Received JUL berg Weiss UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE IN RE. No. C P

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1 1 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE The Honorable Marsha J. Received JUL 00 berg Weiss Pechman I 1 1 IN RE UPGRADE INTERNATIONAL CORP. SECURITIES LITIGATION, This Document Relates To: ALL ACTIONS No. C-00-0-P CONSOLIDATED AND AMENDED CLASS ACTION COMPLAINT. 00 BSC.DOC OPFICE IN SEATTLE PHOENIX Los ANGELES 01 FO-n" Av F, SUITE 0 SEnrn.E, WA 1 TELEPHONE ().. FACSIMILE () -0

2 1 I. SUMMARY AND OVERVIEW r A. Summary 1. This is a class action on behalf of purchasers of the common stock of Upgrade International Corporation ("Upgrade" or the "Company") between November, 1 to February, 00 (the "Class Period"). Upgrade and Daniel Bland represented during the Class Period that Upgrade had created and was in possession of a "revolutionary smart-card" which had 1,000 times the data storage capacity of a contemporary credit card.. This action arises out of a scheme implemented by Upgrade and Daniel Bland, Upgrade's Chief Executive Officer, to inflate the value of the Company's stock in order, inter alia, to: (i) allow Bland to protect his extensive Upgrade holdings, preserve his executive and director 1 1 positions and the substantial compensation and benefits obtained thereby; and (ii) finance Company operations through stock transactions with individuals and/or entities that provided services to the Company including issuing positive research reports.. Defendants' inflation of Upgrade shares and use of such inflated shares as currency was necessary because Upgrade had no reported revenue or cash flow to finance the Company's transactions, operations and executive compensation, and needed to use its stock in order to finance the Company' s acquisition program.. As a result of this scheme, defendants artificially inflated Upgrade's stock from $% per share at the outset of the Class Period to as high as $'/ per share during the Class Period by repeatedly making false public statements that the Company was in possession of a revolutionary piece of technology which consisted of a credit card with megabytes of data storage capacity and was virtually indestructible. Defendants claimed that this card, which it called the UltraCard, would alter the landscape of modem business and consumerism and allow for people to carry all types of data on these wallet-size cards, including x-rays, complete financial records, and electronic money. These statements catapulted Upgrade's stock skyward from the Fall of 1 to January 00. To put this in perspective, just a year earlier, on November 0,, Upgrade's stock traded at $0. per CONSOLIDATED AMENDED COMPLAINT Allorneysat Lair OFPlcss IN SEATTLE PHOENIX Los ANGELES 01 FIrm AVE UE. SUITE 0 SLLrnE, WA BSC.DOC TELEPHONE () - FACSIMILE ()

3 1 share. By January 00, the stock traded at $, and Upgrade, a company trading on the NASDAQ t Bulleting Board, had a market capitalization of over $1. billion.. The spectacular rise in Upgrade's stock was reversed when, on February, 00, BARRON'S published a story that questioned the veracity of Upgrade's CEO Daniel Bland and statements he had made to the media about Upgrade and UltraCard. BARRON'S raised questions, for the first time, as to whether Upgrade's UltraCard was market ready as it had claimed. The I Company's stock value plummeted more than % to $ per share after these revelations, and it now trades below $ per share despite continued false claims about the UltraCard and its alleged revolutionary abilities. B. Overview. Starting in, Upgrade went on an acquisition spree in its quest to become' the majority shareholder in a number of high-tech companies.. During this acquisition period, Upgrade continued to offer additional sales of stock in order to raise capital to stay afloat. However, by late 1, with an already substantial number of its 1 1 shares on the market (over 1 million), Upgrade could not offer any more stock without risking a serious devaluation of both the shares currently trading on the market and the shares it proposed to sell in the future. To compound problems, the Company's stock value had stagnated in the $-$ range with no prospects for any increase in price.. It was at this time, in early November 1, that Daniel Bland announced at a Comdex meeting that Upgrade had acquired the "revolutionary UltraCard" through its subsidiary, UltraCard Incorporated ("UltraCard Inc."). Bland falsely stated in no uncertain terms that Upgrade was in possession of a revolutionary device the size of a credit card with the data storage capacity of a desktop computer. Upgrade claimed the UltraCard was fully read-write capable - that is, it was fully editable and could have new information downloaded onto it, as well as transferring data which it already contained to another medium. complete works of Shakespeare. The UltraCard was touted as being able to contain the CONSOLIDATED AMENDED COMPLAINT -- OFFICES IN SEATTLE PHOENix Los ANGELES 01 FIFTH AVENUE, SUITE 1 SCnr, WA BSC.DOC TELEPHONE () - FACSIMILE ( ) -0

