinson reluctantly went along. It fell to her, Mr. Normand and Mr. Yates to figure out into which of five capital accounts they should transfer the costs. As they considered the options, Mr. Myers walked into Ms. Vinson's office and the group commiserated about how unhappy they were about the transfers. Still, they agreed they had to keep bailing water for the time being, according to a person familiar with the conversation.

Ms. Vinson then made the entries transferring the $771 million, backdating the entries to February by changing the dates in the computer for the quarter, according to court and SEC documents.

Recurring Dilemma
Ms. Vinson faced the same dilemma in the second, third and fourth quarters of 2001. Each quarter she, Mr. Yates and Mr. Normand scraped together small amounts of liabilities that legitimately could be lowered for the quarter, hoping that they wouldn't be required to make a large questionable adjustment. But each quarter they found themselves in the same uncomfortable spot, and wound up making giant and fraudulent entries. In the second quarter, they transferred $560 million to the capital accounts. In the third quarter it was $743 million, and in the fourth quarter it was $941 million.

Ms. Vinson began waking up in the middle of the night, unable to go back to sleep because of her anxiety, says the person close to her. Her family and friends began to notice she was losing weight and her face took on a slightly gaunt look. At work she withdrew from co-workers, afraid she might let something slip, says the person close to her.

In early 2002, she received a promotion, from senior manager to director, along with a raise that brought her annual salary to about $80,000, according to a former WorldCom staffer.

Meanwhile, she and her two co-workers were increasingly distraught. Mr. Yates decided to look for a lawyer, according to a person close to him. Through a cousin, he got the name of Joseph Hollomon of Jackson, a former federal prosecutor in Mississippi. Mr. Yates met with Mr. Hollomon, but unsure of what to do, didn't retain him immediately.

Ms. Vinson continued to cling to the notion that each transfer would be the last, says the person close to her. That hope was dashed in late April 2002. Ms. Vinson, Mr. Normand and Mr. Yates had just finished putting together the financial reports for the first quarter, which included an $818 million transfer of line costs. Shortly afterward, they made a discovery that spurred them finally to take action.

Mr. Normand and Mr. Yates were talking about WorldCom's 2002 financial plan, a copy of which Mr. Sullivan had circulated. Mr. Normand flipped his copy over and began scribbling on the back. Mr. Normand handed his calculations to Mr. Yates, says a person close to Mr. Yates. It suddenly was clear to both men that the line-cost transfers would have to continue at least through 2002, because there was no other way the company would be able to make its projections, say several people familiar with the discussion.

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