4 1. In order to inflate the price of Upgrade stock, however, it was not enough for Upgrade to purportedly possess a card with the ability to store more data than conventional cards as Upgrade's stock had plateaued at less than $ per share. To boost Upgrade's stock price and to provide fuel for his financing plans, on or about November, 1, Upgrade and Bland issued a press release announcing that Upgrade had signed an exclusive licensing agreement with the Ampex Corporation for use of Ampex's Keepered Media technology. Upgrade claimed that the Keepered Media would "virtually eliminate accidental erasure and corrosion of data stored on the card due to exposure in the harsh consumer credit card environment, as well as prevents [sic] fraudulent duplication of information contained on the card. Keepered Media, a patented, special magnetic conductor material, is designed to protect information magnetically storeif on the UltraCard." The reality was that the Keepered Media technology had been used by Ampex to prevent accidental erasures or corruption on computer hard drive disks. It had never been used or tested for use on a 1 credit-card device intended to be carried around in a wallet or purse.. Upgrade's false representations had their intended effect as the stock value quadrupled in value and shot up to $ per share by December, 1.. Upgrade's stock continued to rise in value throughout December and January as defendants continued to make false representations that they were in possession of the virtually indestructible, fully editable "revolutionary" UltraCard. On January, 00, defendants went even 1 further and made the false claims that estimates of the memory capacity for the UltraCard now exceeded 1 gigabyte (1,000,000,000 bytes of memory, or,000,000 times the storage capacity of conventional cards). Upgrade's stock shot up to more than $.. Upgrade's stock continued to hover at this unprecedented level until the truth began to leak out in mid-february about Upgrade and its UltraCard. On February, 00, a BARRON'S article exposed the past about Daniel Bland and how he had driven up the price of his previous company's stock, Empyrean Diagnostics, through the issuance of misrepresentations and falsehoods. Most importantly, though, the article revealed that there would be no UltraCard product, even to CONSOLIDATED AMENDED COMPLAINT. 00 BSC.DOC - - OFFICES IN SEATTLE PHOENIX Los ANGELES 01 FIFTH AVENUE, SUITE 0 SEATTLE, WA 1 TELEPHONE () - FACSIMILE ( ) -0

5 1 license, until thefirst quarter of01. Upon these revelations, Upgrade's stock fell more than % to $ per share and, in the ensuing months, it fell below $ per share.. In response, Bland attempted once more to bolster Upgrade's stock by issuing additional false and misleading statements. Bland publicly denounced the BARRON'S article and stated that Upgrade was in full compliance with the SEC and would file with the SEC well before the May deadline. Furthermore, Bland stressed that "Upgrade's success is based upon ownership of proprietary, cutting-edge technology in smart cards, which has been labeled revolutionary by many industry experts. As a leader in the rapidly expanding smart card industry, Upgrade is well positioned to capitalize on a market that is expected to triple sales to $0 billion within the next few years.". These statements were made despite the fact that Upgrade did not have in its possession the UltraCard in the form as it claimed. In fact, Upgrade was not in possession of a 1 working, fully editable, virtually indestructible credit card with megabytes of data storage capacity. $ per share. 1. Bland's remarks had their intended effect and they have kept Upgrade's stock above II. JURISDICTION AND VENUE. The claims asserted arise under (b) and (a) of the Securities Exchange Act of (the "Exchange Act"), 1 U.S.C. j(b) and t(a), and Rule lob- promulgated there under 1 by the Securities and Exchange Commission ("SEC"), C.F.R. 0.1 Ob-. Jurisdiction is further conferred upon this Court by of the Exchange Act, 1 U.S.C. aa, U.S.C. 1 and supplemental juri sdiction.. Many of the acts and transactions constituting the violations of laws described in this complaint occurred within this judicial district. In addition, Upgrade has its principal place of business in this district at Martin Street, Suite, Blaine, Washington.. In connection with the acts alleged herein, the defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the United States mails. CONSOLIDATED AMENDED COMPLAINT -- AttorneYs at Law OFFICES IN SEATTLE PHOENtz Los ANOSLSS 01 FIFTH AVENUE. SUITE 0 SEATTLE, WA BSC.DOC TELEPHONE ( ) -.- FACSIMILE ( ) -0

6 0 1 III. THE PARTIES 1 1. Lead Plaintiff Wayne Byrne purchased, shares of Upgrade common stock, during the Class Period and was damaged thereby.. Lead Plaintiff Gerald Gartner purchased,0 shares of Upgrade common stock during the Class Period and was damaged thereby.. Lead Plaintiff Helmut Jarmalavicius purchased,00 shares of Upgrade common stock during the Class Period and was damaged thereby.. Lead Plaintiff James Saitch purchased,00 shares of Upgrade common stock during the Class Period and was damaged thereby.. Lead Plaintiff Wolfgang Schmidt purchased 1, shares of Upgrade common stock during the Class Period and was damaged thereby.. Lead Plaintiff Dorthy Shelton purchased,000 shares of Upgrade common stock during the Class Period and was damaged thereby.. Defendant Upgrade International is headquartered in Blaine, Washington.. Defendant Daniel Bland was, at all relevant times, Upgrade's Chairman of the Board, Chief Executive Officer and President. By virtue of his position as an officer and director and his large stock holdings in Upgrade, Bland was a control person of the Company under (a) of the Exchange Act. Defendant Bland, because of his position of control and authority as an executive 1 officer, director and controlling shareholder of Upgrade, was able to and did directly and/or indirectly, control the contents of the various financial reports and statements, reports to shareholders, and press releases of Upgrade. As an officer, director and large individual shareholder of Upgrade, defendant Bland had a duty to promptly disseminate accurate and truthful information with respect to Upgrade's business practices and financial condition so that the market price of the Company's stock would be based on truthful and accurate information. CONSOLIDATED AMENDED COMPLAINT BSC.DOC OFFICES IN SEATTLE PHOENIX L os ANGELES 01 FIFTH AVENUE, SUITE DO SEATTLE, WA TELEPHONE () - FACSIMILE () -1

7 1 IV. STATEMENT OF FACTS A. Bland's History of Artificially Inflating the Stock of His Previous Company I. The story of Upgrade ' s conduct during the Class Period begins with Daniel Bland when he was the president of Empyrean Diagnostics in the early s. Empyrean Diagnostics was a biotechnology company located in Vancouver, Canada with Bland as its President. Under Bland, Empyrean Diagnostic's stock had a meteoric rise and fall parallel to that of Upgrade's. Specifically, while at Empyrean Diagnostics, Bland announced to the public that Empyrean had created a "revolutionary"1 quick diagnosis AIDS kit that would indicate within seven minutes whether a person was HIV-positive. The purported kits worked without the benefit of a laboratory or electricity. "This technology belongs in every village in the world," Bland told the VANCOUVER SUN. " This is going to be like Coke or Pepsi.". Bland soon announced huge orders for the kits. From its low to its high in September 1, shares of Empyrean Diagnostics appreciated tenfold. But out of the blue, the Vancouver Stock Exchange halted trading in the stock and, on November, 1, compelled Bland 1 to issue a clarifying press release. Of million employee and director stock options given to individuals, Bland disclosed that only nine of the latter were bona fide directors or employees. As to 1 Empyrean's announcement in January that a marketing partner had obtained an order for one million test kits, Bland later confessed, "There was no commitment or promise to purchase one million of these kits.". In like vein, Bland admitted that when the company declared in March that its U.S. subsidiary was on schedule to distribute eight million test kits in fiscal, it "did not at that time have a purchase order." And even if it had one, the company "was not capable of producing such quantities of kits." Moreover, as to a purported agreement with Jin-Greene Biotechnology to distribute million kits to the Minister of Health of the United Arab Emirates for expected revenues of $ million, it was, in plain language, bogus - nothing more than "a letter of inquiry." ` The exact same word Bland later used to describe the UltraCard. CONSOLIDATED AMENDED COMPLAINT - - OFFICES IN SEATTLE PHOENIX Los ANGELES 01 FnTH AVENUE, SUITE 0 Sentu, WA BSC. DOC TELEPHONE () - FACSIMILE ().0

8 1 1 1 B. Upgrade Needed to Raise Funds to Pay For Its Debt Accumulated During Its Acquisition Spree - Thus There Was a Motive For the Hype 0. The saga of Upgrade, the rags-to-riches stock, began appropriately amid similar humble circumstances. Upgrade was incorporated in as a computer repair company that also installed software upgrades. Upgrade produced no product of its own. On November 0,, Upgrade had. million shares, total assets of less than $ million and an accumulated deficit of $00, When Upgrade formed in, it had no product of its own. It was simply a service business, providing repairs, installations and upgrades of computer hardware and software systems. When Daniel Bland took over the company in, Upgrade's business plan changed and became based on growing and feeding upon other companies which had or were in the process of developing products and technology. Specifically, Upgrade's business plan was to acquire and/or develop and commercialize proprietary technology in the information technology industry.. Historically, Upgrade's stock traded at a very low value, sometimes as little as cents per share. The low value of Upgrade's stock during the time of these acquisitions forced Upgrade to pay cash for its majority position in these companies, resulting in a massive debt by the end of 1.. Listed below are Upgrade' s acquisitions since Bland ' s involvement: % of UltraCard Inc. in Efornet Corporation - acquired in February, 1 Global Cyberstems S.A. (Switzerland) Centurion Technologies Incorporated - acquired June, 1 Acquired more than 0% of UltraCard Inc. in 1. During its three years of existence, Upgrade had never recorded a penny of revenue, let alone profit. Losses for the past three years totaled $. million. Thus, the money to fund Bland's acquisition drive came either from debt or the sale of stock. Attorneys at Low II CONSOLIDATED AMENDED COMPLAINT -- OFFICES IN SEATTLE PHOENIX Los ANGELES 01 FIFTH AVENUE. SUITE 0 Senrne, WA BSC. DOC TELEPHONE () - FACSIMILE ( ) -0

9 1. Due to the low value of Upgrade stock prior to the Class Period, stock placements were risky in that they required a substantial number of shares of stock to raise adequate capital, thereby diluting the already minimal value of the stock. Debt was the other answer. For example, in late, Upgrade acquired.% of UltraCard for $0,000. At the time of the acquisition, Upgrade's stock traded at a mere cents per share. Upgrade completed the acquisition of UltraCard Incorporated on October, 1 for a total amount of $,0,000. Upgrade had reached a $ million financing agreement with European institutions in September in order to acquire UltraCard Incorporated.. The acquisitions made Upgrade low on cash. Stock placements at inflated values were the only means to keep the Company operating. As of May 00, Upgrade announced that it had only enough cash to continue operating for a few more months.. From its inception in to September of 1, Upgrade had no less than six stock offerings. These offerings, however, failed to raise as much money as hoped for, as Upgrade's stock traded at a very low value. For instance, when Upgrade had an 00,000 share placement on 1 1 November, 1, it raised only $ million due to the fact that its stock was trading at only $.0. By contrast, when Upgrade had its eighth placement of stock in January 00, during the Class Period when the stock value was artificially inflated,. Upgrade raised more that $ million dollars, or twice as much money on half the amount of stock as it did in November.. The inflated price allowed Upgrade to accomplish the important goal of raising more money on less stock. This was important because Upgrade was in serious jeopardy of diluting the value of its already lowly priced stock because of the numerous placements it had in less than three years since the Company' s incorporation in February. Consequently, Upgrade needed to do more with less and had to artificially inflate its stock in order to accomplish this. I CONSOLIDATED AMENDED COMPLAINT BSC.DOC OFFICES IN SATTLE PHOENIX Los ANGELES 01 Flrnf AVENOI, SUITE 0 SEAMS. WA 1 TELEPHONE ( ) -.- FACSIMILE () -0

10 1 C. Upgrade ' s Three-Year Existence Without a Single Product to its Name and the Need to Raise Money Pressured Upgrade and Bland to Tout the UltraCard Prematurely. Upgrade's history was one of tremendous capitalization with nothing to show for it. As discussed above, Upgrade raised millions of dollars through numerous stock offering and,loan agreements. Yet, as of September 1, Upgrade still had no product to show for all of its capitalraising endeavors. 0. Furthermore, in its three years of existence, Upgrade has never recorded a penny of revenue, let alone profit. Losses total $. million for the past three years. This explains why Upgrade's stock continued to trade at low prices well under $ prior to the Class Period. 1. To defeat this stagnation, Upgrade grabbed onto and started to promote its one potential product - the UltraCard. Starting in November 1, Upgrade and Bland represented that they had a product to show. At a technology trade show in November, Upgrade, through its subsidiary UltraCard Inc., announced that it had a revolutionary device - a credit card-sized product with the ability to store over 00,000 bytes of information, which Upgrade called the "UltraCard." Upgrade claimed that the UltraCard had,000 times the storage of conventional cards and would 1 allow for storage of medical records, financial information, and electronic money.. Unbeknownst to the public, Upgrade did not have a "revolutionary" credit card at the time. In fact, Upgrade was, at a minimum, over a year away from possessing the "revolutionary" UltraCard. Though Upgrade possibly possessed pieces of the technology that would point in the 1 direction of a credit card with higher data storage potential than conventional cards, most of this technology was untested and several pieces of it were non-existent at the time Upgrade made these claims. Nonetheless, in order to inflate its stock, Upgrade made these false representations to the public that it already possessed this "revolutionary" credit card.. The announcement had the intended effect as Upgrade's stock increased to around $. However, this rise in stock was not large or fast enough to meet either the needs of Upgrade and its debt demands or the machinations of CEO Bland. Consequently, on November, 1, II CONSOLIDATED AMENDED COMPLAINT BSC. DOC OFFICES IN SEATTLE PIIGENix Los ANGELES 01 FiFth AVENUE, SUITE 0 Stwrn, E, WA 1 TELEPHONE () - FACSIMILE ().0

11 Bland announced through a press release that Upgrade had recently reached a licensing deal with Ampex for its Keepered Media technology. Bland claimed that the Keepered Media technology would make the UltraCard virtually indestructible. The release stated that the agreement was for use 1 1 of the Keepered Media technology on magnetic cards, not hard drive disks: The agreement positions UltraCard as the sole provider of credit card storage technology that offers megabytes of storage (,000 times the storage capacity of magnetic stripe cards) in a secure, rugged, read write format. UltraCard's adoption of Keepered Media will virtually eliminate accidental erasure and corrosion of data stored on the card due to exposure in the harsh consumer credit card environment, as well as prevents [sic] fraudulent duplication of information contained on the card. Keepered Media, a patented, special magnetic conductor material, is designed to protect information magnetically stored on the UltraCard. Combined with UltraCard's credit card storage form factor, the technology package represents a significant advance in the way consumers and businesses will utilize portable data in the nearfuture. According to UltraCard's Chief Technical Officer Don Mann, the agreement to license the Ampex Keepered Media technology signifies the most comprehensive suite of intellectual property for credit card technology today. "The credit card has not evolved at the same pace of other technologies, it is basically the original technology that was in use 0 years ago. Our agreement with Ampex rounds out the technology needed to complete our revolutionary storage medium, a hard drive in a credit card format," explained Mann. Upgrade International Corp., through its 0% ownership interest in UltraCard Inc., is engaged in the development and commercialization of a patented, revolutionary data storage technology. The UltraCard technology is a combination of proprietary magnetic and non-magnetic layers deposited on the card's surface in place of or in addition to the magstripe. The card consists of a specially formulated base material, followed by magnetics and topped off by a cohesion of extremely durable protective layers, including the addition of the Ampex Keepered Media. The resulting UltraCard product has a mechanical durability many times greater than any other card storage device. Additionally, the card is between eight and ten times more resistance to demagnetization than ordinary magstripe cards. (Emphasis added.). In response to these statements, Upgrade stock rocketed from $'V per share on November, 1 to $ per share on December, 1. CONSOLIDATED AMENDED COMPLAINT. 00 BSC.DOC _- OFFICES IN SEATTLE P HOENIX Los ANGELES 01 Firm Av NUE. SUITE 0 SEArnE, WA 1 TELEPHONE () - FACSIMILE () -0

12 . Ampex in turn did not issue a press release regarding the Upgrade transaction. Ampex felt the transaction was immaterial because (1) Ampex had discontinued its use of Keepered Media Technology because it was too costly for commercial manufacturing, and () Ampex did not believe the technology had any real value. Thus, Bland's statement that Keepered Media "will eliminate accidental exposure" was false and without reasonable basis as it had never been tested by. Ampex in a credit-card format but had only been proven to work on hard disks. Further, there was no basis to represent that this "technology package represents a significant advance," as the technology was untested and not commercially feasible at the time this representation was made.. Through the next few months, Upgrade and Bland continued to represent to the public that it possessed a revolutionary, virtually indestructible credit card. For example, Upgrade's Internet Website maintained, under the headline "UltraCard's Proprietary Technology Will Revolutionize the IT Industry," that the UltraCard "is positioned for immediate acceptance in the existing and rapidly growing smart card market" and pegged the global market to be worth $0 billion. In fact, representation that the UltraCard was positioned for "immediate acceptance"-was 1 1 false and misleading for the reasons stated in paragraphs and above.. On January, 00, Upgrade announced the addition of David Nordemann to the EforNet (a subsidiary of Upgrade) Board of Directors and in the release continued to issue misleading statements regarding the UltraCard: Following the appointment of Mr. Nordemann to the board of EforNet, the President of Upgrade International Corp., Daniel Bland, stated, "Mr. Nordemann's appointment strengthens the effort of EforNet in becoming a market leader in monetary transaction software, for consumer-to-business and business-to-business solutions. In addition, based on proprietary software which we are currently developing at EforNet to be used in conjunction with UltraCard, the dream of a feature-rich credit card is now rapidly becoming a reality. Over the next few years, ATM networks, telephone booths, credit card access points, mobile phones, etc. will all become Internet access points. E-commerce is what EforNet is about and the UltraCard technology provides us with a substantial transportation platform to enhance e-commerce, both in the developed and developing world." CONSOLIDATED AMENDED COMPLAINT. 00 BSC.DOC OFFICES IN SEATTLE PHGENIE L os ANGELES FIFTH AVENUE, SUITE 0 SEATTLE, WA 1 TELEPHONE () - FACSIMILE () -0

13 The release also stated: 1 1 misleading. Upgrade International Corp.... is focused on the development and acquisition of state-of-the-art information technology. In addition to EforNet Corp., one of the companies in which Upgrade holds a substantial stake, Ultra Card Inc.,... has developed a revolutionary system for high capacity data storage. The management of UltraCard, Inc. believes that their developed and patented product represents a significant advance in the method [sic] consumers and businesses will utilize portable data, integrating UltraCard products into everyday life. Utilizing existing hard disk storage technology, UltraCard provides a unique and highly durable media in a common credit cardformat, to satisfy the next generation in personal portable data storage for a broad range of existing and new market sectors. UltraCard currently provides megabytes of memory and isfully editable. Management estimates that more than 1 gigabyte of recordable data, on a single credit cardformat, can be achieved without the needfor compression technology. (Emphasis added.). For the reasons stated in paragraphs and above, this statement was false and. Fueled by these statements, Upgrade' s stock surged to unprecedented heights, culminating at a Class Period high of $'/ on January 1, Again, unbeknownst to the public, Upgrade did not possess nor had it developed a revolutionary credit card at the time. be marketed until 01 or later. In fact, the product was far from being finished and could not 1. Additionally, the Keepered Media technology, which Upgrade touted as making its card virtually indestructible, had never been proven to work on a credit card-type medium. Sources at Ampex Corporation state that the Keepered Media technology had been used only on hard-drive disks and never on a credit card-type format. Keepered Media had never been tested by Ampex in the rough and tumble environment (e.g., a wallet or the bottom of a woman's purse) to which the UltraCard, whenever it actually came into existence, would be subjected. the Keepered Media technology to be too costly and lacked any real material value. In fact, Ampex believed This explains why Ampex has never issued a press release regarding the licensing of the Keepered Media CONSOLIDATED AMENDED COMPLAINT. 00 BSC.DOC -- OFFICES IN SEATTLE PHOENIX Los ANGELES 01 FIFTH AVENUE. SUITE 0 SEATTLE. WA 1 TELEPHONE () - FACSIMILE ().0

14 0 1 technology, despite Upgrade's claims that the Keepered Media technology was the last step in rounding out its "revolutionary" UltraCard. D. Upgrade Never Filed Financial Documents With the SEC as it Promised Investors. Upgrade did not file financial documents regarding the Company as it promised investors it would do so. In a press release issued September, 1 announcing its sixth sale of stock in less than three years, Upgrade stated through CEO Bland that "[a]ll shares sold are currently restricted securities as defined by Rule promulgated under the Securities Act of, as amended. However, Upgrade has agreed tofile a registration statement with the Securities and Exchange Commission within 0 days after closing of the placement covering the shares sold in the private placement " (Emphasis added.) This statement was made to assuage investors concerned by the fact that Upgrade had not filed any financial reports or statements with the SEC. Despite this statement, Upgrade did not file any financial documents with the SEC by this December 1 deadline.. On January, 00, Upgrade again made false and misleading statements in an 1 attempt to calm investors worried about the Company's lack of accountability with the SEC. Yorgo Katsanos of Cyber Capital Ltd. (a European stock promoter firm retained by Upgrade) appeared at an Upgrade conference in Hertfordshire, England. Based on information provided to him by 1 defendant Bland, in a formal presentation and break-out session, Katsanos told the assembled analysts, money and portfolio managers, institutional investors, brokers and stock traders that: Upgrade would be an SEC-reporting company by February, 00. Upgrade had applied for NASDAQ National Market System listing. He was convinced Upgrade's share price would reach $00 to $00 per share by Q 00.. These statements were false in that Upgrade had not filed for NASDAQ listing and it did not, nor ever intended to, file financial documents with the SEC by February, 00. CONSOLIDATED AMENDED COMPLAINT BSC.DOC OFFICES IN SEATTLE PHOENIX Los ANGELES 01 Firm AVENUE. SUITE 0 SETTLE. WA 1 TELEPHONE () - FACSIMILE ().0

15 V. SUMMARY OF FALSE STATEMENTS. Starting in November of 1 at a trade show and continuing throughout the Class Period, Upgrade stated that it was in possession, through its subsidiary UltraCard Inc., of a "revolutionary" type of credit card, which it called the UltraCard. Upgrade claimed that the UltraCard had,000 times the storage capacity of conventional credit cards and would allow users to store information such as x-rays, complete financial records, and electronic money. Importantly, Upgrade represented that the card was ready for market at that time. More specifically, at the Comdex show in November 1, Bland represented that the "UltraCard has made it possible to adapt the data storage capacity of a hard disc drive onto a credit card format. In this regard, the UltraCard technology is not an evolutionary technology, it is a revolutionarytechnology." reasons identified in paragraph below, this statement was false and misleading. For the. On November, 1, in announcing its agreement with Ampex for use of the Keepered Media technology, Upgrade again made the false representation and misleading statement 1 that it possessed the "revolutionary" UltraCard in a form ready for market. announcement stated: Specifically, the 1 The agreement positioned UltraCard as the sole provider of credit card storage technology that offers megabytes ofstorage (,000 times the storage capacity of magnetic stripe cards) in a secure, rugged, read write format. UltraCard's adoption of Keepered Media will virtually eliminate accidental erasure and corrosion of data stored on the card due to exposure in the harsh consumer credit card environment, as well as prevents [sic] fraudulent duplication of information contained on the card. Keepered Media, a patented, special magnetic conductor material, is designed to protect information magnetically stored on the UltraCard. Combined with UltraCard's credit card storage form factor, the technology package represents a significant advance in the way consumers and businesses will utilize portable data in the near future. According to UltraCard's Chief Technical Officer Don Mann, the agreement to license the Ampex Keepered Media technology signifies the most comprehensive suite of intellectual property for credit card technology today. "The credit card has not evolved at the same pace of other technologies, it is basically the original technology that was in AttorneYs at Law CONSOLIDATED AMENDED COMPLAINT -- OFFICES IN SEATTLE PHOENIX Los ANGELES IJIII FIFTH AvcN^, SUITE 0 SEATTLY, WA BSC. DOC TELEPHONE () - FACSIMILE () -0

16 1 1 use 0 years ago. Our agreement with Ampex rounds out the technology needed to complete our revolutionary storage medium, a hard drive in a credit cardformat," explained Mann. Upgrade International Corp., through its 0% ownership interest in UltraCard Inc., is engaged in the development and commercialization of a patented, revolutionary data storage technology. The UltraCard technology is a combination of proprietary magnetic and non-magnetic layers deposited on the card's surface in place of or in addition to the magstripe. The card consists of a specially formulated base material, followed by magnetics and topped off by a cohesion of extremely durable protective layers, including the addition of the Ampex Keepered Media. The resulting UltraCard product has a mechanical durability many times greater than any other card storage device. Additionally, the card is between eight and ten times more resistance to demagnetization than ordinary magstripe cards. (Emphasis added.). The statements in paragraphs - were materially false and misleading when made and/or omitted material facts. The true but concealed facts at the time were: (a) Upgrade did not have in its possession at that time the card device with mega-bytes of data-storage capacity. At most, Upgrade was working on technology to achieve such a card much later, at a minimum, and more likely several years down the road, if ever. (b) on a credit card or similar device. The Keepered Media technology was unproven as to its use and effectiveness computer hard drive disks and not for credit cards. The Keepered Media technology had been used solely for The Keepered Media technology had never been used or tested for an environment to which a credit card or similar device would be subjected. (c) The representation that the UltraCard has a mechanical durability many times greater than any other storage device was without foundation in that UltraCard had not been tested and proven to support such a claim. (d) The Keepered technology upon which UltraCard was based is not commercially feasible and had been abandoned by Ampex and did not represent a "significant, advance"; (e) Keepered Media was not "designed to protect information magnetically stored on the UltraCard," in fact, it was not devised for use with the UltraCard as represented; CONSOLIDATED AMENDED COMPLAINT Atto,rneys at Law OFFICES IN SEATTLE PHOENIX Los ANGELES 01 Fig AVENUE, SUITE 0 SEATTLE, WA 1.00 BSC.DOC TELEPHONE ( ) - FACSIMILE ( ) -0

17 (f) The agreement with Keepered did not "round out" the technology required to complete "our revolutionary storage medium... in a credit card format" and, in fact, Keepered,did little to advance the commercial feasibility of UltraCard, which was not commercially feasible; (g) The statement that "UltraCard has made it possible to adapt the data storage capacity of a hard disc drive onto a credit card format" was misleading by virtue of the facts alleged in (a)-(f) above and by virtue of the fact UltraCard had not demonstrated in a real unit the ability to store information on a credit card and was far from being able to do so. (h) The statement that UltraCard was "revolutionary" was misleading for failure to disclose that facts set forth in (a)-(f) above, as well as by virtue of the fact that UltraCard was far from developed to the point anyone could represent it was "revolutionary," which implies that it works, which was not the case. As Bland later admitted after this lawsuit, the UltraCard needed "to put it in a like setting, through a beta, and then evaluate the results." Bland did not include this 1 1 caveat when he was making representations during the Class Period and this caveat was required in order to render the statements accurate. following:. Throughout the class period, Upgrade also represented on its Website the UltraCard Inc.'s proprietary technology, will result in a new sector in the information technology industry. UltraCard Inc., a private California based corporation has developed, patented and is currently commercializing a revolutionary system for ultra high capacity data storage and retrieval in a credit card format expected to become a new industry platform. In addition to existing applications, the UltraCard technology will facilitate the development of new, more powerful, user-friendly software applications to the information technology industry. UltraCard's proprietary technology is scheduled to complete the beta testing phase of commercialization by the end of the second quarter of the year 00. The development of the UltraCard technology was completed in July. At that time, the Company conducted a proof of concept demonstration for a panel of independent engineers and technical advisors. Having achieved this milestone, the Company has implemented the commercialization stage of the technology scheduled J 1 Attorue.vs at Law CONSOLIDATED AMENDED COMPLAINT BSC. DOC OFFICES IN SEATTLE PHOENIX Los ANGELES 01 Flwru AVENUE, SUITE 0 SEAT.E. WA 1 TELEPHONE ( ) - FACSIMILE ( ) -0

18

19 for launch by mid-year 00. The product and technology held by the Company will offer the consumer a combination of features not currently available in any existing data storage medium: SIGNIFICANTLY HIGHER MEMORY CAPACITY. The UltraCard currently provides million bytes (Mb) of data on a single credit card format. Enhancements to the technology currently under development are expected to increase the storage capacity substantially. Management estimate that 1 Gigabyte of recordable data on a single credit card format can be achieved. By comparison, the popular smart card holds only thousand bytes (k) of data.. The representations contained therein are misleading for the reasons set forth in,, 0, 1 and. In addition, this statement is misleading as the technology was not "completed" as set forth above in paragraph. 0. On January, 00, in announcing the appointment of David Nordemann to the board of EforNet (an Upgrade subsidiary), Upgrade again represented that it possessed a revolutionary card. Specifically, it stated: 1 1 Following the appointment of Mr. Nordemann to the board of EforNet, the President of Upgrade International Corp., Daniel Bland, stated, "Mr. Nordemann's appointment strengthens the effort of EforNet in becoming a market leader in monetary transaction software, for consumer-to-business and business-to-business solutions. In addition, based on proprietary software which we are currently developing at EforNet to be used in conjunction with UltraCard, the dream of a feature-rich credit card in now rapidly becoming a reality. Over the next few years, ATM networks, telephone booths, credit card access points, mobile phones, etc. will all become Internet access points. E-commerce is what EforNet is about and the UltraCard technology provides us with a substantial transportation platform to enhance e-commerce, both in the developed and developing world. Upgrade International Corp.... is focused on the development and acquisition of state-of-the-art information technology. In addition to EforNet Corp., one of the companies in which Upgrade holds a substantial stake, UltraCard Inc.,... has developed a revolutionary system for high capacity data storage. The management of UltraCard, Inc. believes that their developed and patented product represents a significant advance in the method [sic] consumers and businesses will utilize portable data, integrating UltraCard products into everyday life. CONSOLIDATED AMENDED COMPLAINT 00 BSC.DOC -- OFFICES IN SSATTLH PHOENIX Los A NGELES 01 FiFT H AveiUP, SUITE 0 SEFTnH, WA 1 TELEPHONE () - FACSIMILE () -0

20 1 1 1 Utilizing existing hard disk storage technology, UltraCard provides a unique and highly durable media in a common credit card format, to satisfy the next generation in personal portable data storage for a broad range of existing and new market sectors. UltraCard currently provides megabytes of memory and isfully editable. Management estimates that more than 1 gigabyte of recordable data, on a single credit cardformat, can be achieved without the needfor compression technology. (Emphasis added.) 1. The above statement was materially false and misleading when made. The true but concealed facts at the time were that Upgrade did not have in its possession at the time a card device with megabytes of data storage capacity. such a card, at a point in the future. At most, Upgrade was working on technology to achieve In fact, at the time this statement was made, Upgrade had not even completed a demonstration unit and did not expect to do so until June 00 at the earliest..). Additionally, during the Class Period, Upgrade published several statements on its Website regarding the UltraCard. Specifically, the Website told the investing public that: UltraCard is available for market introduction now at MB [megabytes]... The typical magstripe card today holds only a tiny amount of data. Nearly all of the smart cards on the market today hold only about one page of text. The UltraCard, readyfor market introduction now, can accommodate up to,00 pages of text. (Emphasis added.). The above statement was materially false and misleading for the reasons stated in paragraphs,, 1, and 1 above.. On January, 00, Upgrade again made false and misleading statements. On that date, Yorgo Katsanos of Cyber Capital Ltd. (a European stock promoter firm retained by Upgrade) appeared at an Upgrade conference in Hertfordshire, England. Based on information provided to him by defendant Bland, Katsanos told the assembled analysts, money and portfolio managers, institutional investors, brokers and stock traders that: Upgrade would be an SEC-reporting Company by February, 00. Upgrade had applied for NASDAQ National Market System listing. (See CONSOLIDATED AMENDED COMPLAINT. 00 BSC.DOC -- OFFICES [N SEATTLE PHOENIX L o s ANGELES 01 FIFTH AVENUE. SUITE 0 SEATTLE, WA 1 TELEPHONE () - FACSIMILE () -0

21 He was convinced Upgrade's share price would reach $00 to $00 per share by Q 00.. The above statement was materially false and misleading when made. The true but concealed facts at the time were that: (a) Upgrade would not, nor did it ever intend to, file with the SEC by February, 00; and (b) Upgrade had not applied for NASDAQ listing On February, 00, Upgrade announced the appointment of Andy Seybold to the UltraCard Board of Directors and, in so doing, repeated previous misleading statements about UltraCard: As I mentioned at COMDEX last November, the UltraCard has made it possible to adapt the data storage capacity of a hard disc drive on to a credit card format. In this regard, the UltraCard technology is not an evolutionary technology; it is a revolutionary technology. In my experience, the UltraCard represents a new technological platform, itself a rare scientific discovery, which will provide a new tool to various industries, such as portable computers, PDAs, mobile phones, ATMs, banking, digital photography, entertainment, etc. From the narrow perspective of mobile communications, the UltraCard solves substantial current problems in that it provides for significant data storage capacity thereby lending itself to the design of powerful software applications. Until now, mobile communications have been hampered by the high cost of data storage. There is no doubt in my mind that the UltraCard will lead the way in giving the mobile communications industry an inexpensive, robust and powerful technology which will open up the gates to e-commerce.. The February, 00 statement was misleading for the reasons set forth in paragraphs,, 0, 1, and 1.. In response to the BARRON'S February, 00 article which began to reveal the truth about Upgrade and the subsequent fall of the Company's stock, the Company again made false representations and misleading statements. Specifically, Upgrade stated: The solid underlying fundamentals of our company that have attracted strong market support are unchanged and it is obvious that the decline was precipitated by a story in the financial press. CONSOLIDATED AMENDED COMPLAINT - 1- OFFICES IN SEATTLE PHOENIX Los ANGELES 01 FIFTH AVENUE, SUITE 0 SEAT LE. WA BSC. DOC TELEPHONE ( ) - FACSIMILE () -0

22 1 1 We take strong exception to the inferences and conclusions made in the article. Upgrade is in full compliance with all Securities and Exchange Commission (SEC) regulations and, in fact, will file necessary filings with the SEC well before this year's May deadline. While it is true that the Company is not required to file l OK and I OQ's at this time, Upgrade and its three subsidiaries have undertaken an expansive audit with a nationally recognized accounting firm. Furthermore, the Company has been diligently pursuing all reporting obligations under federal and state securities laws. Upgrade's success is based upon its ownership of proprietary, cuttingedge technology in smart cards, which has been labeled revolutionary by many industry experts. As a leader in the rapidly expanding smart card industry, Upgrade is well positioned to capitalize on a market that is expected to triple sales to $0 billion within the next few years.. The above statement was materially false and misleading when made. The true but concealed facts at the time were that (a) Upgrade did not have in its possession at the time a card device with megabytes of data storage capacity. card later in time and more likely a year down the road, if ever. (b) At most, Upgrade was working on technology to achieve such a As discussed in,, and, Upgrade had promised investors that it would file with the SEC as early as December 1 and by February, 00. VI. APPLICABILITY OF FRAUD-ON-THE-MARKET PRESUMPTION OF RELIANCE 0. At all relevant times, the market for Upgrade common stock was an efficient market for the following reasons: (a) NASDAQ Bulletin Board; (b) Upgrade common stock met the requirements for listing and was listed on the Upgrade communicated with public investors and market professionals regarding the release of current information, and generally assured that information was released over major newswire services on a current basis; (c) During the Class Period, Upgrade traded on the Over'-the-Counter-Bulletin Board ("OTCBB"). In 1, about,00 securities traded on the OTCBB, generating total dollar Attorneys at lan, CONSOLIDATED AMENDED COMPLAINT BSC. DOC OFFICES IN SEATTLE PHOENIX Los ANGELES 01 FIF' r0 AveNVE, SUITE 0 SEArnY, WA 1 TELEPHONE () - FACSIMILE () -0

23 1 trading volume of more that $ billion. The OTCBB includes both actively traded securities and 0 securities that trade infrequently. During the Class Period, Upgrade was an actively traded stock. In fact, during the Class Period, Upgrade had a reported trading volume of more than million shares with a total dollar trading volume of more than $00 million. The average weekly reported Upgrade trading volume was more than one million during the Class Period, or more than percent of the more than 1 million shares outstanding. Cammer v. Bloom, F. Supp. (D.N.J. ). This clearly demonstrates that Upgrade, during the Class Period, traded in an open and well-developed market and that there were sufficient economic incentives for investors to monitor and evaluate the new information that became available regarding the Company. (d) An analysis of the price movements in Upgrade's common stock also reveals that new, material positive or negative information quickly became reflected in the Company's stock price. For example, on November 0, 1, Upgrade announced that its 0 percent-owned subsidiary UltraCard had signed an exclusive agreement with Ampex Corporation, another publicly traded company. Following this announcement, Upgrade's stock price closed at $1 per share on 1 November 0, an increase of more than percent from the prior trading day. Conversely, on February, 00, BARRON'S published a negative article on Upgrade. In response to the article, 1 Upgrade's common stock declined more than percent to a closing price of about $ per share. This demonstrates that Upgrade traded in an open, well-developed and efficient market in which new material information quickly became incorporated into the Company's stock price. 1. Throughout the Class Period, the market price for Upgrade common stock reflected publicly available information about the Company, its results, and its potential products and development of those products. Thus, all Upgrade common stock purchasers during the Class Period are entitled to rely on the "fraud-on-the-market" doctrine, which presumes reliance on the fraudulent statements alleged herein. The market price for Upgrade shares, established in an open, developed and efficient market, reflected those false and misleading statements. false and misleading statements alleged herein is presumed. Accordingly, reliance on the CONSOLIDATED AMENDED COMPLAINT. 00 BSC.DOC -- OFFICES IN SEATTLE PHOENIX Los ANGELES 01 Mimi AVENUE. SUITE 0 SEATTLE. WA 1 TELEPHONE (). FACSIMILE () -0